Let’s have an honest debate about universal basic income
This debate about UBI has recently come alive as governments have moved to deal with the asymmetric effects of COVID-19, with vulnerable groups being particularly affected. Certainly, many countries are already providing temporary cash relief to the poorest, to limit the consequences of the lockdown, but in many countries the question of what happens afterwards has acquired renewed urgency because of the disproportionate effects on low-skilled workers, and the expectation that the world will remain vulnerable to other viruses in the future and the additional impact of climate change.
The opposition to UBI has several dimensions. For many UBI is seen as unaffordable and thus fiscally irresponsible, particularly against the background of the massive worsening of the public finances which will be a legacy of COVID-19. A second set of factors pertain to the role of incentives: delinking income from work and paying people to “stay at home” is seen as potentially destructive of the social fabric. It might also worsen inequality, particularly if UBI replaces other targeted transfers, the main beneficiaries of which are currently the poor and the unemployed. Some also worry about the extent to which UBI might then provide an excuse for politicians to ignore the inevitable challenges of population aging and the impact of technologies on the future of work.
The question of affordability is certainly key. This was one of the main reasons why the 2016 referendum on UBI in Switzerland was roundly defeated, not surprising in a country with a long tradition of cautious fiscal management. There are currently several countries running large budget deficits and with debt levels in excess of 100 percent of GDP where UBI is very much on the table, but this seems unrealistic, although understandable in the middle of an unprecedented crisis boosting unemployment to sky high levels.
But rapidly dismissing UBI on the grounds of unaffordability may be premature, at least until we have had an honest debate about the structure of the budget and associated spending and tax policies. To take an example: a recent IMF study on energy subsidies concluded that the annual cost of these amount to US$5.3 trillion, equivalent to about 6½ percent of world GDP. Not only are these subsidies deeply regressive—e.g., 61 percent of the benefit of the gasoline subsidy going to the top 20 percent of the income distribution—but they also contribute to accelerate climate change. Indeed, the elimination of energy subsidies would substantially reduce CO2 emissions and air pollution deaths. The IMF´s latest numbers are highly revealing. The cost of these subsidies for India, Nigeria and the Democratic Republic of the Congo, the 3 countries with the highest headcount for extreme poverty, range from a “low” of 2.4 percent of GDP for Nigeria, to 9.2 percent of GDP for India.
Of course, energy subsidies are not the only large pocket of resources potentially available to finance more sensible social protection policies. We also spend massively on what the IMF calls “unproductive” areas, much of it linked to overspending in defense due to the absence of adequate institutional arrangements for collective security, as called for (and never implemented) in the UN Charter. There is an abundant empirical literature that speaks to the deleterious effects of corruption on government revenue, on economic growth and investment, on private sector development, among others, all of which have a bearing on the ability of governments to deploy resources in productivity-enhancing areas, such as social protection, education, infrastructure and strengthening health systems, which COVID-19 has shown to be in a general state of disrepair, even in some high income countries. According to the IMF the annual cost of bribery alone is in the neighborhood of U$1.5-2.0 trillion dollars, equivalent to about 2 percent of GDP.
To this one may add whether enough is being done to improve tax administration and the equity of the tax system, with yet another vast literature on tax avoidance and evasion. A recent literature review published in Finance & Development indicates that “tax havens collectively cost governments between US$500 to US$600 billion a year in lost corporate tax revenue” and notes that US$200 billion of this is lost to low-income countries, substantially higher than the total of official development assistance and a proportionately much higher share of GDP than in the case of the advanced economies.
It is beyond the scope of this note to discuss extensively the resource mobilization implications of progress in each of the above areas. The point, rather, is that the debate about UBI and other mechanisms to strengthen social protection and better prepare the population to withstand the shocks of something like COVID-19 cannot take place in isolation, as though the structure of public spending or the nature of the tax system are immutable, beyond the reach of policymakers and the voters who elect them. It most definitely is not.
The issue of whether UBI or the presence of a social safety net more generally undermines work incentives is an empirical one. The evidence on UBI, specifically, is fragmentary but I find an accidental pilot experiment done at an American Indian Reservation in North Carolina with a population of 15,000 specially encouraging; the presence of UBI was associated with lower levels of crime, higher school graduation rates, lower levels of substance abuse and growing evidence of small business creation and entrepreneurship. One plausible conclusion from the studies examining the evidence is that at least some of the crime, substance abuse and other social dysfunctions may be linked to the psychological burdens of economic insecurity. Poverty is not just low income. It also brings mental distress, hardship and anguish, which may contribute to social breakdown. Provide individuals with a reliable safety net, and we will see tangible improvements in social and economic conditions as people leverage enhanced opportunities for self-improvement, not to stay at home doing nothing, as some of the critics of UBI have suggested.
Whether UBI worsens income inequality is surely a matter of design, not a preordained outcome. There is no compelling evidence to suggest that UBI would lead to complacency and the refusal to confront other structural trends in the global economy, such as aging populations and the impact of artificial intelligence and robotics on the future of work.