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UBI is a pipe dream that would bankrupt the nation

Universal Basic Income would wreck the economy

This is part of series on UBI, see the case for it here and the history of UBI here.

On 22 April, in the thick of the lockdown, the Financial Times ran a letter signed by 100 opposition MPs and peers, calling on the government to establish a universal basic income as part of its economic response to the coronavirus crisis. The signatories included the Liberal Democrat acting co-leader Sir Ed Davey, the former Lib Dem leader Tim Farron, 17 Labour MPs, including former shadow chancellor John McDonnell, and 39 SNP MPs.

Compass, the left-wing think-tank that organised the letter, has been advocating a UBI for years. They were simply following the US politician Rahm Emanuel’s advice and not letting a crisis go to waste. Rishi Sunak, the Chancellor, responded to the letter by saying that he was opposed to the idea, and that the current unemployment benefit sufficed.

But that is unlikely to be the end of the matter. Support for a UBI has been growing since the financial crisis, not only on the political left but among some on the right, or neo-liberals like Matt Zwolinski in the preceding article. As Zwolinski notes, they are after all only following in the footsteps of Milton Friedman, whose proposed “negative income tax” is a close relative of the UBI. Indeed, back in 2016, Sam Bowman of the free-market Adam Smith Institute, wrote an influential article in support of UBI that is still widely quoted (even though Bowman has since modified his views) and can be found prominently displayed on the website of Basic Income Earth Network (BEIN), which co-ordinates basic-income organisations around the world.

Which goes to show that no one’s perfect, not even Milton Friedman. The UBI is a bad idea. To see why, we first need to know what a UBI is and what problems it is supposed to solve. A UBI is an income paid to every adult by the state. You don’t have to be unemployed, a single parent, retired or anything else. Everyone gets it, no matter what. Which is just to say that, as its name suggests, it is a universal income. It is a “basic” income because it is supposed to be enough to cover the basic expenses of life — for food, clothing, shelter and transport.

What’s not to like? A £13,000 UBI would mean a 70 per cent tax hike and a wrecked economy

You can easily imagine why many left-wingers would favour a UBI. Some say it will promote equality. Some say it is required by the mass unemployment that they think will be caused by artificial intelligence and robots. Others have a more romantic reason, claiming it would emancipate people from the indignities of employment in a capitalist system, allowing them to pursue occupations out of choice rather than financial necessity.

But why would fans of free markets advocate a UBI? The answer is that it would solve two problems with current unemployment benefits, which are conditional on not having an income. The less important is that conditional payments are laborious to administer. Work is required by both the claimant and government staff to establish that the conditions are met and that the claimant is eligible. By paying everyone unconditionally, these expenses would be spared.

The more important problem is that payments conditional on not working discourage people from working. The combination of income tax and the withdrawal of benefits means that unemployed people re-entering the workforce face an effective marginal tax-rate of 80 per cent or more. Each pound they earn in their new job makes them only 20p better off, and they suffer all the inconvenience of going to work. This is the “welfare trap” which keeps many people in long-term unemployment. A UBI would avoid this problem because, unlike an unemployment benefit, the unemployed wouldn’t lose it when they re-enter the workforce.

With so many justifications for a UBI, and support from across the political spectrum, what’s not to like about it? Start with the numbers. How much would a UBI need to be? Since it must cover basic needs, it should be at or above the “poverty line”: that is, the income below which someone is deemed to live in poverty. According to the standard measure — the one used by anti-poverty campaigners, the Labour Party and the government — a single person with no children lives in poverty if his income is less than £152 a week after housing has been paid for. (The state pension is now only £135 a week. But pensioners get all sorts of other help, such as free TV licences and winter fuel allowances.)

Of course, housing isn’t free, so we need to add that back to get our basic income. Rents vary around the country. But let’s say the average for a single person is £98 a week, which brings us to a nice round total of £250 a week or £13,000 a year.

By how much will tax need to increase to fund this? Annual spending on social welfare (including the housing benefit) is now about £230 billion or £4,000 per adult. If all social welfare were replaced by a £13,000 UBI, then taxes would need to increase by £9,000 per adult or £500 billion in total.

The government now collects £700 billion from taxation. This UBI would therefore require taxes to increase by more than 70 per cent. That is impossible. Raising tax rates by so much would end most of the economic activity that gets taxed. The government would fail to collect the extra £500 billion and the economy would be wrecked in the attempt.

Some might reply that this problem arises only because I have set the UBI too high. OK, let’s halve it then, so that it is £6,500 a year and the additional taxes required are only £2,500 per adult or £137 billion. Maybe this much more tax could be collected. But now we no longer get what the UBI was supposed to provide. Because £6,500 is only half what is needed for a basic existence, people are no longer safe from being put out of work by robots, and no longer free to turn their noses up at the jobs on offer from capitalists.

Free marketeers don’t get what they want either. A single mother with three children who cannot work will not get by on £6,500. So she will need some kind of top-up. But now we are back to welfare payments conditional on your circumstances and the perverse incentives and administration costs that come with it. Which is what the UBI was supposed to avoid.

Advocates of the UBI face a dilemma. Either the UBI is set at a level where it can serve its intended purpose, in which case it is fiscally impossible and economically ruinous. Or it is set at a fiscally feasible level, in which case it doesn’t serve its purpose.

This dilemma arises from a fundamental flaw in the UBI idea. To see what it is, note that administration costs and moral hazard are not unique to unemployment insurance. Consider car insurance. If you crash your car and make a claim, you and your insurer will need to do some work to establish that the incident is covered by the policy. And because you are insured, you are likely to drive more carelessly than you would if uninsured. Suppose that, to solve these problems, your insurer suggests a new policy. Instead of paying you the cost of repairing your car in the event of an accident, it will pay you £10,000 every month whether you have an accident or not. Of course, this will require your premium to go up to a little more than £10,000 a month – the extra covering the cost of collecting your £10,000 and then sending it back to you. What would you think of this suggestion?

You would surely think your insurer had gone mad. What he is now offering is not insurance. The point of buying insurance is to replace the risk of a big expense with the certainty of regular small expenses. You pay £50 every month so that you won’t have to pay £10,000 to have your car fixed in the event of a crash.

Similarly, you might lose your income. The business you work for might fail or you might fall sick and be unable to work. Most people want insurance to cover this risk. In the nineteenth century, this was supplied by friendly societies and similar organisations. The cover was highly conditional and usually time-limited. In the twentieth century, the state “crowded out” such suppliers with unemployment and incapacity benefits. But what it offers still resembles insurance. You pay regular small “premiums” through taxation and, in the event that you lose your income, the state pays you an income.

This is what most of us want, even if we would prefer a voluntary private arrangement. We do not want to pay in large amounts and automatically get large amounts back. Nor do we want to pay in small amounts and automatically get small amounts back. Of course, we might all like to pay in nothing and automatically get large amounts out. But grown-ups really should not indulge in fantasy.

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