Monday, August 25, 2014

Ed Dolan — A Universal Basic Income and Work Incentives. Part 2: Evidence

In Part 1 of this series, I outlined some basic economic theory regarding a universal basic income (UBI) and work incentives. By a UBI, I mean an income support policy that provides a set monthly benefit to every citizen. A UBI, as I define it, would to everyone, regardless of income, wealth, or employment status. In that respect it differs from means-tested income support policies (MTIS), such as current US welfare system programs or a negative income tax (NIT), which reduce benefits as the recipient’s income increases. 
The fear that a UBI would undermine work incentives is among the most important sources of resistance to the idea. In Part 1, I argued, on theoretical grounds, that replacing the existing welfare system with a UBI would tend to increase average work effort. This part will look at several sources of evidence that support the theory, beginning with the famous income maintenance experiments (IMEs) of the 1970s and 1980s.


Dan Lynch said...

Ed advocates a UBI as opposed to a means-tested BIG.

Ed does not provide any links to the IME experiments that he refers to, so it's not clear what he is talking about. He claims the IME's were a negative income tax, but I believe the Canadian MinCome was a cash benefit, not a negative income tax. In any event, there is no law requiring a means-tested BIG to be a NIT. My proposed means-tested BIG is a weekly benefit based on that week's earnings.

Ed claims that IME's reduced benefits, but as far as I know MinCome did not reduce benefits per se.

Ed claims that the Canadian and Nixon experiments with BIGs showed “every tested variant of a BIG to have pernicious effects on work incentives." That's simply not true. The declines in male head of household workforce participation were quite minimal (5% in the Seattle-Denver test).
Later Ed seems to backtrack by admitting that "full withdrawal from the labor force was a relative rarity. Instead, the reduction in hours worked more often took the form of longer periods of job search between spells of employment. For some that might mean loafing, but for others, it could well mean a more thorough search process resulting in a better job match. In the case of young secondary workers in families receiving NIT benefits, reduction in work often meant more time spent in school."

Well then, why are we wasting time worrying about work incentives? It's much ado about nothing, at least with regards to a subsistence level BIG (it might be a different story if you had a more generous BIG). My proposal is to set the BIG at the poverty level threshold.

Ed goes on and on about how a means tested BIG might reduce benefits, but somebody needs to remind Ed that Clinton killed AFDC, that about half of Americans below poverty level do not qualify for SNAP due to the asset test, and that about 80% of the unemployed do not receive unemployment insurance. So exactly what benefits is Ed talking about? Like many ivory tower economists, Ed seems unaware of what it is like to be poor.

All this talk about work incentives misses the main reason that some people don't want to work -- if you have health problems, if you have a small child, or a family member with special needs, or if you are stuck in a low paying job that you hate with a passion, then you may want to opt out of working if can instead draw benefits, and it doesn't matter whether the benfit is a UBI, a means-tested BIG, disability, or some other sort of dole.

Ed seems to propose maintaining existing benefits in addition to a UBI, but there is zero political support for doing so. Just as any real-life JG will likely replace existing safety net benefits, any real-life BIG will also likely replace most existing safety net benefits.

The main problem with a UBI, as I see it, is that it would require a substantial tax increase. MMT does not change this one iota since the deficit still would need to be "right-sized." A tax increase is always a political hard sell. Assuming the new tax was progressive, then only the poor would see a net increase in after-tax income -- which begs the question "why not only give the BIG to the poor in the first place?"

Dan Lynch said...

Tom, a while back you posted an article about incentives. I can't remember the link but the gist of the article was that carrot and stick incentives only worked for simple, straightforward tasks, and not for more complicated and more creative tasks. Anyway I thought it was an important lesson with regards to economics in general and BIGs in particular. Economists worry too much about work incentives while ignoring that there are other reasons that people choose to work or not work.

Tom Hickey said...

The informal fallacy of hasty generalization.