The 21stcentury is already characterized by its technological innovation. It is an era in which artificial intelligence, robotics, engineering and many other fields are developing at a speed that has never been seen before. The number of jobs that can be automated is growing at an exponential rate. Nowadays, simple tasks such as handling cash registers, bank account management, etc. is all done with robotics or through an app. Between the year 2000 and 2010 approximately 4 million jobs in the United States manufacturing industry have been lost due to automatization. According to a 2013 Oxford study, 47% of all jobs are vulnerable to be taken over by machines within the next decade. One of the critical questions that people are trying to solve is what to do with those who lose their livelihood.
One of the many proposals is known as the Universal Basic Income (UBI). UBI is a government program that would give all citizens an equal amount of money, irrespective of need or wealth. This idea has gotten a lot of traction over the past few years with younger generations as well as Silicon Valley CEO’s such as Elon Musk and Mark Zuckerberg. Even Andrew Yang, who is a Democratic presidential candidate, has shown his interest in UBI. He proposes to give every United States citizen above the age of eighteen $1000 per month.
Advocates of the proposal claim that it would help lower poverty and give people flexibility to find a new job. Clearly at first glance the program looks very appealing. However, there are certainly a few drawbacks that should be considered.
First, the cost. Conservative estimates made by the Hoover Institution show that the program would cost at least $2,544 trillion per year. To put this number in perspective, the United States total government spending in 2018 was $4,109 trillion. This additional program would mean both a drastic increase in the size of the federal government and a big tax increase. Presidential candidate Andrew Yang has proposed to pay for the program through a consumption tax. Consumption spending in the United Stated is around $13 trillion per year. Which means that the required tax rate, if all consumption would be taxed equally, would be around 19.569%. If the cost of consumption were to go up by this amount it is likely consumers’ behavior would change. Therefore, the tax rate would probably have to be higher.
Secondly, according to economic theory, Universal Basic Income could reduce the incentive to work. This is due to the fact that an individual can afford more free time when he is given unconditional income. To what extend this would take effect depends on factors such as earning potential, family structure, individual preferences, etc. It is likely that in couples the second earner, the person whose income is the lowest, will reduce his or her hours worked, for example.
To convince skeptics that the program would work numerous experiments have been done. The main test that has been conducted in recent years was the Finnish basic-income program, launched in 2017. The program randomly selected a group of 2000 unemployed Finnish citizens and paid them €560 per month. The government did not place any restrictions on the money – people were not required to look for a job, nor would they lose the money if they found a job. In December 2018, two years after it was launched, the program was cancelled. The results showed two important things. First of all, the disappointing news that UBI did not make the participants more likely to rejoin the labor force. Secondly, the report showed that overall welfare among UBI participants was higher than among the control group. These disappointing results have since been widely publicized. However, according to Parecon Finland, a Finnish think tank, the government stopped the program too early and did it on too small of a scale for it to be truly meaningful. They claim that the conservative government that started the experiment never truly wanted it to succeed.
Currently, there is a split between two groups of thought. On the one side those who think UBI will help raise people out of poverty and address one of the big dangers connected to the automation of the workforce. While on the other side those who see it as potentially shrinking the labor force and raising taxes without having any proven benefits.
However, there might be a third option: the Negative Income Tax. The Negative Income Tax is a program that would give people an amount of money depending on the difference between their income and an income cutoff. In effect, if the income cutoff is $20,000 and the negative income tax is 50%, then a person who earns nothing would receive $10,000 from the government. If the person earns $10,000 then they would receive $5000, etc. This program is different from UBI in two distinct ways. First, only people who earn below a certain threshold would receive government support. Second, the amount of money that is handed out decreases when a person starts to earn more but does it in such a way that they are still better off working more hours. These two conditions make the Negative Income Tax a lot more affordable.
This proposal is a lot more attractive to conservatives and libertarians than Universal Basic Income. They would implement the Negative Income Tax as a replacement for current social security programs. According to MIT professor Angrist: “From the point of view of consumer welfare, money is always just as good and probably better than in-kind transfers.” Replacing welfare benefits would have two effects. First, by giving poor people money rather than government benefits, people would be able to buy what they think they most need, thus allocating resources more effectively. Second, the program would be administered by only one organization, in this case the IRS, instead of multiple welfare organizations. This would simplify the system greatly.
The idea of a Universal Basic Income is a step in the right direction. However, for it to be effective it would have to be changed in such a way as to not reduce the incentives to work nor bankrupt the country. This might be done by giving a Negative Income Tax rather than Universal Basic Income. Whereas UBI gives everyone free money, the Negative Income Tax allocates the money in such a way as to only benefit those in need. Using the Negative Income Tax to replace current welfare benefits would make the system cheaper, simpler, and more effective than it currently is. If in the future automation does increase unemployment it would not be difficult to expand the negative income tax. All one has to do is increase the income cutoff. Clearly the Negative Income Tax offers the benefits of UBI at a lower cost. This shows that there should not be a debate about what program is better. The only true questions that remain are about what income level should be the cutoff for the benefits and when politicians will have the courage to face the future and implement this needed change.
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