8 December 2015

Julia Hartley-Brewer is wrong on the economics of a basic income


Julia Hartley-Brewer today ridiculed a guaranteed basic income – the idea that we should replace the welfare state with a cash payment to all adults, as about to be trialled in Finland. Her charge sheet was extensive. Apparently the basic income would be hugely expensive, would increase unemployment and divert resources from those most in need, was immoral and would extend the scope of the state.

Certainly, aspects of the detail are important. Yet if we believe that the state has a role in providing a safety net for the poor without destroying the incentives for a dynamic economy, then I’m afraid on the substance of the economics, Julia has it wrong.

Firstly, our existing benefits system is already extraordinarily expensive. Social protection spending (including all benefits and the state pension) ran at £261 billion in 2014/15. That’s £4,044 for every man, woman and child in the country. Given that the stated aim and Julia’s interpretation of the welfare state is to help the poorest, if this were targeted on the bottom quintile of the population it would amount to over £20,000 per person. Few would argue this works effectively.

The truth of course is that our system is not currently highly targeted at those in need as Julia implies. Indeed, all pensioners (many of whom are wealthy) receive state transfers irrespective of need. Yet all other overt redistributive policies come with a huge bureaucratic cost of implementation too: think of the means-testing of benefits and tax credits, the conditionality, and the raft of programmes with their byzantine rules. A basic income would replace this and just distribute cold, hard cash. At a swoop, the departments and bureaucracies would be abolished and replaced with a computer – eliminating not just the administrators but also the conditions and bureaucracy that claimants face. This mitigates some of the cost and a lot of the stress.

The idea of redistributing money to everyone as a way to increase employment is counterintuitive. Julia is right that, ceteris paribus, if you pay people not to work, then fewer people will work. That of course is what our current system does – out of work benefits and many aspects of tax credits act as a wage substitute. That’s why we then feel compelled to use carrot and stick to coax people into employment. No doubt then that some would decide to ‘do nothing’ – i.e. not engage in the formal labour market – given a new basic income stream to all (though if they instead decide to engage in caring for loved ones or civil society activity etc, this need not lower overall welfare).

The problem for Julia is this is not the end of the story. Actually, a basic income could well increase employment. Giving unconditional cash would abolish means-testing, which currently disincentivises work through the creation of high effective marginal tax rates as people work more and benefits are withdrawn. It would also achieve the aim of universal credit – eliminating the uncertainty of what benefits are lost.

The overall effect on employment is therefore ambiguous. But the fact that a state-guaranteed income floor would exist would also negate the argument that people are forced into “insecure” or “exploitative” work. We could therefore justify the abolition of much labour market regulation which currently keeps the lowest-skilled workers (and often vulnerable people with minor disabilities) out of the labour market all together. No more minimum wages. No more working time directives. No more curbs on zero-hours contracts or agency work. If we did all that, I’d wager employment would increase, not fall. And the scope of the regulatory state would be hugely reduced.

This could all be particularly important with the rapidly changing nature of the labour market. With automation believed to disrupt the activities within many jobs, in future we might imagine the churn of the labour market to be more vigorous. I’m not a jobs pessimist. But if people are engaging more in portfolio careers, and moving jobs more often, sometimes having to get new skills, then providing an unconditional income safety net would allow people to experiment in new jobs or entrepreneurial activity, safe with some basic security.

There could be other benefits in terms of preventing the causes of poverty too. Unlike our current welfare system, the basic income would not discourage family formation. Indeed, in a dynamic sense, the basic income might strengthen the family, and lessen the need for welfare per se.

The strongest argument that Julia posits against the idea is that it would reduce the incomes of some of those really in need: those with disabilities, multiple children or high housing costs. Accepting a slightly more complex system with more generous payments for the disabled, and having the basic income given to all citizens rather than just adults could negate these effects. But certainly, if the spending on the poor stays more or less the same, but the same amount is extended to the middle-classes and the rich, you need much higher levels of spending and hence taxation, which few of us would favour.

Yet there are two important things we could do to reduce this. First, we could complement this with a genuine agenda to reduce living costs. Fundamentally liberalising planning as a way of bringing down housing costs could at least mitigate some of the housing support issue. Re-examining policies that raise the cost of housing, energy, food and childcare through supply-side reform would also lessen the need for a higher level of basic income.

Second, we could still achieve most of the benefits of the basic income with a more highly targeted negative income tax with generous household allowances for dependents. This would share the basic income’s best features: transferring pure cash, providing a basic income safety net and divorcing the tax and transfer system to lower marginal tax rates drastically for low earners – meaning work always pays. The trade-off would be to accept slightly higher work disincentives, but much more acceptable than those the low paid experience today.

So whilst there are indeed some problems of detail of the basic income that would need to be addressed, the benefits it has can provide good lessons for a better starting point than the welfare state we currently have. The idea that the state should in effect provide a minimum income guarantee to all is a powerful one. Who knows, we might learn something from a bit of policy experimentation in Finland. After all, our starting point should surely be: what works?

Ryan Bourne is Head of Public Policy at the Institute of Economic Affairs and Director of the Paragon Initiative, which today publishes Dr Kristian Niemietz’s ‘Diagnosis Overrated: An analysis of the structural flaws in the NHS’.