During the US presidential race, it has become abundantly clear that voters from both ends of the political spectrum are angry about free trade.
In a blog post for EconoMonitor, accomplished economist Ed Dolan argues that protectionism is not the answer to Americans’ worries about trade.
Instead, Dolan recommends two solutions to assist displaced workers while also building work incentives and increasing domestic productivity: universal health insurance and a universal basic income.
Dolan admits that it might seem counterintuitive that work incentives would increase if the government gave people “money for nothing.” He goes on to explain, however, that a UBI would eliminate powerful work disincentives inherent in our current welfare system:
The answer to the paradox lies in a distinction that economists make between two effects of any social safety net program. One is the income effect: If you give people more money, other things being equal, they do have less incentive to work. The other is the substitution effect: If, while giving people money, you also decrease the amount of each added dollar of earned income they get to keep, that also reduces incentives to work. …
Empirical research has repeatedly found that the substitution effect is far stronger than the income effect. Eliminate the tangle of overlapping social programs that give rise to 80 percent effective marginal tax rates for the poor and near poor, and you are sure to get greater work incentives. Those incentives would be especially important for workers displaced by trade who need to relocate and retrain for new jobs.
Read the full article here:
Ed Dolan, “Voters are Angry about Free Trade. What is the Right Policy Response?” EconoMonitor, April 4, 2016.
More extended arguments for basic income can be found in Ed Dolan’s previous work for EconoMonitor, including the multi-part series “The Economic Case for a Universal Basic Income” (January 2014).
Image Credit: AFGE via Wikimedia Commons
