Friday, January 3, 2014

The Economic Case for a Universal Basic Income

The news that Switzerland will hold a referendum on a proposal to provide every citizen with an unconditional grant of 2,500 Swiss francs a month (about $2,800) has sparked renewed interest in the old idea of a universal basic income (UBI). Under such a program, the government would not just top up the incomes of the poor, but would give a subsistence-level grant to everyone, regardless of wealth, work status, or anything else. The appeal of a UBI seems to cut across the ideological spectrum. Progressives, libertarians, and conservatives have all supported one or another variant.

This post begins a series that will explore various aspects of a universal basic income, beginning with the simple economics of the UBI and contrasting it with other approaches to income support. Future posts will examine the fiscal cost of a UBI and some of the political and ideological issues it raises.

Criteria for evaluating income support systems

What makes an income support program good or bad? Although opinions differ, people who evaluate existing or proposed policies often appeal to these four criteria:
  1. A good income support program should be effective in leaving no one below an agreed poverty level.
  2. It should be targeted in the sense that it should provide support to those who need it rather than to those who already have adequate means.
  3. It would,  as much is possible, leave work incentives intact.
  4. It would be administratively efficient, in the sense of holding down administrative costs per dollar of support that beneficiaries receive.
Unfortunately, no income-support mechanism can simultaneously meet all of these criteria in full. There are inherent trade-offs among them. Let’s take a look at the different ways that actual and proposed policies handle those trade-offs.
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