Blog Post

The Universal Basic Income discussion

What’s at stake: the concept of a Universal Basic Income (UBI), an unconditional transfer paid to each individual, was prominent earlier this year when Finland announced a pilot project. It’s now back in the discussion as the OECD published a report illustrating costs and distributional implications for selected countries. We review the most recent contributions on this topic.

By: Date: June 12, 2017 Topic: European Macroeconomics & Governance

The OECD recently published a policy brief and a methodological note looking into the cost and benefits of adopting Basic Income (BI) as a policy option. The simplest way of introducing a BI would be to take existing cash benefits paid to those of working age and to spread total expenditure on these benefits equally across all those aged below normal retirement age. The resulting BI amount would be very much lower than the poverty line for a single individual. Therefore, without any additional taxes, a budget-neutral BI will be very far from eradicating poverty.

Source: OECD

A perhaps less ambitious alternative may be to use the levels of guaranteed minimum-income benefits (GMI) in existing social protection system as an initial target value for a BI. However, many individuals receive benefits other than a GMI to pay for additional costs for specific needs that they have and they would lose out even more from a flat-rate BI. So it would be likely desirable to retain some targeted cash transfers, but this would require even greater reductions of BI amounts if expenditures are to be kept at current levels. Thus a BI at socially and politically meaningful levels would likely require additional benefit expenditures, and thus higher tax revenues to finance them.

The OECD  simulations for four countries (Finland, France, Italy and the UK) show that although a universal basic income is simple, existing benefits are not, and replacing them with a single flat rate benefit produces complex patterns of gains and losses. Those receiving social insurance benefits would normally lose out from the replacement of those with a universal basic income at GMI levels. Those not qualifying from any social benefit under existing policies would benefit as long as the increase in benefits exceeds the corresponding increase in their taxes. Lower-income households are more likely to receive means-tested income support so they are actually less likely to gain from a BI set at a similar level to GMl.

Source: OECD

Robert Greenstein at the Centre on Budget and Policy Priorities looked specifically at the case of the US, for which Charles Murray proposed that every citizen age 21 and older could get a $13,000 annual grant deposited electronically into a bank account in monthly installments, $3000 of which should be used for health insurance, leaving every adult with $10,000 in disposable annual income for the rest of their lives. Greenstein points out that with over 300 million Americans today, an UBI of $10,000 a year would cost more than $3 trillion a year. This single-year figure equals more than three-fourths of the entire yearly federal budget and it’s also equal to close to 100 percent of all tax revenue the federal government collects. UBI’s financing challenges raise fundamental questions about its political feasibility, both now and in coming decades. UBI’s supporters generally propose UBI as a replacement for the current “welfare state”, which may  increase poverty and inequality rather than reduce them. Some UBI proponents may argue that by ending current programs, we would reap large administrative savings that we could convert into UBI payments. But Greenstein thinks that’s mistaken because the major means-tested programs – SNAP, Medicaid, the EITC, housing vouchers, Supplemental Security Income (SSI), and school meals – administrative costs consume only 1 to 9 percent of program resources, and their funding goes overwhelmingly to boost the incomes and purchasing power of low-income families.

Berk Ozler at the World Bank refers to a paper by van de Walle, Ravallion and Brown, who examine the best methods available for targeting poor people to see how they would fare in reducing poverty. The policies evaluated include a universal basic income, targeting on the basis of basic proxy-means tests (PMT), improvements to PMT they propose, and some simple categorical targeting options (such as targeting the elderly, children, widows, etc.). They find that these would reduce poverty by less than 25% depending on the choice of poverty measure. Universal Basic Income (UBI) would reduce the Headcount Index by 14.5 percent. Categorical targeting performs very similarly to UBI. They do significantly better when caring about distribution-sensitive measures of poverty (43 percent reduction in the Poverty Gap) – but only assuming an improvement upon the common PMT methods by using poverty quantile regressions or means from panel data when available. The difference between the performance of UBI and the best targeting method looks small. But that is a little deceiving: in a country of 25 million people, such as Cameroon, reducing the Headcount Index from 17.1% to 15.4% allows close to half a million people escape poverty.

Shanta Devarajan offers three reasons in favour of a Universal Basic Incomes. First, efficient use of natural-resource rents. Most of the oil-rich countries in sub-Saharan Africa suffer from poor public-spending outcomes. One reason is that oil revenues go directly to the government without passing through the hands of the citizens. If the oil revenues were transferred directly to citizens, with government having to tax them to finance public spending, citizens would know the magnitude of oil revenues and they would have a greater incentive to monitor how their tax money is being spent. Even without these changes, a simple transfer of 10 percent of oil revenues could effectively eliminate poverty in several oil-exporting countries.

Second, improving the welfare of the poor. Replacing inefficient subsidies with cash transfers would ensure at the very least that the poor are getting the intended monetary benefit. But it could also be empowering. Targeting would be preferable in principle, but in practice there are so many problems in identifying the poor that a universal scheme may do just as well. Third, adjusting to labour-saving technologies. The dilemma is that with these technologies productivity will increase but many people will lose their jobs. Managing this transition is difficult from an economic, political, and moral viewpoint. A system where part of the increase in productivity is taxed, and then distributed as cash transfers to all citizens, whether they are working or not, could help resolve some of the tension.

Rick McGahey at INET says the UBI debate should focus on the long-term weakening of labour’s bargaining power. Much of the current interest in UBI stems from a belief that technology is eliminating jobs more rapidly than new ones can be created, and that future job growth will be much lower. McGahery argues that the assumption that technology will be so disruptive as to justify discarding existing welfare state and other labour market institutions for a UBI should be treated with caution. Politically, that could result in an alliance with libertarian advocates of a UBI who want to eliminate the welfare state and use the funds to provide cash grants to individuals, with the ultimate goal of reducing public spending. Instead, the UBI debate should focus on the strengthening of business’ economic power over labour over a more than three-decade period.  Rather than a historically unique event, advanced technology may just be the latest factor impeding labour’s ability to bargain by contributing to weaker demand and growing inequality.

Nathan Keeble at Mises Wire argues that UBI would not create incentive to work, help solve unemployment, or alleviate poverty, and it could turn out to be worse in the long run than traditional, means-tested welfare systems. First, UBI does not eliminate the disincentives to work that are inherent in welfare programs; it simply moves them around as this program must be financed, and any welfare system, including the UBI, is necessarily a wealth redistribution scheme.The progressive taxation that is necessary to finance a UBI means that the more a person earns, the higher percentage of their wealth will be taken from them. The work disincentives are therefore still very much present in the tax system. They’ve simply been transferred onto different, higher income groups of people. Moreover – Keeble argues – UBI diminishes the power of consumers in directing the marketplace, as it would subsidize non-productive activities.

Bryan Capland and Ed Dolan had a long exchange earlier this year, on how libertarians should see UBI. Capland first argued that while dropping multi-faceted means-testing that characterises other types of social spending would reduce moral hazard, it would also greatly increase the number of eligible recipients. He declared himself “baffled that anyone with libertarian sympathies takes the UBI seriously”, because the welfare state is already unsustainable, largely because our means-testing by age and health isn’t stringent enough. Doland took on the challenge and offered a taxonomy of three kinds of libertarians who might take a UBI very seriously, arguing that UBI could very well be a policy for pragmatic critics of well-intentioned but ineffective government, for classical liberals, and for advocates of personal freedom.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Hurricane Harvey’s economic impact

What’s at stake: tropical storm Harvey has caused unprecedented and catastrophic flooding in southeastern Texas. We review recent estimates of the economic impact of this natural disaster.

By: Silvia Merler Topic: Global Economics & Governance Date: September 4, 2017
Read article More on this topic More by this author

Blog Post

EU posted workers: separating fact and fiction

After President Macron’s recent tour of Central and Eastern European countries, EU posted workers are getting a lot of attention. However, a major reform of the system is already underway and we should not confuse posted workers with long-term labour migrants. Posted workers are a small part of the labour force, and their labour market impact is likely to be minor.

By: Uuriintuya Batsaikhan Topic: European Macroeconomics & Governance Date: August 31, 2017
Read article Download PDF More by this author

Parliamentary Testimony

European Parliament

Could revising the posted workers directive improve social conditions?

This presentation was delivered in Brussels on 31 January 2017 at a hearing of think-tanks, to advise the European Parliament on the revision of the Posting of Workers Directive.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: August 29, 2017
Read article More on this topic More by this author

Blog Post

The US Antitrust Counter-Revolution

Plenty of recent research has highlighted a rise in concentration in the US economy, across different sectors. Economists are now wondering to what extent this is attributable to a shift in the antitrust enforcement philosophy. We review contributions to this debate.

By: Silvia Merler Topic: Global Economics & Governance Date: July 31, 2017
Read article More on this topic More by this author

Blog Post

The US retail crisis

What’s at stake: America is undergoing a retail sector crisis, partly related to the increase of competition from online commerce. We review recent contributions to this debate.

By: Silvia Merler Topic: Innovation & Competition Policy Date: July 17, 2017
Read about event More on this topic

Past Event

Past Event

Perspectives on Universal Basic Income

At this event, we discussed the possible benefits but also the possible disadvantages of Universal Basic Income.

Speakers: Grégory Claeys, Olli Kangas, Professor Philippe Van Parijs and Prof. Dr. Hilmar Schneider Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2017
Read article More on this topic More by this author

Blog Post

President Trump’s budget: the 3% growth quandary

What’s at stake: the Trump administration released its full budget proposal. Economists have been arguing about the feasibility of the underlying growth assumptions, and on whether there is a double-counting implied. We review the most recent contributions to this debate.

By: Silvia Merler Topic: Global Economics & Governance Date: May 29, 2017
Read article More on this topic More by this author

Blog Post

Dial N for NAIRU, or not?

What’s at stake: The concept of the NAIRU (Non-Accelerating Inflation Rate of Unemployment) has recently divided the minds in the economic blogosphere. We review the most important contributions on its usefulness, its shortcomings, alternatives and we discuss why it is such a contested concept.

By: Pia Hüttl Topic: Global Economics & Governance Date: May 22, 2017
Read article More on this topic

Blog Post

UK economic performance post-Brexit

What’s at stake: Almost a year after the UK voted to leave the European Union, its economic performance has showed mixed results. The risks of a Brexit-induced recession do not seem to be materialising. On the contrary, up until the end of 2016 the UK saw a continuation of strong consumer spending and strong output in consumer-focused activities. However, the UK economy is showing signs of slowing down in the first quarter of 2017, with weak growth in the services sector and business investments. In addition, strong consumption growth started to cool down as individuals’ purchasing power declines due to a weaker exchange rate. This leads to a question whether it is the beginning of the Brexit slowdown. We review the contributions made on this topic in the last year.

By: Uuriintuya Batsaikhan and Justine Feliu Topic: European Macroeconomics & Governance Date: May 15, 2017
Read article More on this topic More by this author

Blog Post

The US and the productivity puzzle

What’s at stake: Productivity growth fell sharply following the global financial crisis and has remained sluggish since, inducing many to talk of a “productivity puzzle”. In the US, we may be seeing what look like early signs of a reversal. We review recent contributions on this theme.

By: Silvia Merler Topic: Global Economics & Governance Date: May 8, 2017
Read article More on this topic More by this author

Blog Post

The Trump tax cut

What’s at stake: on Wednesday, the Trump administration - now 100 days old - unveiled a draft tax plan including the intention to enact a radical cut to the corporate income tax, lowering it to 15 percent. While we are still missing details on how this and other measures would be implemented, we review some of the early reactions.

By: Silvia Merler Topic: Global Economics & Governance Date: May 2, 2017
Read article More on this topic More by this author

Blog Post

The decline of the labour share of income

What’s at stake: at odds with the conventional wisdom of constant factor shares, the portion of national income accruing to labour has been trending downward in the last three decades. This phenomenon has been linked to globalisation as well as to the change in the technological landscape - particularly “robotisation”. We review the recent literature on this issue.

By: Silvia Merler Topic: Global Economics & Governance Date: April 24, 2017
Load more posts