The Flawed Idea of a Universal Basic Income
A Universal and Unconditional Basic Income is a disincentive to employment and financial sovereignty that ought to do more harm than good in the long run.
Shereein Saraf
February 08, 2021 / 8:00 AM IST
A Universal and Unconditional Basic Income is a disincentive to employment and financial sovereignty that ought to do more harm than good in the long run.
The idea of a Universal Basic Income is to provide unconditional universal cash transfer without having to fulfill any qualifications. It is an income for all, irrespective of one’s income, education, or work. This idea has entered the public discourse, now and then, due to rising inequalities between the developed and developing nations.
The proposal resembles Milton Friedman’s idea of negative income taxation, according to which citizens earning below a threshold receive a cash transfer instead of paying taxes. The Universal Basic Income contrast with this idea as it does not exclude anyone from its ambit.
An unconditional income to all is an attempt to bring the poor out of the poverty trap, giving them a head-start to feed themselves and find suitable work. Instead, it eludes the need to work for the poor who can make do with the meager cash transfer provided.
Another school of thought feels that an income to all is a right to freedom – freedom of choosing to work or not. Obtaining sufficient wages, however little the sum might be, is a human right. Moreover, the government must fulfill this condition for the better of its citizens.
With the world facing the COVID-19 pandemic, millions of jobs lost, and financial insecurity among people, this idea has sprouted yet again. Governments have extended stimulus to lead the economy into recovery and build confidence among people. In the light of these circumstances, the idea of a basic income seems fit to implement.
Many countries have begun trying this idea in the form of experimental pilots. While Canada witnessed a five-year pilot in Dauphin, a town where beneficiaries below the poverty line received an annual income, the Indian states of Madhya Pradesh and Delhi also tried experimental evaluations producing favorable results. In Kenya, GiveCharity – a charity providing money to the poor in Kanya and Uganda – rolled out an experiment transferring a basic income to 6000 Kenyans.
In Utrecht, a city in the Netherlands, tested giving direct cash transfers instead of existing social benefits to welfare recipients. One thing that is common in these trials is that the income is not universal. Instead, it targets a particular section or class of the society. An experiment held for a restricted sample (even when it truly represents the population) might not show similar results when extended to the national and global population.
Even though these experiments have resulted in favorable outcomes, such as reduced crime, happiness, better health, improved attendance at schools, for implementing a basic income, these provide little evidence for the impacts of a universal income. That’s the power of the external validity assumption.
Many of these experiments have been short-lived except in Alaska, where everyone receives an annual check since 1982. The state has successfully eradicated extreme poverty, but evidence suggests that people work less, encouraging them to raise more children.
Despite its merits, rolling out a universal basic income will financially strain the public expenditure. Though economists propose discarding other welfare schemes to implement a basic income, it would burden the exchequer in the long-run. Taking the Indian case, many economists have proposed their calculations to roll out a universal basic income efficiently. Pranab Bardhan (2016) recommended an annual transfer amount of INR 10,000 (~USD 137) to all, amounting to 10% of Gross Domestic Product (GDP). To finance this, he proposes a roll-back of all non-merit subsidies, amounting to 9% of GDP, and eliminating corporate tax holidays and exemptions, amounting to 3% of GDP.
Abhijeet Banerjee (2016), a Nobel Prize-winning economist, suggests replacing all welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act 2005 (MGNREGA) and Public Distribution System (PDS) to universally extending INR 13,000 (~ USD 179), amounting to 13% of GDP.
But these calculations do not account for price fluctuations, especially the rising year-on-year consumer price inflation. The annual transfers in Alaska, for instance, range from USD 1000 to USD 2000, depending on the oil prices. Further, It does not pin down an action plan for the years to come, whether basic income will be provided indefinitely or discontinued after decimating extreme poverty. If the income transfer will be in place for a specific period, should it be announced ex-ante? Also, are scaled experiments enough to understand the impact of a basic income for the whole population?
One drawback is the unwillingness to go back to work or search for it. This idea can have its extreme variations. A typical agricultural household in rural India comprises a joint family with many members who can pool their income transfers to live-off that sum. This financial synergy could resist household members to migrate to urban areas, especially men, away from their families, searching for a job. Though a revelation, it could be the case.
The study of behavioral economics could enlighten social scientists with individual and household behaviors as a response to receiving a basic income. Evaluators can collect data concerning when, how, where beneficiaries spend and save their transfer income. This exercise could acquaint policymakers with the subtleties of expenditure patterns and behaviors among people.
Counterarguments could range from income being an inherent human right, making rolling out universal income indefinitely, irrespective of poverty levels. Furthermore, income is a monetary value dispensed in exchange for goods or services. When economists and policymakers propagate the same idea as what resembles a transfer, it doesn’t remain income anymore, at least in economic terms.
While proponents believe that an unconditional income will counterbalance joblessness due to automation, many believe automation will increase jobs, increasing the demand for highly-skilled people. A basic income, on the other hand, will make people complacent. People will be unconcerned about having to work or be a productive asset for the economy.
If a Universal Basic Income is the means to eradicate extreme poverty, it alone might not be an adequate measure. After all, poverty is not only a lack of money. It has a multidimensional aspect, a part of which is Amartya Sen’s theory of capability deprivation. It is the lack of opportunities, education, and health, happiness, and wealth, etc.
It is imperative to support the poor with targeted schemes and incentives to overcome extreme poverty. Though many of these schemes have fewer beneficial spillovers and more leakages, there are measures to resolve this issue. The cash transfers and subsidies issued towards any particular welfare scheme should direct to e-wallets or a financial instrument of the beneficiaries. Further, these transactions should have transparent records accessible to the public.
Moreover, creating jobs – part-time or full-time, especially in the rural sector, could eradicate extreme poverty. Better infrastructure – schools and universities for quality education, hospitals, and primary healthcare centers for affordable and accessible healthcare – is essential to aid advanced growth and progress. Ensuring an adequate safety net such as social security and access to credit and banking facilities will complement economic growth.
All in all, a Universal Basic Income is not a means to end. It will not give people dignity; it will take it away from them if they become dependent on the basic income. Lastly, it is not a permanent solution to poverty due to its many facets.