UBI isn’t helping the poor

Universal Basic Income (UBI) is getting more popular as an idea. I have been writing about UBI in previous jobs behind paywalls, but I think I have to start writing about it here more often. In any case, let me give you a 30-second introduction. The idea of a UBI was originally was developed in the 19th century and then popularised by conservative economists like Milton Friedman in its related form of a negative income tax (NIT) for low-income households. In the early 1970s, a UBI law almost passed into law but was essentially stopped by the Watergate Scandal that discredited Richard Nixon who had pushed heavily for this idea.

At the risk of alienating everyone with this brief intro, the appeal of UBI for conservatives was that it would allow reducing the size of government by replacing a myriad of social safety nets from social security to food programs and even unemployment benefits with a simple check sent to every citizen of a country. 

After a few decades in obscurity, the push for a UBI has gained new traction in the age of digitalisation. As lower-skilled workers have increasingly been replaced by robots or foreign workers in low-income countries, UBI gained appeal on the political left as a way to help guarantee a minimum living wage to everyone.

And after a number of trials, the Covid-19 pandemic saw the introduction of country-wide UBI in the United States. Obviously, sending checks to everyone in a crisis is a very different thing from sending checks to everyone all the time.

However, I am somewhat of a fan of UBI as a concept, because the empirical data shows that the introduction of a UBI does not make people lazy, as conservatives so often claim. Labor supply drops by about 1% to 3% in reaction to an annual $12,000 UBI in the United States. And that drop in labour supply is essentially explained by single parents who stay at home and take care of their children because thanks to the UBI, they can afford to do so. My friend Michael Falk has written a brief bought excellent book that looks at the potential benefits of UBI in the American context. 

However, one thing, I don’t quite understand is why politicians on the left are so eager to introduce a UBI. Either they assume that a UBI will be paid on top of existing social safety nets, in which case it will be very, very expensive as we have just seen in the case of the current crisis, or it will be a replacement for existing social safety nets. However, if you replace existing social safety nets with a UBI, you are generating a massive fiscal transfer program that flows in the wrong direction. The introduction of a UBI – even if it is phased out above a certain level – would reduce income for low-income households and increase it for the middle class.

The 2019 Annual Review of Economics has a great article by Hilary Hoynes and Jesse Rothstein, which is available for free during the crisis (and will disappear behind their paywall again in a few months) that looks at all the evidence in favour and against a UBI. If you want to learn more about UBI, this is a good point to start.

The killer chart to ponder is the one reproduced below. It shows the monthly equivalized transfer payments in the US of households by income. What are equivalized transfer payments? They are payments rescaled to a uniform household size where the first adult in a household is counted as a full adult and every additional adult is counted as a 50% adult while children under 14 are counted as a 30% adult in terms of income needs. Hence the numbers in the chart below are adjusted for differences in family and household size.

Transfer payments received by income

Source: Hoynes and Rothstein (2019).

What is important to notice about the chart is how quickly it drops off as income rises. Replacing social transfer payments with a UBI would essentially replace this distribution with a flat distribution. Hence, middle-income households (and high-income households if the UBI is not cut off at a certain income level) would get more money, while poor households would get less. Somehow, left-wing politicians seem to forget that effect of a UBI, though personally, I like it because I would get more money.