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Basic Income: What We Give Up

The expansion of direct income supports during the COVID-19 crisis, through policies like the Canada Emergency Response Benefit, is reigniting our national debate on basic income. Policy experiments across the world consistently deliver positive results, and we can afford to implement a basic income. But it’s worth considering the socially transformative policies we might have to give up to do it.

In short: Academic research on basic income, while incomplete, suggests it would improve financial, emotional, and physical wellbeing. However, the necessary fiscal and political commitment might crowd out room for progress on removing deeply entrenched barriers to social mobility. Basic income advocates risk conflating the mathematical elimination of poverty with a remedy for structures that caused it.

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Basic income can be many things and depends on the designer’s framework. Here are some dimensions across which it can vary:

  • The maximum size of the cash transfer
  • The rate at which it is clawed back as recipients’ incomes rise
  • Whether the transfer should be clawed back at all (i.e. should basic income be universal?)
  • Sensitivity to age, household size, and physical ability
  • Elimination, evolution, or maintenance of existing social programs

The characteristics of each dimension of a basic income affect its fiscal cost, impact across demographic groups, and political palatability. There is no one basic income policy.

Let’s adopt a simplified definition of basic income:

  • A broad government cash transfer that disproportionately benefits the poor.

The evidence on basic income, all from real-world experiments, points in a consistent yet incomplete direction. You can’t understand massive structural change until you try it.

The Government of Ontario, in 2017, commissioned a three-year study of basic income. It was cut short the following year when a new government was elected, but it yielded useful results.
Recipients reported:

  • Fewer visits to health practitioners,
  • Improved self-esteem,
  • More stable finances,
  • Stronger bargaining power in the labour market.

Manitoba conducted a similar experiment in the 1970s; one of the most carefully designed and politically mismanaged basic income studies in history.

  • Hospital visits in Dauphin, where all residents were eligible for the program, fell by almost a tenth.
  • However, researchers found that employment fell between one and five percent among recipients, depending on demographic characteristics.

When the Eastern Band of Cherokee Indians opened a casino on a reservation in the 1990s, the profits were distributed to adult residents as a universal basic income. By coincidence, roughly 350 of the band’s children were participating in a longitudinal study of youths, tracking their mental and physical health over time.

  • Cash transfers to parents not only reduced their children’s behavioural challenges, but improved behaviours associated with long term financial security.

A study in Finland, where universal basic income was given to a sample of unemployed people, found no effect on labour force participation. Recipients were also happier and healthier.

All the evidence points in a similar direction.

All the evidence is fundamentally flawed. Here are some reasons to be sceptical of basic income studies.

Recipients’ behaviours do not fully reflect long term career and financial planning because:

  • The studies are temporary
  • The studies are often cancelled, as they were in Ontario and Manitoba

Small sample sizes mean studies miss:

  • The total dynamic labour market effect of a basic income
  • The effects of the tax increases necessary to finance the policy
  • Which groups are negatively affected by potential labour shortages
  • The composition of price changes due to the policy, and which groups might be negatively affected

While economists try to account for these effects, it is impossible to produce a reasonable model that integrates all these factors. We won’t know the effects until someone implements the policy.

But what are we trying to do? Are we repackaging all social assistance into a simpler program? There’s a great argument for streamlining these policies to increase uptake by reducing stigma and administrative burden. That is what we saw in Dauphin, Manitoba.

Are we trying to eliminate poverty? We have the resources to repackage existing social assistance, boost funding, and mathematically solve poverty.

However, this would do little to the structures that got us to such an unequal state in the first place. While a basic income could eliminate poverty, it would still leave us with an inequality that is just as deeply entrenched as before.

Here is a short list of things basic income does little or nothing to solve:

  • Access to education, clean water, and affordable intercity transportation (i.e. markets) for isolated northern and indigenous communities
  • Restrictive residential zoning bylaws that cement racial segregation in housing and education
  • The ability of land owners, through leasing or selling, to eat up the gains of basic income
  • Discriminatory hiring practices

This list is only a small sample.

This is not a false choice, because basic income is expensive! The Parliamentary Budget Officer (PBO) estimated that implementing Ontario’s basic income pilot design across the country would cost at least $44 billion.

  • This could be financed by policies like more than doubling the federal sales tax or eliminating the basic personal tax exemption.
    • It would be the largest tax increase in modern Canadian history.

This would take a colossal amount of political capital, and it would be hard to convince Canadians and their leaders to embark on more ambitious social changes afterwards. It would be hard to address the important things in the bulleted list above.

So, suppose you could raise $44 billion and only $44 billion of new revenues.

  • Is a basic income what you’d spend it on? If we blow our political and fiscal load on basic income, we might lose the opportunity to achieve the social changes people have been fighting for. That cost-benefit is the reader’s call.

The bottom line: There are serious gaps in basic income literature that might overstate the benefits of the policy. At the same time, implementing one comes with tremendous political costs that might erode our ability to continue pushing the envelope on social transformation. Your advocacy is your decision, but the paths of basic income and other social policies are divergent.

Did you enjoy this piece? Read more from Nikola’s blog here.

READ: Unpacking Canada’s COVID-19 related job loses.