Universal basic income: Venture capital for the people

Persistent and harmful features of capitalist societies that have proved immune to previous policy changes would seem to demand a new and radical approach. Large and growing inequalities of wealth and income, stagnant economies that increasingly provide only low-paid and precarious work, robots taking all the jobs, bloated and unaffordable welfare states creating perverse work incentives and poverty traps, zombie businesses kept alive and distorting markets by governments fearful of the social consequences of letting them die might all these seemingly complex problems not all be interlinked, and be fixed with a simple one-size-fits-all remedy?

The vision

The answer, say an increasingly vocal minority, is yes simply pay everyone a basic income. It is an old idea that is gaining new ground. The details of what precisely is proposed in such schemes differ, but they share in common the idea that every individual, by right of citizenship, or perhaps residency, should receive from the state a basic minimum amount of money to live on without condition. Proponents can point to a large and growing number of trials which show that simply giving the poor money does indeed tend to lead to the results you might hope for, rather than to what some miseries might rather predict.

But the devil is in the detail. No trial or experiment yet has tested the actual proposal: giving everyone in society an income that is sufficient to live on. Given the growing enthusiasm for the idea, it cannot be ruled out that it may one day happen. Finland is currently running a trial with 2,000 households. Just last year, the Swiss voted in a referendum on the idea (it was defeated). Benoit Hamon, a candidate for the French presidency, has pledged to introduce a basic income, an idea backed by his adviser, Thomas Piketty, the author of bestselling economics book. John McDonnell, Britain's shadow chancellor, is toying with the idea. But could it really work?

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The costs

The big obvious question is, is it affordable? A new paper from the Institute for Policy Research at Bath University is the latest to crunch the numbers. The study authors took household survey data and looked at the likely fiscal implications and effect on levels of poverty and inequality of various basic income proposals, schemes with varying levels of generosity and with different levels of coverage (by age, say) or attached conditions (compromising the ideal for the sake of practicality). Among its key findings was that a basic income at the level of existing benefits (£72 a week for working-age adults, with lower payments for children and higher for pensioners) would cost £288bn in additional tax revenues. (Under a basic income scheme, everyone would receive these sums, without condition.) To make such a scheme revenue-neutral would require the elimination of all major wage-replacement benefits, children's benefits and state pensions, as well as the elimination of the personal income-tax allowance and the lower and upper earnings thresholds on national insurance, and an increase in income tax of 4% across all tax bands.

Yet even with a basic income set at this relatively high level (many basic income proposals suggest lower amounts, or at least starting at lower amounts before phasing in a fuller scheme), it would nevertheless have a fairly limited impact on poverty reduction and would leave large numbers of disadvantaged households poorer, according to the IPR study. Inequality levels would actually rise. Making additional payments to disabled people (to compensate for the loss of supplements and premiums in the existing system) would have more favourable distributional impacts, but would require income taxes to rise by a further 4%. Less generous schemes, including those with only partial coverage, paying only young people, for example, were found to have favourable impacts on poverty levels, but at costs ranging from £23bn to £36bn.

The unavoidable reality, says lead author Luke Martinelli, is that a basic income would either make the poorest worse off or would simply cost too much. Crafting alternatives to account for this introducing a basic income but retaining the existing structure of means-tested benefits ensures a more favourable compromise between the goals of meeting need and controlling cost, says Martinelli, "but does so at the cost of administrative complexity and adverse work incentive effects" in other words, destroying some of the key arguments made in favour of basic income in the first place.

John Kay, writing in the Intereconomics journal, comes to the same conclusion based on some simpler arithmetic. He compares basic income proposals with what people actually get now, either as an average worker, or on the minimum wage, or on current levels of benefits, and calculates the cost in additional taxes. The details of such calculations vary from country to country, and depending on the details of the proposed level of basic income, but "the essentials remain the same, and the conclusions are inescapable", says Kay. "The provision of a universal basic income at a level which would provide a serious alternative to low-paid employment is impossibly expensive." It thus cannot fulfil the hopes of its proponents, and detracts from more realistic and much needed welfare reform. "Either the level of basic income is unacceptably low, or the cost of providing it is unacceptably high. And, whatever the appeal of the underlying philosophy, that is essentially the end of the matter."

The debate

Not for its proponents it's not. Malcom Torry, director of the Citizen's Income Trust and author of a book on the subject, challenges the idea that introducing a basic income at a low level need eliminate its benefits. A basic-income scheme that retained and recalculated some means-tested benefits could nevertheless "still float a lot of households off means-tested benefits, and would ensure that everyone on means-tested benefits would end up on lower amounts of them", thus achieving the greater simplicity promised by basic income and going some way to ending the poverty and unemployment traps.

Guy Standing, a professor at the University of London, and author of a forthcoming book on basic income, warns against concluding that these kinds of studies prove anything. They are "static exercises" that do not take into account likely behavioural reactions to the introduction of a basic income, nor incentive effects. For example, the "poverty traps with the existing system are huge", says Standing.

By the government's own figures, the marginal tax rate of going from benefits into a low-wage job is 80%, which deters people from taking jobs. So introducing basic income would have two positive fiscal effects straight away raising taxable income and lowering the demand or need for benefits.

The positive thing to take from such studies, says Standing, is that they tend to show that basic income schemes are actually fiscally feasible, just that generous ones would be a "challenge". They then "put all the heavy lifting" on personal income-tax rates and national insurance contributions. But why? "My own approach would be to put less emphasis on raising revenue from direct taxation and more on rolling back existing regressive subsidies, including tax credits." And remember QE? Finding £375bn, a "basic income for bankers", did not trouble us, so why should we assume it's impossible to find similar sums for the poor?

A map with utopia on it

The claim that a basic income would simply cost too much to be feasible generally makes two mistakes, Rutger Bregman, author of Utopia For Realists, told MoneyWeek.

First, it confuses gross and net costs. The economic cost of childhood poverty, to take just one example, in terms of such things as later propensity to crime, increased healthcare costs and foregone educational and hence job and income opportunities, has been estimated at $500bn per year for the US, or 4% of GDP.

Second, it ignores return on investment. What will people who are freed from pointless work or trapped in poverty create instead? The return on investment could conceivably be a much smaller state, with so much less to do to mitigate poverty and all that results from it, and more profitable and enterprising businesses and individuals. Instead of looking at basic income as an intolerable cost, why not look on it as an investment in our societies? Think of it as "venture capital for the people", says Bregman.

The idea is gaining ground. The defeated referendum in Switzerland secured a pretty impressive amount of support nearly a quarter of those voting given the counter-intuitive nature of the idea and the relatively high figure for the proposed basic income bandied about in the campaign (2,500 Swiss francs for adults and 625 francs for children per month). A survey last year by Dalia Research found that 68% of people across all 28 EU member states would "definitely or probably" vote in favour of some form of basic income.

But even if this is all wishful thinking and the sceptics are right, the debate will have had some value anyway. All sides in the debate seem to welcome putting the idea to work in randomised controlled trials the gold standard of respectability in science. This, along with the appeal of the idea across the left/right ideological divide, gives hope for a future where policy ideas are discussed rationally. "The real value of utopian thought", as Akash Kapurin puts it in the FT, is not so much in its particulars, as in that it "forces us to confront the present and acknowledge the need for a different future". It tells us we're at an impasse, and makes "a compelling even devastating case for the insufficiency of business as usual".