A universal basic income is less attractive if it needs to be paid for – American Enterprise Institute

Posted: June 17, 2020 at 12:57 am

I thought Andrew Yangs political campaign might mark Peak UBI. First, the rest of the Democratic field seemed dismissive. Second, it seemed strange to call for a massive, new, and untried social program at a time of record low unemployment. Third, there really wasnt much evidence that robots were about to take all the jobs, as Yang argued.

Then came the coronavirus. Hey, as long as the government is cutting $1,200 checks because of the shutdown-affected economy, maybe it can, you know, just keep on sending them. Like, forever. Or so argued UBI supporters. As Yang said back in March, Certainly I would never hope that UBI gets adopted because of this terrible virus. But I will say its somewhat surreal to suspend my presidential campaign in February and see it potentially implemented [the following month].

Well, one or two checks arent infinite checks. And theres good reason for policymaker caution before ever implementing a UBI. One more bit of evidence on that front at least evidence of tradeoffs from the new NBER working paper Universal Basic Income: A Dynamic Assessment by Diego Daruich of the University of Southern California and Raquel Fernndez of New York University. From that paper:

We introduce the UBI policy as a lump-sum transfer made annually to all individuals once they reach adulthood. What are the benefits of a UBI policy? In an economy in which individuals are subject to both wage and employment shocks and in which credit and insurance markets are imperfect, UBI allows for greater smoothing of consumption and the guarantee of a minimum standard of living. It can also allow agents to undertake relatively expensive investmentsin our model, attend collegewhich might have large consumption costs associated with them given the inability to borrow against future income.

Furthermore, it can have beneficial intergenerational consequences from allowing parents to increase their investments in their childs skill formation. We find that a UBI policy that unconditionally gives all households a yearly income equivalent to the poverty line level ($11,000 per household per year as measured in year 2000 dollars) has very different welfare implications for generations that are alive when the policy is introduced relative to future generations. The policy is welcomed by poorer householdsthose hit by out-of-work shocks as well as those with low skills or without a college education. Average welfare for adults alive when the policy is introduced increases by 1.2 percent measured in consumption equivalence units and, indeed, if this policy were voted upon it would win against the status quo.

It is, however, a very expensive policy to implement. The higher tax rate required to finance this policy reduces investment in skills, leading to a less skilled work force and requiring even higher taxes over time. All future generations, operating behind the veil of ignorance, would prefer to live in a world without UBI and would be willing to sacrifice over 9% of consumption to do so.

Of course, if one believes in a world with few if any fiscal constraints on policy, maybe this study is less relevant.


A universal basic income is less attractive if it needs to be paid for - American Enterprise Institute

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