What If Corbyn Introduced Universal Basic Income? A Debate

(Bloomberg Opinion) -- A new U.K. report has brought the growing international debate over the concept of a universal basic income to Britain. Two Bloomberg Opinion columnists – Leonid Bershidsky and Ferdinando Giugliano -- debate whether that’s a good thing.

Leonid Bershidsky: In a report commissioned by U.K. Shadow Chancellor John McDonnell, London academic Professor Guy Standing proposes a universal basic income trial in the U.K. I think that's a great idea. The world needs a well-designed UBI trial: There aren't all that many big ideas around with such powerful appeal as this one, and it's clear from the Standing proposal that he understands how it should be tested.

So far, the only serious government-run trial has taken place in Finland, but I have problems with its design. The amount the Finnish government paid to 2,000 participants, 560 euros ($627) a month, wasn't enough to live on, and it didn't replace all of the many types of conditional social aid people receive in Finland. Besides, it was only tried on unemployed people, while the idea of a universal basic income is that everyone should receive it. The response of people in precarious, hated jobs to this new income source should be tested, too. The Finnish government seemed uneasy about the experiment and ended it too early.

Prof. Standing would eliminate most of these design flaws by not limiting the pilots to the unemployed, but instead expanding them to entire communities, and by running a number of different experiments with the basic income replacing means-tested benefits to different degrees. The only problem I see with the proposed design is that the amounts to be paid out are even lower than in Finland -- up to 100 pounds ($130) a week, and it's difficult to see how people can survive on that.

But the biggest question the Standing proposal raises is, "why not?" The U.K. can certainly afford the trials, and it makes no sense to propose a UBI without trying it out first (that's one reason the Swiss UBI referendum failed in 2016). What would be a compelling reason not to do this?

Ferdinando Giugliano: I am all in favor of well-designed trials. But before the U.K. runs one, it would be wise for politicians to ask themselves whether the math behind a basic income can indeed add up.

A recent study by the OECD suggests it would not - especially in the U.K., but also elsewhere. The OECD looked at the impact of a reform where a basic income replaces most existing working-age benefits, as well as the tax-free allowance. Researchers find out that if the U.K. wanted to stick to such a budget-neutral basic income, it would only be able to disburse £230 monthly to each adult – which is only a third of the poverty line for a single person and 28% less than the level of guaranteed minimum-income benefits (GMI). As a result, a budget-neutral basic income would lead to a significant increase in poverty rates.

You argue that any well-functioning trial should be more generous than what was tested in Finland and what Prof. Standing proposes should be trialed in Britain. But it is unrealistic to imagine the U.K. government would have the resources to fund a very generous universal basic income scheme. At the very least one should imagine how the government would be paying for it.

Personally, I think it would be a much wiser use of resource to focus on the most in need in society, rather than handing out money universally. Surely this is what the Labour Party should stand for too.

LB: I'd argue that funding should only be explored and debated after the effects of a UBI are well-understood. Otherwise we'd be putting the cart before the horse: If we don't know what a UBI does, how it affects people and communities, why should we even try to figure out how to fund it?

If we discover that the benefits are highly desirable, there may well be support for higher taxes to finance the scheme, or for the abolition of tax exemptions, as Standing suggests. Of course, resources will always be scarce. But the way Standing wants to design the trials will help figure out which existing benefits could be replaced by a UBI -- and, by the way, what resources will be saved by eliminating the vast means-testing bureaucracy, a goal that is attained by simplifying the process and sending checks to everyone.

At this point I, for one, am not sure governments aren't spending more on trying to figure out who "deserves" social aid than they would spend on a small universal income.

FG: If the U.K. wants to be a guinea pig for the rest of the world, so be it. But I can’t see how the government would be spending its money wisely. The OECD study shows that in Britain nearly 70% of those in the second poorest decile of the income distribution would be worse off under a basic income than under the existing welfare system. This is the decile where there would be most losers – and this includes top earners!

The funding of a UBI – and the distributional implications of such choices – are only one of the problems, too. How do we ensure people face the right incentive to work? I do not, for one, believe that most people prefer shirking to working. But we need to take into account the risk that some may prefer to stay at home. One lesson from the recent experience of designing welfare schemes is that benefits should be tied to measures that help with job search and labor market integration. There may be a case for rolling out some form of basic income in countries with non-existent welfare nets. But Britain is not one of these countries.

LB: The OECD basic income paper is based on very specific assumptions about the design of the basic income, including budget neutrality. I'm not sure these assumptions will hold after the different experiments are run and the resulting benefits compared. If, for example, certain conditional benefits remain or the amount of the UBI is higher, effects on different parts of the income spectrum will be different, too. There's simply no way to make that type of assessment before the trials have been run and a model chosen as optimal.

The optimal package would, in theory, create the best incentives for people to work. But even if no special effort to reach that goal is made, the results of the Finnish experiment show no diminished propensity among UBI recipients to look for work. They do so at the same rate as the unemployed people who get the usual means-tested benefits -- but, at the same time, they feel less stressed and less humiliated by the bureaucracy.

FG: If you are imagining a more expensive form of basic income, then you also need to test the way you are going to pay for it. However, this makes any trial much more complex. There will be some big losers, who will move out of their community once they hear they will be subject to, for example, greater taxation just to pay for this trial. Alternatively, if you only hand out generous sums, you are still left with the very big question of how you are going to pay for such an extravagant scheme.

I thought you did not like the Finnish experiment! If you buy its conclusions on the incentive to work, then you must also agree with its general result: That this was a very expensive way to make people slightly happier.

LB: Indeed, I find the Finnish experiment limited. But of course we should heed its conclusions. According to them, the UBI makes people very considerably happier without increasing or decreasing their propensity to look for work. I'd like to know more, though -- for example, would people quit jobs they hate and look for better ones? Would they find them? Would companies improve working conditions to keep workers from leaving bad jobs?

I don't think the trial stage would or should involve changes to taxation in specific communities. Standing certainly doesn't recommend that. The final scheme, should UBI be deemed desirable, will be subject to a national debate. Then if higher taxes are imposed, those unhappy with it will have to move out of the country, not just their community (and I acknowledge that if too many do, that's a problem).

FG: I would argue that if you are testing a very generous basic income scheme, you also need to test the ways you are going to fund it. Otherwise, you are simply giving people the illusion that there is a free lunch, until you roll out the policy nationally, and discover there are costs and, indeed, side-effects!

LB: Why do you think this has become such a thing now? My theory is that the left, both in Europe and in the U.S., has been experiencing a sustained crisis of ideas, which has led to an electoral decline. They need to offer something to a differently structured society with a lot of workers with precarious, temporary, part-time jobs, including those in the sharing economy. There's a search for answers to the problem of job losses because of the increasing automation level, too.

For all these reasons, the left needs some big ideas to inspire voters, to take their basic belief in social justice to the next level. The UBI fits the bill in most European countries -- and in the U.S., too, where a Democratic presidential candidate, Andrew Yang, advocates for it.

FG: I agree with you on why we’re seeing this debate now. In some countries, such as the U.K., the left is short of big ideas, and is leaping on this one. The trouble is that it leads to some awkward conclusions: For example, abandoning the traditional welfare state to hand out money to everyone in society, including the richest. No surprise many libertarians agree with some form of basic income. Indeed, it made more sense for Finland's center-right government to test it than it would for Britain's Labour Party.

I am less surprised that some populist parties are going for it too. One example is the Five Star Movement in Italy, which campaigned on a "citizenship income" - only to then roll out a more conventional income-support scheme. A basic income sounds exceptionally good, until you discover you have to pay for it. But since many populist parties such as Five Star don't really care about how they fund their measures - or at least don't like explaining how they will do it - a basic income is a very good promise to make.

LB: Some on the left also realize that traditional welfare systems have two major flaws, which are discussed at length in the Standing report. One is that they often humiliate and demotivate people by making them jump through hoops to receive assistance. Keeping relatively poor people happy, however, is an important goal, it's not to be dismissed especially if one wants to shrink anti-elite populist parties' support base.

The other problem is that these systems require enormous, complex, costly bureaucracies that even the governments themselves don't fully control. The UBI has the potential to remove the humiliation and simplify government.

FG: True, but the hoops that you and Prof. Standing describe are there for two reasons: First, to make sure that assistance really goes to those in need, rather than to those who can do without it; and, second, to ensure that people face the right incentive to work - and are given help to get back on the job ladder.

There is nothing really humiliating about these measures, provided governments deliver fair and efficient implementation (not always the case). Switching to a more primitive "basic income" would amount to a gigantic admission of failure on the ability of the government to support those in need effectively. I would be astonished if the Labour Party could ever jump to that conclusion!

LB: It's fundamentally wrong to let the government determine who needs assistance and who doesn't. In my book, an Amazon warehouse worker on minimum wage getting chronic back problems deserves some help from society to figure out if there might be a better job somewhere. When governments make distribution decisions, that's essentially a very Soviet system, and I'm worried that it leads to suboptimal outcomes.

FG: Not necessarily. A government should provide active labor market policies to give some support to workers when they choose to retrain.

I grant you that the existing welfare system has been lacking in many areas: For example, in southern Europe it has been too generous with pensioners and too stingy with people of working age. But I believe this is a reason to reform existing welfare systems, rather than simply ditching them and replace them with a primitive, one-size-fits-all payment, such as a UBI. There may be a libertarian case for basic income. But I am astonished that, of all politicians, a self-declared socialist such as John McDonnell is considering going for it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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