Wednesday, July 13, 2005

Universal basic income?

Isaac writes,
For in America even if we instituted a safety net as dramatic as universal basic income people would still work, because most people can anticipate living far above subsistence, and thus would still want to work even if guarenteed subsistence. But in a really poor country, a welfare state that guaranteed people subsistence would discourage most people from working for they already live at subsistence, so why work at all?
Isaac is basically right, but I think this depends on how you set it up.

Suppose the system was such that the government gave everyone who earned less than subsistence a check for the amount needed to bring them up to subsistence. The problems Isaac is talking about are in full force here. If you are already living at subsistence you won't work because you are guaranteed subsistence anyway. If you can make far more than subsistence, you'll probably keep working because your higher consumption is worth it. If you make a bit more than subsistence you probably won't work either because the marginal benefit of working is very low. That is, suppose that someone could make $15,000 without the government program. If subsistence is $10,000 then the marginal benefit from working is only $5,000 and they will likely decide to not work.

But the system advocated by the website Isaac cites avoids most of these problems. Their plan is to just give everyone a check for $5,000. The government is still guaranteeing "subsistence" (if $5,000 is subsistence) because everyone has at least $5,000, but the incentive to work is still there. If you would normally make $10,000 you'll probably still want to work and make $15,000. There is still some incentive distortion here, because the 5,001st dollar is probably worth less than is the 1st dollar. But it's far less than in the other system. The bigger problem is funding. Giving everybody a check for $5,000 (or whatever subsistence is) would be incredibly expensive.

The root of the funding problem is that you are giving $5,000 checks to a lot of people who don't need them. To make the system reasonable, you'd have to limit the checks to only those in, say, the lowest 20% of the income distribution. In 2001 the lowest 20% of the income distribution in the United States ranged from $0 to $17,970. If you limited the subsistence checks to only those people with incomes in this range, you'd end up with the same incentive distortion as in the first system. Those with incomes from $17,970 to $22,970 and a bit above that would have the incentive to cut their hours just enough so they would qualify for the $5,000 check.

A better system would smooth out the marginal benefit curve so there wasn't such a big jump. Give people making $17,970, say, a check for $500, those making $12,970 a check for $2,000, those making $0 the check for $5,000 (but no jumps, all smooth.) In other words, an earned income tax credit.

But I do agree with Isaac's basic point: none of these systems are particularly good for very poor countries. The first system has the incentive distortion problems, the second system would be very expensive for poor countries who have few sources of revenue anyway, and the third system has the funding problem as well as being rather administratively taxing. And after reading Tropical Gangsters, you realize that administrative problems can actually be quite large.


Blogger Isaac said...

I would suport the give everyone a $5000 check plan: universal plans are better than targeted plans. Plus, it's not really "expensive," it's just tax policy....

12:49 PM  

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