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September 9th, 2014 at 11:06 am

Is it time for a Guaranteed Basic Income?

homeless

Poverty and homelessness on the rise.

Is it time for Basic Income? The idea of Basic Income has been endorsed by economists from a variety of political camps, but has always seemed more of a distant dream than a reality.  Productivity and standard of living increases made Basic Income practical and logical.

 

 

What is Basic Income?

Basic income is providing every citizen regular, flat cash payments unconditionally.  In other words, if you can prove you are a citizen, you get a regular paycheck.

What are the definite benefits of Basic Income?

  • It is the most efficient possible form of wealth redistribution because there is no bureaucratic overhead needed.  More money reaches the poor directly.
  • It is more equitable than retirement plans, which transfer wealth from young to old.
  • It enables people to work on only what they want to.
  • It improves opportunities for individuals to use their Basic Income to get an education, start businesses, or make investments.
  • The amount of Basic Income could rise over time with productivity & automation growth.
  • It would enable resources spent on the current bureaucracy to work on other tasks beneficial to society.
  • It reduces the marginal tax rate for the poor, creating better incentives.  Currently, the poorest receive a combination of unemployment, food stamps, and other government subsidies, which often go away if they take a job.  Each of these issues create in effect high marginal tax rates.  In extreme situations, it means people can go back to work and make less money than before.  With basic income, there is more incentive to work, as everything you make is additive.
  • It should replace unemployment, which is pay to not work, which creates a perverse incentive.
  • It should replace minimum wages, which incentive employers to reduce jobs.
  • It reduces political corruption.  There are fewer government bureaucrats and fewer spending levers to grant political favored groups favorable treatment.

What are probable benefits of Basic Income?

  • It would provide a more stable consumer purchasing base, stabilizing the economy.
  • It would reduce crime as a result of lower levels of desperation, particularly among the youth.

Isn’t this socialism/communism etc?

There are people who conflate redistribution with market mechanisms, such as people who say Income Redistribution’s Logical Conclusion is Communism.  In reality, redistribution and centralized spending are only perfectly aligned at the extremes.  The below graph shows how when you have something between “pure capitalism” and “complete redistribution”, you can opt to provide more or less redistribution in a more or less centralized fashion.

redistribution

Neither pure capitalism nor complete redistribution exist in the world today.  Unfortunately, “centralized redistribution + capitalism” has proven to be the most common middle ground, with varying degrees of redistribution.  This isn’t surprising.  Public choice theory theorizes that political elites want to control the distribution of assets in order to increase their power and influence.

Centralized spending mechanisms have generally been proven to be inferior to market based methods of allocating resources at scale.  For example, centralized redistribution has failed to effectively cure poverty, despite spending $20,610 per person below the poverty line.  In general, decentralized market based mechanisms have proven to be the more effective means of allocating resources and motivating people to optimize around growth.  Combining income redistribution and decentralizing spending would solve poverty today.

What about pure capitalism + charity?

While people could theoretically survive off the charity of others, advanced artificial intelligence and robotics are likely to increase the portion of the population who are unemployable.  As a society, we would have to be very generous indeed to support an ever increasing population of the unemployable.

The term “unemployable” is a part of the problem.  There is no fundamental reason that humans should have to work after automating most of life.  We should prefer to live in a world where nobody has to work to survive.  Enabling most of our race to live a life of leisure should be something we strive for.  People are passionate, with diverse interests.  We expect to see a flourishing of culture, science, and progress in a world after Basic Income.

What is an appropriate level of Basic Income?

It is better to have a permanent income than to be fascinating.

-Oscar Wilde

Its pretty much pointless to talk about Basic Income without discussing the amount.  $1,000 per year and $50,000 per year are very different propositions, with likely very different effects.  In this blog post, we will attempt to answer the question: “What is an appropriate level of Basic Income today?”

There is no “right” answer.  $7,000/year might be an appropriate “minimum Basic Income”, since people were considered quite wealthy in the “roaring 20s” and they made an average of $7,000/year adjusted for inflation.  However, we’d prefer a more rigorous approach.

We propose that the first target Basic Income in the US match the following criteria:

  1. Be enough for basic necessities: food, water, sanitation, clothing, health care, & shelter in a reasonably inexpensive location in America.
  2. Provide some capacity to improve one’s lot in life.
  3. Be large enough to eliminate existing means-based social support programs, such as unemployment.
  4. Be large enough to enable the elimination of regulatory disincentives to hire, such as minimum wages or minimum benefits.
  5. Be small enough to provide incentives to work and the economy to flourish.
  6. Increase over time to ensure automation improves the standard of living for the unemployable.

To find the right amount of Basic Income, we will first look at how the United States has traditionally defined poverty.  Then, we will complete a bottoms up calculation in order to determine a good target number for the appropriate level of Basic Income.

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Assessing The US Poverty Line

The US definition of poverty was developed in the following way.

  1. In 1964, the US Department of Agriculture developed the “economy food plan” which was the least expensive nutritionally adequate food plans.
  2. At that time, the average family spent 1/3 of their after-tax income on food.
  3. The US set the “Absolute poverty line” at 3 times the “economy food plan”
  4. The US adjusted this to the CPI over time.

This measure is interesting but fails to actually measure the costs of other basic necessities.  It simply assumes that all items add up to 2x the spending on food.  This assumption makes decreasing sense over time.  There are some specific problems that have emerged since the creation of this index in 1964.

1.  The average family now spends 34% less of their after-tax income on food, despite significant quality improvements.

spending

2. There have been several movements in food that affect the price of food more generally.  In fact, the organic and artisanal food movements would contribute more to US poverty than any other factor, using this model of calculating poverty.

3. The official poverty measure excludes non-cash benefits such as food stamps, housing assistance, refundable tax credits, or other government benefits.  These are clearly meant to decrease the rate of poverty, yet by definition it is impossible to for non-cash benefits to do so.  This is a definitional problem.  Non-cash benefits represent a significant and growing component of assistance, particularly for households that are not elderly or disabled, since 1970.

4.  The poverty measurement assumes traditional nuclear family arrangements with an average of 2.5 related parties living in a home.  The 2014 US Poverty line is $11,670/year for an individual, and ~$4,060 for each additional person.  It is strange to assume that some humans can live off of $11,670 and others can live off of $4,060.

The net result of these problems means that the official US Poverty rate is not really sensible measurement of poverty in the US.

So How Should We Measure the Minimum Basic Income?

We propose the easiest way to assess the amount of Basic Income needed to satisfy the criteria we set out above is to do a grounds up analysis of what we think the minimum standard that everyone should be given if you are unemployable.  We think most people today would agree there are some people who are unemployable, due to mental or physical ability.  This population of unemployable people will increase as robots become increasingly sophisticated at both physical and mental tasks.  In other words, “What should people get if they can’t compete against a robot?”

Here is how we have measured a minimum Basic Income:

basic income

For reference, the US Poverty Line is $11,670 and the US currently spends an average of $20,610/year per individual below the poverty line to combat poverty.

The above outline of Basic Income has several distinct opinions related to policy matters that may be controversial:

  1. We only budget for a reasonable, low cost method of accomplishing a goal.  If there is a technologically free way to do something, we provide no budget to do that task another way.  The biggest example of that is transportation, with only $50 a month budgeted.  We feel there is very little necessary transportation today that is not related to work or entertainment, so is therefore excluded.  Any work related travel should be covered by work pay.
  2. We assume living in a high cost area is a form of entertainment, and there is no preference given to someone who prefers to live in Santa Monica, with an average home value of $1,135,000 vs Wyoming, with an average home value of $191,000.
  3. These numbers are absolute measures of poverty, not relative ones.

Is this too little?

It is never good to be poor, and we can strive to do much more than the above.  However, we think if we are looking to practically implement Basic Income, we need to make this as affordable and practical as possible.  While we are continuing to automate a wide range of job functions, we still need a large and motivated labor force.

If you think that this is not enough to have a high quality of life, we disagree.  You can have a great life on a low budget, and much of the world has proven that.  For reference, the average US per capita social security benefit is $12,666, and this Basic Income figure is actually higher than the national poverty rate.  So implementing Basic Income at this amount would immediately eliminate poverty in the US.

Of course, living off $12,000 is not like living on a luxury cruise ship. We expect the amount of Basic Income would be increased over time, as we improve productivity and Per Capita GDP.

Is this too much?

For those that think this is too much, it is true that it is not as low as it could be.  We would challenge you to look closely at the assumptions and provide feedback about where we can cut.  In practice, Basic Income is designed to completely replace much of the social spending currently in place.  The bottom line is that this system would save costs over the current social spending network.  We are spending roughly double the poverty line on social spending programs.  This enables us to stop doing that.

Workers would be more incentivized to work and employers more incentivized to hire with Basic Income.  First, it eliminates the arguments for social regulations such as minimum wages or minimum benefits.  With a low or non-existent minimum wages/benefits, companies would have more flexibility to hire workers and labor participation would likely go up.

Second, the means-based system of benefits like unemployment and food stamps means that as soon as you make more money you lose these benefits.  This is why the there is a significant population of the poor in the US with effective marginal tax rates of over 80%.  Because means-based benefits would replaced with Basic Income, workers would be able to work for lower wages and still take home more, due to a much lower marginal tax rate.

Evidence suggests that people would not exit the workforce en masse at this level of Basic Income.  Individuals can already get many benefits from existing welfare programs while doing nothing, but most try to work.  Also, despite the fact that most working Americans could keep expenses low and retire young on a low income, few actually do.  In practice, most Americans work hard to build better lives for themselves.  Alternatively, Americans today could cut their standards of living greatly and reduce the number of hours they work…but they don’t.

The appropriate amount.

All of the information we laid out above gives us confidence that $12,000/year is an appropriate amount of Basic Income. Remember, we are aiming for “what we think the minimum standard that everyone should be given if you are unemployable”. We approached the issue from the bottom up and arrived at $12,000. This number has shown to not be too much or too little.  This level of Basic Income has shown to provoke the correct incentives. It is also a moving target. We know that the landscape will change through technology and innovation. As society progresses and grows, the amount of Basic Income needs to be reevaluated.

Basic Income Is Practical Today…Necessary Soon

No one, as a child, ever aspired to scrub toilets or flip burgers or restock merchandise. But you had to earn money to live your life, and these were the jobs being offered to tens of millions of people.

-Marshall Brain, Manna

Workforce automation will drive away the need for humans to work, allowing us to enter a new era of post-abundance society with Basic Income. We are going to discuss why this is something that is possible today, easy to accomplish in 20 years, and necessary in 40 years.  Let’s look at a few numbers.

Assumptions

We assume that the current system of taxation and spending would be re-worked to make Basic Income practical in the short term and to realize its full benefits. There are a variety of ways this could occur, and we won’t go into too many specifics here. We do, however, make the following assumptions about how things would occur:

  • All current means-tested social safety net programs (e.g. food stamps) would be dismantled.
  • All age-related social programs, such as Social Security and Medicare would be dismantled.
  • Any government paid benefit, such as pension fund obligations or VA benefits, that are less than or equal to Basic Income would be replaced with Basic Income.
  • Basic Income would be not taxed.
  • In our last post, we argued that Basic Income should start at $12,000 per year, or $1,000 per month.  This isn’t that different than the official poverty line of $11,670/year, despite the fact that they were calculated very differently.  GDP Per Capita in the US is $51,749 in 2012 according to the World Bank.
  • Today, roughly 43% of Americans do not pay income tax, of whom 16% live below the poverty line.  We assume that there will be structural tax changes to the tax code so that most Americans would contribute roughly the same net tax revenue after the introduction of Basic Income.  In other words, if someone pays $8,000 in income tax today, and tomorrow Basic Income is introduced, that person would likely pay $20,000 in income tax, but receive $12,000 in Basic Income, netting $8,000 in income tax.  This means in effect that we assume that Basic Income will be only a net cost, after taxes, for 43% of Americans.
  • We only look at providing Basic Income for adults in this particular discussion.  Providing for children will be addressed at a later time.  We will look at the costs of providing Basic Income to adults and children separately.  We will go into this in more detail, but in general our opinion is that Basic Income for children does introduce some negative incentives, but Basic Income for adults is a no-brainer.

Measuring Affordability

To measure affordability, we are going to look at the level of government spending on various programs versus GDP.  We use GDP for the following reasons:

  • GDP growth has been predictably driven by productivity gains historically, so we can reasonable predict GDP growth in 20 and 40 years.  Basic Income is closely related to productivity.
  • GDP per capita is generally seen as a measure of standard of living.  The level of Basic Income compared to our total economic output gives some sense to the scale of its effect.
  • Tax revenues closely track the economy, and GDP is a measure of the economy.

Basic Income Is Realistic To Provide Today

Lets look at the cost of providing Basic Income today for adults.

cost

The US Federal and State governments spend 13.5% of GDP annually on programs that would be immediately and directly replaced by Basic Income.

programs

Bottom Line: Because our current social spending programs cost 11.4%, and Basic Income would be expected to cost 7.7%, we expect to save 3.7% of GDP by switching to Basic Income.

20 Years – Basic Income Becomes Easy To Provide

Currently, there are many jobs that need to be done, that few would do without monetary benefit (eg. cleaning, plumbing, garbage collecting, industrial farming, and accounting).  Over time, these are being roboticized.  This technology-driven-automation is helping drive GDP per capita growth since the industrial age, measured by productivity.  If you look at trendline real GDP growth per capita you will see that we have risen it from roughly $5,000 in the late 1800s to over $44,000 by 2012 as the economy began to pick up.

growth

With real GDP per capita growth of 2% (an inflation-adjusted historical average), real GDP per capita will be $76,896 in 20 years.  This means providing the same level of Basic Income will drop from 7.7% to 5.2% of GDP, or that the level of Basic Income could easily be increased.

40 Years – Basic Income Becomes Essential

Within 40 years, $1,000 machines are expected to have computing power comparable to the human brain, and the service industry will be dramatically impacted by automation.  At this point, assuming productivity growth continues, we calculate Real GDP to be approximately $114,263.

We have no idea what percent of the population might no longer be employable and able to contribute to the government coffers.  Providing all Americans a the originally proposed amount of Basic Income would cost only 3.5% of Real GDP.

What if technology increases unemployment?

If the historical average productivity growth continues, in 20 years years productivity improves by almost 48.6%.  This means almost one half of the number of people are needed to produce the same economic output every 20 years.  That is a lot of jobs that will be impacted.  Historically this has created new opportunities, particularly in the service industry.  Technology has enabled people to do things previously impossible.  However, as automation is increasingly targeting the service industry, this trend could run its course.  There will certainly be new, higher paying jobs created, but more and more people may simply not be able to compete against automated labor…for any task.

We don’t have a model to know what this might look like, but it is worth making some simple guesses.  Lets say that for jobs disrupted by productivity gains over the next 20 years, 75% are replaced by a better job.  25% are eliminated, increasing the unemployable population.  This means that in 20 years we would expect 12.2% of the workforce to be unemployable.  With a current workforce of 156 million, this is 19 million people.6  This elimination of jobs would increase the number of people for whom Basic Income will cost to 49.9%.  Under this assumption, Basic Income would cost 6.0% of GDP (versus 5.2% using the previous assumptions).

In 40 years, if we assume that another 25% of productivity gains create unemployment, than the percent of people costing money grows to 56.0%, and  Basic Income would cost 4.5% of Real GDP (versus 3.5% using the previous assumptions).

This is pretty remarkable.  Even assuming that 25% of productivity gains every 20 years create unemployment (an effect entirely unseen to date), we are able to provide basic income for the unemployable at a steadily declining rate.

Not Only Affordable…Better

None of these numbers take into account that technology should reduce the cost to provide services.  Software has already driven the cost of entertainment, education, and information to nearly zero.  For example, medicine is largely an information science, and should trend towards $0 marginal cost over time. 25% of a residential construction project is field labor. Approximately 80% of a food’s cost is labor. It is probable that we will decrease the costs in inflation adjusted terms of essential goods to half of today’s levels, while improving quality.

Don’t Believe Our Numbers?

There have been several studies and research that provide evidence that my numbers fall within a reasonable and respectable range.  From Wikipedia:

Specific, though informal, measurements were made by Pascal J. for Canada.   A 2004 taxable basic income benefit of $7800 per adult could be afforded without any tax increases by replacing welfare, unemployment, and core Old age services…

To estimate affordability of basic income in the US, the starting point of 265M adult citizens and $6.3 Trillion in estimated federal, state, and local government spending means that replacing all US government spending can provide nearly $25k per citizen in basic income….

Natural finance.net estimates that by cutting the $1.85T spent on social security and welfare in the US, $9905 can be given to each adult American citizen as a taxable basic income benefit.

Quick Note On Children

For the purposes of this discussion, we will look at the costs of providing Basic Income for adults only.  We consider Basic Income for children to be a separate issue, and we will discuss it in more detail in a separate post.  There are many questions around incentives and the size of the funding.  Here are some high level thoughts:

US Government spending on children is approximately $348 Billion today, or 2.1% of GDP.9 The cost to provide a Basic Income of $12,000/year today is 5.5%.  Calculations below:

population

Unlike for adults, Basic Income for children costs more.  The combined cost to provide Basic Income to adults and children at $12,000 annually is 16.9% of GDP.  Our existing spend is 13.5%.  So the argument for including children, while quite possibly a good one, does increase the overall level of spending.  Some people will be uncomfortable with that, so we’d prefer to not dilute the message.

The primary reason that there is no cost savings for providing Basic Income to children is that the current level of financial support for children is much lower for a child than for an adult.  It is not clear to me why it should be significantly different, as a 12 year old needs basically the same as an 18 year old.  My best explanation for this is that historically many of the adult programs have been trying to accomplish more wide ranging things (such as getting people back to work) and that adults can vote on benefits for themselves.

Photo credit: International Business Times

Via Hawkins Ventures

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