The idea of a universal basic income (UBI) – where every citizen inside an implementing country gets a monthly amount of money – is not new. It even is not a left-wing idea originally.
However, no government on earth has seriously experimented with it until recently.
Finland is conducting a pilot experiment by giving 2000 randomly selected unemployed Finns a monthly cash transfer of about €590 a month, replacing their current social benefits. In a Nordic country like Finland, such amount will not allow you to live any comfortable life. But here is the trick: These Finns will keep on getting such amount of money, whether they find a job of any kind.
It’s a bonus on whatever they do. Meanwhile, most countries suspend welfare payments such as unemployment benefits once the beneficiary finds a job, no matter if it is flipping burgers for minimum wage or as a Wall Street executive.
The UBI experiment in Finland shows the point of such a program: providing long-term (theoretically, forever), but modest financial aid to all citizens regardless of who they are. It can at least prevent extreme poverty among unfortunate people who lost their jobs, for example. Or it can give people a needed cash boost while they take up a low-paying part-time job, or go back to school to acquire higher skills demanded by the job market.
Interestingly, the world’s largest democracy (no, it’s not the USA… Vladimir Putin hasn’t said anything about having UBI there…) is discussing implementing UBI. India has actually been running small scale pilot programs since 2011, and the government is starting to consider the pros and cons of a national program with the aim of eliminating extreme poverty in the country.
In a country of 1.3 billion people, the implementation of such a program is no small thing, especially since it does have some big pros and cons.
The difference between UBI and other cash transfer programs
Before getting into the pros and cons of UBI programs, it’s important to distinguish this from other cash transfer programs.
Generally speaking, there are two kinds of such programs: targeted and non-targeted. A Google search of countries implementing UBI, which is a type of non-targeted cash transfer program, shows welfare programs that do not belong to the same category.
Examples of targeted cash transfer programs are unemployment benefits, or Hartz IV in Germany, and the very successful Bolsa Familia in Brazil. This latter program aims to reduce poverty via cash transfers from the government to financially needed families. This is a targeted program, since families need to show financial need to qualify and, if they have children, they must show proof of vaccination and of continuous school enrollment.
UBI programs are non-targeted if implemented nationwide (no country has done it yet) and would benefit everyone without distinction. This means that Mike, the laid-off factory worker, and John the super-rich hedge fund manager, will get a modest monthly cash transfer every month, until they drop dead or the government scraps the program.
This is where the pros and cons discussion gets complicated.
Pros of UBI
The UBI idea has its conceptual roots not in the moldy basement of an ultra-leftist collective, but with the intellectual father of neo-liberalism, Milton Friedman.
His idea was that poverty needs to be eradicated in the name of economic efficiency (the poor revolt when hungry, not good for business…), but welfare programs tend to be inefficient since they require large bureaucracies to run them. (For example, Bolsa Familia requires many government employees to monitor that kids of beneficiary families are really going to school.) Also, they don’t always target people who actually need them.
Hence, UBI can replace most welfare programs and their clunky bureaucracies, leading to economically efficient poverty reduction. This view is shared by the Indian government’s chief economist.
The idea has picked up momentum with politicians across the political spectrum, as changing economic structures, such as automation of the workplace, is constantly reducing low-skilled manufacturing jobs that employ a lot of people. Coupled with that, migration flows (forced and not) create anxieties in many people, fueling the populist wave of recent times. UBI might be a solution to this big socio-political problem of our time.
As mentioned above, another pro of UBI programs is that they can eliminate extreme poverty by providing a modest cash transfer.
It doesn’t necessarily put people above the poverty line, but makes sure that they will have enough to eat every day.
A universal livable wage, one giving cash transfers above the poverty line, is another thing. It isn’t a good idea from the point of view of the UBI logic, since it would be too expensive, and the point is to be economically efficient. This was the view of the German Parliament when such a proposal was discussed in 2013.
Another pro of an UBI is that it can solve the “moocher problem” of welfare programs. Experiments with cash transfers in developing countries show that it doesn’t increase the number of drunks and junkies; instead, it increases productivity, since a safety net motivates people to look for a job that they feel comfortable doing.
Targeted welfare programs, on the other hand, are more likely to create “moochers” – since such people invest their time and resources in cheating the system to qualify for them. With UBI, moochers will have a hard time living on a wage that just keeps them from starving.
The cons and the obstacles to UBI in Germany
An often mentioned con of a UBI program is that it’s too expensive. Actually, the economic logic of such a program rests on its replacing all other welfare programs aiming to reduce poverty.
Also, it benefits people who do not need any financial aid from the government, like our hypothetical John, the hedge fund manager.
Milton Friedman suggested that a “negative income tax” could replace welfare programs, as a progressive payment to people whose monthly income falls bellow a certain threshold. For example, if the basic income threshold is €800 and a person earns €450 with a mini-job, the government will transfer €350 to such person. This would be managed by the tax collection agency, which would still allow the scrapping of welfare bureaucracy.
A negative income tax has never been tried, and it would be very difficult for developing countries with limited tax collections capacities to implement such a program.
The main con of UBI, following its economic logic of replacing other poverty reducing welfare programs, is actually political.
Take the case of Germany. What would the political repercusions be of scrapping a unionized, employed-for-life bureaucracy such as the Arbeitsamt, for the sake of UBI? These beamte, or public employees, are not likely to go quietly into the night to live off just above extreme poverty on their brand new basic incomes after losing great lifetime benefits.
The political rock in the road is what requires the most thorough analysis in order to implement a bold idea such as UBI. Nonetheless, in times when policymakers need fresh ideas to revitalize the welfare state, and fend off populist threats to the political system, such proposals are getting momentum.