Features; Opinion

How basic income ends the poverty trap

Written by: Derek Horstmeyer

Aside from the numerous societal benefits that Universal Basic Income (UBI) offers in the future as automation disrupts the nature of employment, we in the basic income movement should not forget the benefits it also offers in the immediate term.

Economists across the board, whether they focus on labor, corporate governance or environmental issues, love to see mechanisms and incentive systems designed so they are free of distortions. Our current national system in the US of assistance for the short-term unemployed and long-term unemployed is designed with incentive misalignment over different income levels. This is particularly evident on the lower end of the income distribution.

An individual who has just lost their job or an individual who continues to suffer long-term unemployment faces a daunting decision when posed with the prospect of taking on a new job.  On one hand, there are the wages associated with the new job and on the other there are is potential loss of federal and state assistance. CATO’s 1995 “The Welfare-Versus-Work Tradeoff,” estimates that a change in employment status from a part-time position (below the poverty line) to a full-time position at 18 dollars an hour might actually cost the individual a net of 5 to 10 thousand dollars a year due to a loss in state benefits.

These benefits that the individual may have to relinquish span numerous forms including cash assistance (Temporary Assistance to Needy Families), food assistance (SNAP), medical insurance (Medicaid) and housing assistance. And, one criticism of the Affordable Care Act is individuals just above the income cutoff for Medicaid are doing far worse when you consider the mandatory penalty they must pay as compared to those who are receiving Medicaid.

While the magnitude of the loss in state benefits that one suffers as their wages increase is debated, one thing that all economists agree on is that poverty traps are real. As an individual moves up the income ladder, there is a class of income where they would better off monetarily if they turn down a job (or a pay increase) because they must forfeit state benefits.

If we desire to have incentive alignment in our economic system, where every marginal amount of time worked by an individual leads to a marginal increase in total income, the poverty trap created by the welfare system is a major problem. Of course, there are a few ways to fix this issue. One is to just reduce the number of benefits that people receive on the lower end of the income distribution. This does not sound appealing seeing as the number of vulnerable people in the US may continue to increase as the nature of employment changes over time. The second way to handle this issue is to extend the ‘phase-out’ ranges, so people don’t lose as many benefits as they earn more income. This is more appealing, but only puts a band-aid on the issue and still allows for income ranges where incentive misalignment persists.

The third and final option is UBI. The beauty of universal basic income, paired with a negative income tax, is that these decisions to forgo work or a raise because of a loss in state benefits, are non-existent. In a UBI system, incentives are always aligned for the individual to accept a raise or to work an additional hour because it will always put more money in their pocket.

As work becomes more automated, it is important to highlight the wonders that UBI may serve us in the future. However, one should also not forget what UBI affords us today in terms of a system of welfare and assistance that is free of incentive misalignment.

 

About the author: Derek Horstmeyer is a professor at George Mason University School of Business, specializing in corporate finance. His research, which has garnered several awards, focuses on boards, governance and hedge fund activism. He has presented at conferences across the country as well as internationally, and is consistently rated a top professor by his undergraduate, MBA and EMBA students who have honored him with teaching awards.

Derek has a BS in Mathematics and Economics from the University of Chicago, an MS in Financial Mathematics from Stanford University and a PhD in Finance from the USC Marshall School of Business.

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6 comments

  • I have just tried to submit a comment to the effect thatno one else draws attention to the benefits of the Basic income in helping to avoid climate change. it has been rejected as spam. why?

  • R Jones

    I have heard much of Dr. Standing’s well structured plan on UBI and the state of the Precariat class,
    also I have followed what comes out of Indonesia [swissindo] related to the worldwide distribution of funds/resources to cover all of humanity along with all governments through payments associated
    with the World Bank, IMF, Federal Reserve, all Central Banks and others. As some in the U.S have
    worked towards paying off homes they have at this point fell victim to the crash of 2007 and are still losing homes to foreclosure. 45 -60 year old’s have little chance of re-employment at this stage. Some
    still with minors in the home receive absolutely NO income and families are faced with homelessness and the splitting of the family. On one side we have the Solariats that are comfortable along with others
    that see profits in the search for answers through experimentation and trials over time to implement a basic income to achieve a level of security. On the side of Swissindo it seems a pipe dream to get globalists to agree on allowing worldwide debts to be repaid. I am concerned about just how many years will studies need to be performed to inact plans to actually roll out programs . Will humanity wait for this…. for 10-25 years….. will the present generations see this in ntheir lifetimes… or are these studies
    just a dream for people today as was the idea of space colonization was planned in the 1960’s.

  • As an unemployed VN VET / Cold war submarine sailor, the unemployed vn vets should b served by this bfor any other. We hav to accept the fact country has moved on & left this specific grp of vets completely screwed. Now we hav elderly parents moved in to support & try this w no regular income. NO VA DOESNT DO IT or Get it. We’re out here on our own. Even our parents suffer from this discrimination. I could giv u a list of how our parents do w/o! They’re suffering is very difficult to overcome for alot of us. Ur concern is our last hope! Pls support unemployed VN VETS for this opportunity. This is the least that should b done for this grp of brave,couregious,& unselfish service for others!! WE EARNED IT!!! Ps no millrs/billrs n communism!!! READ & HEAD!!

  • Carl

    This all sounds great, The one thing I do not understand is how population control will be implemented? Once people realize that each man woman and especially children would get this credit, how will we manage all the people who will have several children for the 18 years of a living credit? Will we continue to have sub par education? We have to do a lot better in order to maintain the tax base to make this happen.

  • Anne Cartledge

    Are Seniors included in the Basic Income? I have read NOT. Why not?

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