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Business News/ Opinion / Columns/  A universal basic income won’t do America’s young any good

A universal basic income won’t do America’s young any good

Studies suggest that guaranteed transfers go against their interests

The behaviour of lottery winners in the US has raised UBI scepticism (Photo: iStock)Premium
The behaviour of lottery winners in the US has raised UBI scepticism (Photo: iStock)

It’s a simple, utopian idea. If we give everyone a monthly cheque, we can eliminate poverty and do away with the inefficiencies of our cumbersome and flawed welfare state. Minneapolis in the US is the latest city to give a ‘universal basic income’ (UBI) a try. It’s offering $500 a month for 18 months to 150 of its low-income residents with no work or spending restrictions. But others worry it’s not so simple. A UBI would be expensive, and what if it discourages people to work, which could inadvertently increase inequality and lead to social instability? A new paper suggests that UBI sceptics may be right: the policy may cause more harm than good, and at a very high cost, too.

Testing UBI is not easy. What makes UBI universal and basic is that everyone gets the money and this flow of cash is predictable and long-lasting. UBI advocates point to a few experiments that show giving people money doesn’t cause them to work less. But the Minneapolis trial and other studies aren’t truly UBI because they’re short term; the payments only last a year or two. And that impermanence changes how people respond. Most financial and work decisions are based on one’s outlook for lifetime income, not a few dozen months of cash.

How UBI payments are structured is also important. Another widely cited study looks at income paid each year from the Alaska Permanent Fund. Economists estimate that payments haven’t caused Alaskans to decrease work, and may even encourage beneficiaries to do more part-time work. But the permanent fund isn’t a true UBI either, because payments are based on the state’s oil revenues and thus vary significantly year to year. So these payments actually increase Alaskans’ income risk, which is the opposite of what UBI is supposed to do.

Advocates might say these studies are close enough. But close is not enough in this case. Claiming the models represent UBI is like saying a fixed-rate consol bond is a close approximation of a two-year bond or a dividend-paying stock. We know that these types of assets have completely different values and can therefore elicit completely different behaviour on the part of investors in terms of risk-taking and wealth effects.

A new study from the National Bureau of Economic Research takes a different approach to evaluating UBI. Economists reviewed lottery winners over a five-year period. Lottery winners are a good test for UBI because lottery winnings are large enough for the income generated to be life-changing. The average win was estimated to be equivalent to an extra $7,800 a year, similar to UBI proposals. Lottery winners are also chosen at random, which makes for a good experiment.

Contrary to their creativity, motivation and entrepreneurship getting unlocked, lottery winners were found unlikely to start successful businesses. Winners were also found to work less and be more likely to switch to lower-paying jobs. Many winners were observed to have moved soon after the win, usually to a relatively rural area. But few moved to fancied neighbourhoods in terms of college attainment of neighbours, average income and other metrics that are a proxy for opportunities available to them or their children. There was one positive effect: lottery winners were more likely to marry and less prone to divorce.

You may think living in the countryside and working less isn’t so bad. Working a lower-paid job can sometimes offer other benefits, like flexibility and time with your children. But there are costs. Working less at a less-demanding job often means you forgo learning new skills and wage increases. This may not be a big deal for middle-aged people. But it can leave young people who are still establishing their careers and acquiring skills much worse off. Most wage increases occur in your 20s and 30s, and if you miss out on those years, the odds are you won’t catch up.

Our current welfare system is imperfect. But the fact that it makes payments contingent on earnings, age or even having a child is a better alternative. First of all, it’s much cheaper because you don’t have to give money to those who don’t need it. Second, guaranteed money (or money you get no matter what happens) is worth much more than income that only shows up some of the time. The more money we give people, the bigger the impact it would have on their behaviour, and often not in a good way.

One issue with the recent lottery study is that it only tracks winners for several years. Many lottery winners think their windfall will set them up for life, but then end up filing for bankruptcy and are then prone to depression and bad health (which is why you should always take an annuity option). But this demonstrates the challenges of implementing a universal basic income. Once it’s offered, it’ll be very difficult to take away, and doing so can leave people worse off than before.

Allison Schrager is a senior fellow at the Manhattan Institute.

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Published: 19 Jul 2021, 10:31 PM IST
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