by Guest Contributor | Feb 16, 2017 | Opinion
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. Many of these individuals may have been approached by executive search headhunters (PIXCELL – Chasseurs de Têtes Montreal Headhunters or a similar headhunter, for example) to take up a good position in a renowned company. 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. It also might be worth thinking about those that do get Medicaid aren’t actually receiving the support for free. For instance, read over this article touching on avoiding medicaid estate recovery, a part of Medicaid some people look past or don’t even know about. If someone that was receiving Medicaid passes away, Medicaid could then actually legally possess your house to cover the costs, leaving living family members a lot worse for wear. The idea of these benefits and aids always seems to have some downfalls, but there can also be ways to navigate around them.
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.
by Kate McFarland | Feb 15, 2017 | News
In January, Apolitical published an exclusive interview with two leaders behind the planning of a pilot study of a basic income guarantee program in Ontario, Canada: Helena Jaczek, Ontario’s Minister of Community and Social Services, and project advisor Hugh Segal.
Earlier this month, the interview was republished in the official blog of the World Economic Forum, the Switzerland-based organization responsible for the prestigious annual Davos meeting (which this year held a panel discussion and debate on “basic income: dream or delusion”).
In the interview, Jaczek and Segal explain the reasons for their interest in and optimism about basic income. Jaczek sees the program as a means to provide economic security to allow individuals to contribute to society. Segal supports basic income as a way to avoid the “poverty trap” that occurs when poor individuals lose benefits after taking a job, as well as a way to empower the poor to make decisions on their own behalf.
The Government of Ontario has recently completed public consultation hearings on an initial proposal for the pilot study, and will release its final plan in Spring 2017. As proposed, the pilot will consist of both a randomized control study in a large metropolitan area (in which randomly selected individuals receive the basic income guarantee) and several saturation studies (in which all members of a small city receive the basic income guarantee). If Segal’s initial recommendations are followed, subjects will be eligible to receive an unconditional cash transfer of up to 1,320 CAD (about 1,000 USD) per month, gradually tapered off with additional earnings, which would replace existing unemployment programs in the province.
Read more:
“Exclusive: Inside Canada’s new basic income project,” Apolitical, January 4, 2017.
“Canada’s basic income experiment – will it work?” World Economic Forum blog, February 2, 2017.
Reviewed by Danny Pearlberg
Photo (Ottawa, Ontario, Canada) CC BY 2.0 Brian Burke
by Cordelia Holst | Feb 15, 2017 | News
“Open Mind” Photo CC BY 2.0 Anders Sandberg
“Being open-minded about universal basic income”
The Safety Nets Global Solutions Group at the World Bank has recently blogged about basic income, explaining the income level of a country can indicate where its government is on developing a social security / welfare protection system for its citizens. High income countries with a history of welfare policy focused on the poor, are seeing increased job insecurity for all workers due to advances in AI, robotics and automation. Middle income countries are adjusting and measuring relatively new welfare systems. Meanwhile, low income countries are just at the beginning of these efforts, and struggling with low government revenues to finance these programs. With basic income research pilot projects having been launched around the world, from Finland to Namibia, the Safety Nets Global Solutions Group encourages policymakers to keep an open mind around basic income as we together look at the rationale, context, incentives, and outcomes that will shape the possibilities for these policies going forward.
The Safety Nets Global Solutions Group (GSG) is a network of practitioners within the World Bank who share an interest in the analytics and practice of social assistance. It currently includes 150+ professionals actively engaged in different regions across the world.
Read the article here:
Ugo Gentilini and Ruslan Yemtsov, “Being open-minded about universal basic income,” Let’s Talk Development (blog), January 6, 2017.
by Genevieve Shanahan | Feb 13, 2017 | News
The Economist has published a short article focused on the basic income chapter of India’s recent Economic Survey (covered in Basic Income News here).
The article expresses the opinion that the case for basic income is premature in rich countries (assuming automation and associated job loss is the main case for such a scheme in these states). However, it argues, the case is more compelling in India given its “thicket of welfare payments” that are plagued by inefficiencies and corruption:
“Giving people cash would be far better than today’s system of handing out welfare in kind. The plethora of schemes in place for Indians to claim subsidised food, fuel, gas, electricity and so on are inefficient and corrupt. Beneficiaries are at the mercy of venal officials who can lean on them to accept less than they are entitled to. Payments in kind rest on the paternalistic assumption that poor Indians are incapable of making rational spending decisions.”
While exploring potential issues to do with the political palatability of including wealthier people in the programme and ensuring the payments reach low-income rural areas with limited access to banking facilities, the article concludes: “as a way of helping the world’s poorest people, the case for a UBI is strong.”
The Economist, “Bonfire of the subsidies: India debates the case for a universal basic income”, The Economist, February 2, 2017.
Reviewed by Dawn Howard
Photo: People queue outside a bank, Salt Lake City, Kolkata. CC BY 3.0 Biswarup Ganguly
by Kate McFarland | Feb 11, 2017 | News
Omidyar Network, a “philanthropic investment firm” created by eBay founded Pierre Omidyar, announced on February 7 that it will donate up to $493,000 to the New York based charity organization GiveDirectly. The funds will be used to support GiveDirectly’s major basic income experiment in Kenya.
In the largest and longest-running basic income trial to date, GiveDirectly will provide unconditional cash transfers to the residents of 200 villages in rural Kenya (about 26,000 people in total). The residents of 40 of these villages (about 6,000 people) will receive monthly payments for 12 years. At about $0.75 per day, the amount of the basic income is roughly half of the average income in rural Kenya.
With the grant from the Omidyar Network, GiveDirectly is now just over $6 million shy of fully funding the full $30 million experiment, Communications Associate Max Chapnick tells Basic Income News. Chapnick says, “Since we announced our basic income experiment back in April we’ve seen an outpouring of support from thousands of donors across the world. We’re grateful for the latest grant from the Omidyar Network, whose substantial support will help poor families meet daily needs, while providing valuable data on basic income.”
Mike Kubzansky and Tracy Williams of the Omidyar Network explain the firm’s decision to donate in a blog post titled “Why We Invested: GiveDirectly.”
Citing a recent literature review of 15 years of research on direct cash transfers (“Cash transfers: what does the evidence say?”), Kubzansky and Williams extol the benefits of cash transfer programs in “alleviating poverty and empowering people”:
“[C]ash transfer programs can potentially help to address bigger issues facing our society, such as rising income volatility, lack of secure benefits, social instability, and the changing nature of work. Concerns around these themes have recently sparked growing attention to a particular form of cash transfer: the idea of universal basic income (UBI)—a transfer that would be regular, long-term, a meaningful amount, and available to everyone.”
Kubzansky and Williams also discuss the threat of automation and the rise of the “gig economy” as forces driving interest in UBI. They go on to note, however, that “no study to date has been conducted with sufficient size, rigor, timescale, or universality to truly test the impact of a full-fledged UBI program.”
It’s to help counter this latter deficit, the authors explain, that Omidyar Network has chosen to invest in GiveDirectly’s experiment — which they applaud for its scope, ambition, and rigor.
“Partnering with top economists (reviewed by their institutional review boards) at Princeton and MIT, GiveDirectly is ensuring the experiment is carried out with scientific rigor and responsibly, generating evidence to help answer critical questions on the impact of UBI.”
Kubzansky and Williams refrain from an all-out endorsement of UBI. Instead, they adopt a more cautious“wait and see” approach, stating, “While we don’t know what the right answer will be, or whether UBI will prove useful or feasible, this is an important first step on generating data, so that policymakers can make informed decisions.”
At the same time, though, the philanthropists are clearly willing to invest in empirical studies of its feasibility — even beyond the $493,000 donation to GiveDirectly. In concluding their blog post, Kubzansky and Williams state:
“GiveDirectly’s pilot in Kenya is geographically-specific and focuses more on the issues around poverty alleviation than questions about jobs displaced by technological change. As such, Omidyar Network will look to support additional studies on UBI to diversify the growing body of research across markets, conditions, and formats.”
Reviewed by Cameron McLeod and Dawn Howard
Photo: “Mothers with their children in Loiturerei village, Kenya” (CC BY-NC-ND 2.0 DFID)
