Could a universal basic income save the world?

Long touted as a simple solution to the complex problems that arise in capitalist societies, universal basic income is having another moment in the spotlight thanks to the coronavirus. Could it work? Stuart Watkins reports.

This article was first published in MoneyWeek magazine issue no 992 on 27 March 2020. To make sure you don't miss out in future, and get to read all our articles as soon as they're published, sign up to MoneyWeek here and get your first six issues free.

The idea of a universal basic income – as the name suggests, the proposal that everyone should by right of citizenship receive a basic minimum amount of money to live on from the state, paid without condition – is as old as modern capitalism itself. Thomas More was one of the first to propose something like it in his Utopia in the 16th century. Thomas Paine argued in 1795 that modern forms of property demanded a basic income as a matter of justice – if people were to be forced from their ancestral lands and herded into cities to provide a reserve army for modern industry, depriving them of their livelihood, then they should receive as compensation “for the loss of his or her natural inheritance” a sum of money, funded by a tax on those who now owned the land. 

The idea then arises in semi-regular waves throughout the modern period, as Karl Widerquist, an advocate with campaign group Basic Income Earth Network, points out. In the early 20th century, some supporters of Henry George’s land-value tax suggested that the proceeds be distributed in cash. Major Douglas launched his “social credit” movement between the wars. Between the mid-1960s and the late 1970s, the idea briefly went mainstream: the US House of Representatives passed a bill introducing a version of a negative income tax that missed becoming law by only ten votes in the Senate. The next year, presidential nominees from both main parties, Richard Nixon and George McGovern, endorsed some form of basic income.

This wave culminated in a TV show in 1980, hosted by Milton Friedman, putting the case for a negative income tax, a version of the basic income that Friedman, perhaps surprisingly, supported. The last time the idea was big news, from about 2015, the Swiss were voting on whether to introduce a basic income in a referendum, a candidate for the French presidency was endorsing the idea, and Britain’s opposition Labour Party hinted it might be in favour. When MoneyWeek ran an analysis in 2017, our conclusion was one that socialists down the ages have grown used to hearing – it’s a nice idea, but it’ll never work. 

Why won’t it work? As Widerquist notes, objections boil down in the end to just two – that it will destroy incentives to work and will be ruinously expensive. Economist John Kay, when he examined the idea in a paper, concluded that, whatever the details of the various proposed schemes may be, they either propose sums of money that are too small to live on and would thereby exacerbate inequalities and poverty, or they are generous enough to work as promised, in which case the cost of providing them is just too high. So basic-income schemes are either too useless or too expensive. Current welfare schemes, whatever their failings, are complex for a reason. “And whatever the appeal of the underlying philosophy,” says Kay, “that is essentially the end of the matter.” 

This time circumstances are different…

The economic crisis brought about by the coronavirus has changed the facts, so it’s reasonable to wonder whether a change of mind is called for. As basic-income advocates have been saying in recent weeks, the two main objections to the idea now no longer apply. We can’t worry that a basic income will undermine incentives to work when the state is explicitly asking people to stop working, at least for a time. And the huge sums of money that might legitimately have worried us in more normal times now seem, if not like chump change exactly, then at least not wildly out of line with what has already been promised. In 2017 we reported on a study from Bath University that looked at the cost and tax implications of various basic-income schemes. It found that a basic income paid at the level of existing benefits would cost £288bn in additional tax revenues. 

At the time, that seemed obviously unaffordable, or at least unwise. Today, Britain’s chancellor, Rishi Sunak, has already promised £330bn of loan guarantees to business, the equivalent of 15% of GDP; plus an additional £32bn in assistance, grants and tax reliefs. Later, following cross-party calls from some MPs to introduce a basic income, an idea the prime minister did not rule out, Sunak announced that the state would underwrite 80% of the wages of workers in struggling firms, up to a total of £2,500 a month, and raised the value of out-of-work benefits. The Treasury declined to put a cost on the measures, though the Financial Times estimated it would be £43bn if one million people were supported – a sum that could quickly escalate.

Meanwhile, across the Atlantic, Andrew Lang and Mitt Romney, former presidential candidates from opposite ends of the political spectrum, have both called for a basic income to see people through the crisis. Donald Trump has already announced bailout plans, including sending everyone a cheque for $1,200, at a cost which could total $2trn. “It’s going to be big, and it’s going to be bold,” Trump told reporters. It is also, presumably, going to be temporary. But if basic income is the cure-all its proponents often claim, then could these measures mark the beginning of a grand experiment that will transform our economies for the foreseeable future? 

That’s certainly the view of Daniel Susskind, economist and author of A World Without Work. Susskind was until recently a sceptic about basic income, seeing it as an “imperfect response” to a challenge (robots taking all the jobs) that “we do not yet face”, he wrote in the FT last week. The coronavirus crisis has changed his mind. “Robots may not have taken all the jobs just yet, but the pandemic is decimating the demand that those jobs rely upon.”

Providing a basic income of £1,000 per person per month would cost the government about £66bn a month, he reckons – a fraction of the nearly £500bn bailout the UK needed to stay afloat during the financial crisis of 2008. Susskind sees this as a temporary measure, but one that could, like the Beveridge reforms in the wake of World War II, lead to bigger, “revolutionary” changes, transforming ordinary peoples’ lives at a time of great crisis, as did the creation of the NHS and the expansion of National Insurance. A basic income, once it shows up in everyone’s pockets, might prove popular and hard to snatch away again. 

… but the idea is still redundant

That’s precisely what worries naysayers such as Iain Duncan Smith, the former work and pensions secretary. It is right that the government has stepped in with bold and generous measures to reassure businesses and households, he says in The Daily Telegraph. “It will be expensive, but it is the right thing to do.” But the idea of introducing a basic income remains as “redundant” as it always has been, he says.

The Centre for Social Justice, a think tank Duncan Smith founded, came up with a similar figure to the Bath University study quoted above – an annual cost of £260bn, more than twice the NHS budget, for a basic income paying only £5,000 a year, which is just a third of the poverty line. If it were to pay more like £16,000 a year, that would cost £900bn, more than the total UK public-spending budget. This is by definition money that would go to the richest as well as the poorest in the land. Can that really make sense when it could be buying more ventilators instead? 

Some supporters propose correcting for such grotesqueries by tapering away basic income from higher earners and those who don’t need it. Yet that would mean creating a completely new benefits system. This is not the time to be asking officials to drop everything to do that – it would be impossible for close on a year, according to a civil servant quoted by Duncan Smith. 

Torsten Bell of the Resolution Foundation think tank agrees. That basic income is being proposed in the current circumstances in “understandable”, but “misguided”, he says. As we should have learnt from Duncan Smith’s own problems introducing universal credit, it takes time to sort out new benefit systems, and there are more urgent tasks. The capacity of the state to do things is finite and is “already basically gone”. The focus must be to get help to the families most in need, prioritising payments to large numbers of people using existing institutions and policies. 

The measures Sunak has already announced are welcome, says Bell, but more is needed. The incomes of the self-employed will need far more protection than is currently being provided, for example, and statutory sick pay should be increased and extended to the two million workers who earn too little to be eligible for it. (The government was considering such measures as MoneyWeek went to press.)

Unlike basic income, these measures target the money to where it is most needed, and it can actually be done using existing frameworks and done quickly. In short, basic income is the wrong prescription at the wrong time, as Matt Kilcoyne of the Adam Smith Institute puts it in City AM. Limited resources must be targeted to where they are most needed, not splashed around willy-nilly.

Turn, turn, turn

The consensus among economists remains that there are better ways of achieving what is needed than basic income. Ryan Bourne of the Cato Institute, for example, agrees with Torsten Bell that existing programmes, expanded and made more generous, are the best way to go about subsidising wages and boosting incomes. And such measures seem more suited to the need states will face to increase the help available when it is needed, and withdraw it again when the time comes to get a grip on the escalating costs of this crisis.

Still, in the current situation, it is true that “paying people not to work has become, for the time being, a virtue”. In this upside-down world, it’s little surprise that the basic-income proposal seems to make more sense than at other times. Political and economic realities, however, have not entirely gone away. We’ll see if that’s still true the next time basic income has its day in the sun.

Recommended

Once Covid-19 is over, we’re going to see an economic boom
Investment strategy

Once Covid-19 is over, we’re going to see an economic boom

After the dust from the pandemic has settled, we’re in for a consumer boom and a huge bout of government spending, says John Stepek. Here’s how to tak…
24 Nov 2020
What to buy as the pandemic’s pent-up demand is finally released
UK Economy

What to buy as the pandemic’s pent-up demand is finally released

As economies reopen, says Merryn Somerset Webb, people are going to start spending again. And when they do, here’s what you want to be holding.
23 Nov 2020
Asia's RCEP: free trade without the red tape
Global Economy

Asia's RCEP: free trade without the red tape

Regional Comprehensive Economic Partnership (RCEP), Asia's new trading block, shows that it is possible to create large single markets without making …
22 Nov 2020
The charts that matter: a bigger, better vaccine and a promotion for Tesla
Global Economy

The charts that matter: a bigger, better vaccine and a promotion for Tesla

John Stepek looks at how the week’s events have affected the charts that matter the most to the global economy.
21 Nov 2020

Most Popular

Jim Mellon: the world is on the brink of three major revolutions
Share tips

Jim Mellon: the world is on the brink of three major revolutions

Jim Mellon has been giving MoneyWeek’s readers lucrative ideas ever since our very first issue. He tells Merryn Somerset Webb how he sees the next 20 …
5 Nov 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
6 Nov 2020
November 2020 update: how the MoneyWeek investment trust portfolio has fared
Investment trust model portfolio

November 2020 update: how the MoneyWeek investment trust portfolio has fared

How have our favourite investment trusts been doing? And what would we change?
6 Nov 2020