Universal basic income is ahead of its time

(Bloomberg View) — The universal basic income is an idea whose time has not yet come. Or so say the Swiss in a referendum this weekend, in which the idea of a basic income grant was overwhelmingly rejected, with more than three-quarters of the population voting against.

My colleague Leonid Bershidsky (correctly) says that this is not surprising because Switzerland was in many ways a bad test site for a UBI, with its highly affluent population and low levels of unemployment. On the other hand, in some ways a country like Switzerland is the best possible test for a UBI: It’s got a lot of high-income residents from the finance industry, and its low unemployment rate means that a UBI will probably not discourage work as it will in places where jobs are less pleasant, or easy to come by. So why did it fail?

Well, because the UBI has some problems as a policy. The idea of a UBI is that it fixes many of the problems with the existing welfare system. The current patchwork of food stamps, health benefits and cash assistance creates a lot of economic distortions, because we’re giving people the stuff we think they ought to want (food, health care), rather than the things they actually do want. This can create problems for poor people who might, say, urgently need to cut back their food budget in order to repair their car, something that you can’t do unless you can find a repair shop that takes food stamps.

Moreover, because all these programs have different income cutoffs, the benefit “cliffs” can create absurd marginal tax rates, even climbing over 100 percent —  where you will literally cost yourself money by working more or getting an hourly raise, because the money lost in benefits is greater than the money gained in wages. The UBI is supposed to solve these problems by creating a single benefit that goes to everyone, regardless of income. And in theory, by providing a safety net, the UBI can free potential entrepreneurs and creatives to take risks chasing their dreams, which they couldn’t do if the probable downside ended in bankruptcy and homelessness.

Unfortunately, policy makers trying to craft a UBI end up with an unpalatable choice between creating a benefit that is useless, or one that is too costly to pass. Consider a basic income of $1,000 a month. Most of us would not consider an annual income of $12,000 a year enough to live on; it’s just a smidge above the poverty line for a single person.

But there are 242 million adults living in the U.S. Now, 7 percent of the U.S. population consists of noncitizens, but even if we assume that grants go only to citizens, that’s 225 million adults. Multiply times $12,000 a year … right, it’s $2,700,720,000,000, or 70 percent of the current federal budget.

Yes, but we’ll get rid of the other programs, you say. OK, well, this monthly grant is considerably less than the current average Social Security benefit, a benefit that President Obama (and judging from my social media accounts, most of his party) consider too paltry. It’s going to look even skimpier once you get rid of Medicare and force retirees to buy their health care on the open market, a cost that would consume most of their guaranteed basic income.

Oh, we weren’t going to get rid of Medicare? Nor Medicaid or Obamacare? And of course we’ll keep providing public schooling, and assistance for disabled children, and…. By the time you’ve started saving programs that obviously can’t be cut without immiserating large chunks of the population who currently rely on the government, what you have is a $2.7 trillion program to substitute for Temporary Assistance for Needy Families (welfare), unemployment insurance, Social Security and food stamps — four programs upon which the federal government currently spends about $1.2 trillion.

Moreover, since the grant would be, in many cases, less generous than what a lot of people are currently collecting, we will probably have to either top up for those groups, or increase the size of the benefit, until we have a $3 trillion or $4 trillion program to replace $1.2 trillion worth of welfare spending. Even if we tax back the whole benefit from higher earners (which would reintroduce many of the marginal tax problems we were trying to avoid with the UBI in the first place), the dead-weight loss of the additional taxation needed to pay for this program will probably harm economic growth, making the program more expensive still. I’m not a supply-side hawk who thinks that any tax increases will plunge us all back into the dark ages, but running an additional $2 trillion to $3 trillion through government coffers every year might give even some ardent big-government Democrats pause.