What Can Welfare Experiments of the 1970s Tell Us About a UBI?

In a recent commentary, I examined what economic theory can tell us about the effects a universal basic income would have on work incentives. But theory alone is not enough. We need also to look at evidence. The following will review the evidence from a set of experiments that were conducted in the 1970s as part of an attempt to make antipoverty policies of that era more effective.

These welfare experiments — or income maintenance experiments (IMEs) as we should more properly call them — were true randomized field trials. Such trials are considered the gold standard for testing new medicines or new crop varieties, but they are used all too rarely for testing economic policies. (By way of exception, another set of welfare experiments were conducted in the 1990s in conjunction with the welfare reforms of the Clinton years.)

Critics often say that UBI supporters pay insufficient attention to the IMEs. As Bryan Caplan puts it, in a recent piece for at the Library of Economics and Liberty,

If I were an enthusiastic UBI advocate, I would know this experimental evidence forwards and backwards. Almost all of the advocates I’ve encountered, in contrast, have little interest in numbers or past experience. What excites them is the “One Ring to Rule Them All” logic of the idea: “We get rid of everything else, and replace it with an elegant, gift-wrapped UBI.” For a policy salesman, this evasive approach makes sense: Slogans sell; numbers and history don’t. For a policy analyst, however, this evasive approach is negligence itself. If you scrutinize your policy ideas less cautiously than you read Amazon reviews for your next television, something is very wrong.

Writing on the Heritage Foundation website, Robert Rector and Mimi Teixeira echo Caplan’s sentiments. They point to the IMEs of the 1970s to support their view that a UBI would harm recipients and increase dependence on government. Their conclusion:

Universal basic income policy is an idea with a record of failure; policymakers seeking to reform the welfare state should focus instead on policies proven to work.

But are those really the lessons of the IMEs?

Would a UBI Reduce Work Incentives? Some Answers from Econ 101

More than half of all U.S. college students take a basic economics course. A lot of them hate it. The course is full of graphs and charts. That would be bad enough, but what makes it worse is that the graphs in a typical Econ 101 textbook are about boring stuff — whether a farmer should grow beans or peas, whether a student should eat pizza or burritos for lunch. Who cares?

But, what if we put those Econ 101 tools to work on something we do care about — something like a Universal Basic Income? Then things could get interesting. Read on to see how we can use some basic econ graphs to answer one of the most frequently asked questions about basic income: Would a UBI reduce work incentives?

How our welfare system kills work incentives

We can begin by showing how our current welfare system kills work incentives. Welfare as we know it is based on means testing. The concept of means testing, as applied to programs like SNAP, TANF, and Medicaid, is that if you are really poor, the government gives you benefits, but if you try to work and get ahead on your own, the government takes your benefits away. Not surprisingly, that is not the way to encourage work.

Rather than go through the incentive effects of existing programs one by one (I’ve done that elsewhere), this post will keep things simple by looking at a generic means-tested income support (MTIS) policy.

How Generous a Basic Income Could We Afford?

Summary: Basic income advocates often encounter the objection, “We can’t afford it!” To counter that objection convincingly, they need to address several key questions:

• What resources can a basic income draw upon? Which existing income support programs would be rendered unnecessary if an adequate basic income were in place?
• How would a basic income mesh with other social programs, especially health care, child care, and social security?
• Who would be eligible for a UBI? The entire population? Citizens only? Adults only?
• Does an adequate basic income have to be generous enough to raise everyone out of poverty by itself, or would something less than that be enough?

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In search of a baseline UBI

To many people, a universal basic income (UBI) sounds like a good idea — until you start thinking about whether we could afford it.

Robert Greenstein, President of the Center for Budget and Policy Priorities, is no enemy of  robust government programs to help the poor, yet he is an outspoken critic of a UBI. Affordability is Greenstein’s number one concern. He argues that giving a UBI of $10,000 a year to the entire U.S. population of 327 million people would cost $3.27 trillion, about equal to the entire annual revenue of the U.S. government. It’s hard to imagine that such a UBI would advance very far, he says.

But is asking whether we could afford a UBI of any given size really the right question? A more sensible starting point might be to ask how much basic income we could afford if we used only what the government is already spending on income support, without raising taxes or total spending at all. The answer to that question gives us a baseline UBI that that we can use as a point of reference.

Determining how generous that baseline UBI would be involves two steps: First determining how much money could be made available by redirecting existing income support spending to a basic income (the numerator), and second, determining how many people would be eligible to receive benefits (the denominator). The baseline UBI is then equal to total funds divided by the eligible population.

Here goes.

Latest Data on Poverty and Inequality Show Small Improvements but No Break in Long-Term Trends

On Tuesday, the Census Bureau released the latest data on poverty and income distribution for U.S. households. They show small improvements for 2018 compared with the year before, as would be expected with unemployment nearing 50-year lows. However, the short-term gains were not large enough to constitute a break with long-term trends.

One piece of welcome news was a drop in the percentage of people living in poverty from 12.7 percent in 2017 to 11.8 percent in 2018. Still, as the following chart shows, the 2018 poverty rate remains above the lows reached in the 1970s and again at the turn of the century. The longer-term trend of the official poverty rate since the late 1960s remains upward even when recent decreases are taken into account.

The official poverty rate is only one of several ways of looking at income distribution in America. The Gini index provides another perspective. This statistic varies from a possible value of zero, when distribution is perfectly equal (like a cake cut into equal slices) and 100 for a winner-take-all situation (like a hand of poker where the winner gets everyone else’s chips). The same statistic is sometimes on a scale of zero to one, in which case it is called the Gini coefficient or Gini ratio.

What Explains Voter Aversion to Carbon Taxes?

 Despite widespread support among economists of all political persuasions, polling shows public attitudes toward putting a price on carbon emissions to be lukewarm, whether you call it a tax, a fee, a user charge or anything else. A Hill+Knowlton survey found that although 81 percent of Americans respond positively when asked if they favor government action to limit carbon emissions, support falls to 56 percent when they are asked whether they favor a carbon tax.

Conservatives are not the only ones who are skeptical. According to a YouGov Blue poll, people who identify as Democrats have greater-overall support for climate action than do Republicans, but even they prefer an approach that emphasizes public investment and regulation over any kind of carbon tax or fee. A Politifact analysis of climate policies as stated on campaign websites found that only six of the 21 Democratic candidates who participated in the June and July debates offered explicit support for a carbon tax.

Nor is aversion to carbon taxes limited to the United States. A comprehensive cross-national review of climate policy opinion by Stefano Carattini, Maria Carvalho, and Sam Fankhauser, “Overcoming Public Resistance to Carbon Taxes,” (Carattini) finds similar attitudes both in the United States and abroad.

In what follows, I will try to address the issues that these polling data raise for economists, myself included, who see carbon taxes as “obviously” the best tool of climate policy. Why is it that so many members of the public are skeptical, even when they strongly favor climate action? How can carbon tax backers improve their communication strategies?

A Little-Noticed Inflation Indicator That is Worth a Closer Look

 As talk of a new recession grows louder, everyone is watching some favorite indicator. The yield curve, claims for unemployment, the quits rate — you name it. What surprises me is how few people are watching an underappreciated indicator from the New York Fed that uses more than just price data to tell us what is happening with inflation.

What makes the Underlying Inflation Gauge (UIG) unique is its power to distinguish between changes in the cost of living and changes in the rate of inflation. Did you think those were the same thing? Think again, and read on.

What’s the difference?

The concept of the cost-of-living stems from the first of those role of money as a medium of exchange. When we say the cost of living increases, we mean that it gets harder to maintain a given standard of living on a given income. Either we have to be satisfied with fewer goods or services, or save less, or work harder. In the language of economics, a change in the cost of living is a real phenomenon.

Inflation, in concept, is best understood a change in the value of our unit of account, the dollar. When there is inflation, the value of the unit is smaller each day than it was the day before, for all transactions.

Imagine that you woke up one morning to find that someone had chopped an inch off all our rulers, so that today’s foot was now only as long as yesterday’s eleven inches. You might go from being six feet tall to six-foot-six, but it wouldn’t be any easier for you to reach the top shelf in the kitchen without a footstool. Similarly, if inflation raises both your income and the prices of everything you buy by the same percentage, the value of a dollar as an economic ruler shrinks, but it is neither harder nor easier to maintain the same real standard of living. In that sense, inflation does not measure anything real. It is a purely nominal phenomenon.

Investment and Exports Explain Why the economy Isn’t Taking Off Like a Rocket

President Donald Trump’s huge tax cut, signed into law in December 2017, was supposed to make the economy take off “like a rocket ship.” As the foislowing chart shows, it hasn’t worked out that way. Instead, the growth trend has turned down since the tax cut went into effect. The advance estimate for the second quarter of 2019 year shows growth of just 2.1 percent.

What went wrong? First, let’s see what happened and then speculate about why.

What: Weak fixed investment

Backers of the big cut in corporate tax rates promised an investment boom. Companies were supposed to use the money they saved in taxes to build new plants and buy new equipment – what government statisticians call “fixed investment.” That didn’t happen.