Flaws in Basic Income

Flaws in Basic Income

Today’s post is about the flaws in Basic Income, after the Swiss rejected the adoption of the concept in a national referendum earlier this month.

Basic Income – the story so far

We’ve talked about Basic Income (BI) twice before:

Our conclusions from the two articles were as follows:

  1. basic income has support from the political right as well as the left, and is best thought of as a replacement for welfare, rather than a Utopian fantasy
  2. it is potentially a fairer, simpler and more “small-government” system than we have today
  3. it should reduce bureaucracy and fraud, and replace labour market regulation like minimum wages and tax credits
  4.  it need not reduce the incentive to work (since there is no loss of benefit from working), but might over time remove the stigma from not working
  5. the effect on entrepreneurship is similarly unclear – would BI free people up to take risks, or encourage vanity projects of no use to wider society?
  6. charitable, academic and artistic work could be expected to increase
  7. high-skill work might lose its premium as more people are able to gain the skills (though automation – see below – might increase the premium for truly high-skill work)
  8. without regional variation in BI, some migration to cheaper areas can be expected
    • though perhaps this has already happened under the existing welfare system
    • this can be seen as a good thing and might lead to some equalisation of expenses, though equally, “BI ghettos” might be created
  9. the looming threat of demographic change and large-scale job-losses from software automation and robotics mean that something like BI will be needed eventually, and the incentive to work could become academic
  10. a serious level of BI (enough to live on in Britain) would involve an increase in taxes of approximately 25% compared with today
    • this is the equivalent of taking the government’s share of GDP from around 35% to 44% (a share of GDP that has proven impossible to collect in the past)
  11. the burden would probably fall hardest on the middle classes, with those on incomes between £35K and £80K hit proportionately the hardest
    • these are some of the most productive members of society, and they would face a disincentive to work hard
    • remember though that robots and automation might make this argument academic
  12. as well as extra income tax, funding might come from an increase in VAT on luxuries, a Tobin tax on financial transactions (which the UK already has), a land tax or “mansion tax”, a capital tax on businesses (effectively a “robot tax”) or even a general wealth tax
    • each of these has potential problems of implementation
    • my preference would be for higher and tiered VAT, along with some form of robot tax
Swiss Referendum

BI is back in the news mainly because of the Swiss referendum in early June (similar experiments are proposed in Finland and the Netherlands).

  • A figure of 30K SFr pa (£21K) was mooted, which would have required taxes to increase by 40% of GDP – the Finnish and Dutch proposals plan to pay around half of this.
  • BI was rejected by a massive majority – only 23% voted in favour of the proposal, on a low turnout.

So let’s see what people have been saying.

Flaws in Basic Income

Labour costs

The Economist had a couple of articles on the subject (1 and 2) a few weeks ago.

  • The newspaper starts from the position that work has meaning for people, and also is the main mechanism for allocating spending power.
  • Unfortunately the share of GDP going to labour has been falling over the past 30 years (from 57% to 52%).
  • And now we have the threat of automation and robotics killing off many jobs.
See also:  Election A to Z --- B is for Basic Income

GDP vs earnings

I would say that work can have meaning for people, but most people – myself included – have had to do a majority of work that did not have meaning.

  • Most people work to live rather than live to work.

Gini coefficients

Automation

The Economist is not convinced by the threat from automation.

  • There have been a long series of labour scares from the Luddites two hundred years ago, but in every case new jobs have appeared to replace those lost.

I’m personally finding it hard to imagine the new jobs that won’t be able to be performed by general purpose AI and robots – other than caring for the elderly – but maybe I’m wrong.

  • I’m sure that things will take longer to implement than robotics fan boys think, and that there will be bumps along the way
  • But the direction of travel is clear – machines displace people.

But in any case, the machines don’t provide a reason to bring in BI tomorrow.

The costs

BI affordability

The Economist also has a potentially handy calculator for working out how much a BI would cost.

  • The highest setting available was $14K pa, which is just under £10K.
  • The Economist calculates that this level of BI would need an extra 20% of tax in the UK, which seems very low to me.
  • The Greens’ proposal during the 2015 Election worked out at less than £5K pa per person (including children and retirees), and would need a 25% increase to fund it.
  • Setting the Economist’s calculator back to $8K pa (£5.5K) suggests that Britain would only need a tax increase of 5%, so something is clearly wrong here.

BI affordability £5K

Take the numbers from this calculator with a pinch of salt.

  • But BI is expensive.

[hr]

John Kay

John Kay in the FT also focused on the costs.

The back of the envelope calculation is terrifying:

  • Whatever share of the average national income (GDP per head) you would like BI to be, then that is the share of GDP that it will cost.
  • If the UK GDP per head is around £28K, then a BI of £10K for adults, £8K for pensioners, £4K for children might average out at £8.5K per person.
  • That’s more than 30% of GDP, just on Basic Income

Spending excluding healthcare

Of course, some will be offset by cancelling existing welfare programmes.

  • But it’s easy to see that more than 15% of GDP could need to be raised in extra taxes.
  • With existing government spend at 35% of GDP, that’s a potential 40% increase in the size of the state.

Government receipts

To work or not to work

The newspaper is also worried that BI will remove the stigma from not working, leading to more people leaving the workforce.

  • This in turn would lead to tensions with the remaining workers and tax-payers.

This could definitely be a problem if / when BI is first introduced, though in time, I expect most jobs to be lost in any case, so this situation would become unavoidable in time.

  • But initially, it might prove difficult to find people to clean offices, or to drive delivery vans, unless we adopt a two-tier system (see next section).

It would also prove difficult to know when people should be shifted from a dying industry to a growing one.

  • As with low interest rates leading to inefficient capital allocation, flat wages will lead to inefficient labour allocation.

All this will look much better if / when the robots take over, but the transition will be messy.

See also:  The Job Guarantee
Border control

The Economist’s last point is that BI would mean the end of open borders, as rich countries with BI would need to either close the door on poor immigrants, or run a two-class system, with some citizens ineligible for BI.

  • In the light of of the UK’s Brexit referendum, it seems clear that many people would like to close the borders in any case.
  • And a two-tier system is what BI will inevitably produce in the short run (workers vs non-workers), just as the existing welfare system does today.

Open borders plus BI would simply mean that the two tiers would need to be officially recognised.

The internet reaction

The Economist article hasn’t gone down too well, either with commentators on its own website, or with BI activists on the net.

  • Apart from the social justice warriors who want to “smash the system”, the basic criticism is that work is not great (agreed) and that a lot of people are wasting their life in cubicles rather than expressing their true talents.

This second point is a real “first world” take on the issue, and even more than that an entitled middle-class millennial graduate take.

Western economies aren’t going down the tube just yet – people have never been richer – and in the UK in particular, unemployment is relatively low.

  • The 1980s recession that I graduated into was much worse than this, and the 1970s were no fun either.

It’s generally worse for young people, true, and it’s also the case than many of the jobs recently created are minimum wage, and sometimes zero hours, with little in the way of prospects or security.

[hr]

At the risk of sounding like Clint Eastwood in Gran Torino, so what.

  • It’s always been like that.
  • Not many of us started at the top.

The real change is in expectation.

When I went to university, it was a privilege extended to less than 10% of the population.

  • Most of the people I was at school with expected to – and did – end up in a factory.
  • For a few years, until the factories closed down.

Now everyone is a special snowflake, and 50%-plus go to college.

  • That’s totally unrealistic – we don’t need a 50% graduate population.
  • Yes, people are over-qualified, but that’s because we’ve given out too many qualifications – maybe we should stop doing that.

I don’t blame anyone for not wanting to spend their life in a cubicle.

  • I didn’t like work much myself.
  • But I knew why I was doing it – to make a better life.

So I don’t buy the argument that we need BI to avoid a massive waste of creative talent amongst our twenty-somethings.

[End of rant.]

[hr]

Conclusions

Despite all the recent media coverage of BI, I’m not sure that we’ve learned much today that we didn’t already know.

  • The Swiss referendum shows that people won’t vote for BI today, at least not at £20K pa.
  • There’s no pressing case for BI today, though loss of jobs to automation would change that, and it will probably be needed in the future.
  • BI is expensive and new taxes will be needed, to the point where government receipts as a share of GDP would exceed their historical peaks.
  • More VAT and a robot tax would be the most fair option.

The last word goes to Luis Pares, a commenter on the Economist website:

When universal basic income comes to reality, I want to be 100% invested in casinos, tobacco, alcohol and private security … thanks for the tip.

Until next time.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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5 Responses

  1. I think the case for BI is simply that it’s a much better system than means-tested benefits. In terms of costs, it can cost as much or as little as is desired, or be revenue neutral, or even produce a net gain for the economy; it all depends on how it’s structured and how big the basic income is.

    Given that it’s a massive shift from the current system, and would have many intended and unintended consequences, it should be introduced gradually over many years from a laughably small starting point of perhaps £10 per week, with benefits being reduced at the same rate, more or less, until BI replaces Jobseeker’s Allowance.

    I think it would be a massive missed opportunity if we don’t at least give the thing a try.

    • Mike Rawson Mike Rawson says:

      I appreciate your sentiment, but the maths doesn’t work.

      Balancing BI with benefit reductions only works if we restrict BI to those on benefits, in which case it’s not BI and we can’t make the efficiency savings.

      Giving BI to everyone costs twice as much as current benefits and means that everyone on higher than average income (the “middle classes”) will have to pay a lot more tax.

      • Indeed, there will obviously be more tax paid by those who earn more, if only to offset their basic income! However, I still disagree about the math not working as there are many models which are cheaper/neutral/more expensive, depending on the BI level and the tax rate.

        My preferred scheme is BI-FIT, Basic Income plus Flat Income Tax, as that’s the simplest and reasonably ‘fair’ system. Something like this:

        http://www.parncutt.org/BIFT1.html

        Also, I would love to have a play around with the EUROMOD simulation software:

        https://www.euromod.ac.uk/

        but alas don’t as yet have the spare time.

        If I’m ever on a dating website I’ll be sure to put “would love to play with tax microsimulation software” at the top of my profile…

        • Mike Rawson Mike Rawson says:

          That’s misleading – they don’t pay more tax to offset the BI, they pay more tax because now everyone is getting BI, rather than just a few people getting benefits.

          I agree it can be cheaper than the model I looked at, but then it isn’t BI. It has to be enough for people to live on without working, or it’s just tinkering with the tax and benefits system. I have one eye on the coming robot revolution.

          I will take a look at BI-FIT at some point. Flat tax is another idea I like in principle but find hard to reconcile with reality.

          Thanks also for pointing me at euromod, though I can’t face anything with euro in the name just at the moment.

          There’s someone for everyone John, though tax software sounds like a Marmite interest to me.

          • “It has to be enough for people to live on without working, or it’s just tinkering with the tax and benefits system.”

            Ah, then we are using different definitions, which is my fault.

            Basic income does typically refer to something which would take citizens out of at least absolute poverty and preferably beyond relative poverty (60% below median household income). Personally I think that’s a big ask.

            I’m more a fan of a “citizens income”, which is indeed intended to more or less replace JSA or at least get rid of the means testing. So apologise for the confusion. I like the idea of a social ‘dividend’ for all citizens, but I doubt that it would extend beyond the poverty line, at least not anytime soon.

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Flaws in Basic Income

by Mike Rawson time to read: 6 min
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