UNIVERSAL BASIC INCOME: CRAZY IDEA OR THE FUTURE?

 

A proposal to introduce a universal basic income (UBI) scheme was overwhelmingly rejected in the referendum put to the Swiss people, with 77% votes against and only 23% in favour. Switzerland is the first country in the world to hold a referendum on the introduction of UBI.

 

But how exactly would UBI work and is it as crazy as some commentators say?

 

Very simply put, UBI would introduce a fixed monthly transfer to each citizen, regardless of their income or wealth. In the case of Switzerland the proposal suggested the sum of $30,000 a year. Over three-quarters of the added $200 billion cost were foreseen to be raised through additional taxes. Basic income is seen as a way of putting a floor under the poorest, and minimizing inefficiencies in current welfare systems.

What are the arguments?

• Firstly, the current system is very inflexible. You are either employed and not entitled to benefits or unemployed and eligible for them. With the rapid changes of labour markets across the world, more and more people are doing part-time, freelance or mini-jobs, rather than the traditional 40 hours work week. When moving between jobs they may need a short period of support from the state, however if they have any form of employment they don’t qualify for work-based benefits. This introduces rigidities and makes people stick to jobs they don’t like where they are not as productive as they could be.

• Secondly, the traditional welfare systems introduce inefficiencies in the shape of the welfare gap, which means that some people find themselves in the paradoxical situation whereby they earn just as much or even more by receiving benefits rather than from working. Because of the way the system is set up, once they get any kind of job, they lose their benefits. Thus many people decide to stay on the dole. A system of universal basic income would remove the disincentives to working, as everyone would still receive their UBI even if they had a job. The hope would be that people would want to make more money on top of the government transfer.

• Finally, means tested welfare transfers are very costly to the government due to the administrative and bureaucratic processes. The government needs to make a careful assessment of each claimant and periodical reviews are required to ensure the continued eligibility for state benefits. All these procedures cost a lot of money and could be reduced to almost zero with the introduction of UBI.

 

That sounds all great! What could possibly go wrong?

• First of all there is no way to predict how people will actually react to being given this lump sum every month. In the best case scenario they would keep the money in order to be more flexible and find the job that better matches their skills and talents rather than jumping from job to job simply to guarantee income without much job satisfaction. However, we cannot simply assume the best case scenario. People may also decide to simply live off the UBI and contribute nothing meaningful to the society.
• It would cost too much. Depending on whether UBI replaces the entire welfare system or is introduced as an addition to it, the new scheme could potentially be prohibitively expensive. This money would have to be generated by more taxes, which in turn may introduce more uncertainties and inefficiencies in the market.
• It would hinder social mobility. If people know that they can go all their lives without learning, acquiring skills, networking and so on, they may end up in a situation where they have no incentive to move up in the social ladder. This could result in social and economic stagnation.
• Finally, in migrant societies, which include Switzerland and by now most of the Western world, the introduction of a UBI could potentially hinder integration of migrant communities in their host countries. Given that it is more difficult for migrants to get jobs from the beginning due to language barriers and the lack of a network, providing a UBI would disincentives them to achieve these two elements that are paramount for integration in new countries.

 

 

What other places are trying it?

Although Switzerland is the first country in the world to put the idea to a referendum, there are governments from the US, to Finland and The Netherlands who have been exploring the possibility of introducing some form of UBI. In the United States, the city of Oakland, California is planning on giving it a go. Around 100 families will be given between $1,000 and $2,000 each month to test how a basic income will affect their lives. In Europe, Finland is the only country that will be running trials on a national level. Starting in 2017, up to 100,000 Finns could get up to 1,000 euros a month, in lieu of other benefits. This experiment will be tested for a period of two years, and citizens will be free to use their fixed lump sums as they see fit. Finally, four Dutch municipalities will implemented a local UBI of circa $1000 a month.

 

The question at the heart of the debate is as follows: If you give citizens a certain lump sum of free money, will they simply spend it and do nothing of social or economic value with their lives or will they use that amount as a way to earn more money and live richer, more productive lives? The different experiments that will be run in the aforementioned countries will be very informative, however the results should be treated with caution. People in certain countries may respond differently to the UBI. This could be due to socio-economic but also cultural reasons.
Whatever these experiments may conclude, and despite the negative press that UBI has been receiving, there are clear arguments in favour of it as well as many limitations. What is clear is that the debate should be localised rather than global, different countries and even different regions will always respond differently to policy interventions, and sweeping generalisations are in this case counterproductive.