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July 02, 2020

Four mistaken theses about universal basic incomes

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Despite universal basic income (UBI) being present in the policy debate for more than two decades, its evaluation still suffers from the popularity of a variety of mistaken perceptions or interpretations. Four of them are explained here:

Mistake #1. UBI is more expensive than traditional income support policies such as guaranteed minimum income (GMI) or unemployment benefits.
One can think of a UBI which is more expensive than a GMI or the other way around. However, alternative income support mechanisms should be compared while keeping constant their impact on net tax revenues. With fiscal neutrality, the relevant issues are the incentives and the distribution of the fiscal burden. A possible source of Mistake #1 is the universality of UBI: given to everyone. In contrast, traditional forms of income support are categorical and contingent: given to somebody, sometimes. Hence the idea that UBI would be more expensive. But one should compare the amount received under UBI to the expected value of the amount received through the traditional policies. It might be larger, smaller, or equal. Universal, by itself, does not imply more expensive.

Mistake #2. UBI reduces labor supply.
First year microeconomics tells us that an increase in unearned income can lead to a reduction of labor supply. Implicitly, what Mistake #2 really means is that UBI leads to a LARGER reduction of labor supply compared to other income support policies. As a matter of fact, this notion is paradoxically mistaken, since elementary economics tells us that UBI is likely to lead to a SMALLER reduction of labor supply. Traditional policies are typically means-tested; they provide incentives to maintain eligibility, i.e. a low level of income. Moreover, the assumption that labor effort falls with income should not be taken as granted. Experimental evidence shows that cash transfers might instead motivate labor supply and productive activities.

Mistake #3. UBI favors “surfers.”
The “surfers” (i.e. rich people spending a lot of time in leisurely activities) pay back UBI through taxes. Question: then why give them UBI? Answer: because non means-tested transfers (like UBI) are likely to imply better incentives.

Mistake #4. UBI will not provide a sufficient support in case of adverse contingent events such as unemployment or serious diseases.
Some contingent adverse events might require a larger support than UBI, say, in a month. (Covid-19 induced furlough or even hospitalization might be examples.) This argument suffers from a simplistic idea about the design of UBI and from a purely static representation. First, although there are UBI supporters who favor a design that completely replaces all other income support policies, most realistic versions envisage partial replacement, leaving space especially for other insurance-based policies designed for these adverse shocks. Second, what matters is the comparison between expected values. UBI guarantees an intertemporal endowment, which might allow people to buy insurance against some adverse events and to access contingent loans. How would the intertemporal UBI endowment compare to the expected intertemporal value of all the traditional categorical and contingent policies? I would argue that UBI is likely to be superior, since it is sure and easy to compute the amount of income gains. It is worth noting that this requires accessible and efficient credit and financial markets and competence in acting in those markets on the part of the household. That suggests that those conditions should be promoted if and when policy moves in the direction of UBI. 

© Ugo Colombino

Ugo Colombino is professor emeritus of economics at the University of Torino and a Research Fellow of the IZA.

Read Ugo Colombino's IZA World of Labor article: "Is unconditional basic income a viable alternative to other social welfare measures?"

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