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Free income is a great idea — unfortunately, it sort of doesn’t work

The economy seems to be evolving into one in which fewer companies and workers are required to produce the goods and services everybody needs. And so more and more people are expected to have an increasingly challenging time finding work. Meanwhile, a shrinking pool of workers and investors is accumulating a disproportionate amount of the world’s wealth.

To address this problem, more and more economists are proposing universal basic income (UBI), a policy which would use taxes to redistribute wealth to the needy in the form of a paycheck you don’t need to earn.

Switzerland voted no

Swiss citizens on Sunday voted against an initiative to get an unconditional monthly income. A group of artists and writers got the proposal for individuals to receive a UBI on the ballot after gathering 100,000 signatures for a petition. The final tally of the referendum showed that the overwhelming majority — 77% — voted against the plan and only 23% supported it.

“The bad news is UBI is a horrible idea but the good news is that it’s never going to happen. And, there was no actual plan on the ballot and the group advocating for UBI had to fill it in, so it was unclear what people are actually voting on,” Kevin Milligan, economics professor at the Vancouver School of Economics at the University of British Columbia, told Yahoo Finance.

The Swiss proposal had a lot of missing blanks that were only partially answered by the supporters (who suggested that every adult receive 2,500 Swiss francs ($2,570) and each child receive 625 Swiss francs ($642) per month). The idea of UBI has been hotly contested around the world, with countries like Finland and the Netherlands piloting trial programs and a Silicon Valley startup accelerator is even plotting a mini experiment in Oakland, Calif. to figure out how to pay people, collect data, and choose a random sample, among other things.

UBI: A utopian ideal?

Of course, in theory, the idea of having a fall-back income foundation sounds delightful. But what most advocates aren’t getting specific about is where exactly this money would come from.

Jim Pugh, co-founder of San Francisco-based nonprofit Universal Income, says the Swiss proposal didn’t prescribe a source of revenue because “it’s Parliament’s duty to come up with how to fund the proposal.” There’s only one problem with that proposition — not one of Switzerland’s 12 parliamentary parties supported the idea.

If UBI were to be implemented in the US, it would cost more than $3 trillion a year to provide the nation’s 300+ million people with  $10,000 per year, according to Robert Greenstein, the president of Center on Budget and Policy Priorities. That would cost between $30 trillion and $40 trillion over the next 10 years. An expenditure this huge could come as a shock to people in the US. Greenstein says Americans have not been willing to accept neither the kinds of levels of taxation nor the breadth of social support seen in western Europe.

In the US, UBI would likely take the place of food stamps, temporary assistance, supplemental security income, and other smaller programs. But that would only address part of the net expenditure.

“When you look at the math, it’s extremely difficult to see how you could get close to UBI in the United States without going to levels of taxation that are inconceivable to me or alternatively eviscerating most of the current safety net that includes things like food assistance or social security,” Greenstein says.

But advocates for UBI like Pugh say that individuals have to take a long-term view when thinking about implementing UBI.

“We’re talking 10-20 years for the United States. There’s no scenario where we get a national version before then,” he says. “There are experiments and smaller scale programs that could be implemented sooner that would help us understand how basic income works.”

The idea of UBI, however, becomes less feasible even when taking a long-term approach, says Greenstein: “In 15 years, the baby boomers will be fully retired and we’ll need considerably more resources for Social Security and Medicare, which are unable to pay full benefits under the current structure. The math, if anything, gets even more daunting.”

Can case studies be extrapolated to larger initiatives?

Even within the US, individuals are hatching small initiatives to test basic income on a micro level. Sam Altman, the president of startup accelerator Y Combinator, spearheaded a short-term pilot in Oakland, Calif., which he hopes to convert into a larger, long-term study.

The pilot will include fewer than 100 people and run for between six and 12 months, but we don’t know how much exactly participants will be receiving each month. Y Combinator chose Oakland because it’s “a city of great social and economic diversity, and it has both concentrated wealth and considerable inequality."

Source: Twitter
Source: Twitter

The primary goal of the experiment, according to the company, is to examine how technological advancements can impact individuals’ livelihood. “Although basic income seems fiscally challenging today, in a world where technology replaces existing jobs and basic income becomes necessary, technological improvements should generate an abundance of resources and the cost of living should fall dramatically,” a company statement by Altman read.

Milligan takes issue with the sample size of the program, though.

“We learn almost nothing from this kind of experiment. Why is it 100 people, and not 1,000 or 10,000? Of course they can’t afford to do a pilot with 10,000 people,” he says. “I’m not sure what an experiment of 100 people will actually indicate."

Such tests have been conducted in the past — take, for example, the “mincome” (“minimum income”) experiment in Dauphin, a town of 12,000 people in Canada. About 30% or 3,600 people qualified to receive the a check from the government (a family of four received ~$15,000 current US dollars per year).

Despite Canada spending millions of dollars on the project, “no one ever wrote a final report. There was no more money forthcoming to do an evaluation of the project and it just disappeared,” Evelyn Forget, an economist at the University of Manitoba, told the “Freakonomics” podcast.

“Unfortunately, they weren’t able to do deep analysis right away, but the government did find decades later that there was a small decrease in the workforce participation, though that change could be explained by young people staying in school longer and young parents staying with their kids. More education ultimately means more productive work,” Pugh says.

Despite the impracticality of implementing UBI in the US ever, never mind in the near future, 68% of people across the 28 EU countries said they would definitely or most likely vote for a UBI, according to a May poll by Dalia research.

Countries like the Netherlands and Finland have a pilot program in the pipeline, and unlike the Swiss experiment, the Finnish government is supportive of the initiative. Actually, the prime minister of the country has been at the helm of its rollout. “For me, a basic income means simplifying the social security system,” he said.

Realistic alternatives to UBI

Though Milligan denounces UBI, he says perhaps a wiser method would be to implement something similar for solely children in need. He helped design a program Canada is implementing starting July 1.

Called the Canada child tax benefit (CCTB), the tax-free monthly payment is intended to help eligible families with the cost of raising children under 18 years old. Families would have to file their tax returns on time every year (even if there was 0 income) in order to receive the benefits: Children under the age of 6 would receive $6,400, and children over 6 would receive $5400 every year.

This would support 97% of low-income or impoverished children, according to Milligan. “I think this is a lesson that you can take from this basic income debate,” he says. “I imagine it as taking food stamps and other programs with kids and providing them in a cleaner, more rational way.”

Greenstein agrees that universal children's allowances may be the best starting point to help those in need, noting that several western European nations offer similar programs.

“I would like to see the US do something like that. Politically, I think it’s hard, but not impossible, to get there,” he says. “The first step is to broaden the child tax credit in America so that all low-income children get the help they need.”

Though Milligan and Greenstein don’t see UBI as a realistic or desirable possibility, they both admire and respect advocates’ desire to end poverty in America; it’s just not a feasible way to actually close the inequality gap, they say.

“It’s more productive to talk about things that you can actually advance and win within our political system rather than focusing on a highly impractical utopian vision, which distracts people from more practical ways of making solid progress,” says Greenstein. “I actually view myself as someone who shares a lot of the same policy goals as UBI supporters.”

Milligan echoes this sentiment: “Society needs dreamers. And society needs accountants. You have to think about how we can actually pay for these ideals — they’re putting all of this energy behind something that will simply not happen.”

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