Universal Basic Income: A Bad Idea that Makes Sense Right Now

The idea for a Universal Basic Income gained a lot of press during the Democratic primary debates when Andrew Yang pitched a “Freedom Dividend” plan to give every American $1,000 a month. Since the world didn’t end after most Americans received $1,200 as a part of the first COVID-19 stimulus package, it’s reasonable to think that it might not be a bad idea to continue this every month, indefinitely. After all, many who are against UBI were worried about this short-term version of it having disastrous consequences, and they’ve been proven wrong.

There’s a case for why UBI is a sensible policy, even when the country is not in crisis: supplementing everyone’s income to ensure they can afford necessities — including rent, groceries, and utilities — makes it a lot more feasible for people to switch jobs or start their own businesses. This increased affinity for entrepreneurship can usher in a significant amount of innovation and new jobs.

The counterarguments are straightforward: we shouldn’t use scarce public dollars to give transfers to high earners. If instead we “means-test” in an attempt to ensure that only those below a certain income level can get their Freedom Dividend, then not only is the “basic income” no longer “universal,” but it also creates perverse incentives for people to earn just below the threshold. UBI may also incentivize some people to quit their jobs, leading to a shortage of workers in many industries.

Proponents of UBI refute these criticisms by arguing that it would take a lot of time, effort, and therefore money to administer a means-tested program. For the amount we would spend to make sure that Bill Gates and Jeff Bezos don’t get UBI checks, we may as well just give them one. Furthermore, if the check amount is low enough, which $1,000 arguably is, then people wouldn’t quite be willing to quit their jobs compared to if the UBI was $3,000 a month.

Real world evidence also supports the idea that this argument against UBI doesn’t hold up: most basic income experiments done show that those who receive basic income do not in fact decrease the amount that they work. This certainly makes UBI all the more appealing if a main concern — disincentivizing work — is unfounded.

Before we assume this evidence implies that implementing UBI on a larger scale will have similar results, we have to consider the “scale up effect.” Recent work by University of Chicago professors John List and Dana Suskind on the “Science of Using Science” explores the gap between results from small-scale pilots and scaled-up versions of those interventions. While there are a lot of things to consider in general, such as the representativeness of the participants or the situation in the pilot versus the larger population, one important factor to consider is what economists call a general equilibrium effect.

The general equilibrium effect refers to the fact that other areas of the economy are impacted differently when a policy is applied to a small group of people compared to when it is applied universally. Pilot UBI programs give some people in one town a UBI check and compare their outcomes with those in that same town who didn’t get a check. The impact of this on national markets is quite different from a situation where everyone in the country gets a check, since this would now cause many other things in the economy, such as prices, to change.

Suppose an experimental study showed that those who received UBI payments ended up being healthier, happier, and didn’t work fewer hours. The problem with generalizing these results is that, here, market prices aren’t changing much just because some people in one town have additional income. But if every landlord in America knew that their tenant now had $1,000 more a month, and if new housing units aren’t quick and easy to build, then every landlord has an incentive to raise their rents by close to the amount of the UBI itself. These price changes for rent, cars, and other necessities when enough people get UBI is an example of a general equilibrium effect.

Unless we have a national rent control policy, it’s plausible that UBI would just be one massive transfer of money from taxpayers to landlords. Proposing UBI without rent control seems like an incomplete policy. However, a rent control policy broad enough to apply to every locale in America would at best be complicated and controversial, and at worst harm the very people we intended to help.

Does all of this imply that the government shouldn’t provide people with a second round of UBI during the coronavirus crisis? I would argue quite the opposite. The general equilibrium effect is the best argument against UBI; however, it does not apply to a temporary measure.

Housing prices are too sticky to increase significantly just for a few months. That is, if the UBI is instated only temporarily, we wouldn’t expect prices to go up much as a result. In fact, income losses in light of this pandemic have caused decreases in demand in virtually every market. This can easily lead to a devastating chain reaction where consumer income losses cause shops to close, which cause further income losses. A temporary UBI would help people afford much of what they used to and would mitigate this chain reaction, helping keep markets for goods and services stable until the crisis passes.

These aren’t normal times. Solutions to novel problems will likely be unprecedented. Even if you are skeptical like I am of UBI being a good policy in general, using it in the short term until the coronavirus crisis passes might be the best option we have. UBI may not be a good cane, but it’s a decent crutch.

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About the Author:
Rohen Shah is a Research Fellow and Doctoral Candidate specializing in Behavioral Economics at the University of Chicago’s Harris School of Public Policy. He is a co-founder of DiagKNOWstics Learning and was formerly a math teacher in Detroit.

Twitter: https://twitter.com/RohenShah
Website: www.RohenShah.com
Email: shahr@uchicago.edu