11 February 2014

The Guaranteed Basic Income is Trickier than You Think

Not sure what to make of the recent interest in the idea of a Guaranteed Basic Income (GBI). Apparently, if the current spending on the US welfare state (~$1 trillion, according to this Boston Globe article) would be replaced by the GBI, everyone would get an annual handout of more than $30,000. To get some perspective, I currently have a relatively decent living in the most expensive US county with half that money. This highlights two things.

First, the staggering waste involved in the current welfare system. If the US government is throwing around more than $30,000 per person, how come there are still poor people in the US? Should I suggest firing everyone currently hired in the welfare state bureaucracy and giving them the GBI instead of their wage? But I'm sure many of them earn a lot more than just $30k, which should give you a glimpse at the political economy difficulties involved in any attempt to replace the current welfare system with a GBI.

Second, this highlights the size of the disincentive effect on work that the GBI would have. This is actually well known, but for some reason the concern for mobility is missing from the current discussions. E.g. Richard Wagner's To Promote the General Welfare (chapter 5, "Public Spending and Income Redistribution") discusses the effects of various GBI (or negative income tax) experiments in terms of lowering mobility. Spoiler alert: GBI is far worse than the current complicated system of various targeted welfare payments. This shouldn't be surprising. Giving more money with no strings attached has obviously bigger disincentive effects on work than giving less money with some strings attached. I think it's fair to say that most supporters of GBI have not looked carefully at the mobility side-effects. (Of course, one may also argue for replacing the welfare state with BGI and drastically cutting spending on social transfers, i.e. being in favor of a much smaller BGI, which would no longer have such large disincentive effects – but that sounds even more politically unrealistic.)

So, the real question GBI supporters should ask is how much income mobility are they willing to give up in order to get a lower level of poverty now? To put it differently, if you are concerned about equal opportunity, growing income inequality and a classless society (which is usually framed in terms of how many people succeed in getting out of their parents' income class), you should be against the GBI not in favor of it. The only ways in which to have some sort of safety net that doesn't dramatically affect income mobility are: (a) the current labyrinthic welfare state bureaucracy and waste; (b) a market-based social insurance system with plenty of unavoidable holes in it (occasional fraud, some people left behind, etc.).

There really is no way to have a safety net that is desirable on all margins (such as social mobility, efficiency, and risk aversion). If you want social mobility and are risk adverse, but don't really care about waste, people gaming the system and your occasional homeless person, you should favor the current welfare system, and be quite skeptical of GBI. If you want efficiency and don't care about mobility or growing income inequality, but are risk adverse, you should favor the GBI. If your priority is social mobility, are comfortable with risk, and enjoy your occasional conversations with homeless people, you should favor the market-based social insurance.


Social mobility
Efficient poverty reduction
Very small risk
IMPOSSIBLE
yes
yes
yes
Market-based insurance
yes
yes
no
GBI
no
yes
yes
Welfare system
yes
no
yes