Universal Basic Income: Time to be Brave

The summer edition of Britain’s The Critic Magazine featured a pair of very interesting articles on Universal Basic Income (one pro, one con). This is a subject I’ve been pondering for several years and I’ve found my thinking on the topic over that period has developed significantly and (for me, from a personal perspective) surprisingly.

Although as a teenager I dabbled with various forms of Left-wing thought, for most of my adult life I’ve been a fiscal conservative and a believer in free markets and capitalism. The idea of UBI therefore seemed to go against all my free market instincts: pay people whether they worked or not? Surely everyone would just stay at home and collect the cheque? And how could we possibly afford to pay everyone not to work? And yet, long before the current pandemic made it seem fine for governments to pay people to stay at home, I found myself coming round to conclusion that it was worth a try. Indeed, the pandemic is the perfect opportunity for a government to step forward with a full-scale national deployment of a Universal Basic Income because we’re so close to having implemented it already.

The idea has been around a very long time (it was proposed more than five hundred years ago by Sir Thomas More in Utopia). Milton Friedman suggested something vaguely similar in the form of a negative income tax. Matt Zwolinski, who writes in UBI’s favour, points out that there is something elegant about a single — cash — payment to everyone in place of a patchwork of benefits, tax breaks, pensions, etc all of which need administering especially if they’re means tested.

As part of my research for this article I tried to find out what the current rate of unemployment benefit was in UK. This UK Government website confused me & I assume I’m not the only one.

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Errrm, can someone tell me what I should claim please?

Public spending on pensions & welfare in England (not the whole UK) was £217B in fiscal 2018: 43% of all central government spending. It’s not obvious what proportion of that was actually paid out in the form of benefits and how much was burned on administration. Given the complexity of the rules around the available benefits, and the inefficiency of government my guess is “quite a bit”.

However attractive UBI might be from a purely pragmatic viewpoint, I found Zwolinski’s moral argument more appealing. This is based on Hayek’s views concerning the choices that individuals have. As Zwolinski argues, how much choice does an employee really have to say “no” to the boss if it could mean losing their job? UBI offers a no-questions-asked safety net. The most interesting part of that is the impact it might have for workers at the bottom of the ladder. Most developed countries protect lower-paid workers by enforcing minimum hourly wage rates. Not only are these far from perfect in that employers can (and do) get around them in all sorts of ways — witness Sports Direct’s case in UK for example — they still don’t really give lower-skilled employees much pricing power.

Consider a world in which everyone is getting what the UK currently pays people who are out of work (£75 a week) or what pensioners get (£175 a week). I was surprised by the big gap — sure, there are some additional expenses when you’re elderly, but isn’t everyone subject to the same basic living expenses? I digress. £75 a week is only £2 per hour — way below the minimum wage, so it probably wouldn’t have much impact. But £175 is close to £5 an hour. What would happen to the supply of (say) burger-flippers if everyone was suddenly getting £5/hr even if they stayed at home? There are two possible conclusions a low-paid worker might come to:

  1. Stay at home and collect the Basic.
  2. Work for almost any positive non-zero sum because it’s icing on the cake.

In theory, a country wouldn’t need a minimum wage any more because the UBI (if set at the appropriate level) covers that. Having that no-strings cash cushion gives a person real choice: fewer people might choose to flip burgers and instead choose to do something more interesting (care for an elderly relative, or write a book) or nothing at all. Maybe wage rates for low-skilled jobs might rise until the market balanced again? I think there has been some research on this subject already in the context of people of pensionable age (but I can’t find it): bottom line, some choose to top up their pension, some choose to enjoy their leisure. It’s also worth noting that a recent Yale study suggested that higher unemployment benefits don’t have a disincentive effect on job seekers.

For people who are already working in higher-paid professions, it’s hard to predict what the impact might be; when France introduced a 35 hour week two decades ago, factory shifts were adjusted to accommodate the change, and some employers complained that with shorter hours, fixed costs such as employee training had made it even less attractive to hire new staff. But there was no apparent increase in people taking two jobs so perhaps if UBI were implemented, white collar workers might try to extract shorter hours or more flexible working conditions form their employers.

Jamie Whyte, who writes the argument against UBI, focuses on cost. In terms of affordability, let’s for one moment assume the UK government runs a balanced budget (it doesn’t). 2018 central government spending was £505B (again, England only). So central government tax income we’ll assume to be the same. Around half is income tax & national insurance. England has 56M people, of whom something like 75% are over 18. If we gave everyone the current state pension that would cost £382B gross. We’d get back all of the current pension & welfare spending (£217B), so incremental cost is £165B. However, much of the UBI would end up as taxable income, especially for higher earners. I’m guessing the composite tax rate (income tax + impact on national insurance) on this might be anything from 20% to 30%, i.e. a credit of £75B-£115B. All of a sudden, the numbers don’t look so crazy: it’s possible the incremental cost might only be £50B. Whyte seems to come to a different conclusion because he doesn’t appear to add back the savings on pensions & welfare payments, and he doesn’t assume any taxation of the UBI.

I know there have been experiments. In general, I think the problem with most of them is that they haven’t had scale — and therefore there’s not the same behaviour because people can drift in or out of the zone where the experiment is taking place. Sure, they can do that too at a national level but it’s a lot harder.

Lots of issues remain:

  1. Would all nationals automatically be eligible? What about non-nationals who have been resident for some time?
  2. National Insurance would be irrelevant so it would have to be merged into income tax (as should have happened long ago anyway).

Just because it’s such a massive change from the way the Welfare State has worked across the OECD since 1945, that doesn’t mean we shouldn’t re-consider it. As John Maynard Keynes said when challenged about changing his mind, “When the facts change, I change my mind, Sir. What do you do?”

In Dave Birch’s recent (and excellent) article “Hitler and Helicopter Money” he addresses a similar idea but really in the context of Covid specifically; what I’m proposing is more — well — Universal.

The world has changed.

Now is the perfect time to have a serious look at implementing a Universal Basic Income. UBI already had the support of the Left even pre-Covid; with the threat of another referendum on Scottish Independence looming, introducing UBI has the potential to provide the Conservatives with an almost unassailable lead by permanently demolishing the Red Wall. In other countries, the financial and political arithmetic may differ but the core arguments remain sound.

Germany today announced that it was beginning a 3-year trial, paying 120 volunteers EUR 1,200 per month (roughly £250 per week) but it’s not universal if it’s only 120 volunteers — come on, UK! Do something really innovative, take the plunge.

Note: I’m using data for England rather than the UK in its entirety in this article simply because both Wales & Scotland have professed to want to follow their own paths.

Opinions are mine and not those of my business or employer.