America is slogging through one of the toughest periods of its existence. The pandemic has brought whole sectors of the economy to a screeching halt — suddenly and unpredictably. And with some of America’s biggest states veering into the danger zone again after partial reopenings, it’s possible that even modest attempts at restarting the economy are only inflaming the ongoing pandemic.
So what’s the path forward? When most people rely on the economy to provide for their basic needs, but the basics of the economy are exacerbating the pandemic, how do you prevent people from going hungry while also keeping them safe at home as much as possible? One idea that’s beginning to draw serious attention is the basic income — a small, regular payment to American citizens to ensure they can afford necessities whether they’re working or not. It’s an idea that started to get mainstream attention earlier this year with the presidential campaign of Andrew Yang, and one that could be ideally suited to the country’s current crisis.
So, is a temporary basic income the perfect solution to the perfect storm of conditions created by this crisis? Or is free money still just as dumb an idea as it seems on the surface? Here’s a closer look at what it might mean and why some people think now might be the time to give it a try.
Last updated: July 30, 2020
What Is a 'Basic Income'?
A basic income is just the simplest form of government benefits in the form of “direct cash payments.” One way to think of the basic income would be in the parlance of recent attempts at healthcare reform. You could think of a basic income as being like “Social Security for all.” Social Security is already a system that provides every retiree with a monthly stipend to ensure that they have at least enough income to provide for housing, food and other basics. A basic income would essentially expand those benefits to a much larger group, like all adult citizens.
Why Some People Think It Could Work
On its surface, simply handing out money seems like an insane idea. However, many economists and political thinkers have long asserted that its benefits would far outweigh its flaws, including lauded figures like Thomas Paine and the Rev. Dr. Martin Luther King. Here are some of the arguments proponents of this idea will make in its favor.
There Are Fewer Freeloaders Than You Think
Ever since former President Ronald Reagan raised the specter of the “welfare queen” who abused the social safety net and leached hard-earned dough from taxpayers, plenty of people have the idea that America is beset by a massive population of freeloaders looking for any chance to sponge off of people who actually work for a living. The issue is that it’s largely a myth. Sure, there are people who abuse government benefits. But most studies of means-based government programs reveal that they’re the exception, not the rule, and most people relying on things like welfare or food stamps are hard workers looking for opportunities to improve their situation.
The real question here would be, how many undeserving people need to receive payments before it’s worth preventing millions of deserving people from getting benefits that could help them get enough stability in their lives to make some real progress toward a better life? The answer to that question is going to be different for everyone, but it’s also worth noting that letting a few bad apples dictate public policy for the entire nation can lead to serious issues as often as not.
A Basic Income Could Replace Other Programs
One reason why some conservatives have taken a shine to the idea is because of the idea that it could reduce the amount of federal bureaucracy even if it’s increasing the total size of social benefit programs in the process. A society with a basic income could ostensibly consider eliminating a host of patchwork agencies and programs designed to provide specific benefits to needy Americans.
With a basic income, you could essentially retire things like welfare and food stamps, maybe even consider having it replace Social Security. And if the basic income is “universal” — i.e., everyone gets it — it wouldn’t require any sort of means testing to ensure that it’s only going to people who are genuinely struggling, reducing the additional administrative costs that come with government benefits today.
Poverty Is Expensive
Not only would a basic income theoretically make a number of other social programs redundant, but it could also reduce government spending in many other ways. The simple fact of the matter is that poverty is expensive. People living in difficult situations are much more likely to commit a crime, struggle at school, suffer from costly chronic diseases and ultimately necessitate additional government spending in all sorts of other ways. And while not every criminal or struggling student will see their problems go away because of a basic income, a great many might finally have the resources to directly address the issues in their own lives. Lower crime rates, more efficient schools and a healthier population save governments a lot of money in the long run, and using some of your tax dollars to fund a basic income could mean using a lot fewer to deal with the problems created by people living in great need. And that’s just when you’re talking about the dollar cost — the social, cultural and emotional toll are likely incalculable.
Workers Would Have More Bargaining Power
When not having a job means being unable to provide for your family, people are willing to put up with a lot. Employers know this, and the wages and benefits they offer can very often be with the clear knowledge that if someone doesn’t like it they might not have a lot of other options — especially if their finances are going through a rough stretch. However, if every American could feel confident that they had a reliable financial backstop — regardless of what happens at their job — they might be a lot more willing to try their hand on the open market rather than staying at a job that doesn’t appreciate them.
This should matter, in particular, for low-skill or low-wage workers in the service industry, where a steady paycheck is sometimes the only motivation. Places like Target, Walmart and Amazon would have to put together a package of wages and benefits that would make it worth working there, or a huge portion of their labor pool might decide to just stay home and figure out how to cut their budget to the bone and live off benefits until the right position comes along.
Why Does It Matter Now?
There’s a whole lot more to the debate over basic income, but that should give you a broad sense of what some of the “pro” arguments really boil down to. OK, so maybe a basic income — in a general sense — has more going for it than it first seems. A society without poverty would clearly have a lot going for it. But why is it important right now? What is it about the current crisis that has a lot of people citing these ideas as being especially relevant in the present?
The fact is, there are many elements of a basic income program — even a temporary one — that could be seen as tailor-made for the current crisis. Here’s a look at why a basic income might be an ideal solution for a COVID-19 economy.
A Basic Income Could Mean Closing the Economy as Long as It Takes
America’s leaders are facing life-or-death consequences no matter what they choose right now. Reopening could mean letting the lid off of the coronavirus and seeing it spread rapidly, ultimately costing many vulnerable people their lives. But keeping things closed presents similar problems as many Americans just can’t afford not to be working for so long. And that same issue plays out on a personal basis. What do you do if there’s no food in the house and you’re late on rent, but going out and working could mean putting your family at risk of contracting the virus? For many, they’re only engaging in some of the unsafe behaviors that are causing infection rates to spike because they don’t feel like they have a choice.
If people could really rely on a regular benefit check — even a small one — coming in for as long as they would need it, they could feel comfortable adjusting their life to the current crisis. Rather than being forced to balance health concerns with fiscal ones, Americans could just stay focused on beating COVID-19 until the war has been won — and let restarting the economy wait until it’s safe.
Direct Cash Payments Are Great for Juicing the Economy
Direct cash payments like a basic income have repeatedly proven to be the most effective way the government can stimulate the economy. It makes sense: You give people who need things some money, and you can be pretty sure they’ll turn right around and spend that money on things they need. As such, direct cash payments are essentially injecting money straight into the hands of consumers, and it produces significantly better results.
The Congressional Budget Office (CBO) produced a study about this following the 2007-09 housing crash and the efforts at stimulating the economy that came in its wake. The study found in no uncertain terms that the form of government action with the highest “fiscal multiplier” — or the one where the GDP generated per dollar spent was the highest — was the transfer of payments to individuals, which was among the most effective at producing results, topped only by transferring payments to local government for infrastructure spending and direct purchase of goods and services by the government. Notably, they were significantly better than tax cuts, in the study’s estimation. Giving people free money was more than 30% more effective than a two-year tax cut for middle- and low-income earners, and more than three times more effective than a one-year tax cut for high-income individuals.
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People Are Paying America To Lend It Money Right Now
At a certain point, the question of how to pay for these benefits is impossible to ignore. But even there, the current conditions in bond markets lend themselves to a plan to borrow heavily to finance the program in the short term. Sure, traditional budget hawks are going to be opposed to increasing the deficit regardless, but it’s also important to remember that not all deficits are the same — most notably in how much it costs to borrow.
And right now, the cost of borrowing money for the United States is so low it probably means a lot of people will end up paying Uncle Sam for the privilege to lend money to the U.S. As of late July, the yield on the 10-year T-bill was under 0.60%. And while any good financial advisor worth their salt would tell you that it can be risky to take out loans to cover budget shortfalls, the odds are also pretty good that if you told them you could secure a 0.60% annual percentage rate on a loan, they would tell you to move quickly before someone at the bank realizes what happened.
To really put it in perspective, you also have to consider inflation. If the U.S. takes out a 10-year T-bill at a yield of 0.60% for $10,000, the $10,000 it pays back after 10 years will later be worth significantly less — relatively speaking — than the $10,000 it’s borrowing now. And as long as inflation remains higher than the bond’s yield — a very safe bet at those rates — it means that investment banks and foreign governments are effectively paying the United States for the privilege to lend it money.
It seems insane, but people who are looking for a safe place to park their money in the middle of these deeply uncertain times are absolutely desperate for zero-risk options and U.S. bonds are the gold standard. So, as long as wealthy investors are fighting to buy American debt — and driving borrowing costs this far — running up a big deficit is ultimately much less of a problem over time.
Cushioning a Bigger Recession Could Matter
While there’s still reason to hope that America has avoided some of the toughest, long-lasting economic impacts, the longer the pandemic slogs on, the more likely it is to damage consumer confidence and the broader economy in a way that won’t be easy to come back from. If spending more now can both reduce the duration of the crisis and help prop up the economy, that money could all be coming back in the form of better tax revenues created by avoiding a more serious recession. There’s no way of knowing for sure, but helping ease the overall hit to the economy is unlikely to hurt things, even if it’s not necessarily averting disaster.
A Temporary Basic Income Could Be Paid For With a Temporary Tax
Going to the American people to ask them to accept a semipermanent tax increase so that people could get free money is a pretty tough sell. Just ask Andrew Yang. However, a tax increase that would kick in after the economy has reopened and has a clearly defined end-point in a few years might be something very different. As much as Americans tend to viscerally hate taxes, asking for a small, temporary bump in rates to deal specifically with the consequences of the pandemic would be a lot easier to peddle. So even if a long-term basic income is still a total nonstarter, if it’s specifically sold as a very narrow, targeted response to the current crisis, it might not generate as much backlash as government programs like this often do.
Why It Might Not Work
Of course, there are plenty of economists and political scientists who don’t think the basic income would work — whether as a short-term fix or a long-term program. And even if you’re a big believer in the idea, it’s worth recognizing the valid criticisms many have with how this might work.
Many worry that a lot of people would simply stop working once they no longer had to, drying up the labor pool and crippling businesses in the process. If a basic income brings the wheels of the economy grinding to a halt by removing any incentive to work, it ultimately leaves the country worse off. There’s also the argument that injecting that much cash directly into the economy could have an unpredictable effect on inflation. If prices start to rise too fast, the value of the benefit drops and it could ultimately prove counterproductive and do more damage than benefit. And finally, the cost is an obvious issue. Paying all 300 million Americans $1,000 a month would cost $300 billion. A month. Some of that would potentially be mitigated by removing redundant social programs, higher tax revenues from increased economic activity and/or limiting who would be eligible, but it’s still going to cost no matter how you cut that cake.
Past Experiments — Here and Abroad — Could Give Insight Into How It Might Work
Of course, both the benefits and consequences of a basic income remain largely theoretical. What its critics are right about and what its proponents are right about is going to remain unclear up until it is put into action, and sometimes even after that.
However, it’s worth noting that there are some clear examples of how a basic income might work in action — including several from right here in the United States. And the real-world examples — while clearly happening on a vastly smaller scale than the entire country — do seem to indicate that people’s biggest concerns could be overblown.
Here’s a look at the many places around the world where some form of a basic income has existed.
Under Nixon. Yes, Nixon.
Yes, the United States used to have a form of basic income. More specifically, direct cash transfers actually gained some serious traction within the Republican Party in the late 1960s to early 1970s. They conducted experiments with a “negative income tax” — if the lowest income tax brackets are negative, it effectively functions like a basic income that phases out for people earning more money — in several different towns across America. Ultimately, about 7,500 people received benefits during a period from 1968-74, spread out across locations in New Jersey, Pennsylvania, Iowa, North Carolina, Denver and Gary, Indiana — with an effort made to study the effects both in rural and more urban areas.
And Americans handled themselves pretty well when it came to free money. Labor force participation did decline but only slightly. The bigger takeaway would be why, which appeared to be because a lot of working mothers and teens — who were only in the labor market in the first place because their families needed the money — finally had the flexibility to leave work they never wanted. In fact, much more notable than the slight decline in labor force participation was the increase in people pursuing their education, whether it was teens who could afford not to drop out and take a job or adults trying to create new professional opportunities.
The towns involved were small, so it would be a mistake to immediately assume the results would simply scale to the rest of the country, but it does seem to indicate that some of people’s biggest fears — that free money would send the entire country into a downward spiral of freeloading and sloth — are at least a bit overblown.
It might’ve been shocking to discover that a basic income already happened in America — let alone that the effort was spearheaded by Republicans. However, any sharp-eyed news watchers might remember that the California city of Stockton had also launched its own experiment with how citizens might react to getting a regular stipend for basics. It came to about $500 and lasted for some 18 months for the 125 people involved.
It’s still too early to say much with certainty about the experiment in Stockton, nor would you want to lean too heavily on the results of such a small program, but the results do point to a similar conclusion. Not only did the people receiving the funds generally not lose any motivation to work, they typically used the money to make qualified improvements in their situation.
While the size of the annual check is hardly enough to sustain a person or a family, the Oil Fund Benefit paid to every Alaskan citizen could be viewed as a form of basic income. The state has a unique system wherein its residents get a direct financial benefit from the money made by allowing oil exploration. It usually comes to about $1,000 to $2,000 a year, which isn’t enough to quit your job but surely represents a really important benefit for the state’s poorest residents.
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Eastern Band of Cherokee Indians Casino Dividend
Much like Alaska, the residents of tribal land for the Eastern Band of Cherokee Indians in North Carolina receive a regular payment to reflect the profits earned by the tribe through its gambling license. Each person receives about $4,000 to $6,000 a year, and economic research has repeatedly shown that — far from leading to a crippling lack of motivation — it has mostly been felt in major improvements in education, mental health and reduced crime and drug addiction.
At the same time that the United States was trying out basic income in a few of its own settings, Canada was taking a much bigger bite with its Mincome experiment in Manitoba. Like the U.S., it was interested in seeing how the broader population might respond if there were a minimum income for everyone, regardless of unemployment. It ultimately came in the form of a payment of 16,000 Canadian dollars a year for about four years being paid to the residents of the small, remote town of Dauphin, beginning in 1974.
The results showed a lot of the same things that the experiments in America did. Labor force participation didn’t crater, the people who did stop working were those who would ideally not have been working in the first place — like teens missing school to help support their families.
One charity that’s leaning hard into experimenting with what people do when you give them free money is called Give Directly. It raises money as a nonprofit and then has a relationship with villages in Kenya, Uganda, Rwanda, Liberia and Malawi where they supply regular cash payments to residents and try to carefully document the results. Here, where many people are living on very little, basic income appeared to provide a huge economic benefit. More than anything else, the organization has noted that people largely committed their additional cash to invest in their own businesses or income streams that could keep producing and help them raise their standard of living in the long term.
Not unlike Stockton, Finland also took a stab at a basic income with a small pilot program. The Scandinavian nation selected 2,000 unemployed people at random to see if offering them $635 a month in no-strings-attached money would ultimately lead to them finding employment, particularly if they knew the benefit wouldn’t stop when they found work. It did not ultimately produce the desired result, but it did produce a lot more trust and belief in public institutions, more happiness and less stress for the people in the study.
Brazil’s Bolsa Familia program isn’t exactly a basic income, per se — to keep receiving the money, families have to visit health clinics and ensure their children stay in school — but it’s a direct cash transfer that can still give some important insight into what to expect. One clear takeaway? A massive reduction in the serious poverty that many Brazilians suffer. Per the World Bank, the percentage of Brazilians living below the international poverty line went from 13% to 3% by 2015 and the rate of “extreme poverty” would be 33% to 50% higher without the program. One UN study found that the number of people living in hunger was nearly halved over 20 years from 1992 to 2012.
A privately funded basic income experiment in this African nation supplied every resident of the Otjivero-Omitara region under the age of 60 with $6.75 in benefits each month during 2008 and 2009. Much like other experiments, the residents thrived and the quality of life improved substantially. The area saw a marked decrease in child malnutrition and poverty-related crimes while school attendance was notably higher.
Crowdfunded Basic Income
One other way you’ll see people trying to demonstrate how free money can often promote industriousness rather than create sloth is by asking others to fund their lives. One trend on crowdfunding sites is for people to launch their own campaigns to create a regular income stream. This would be a way for people to pay money to see what the campaign’s founder will do with themselves when they have a regular income stream coming in whether they’re working or not.
Clearly, the results are pretty mixed depending on who’s involved, but it’s proven an interesting way to demonstrate the concept for a broader audience.
As noted earlier, one way to frame a basic income is as “Social Security for all,” and part of the reason that works is because the Social Security program has always been a sort of basic income. It’s limited to those who are older or unable to work for other reasons, but it should also be a clear sign that large-scale direct cash payment systems already exist in this country.
Unemployment and Food Stamps
Speaking of which… while things like unemployment insurance and food stamps are “means tested” — meaning they try to target just people in need — they are still cash transfers, in a way. Food stamps might have restrictions placed on how they can be spent, but they’re still a way of simply providing those in the most need with some additional spending power. And while there are those who feel like food stamps, in particular, are disincentivizing work, these are government benefits that have helped countless Americans who were down on their luck get back on their feet.
On its surface, Andrew Yang’s presidential campaign was a bit of a flop, with Yang failing to win many delegates and dropping out very early. However, many others would argue that he developed outsized levels of support considering his bold talking points and relative lack of a national profile. In particular, Yang hinged his campaign on the universal basic income — in his case, a $1,000/month benefit he referred to as a “freedom dividend.” So while Yang’s political future does not seem to involve the White House — at least not in 2020 — he does seem to have injected the idea of a basic income into the national conversation in a new way.
What Might It Look Like?
So if this was a principle Americans wanted to try out to address the pandemic, what would that even look like?
The simplest approach might be to just expand the current program of offering supplemental unemployment benefits while also telling states the federal government would pick up the tab on offering unlimited unemployment until the end of the crisis, using that impressive borrowing power individual states can’t draw on.
Another might be to use the IRS, either by issuing payments in the form of regular tax credits or stimulus checks like the ones that were sent out earlier this year. It could even mean passing a temporary tax cut that would push the lowest brackets into the negative. In each case, it would be a way to make direct cash payments to people in need while staying within the confines of existing government infrastructure.
Of course, some would point out that there are plenty of needy people out there who aren’t eligible for unemployment or who aren’t filing taxes. If people truly want a universal basic income, there would likely need to be more steps taken to ensure it can work smoothly.
Is America Ready for Free Money?
The idea of a basic income can be a very hard one to wrap your head around, especially for people who adhere to more traditional ideas about earning your place in society through a job. The cultural implications of a program that would simply hand out cash are hard to underestimate, and that might mean that Americans just aren’t in a place where this idea could thrive.
However, the reality of the coronavirus pandemic might be making at least a handful of people who would otherwise have considered the concept to give it a long look. And with the very real potential that parts of the country might be forced to close back down or enact restrictive legislation limiting business, it could mean that many people could see a short-term basic income plan of some form or another as a solution that addresses too many of the issues created by this crisis to ignore.
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This article originally appeared on GOBankingRates.com: Basic Income: Could This Out-There Idea Get America Out of the COVID Crisis?