The case for basic income guarantee

By | 23.2.2017

Unconditional hand-outs make more sense than you think, even from the libertarian perspective.

The notion of basic income guarantee (BIG) for every citizen has been discussed for some time. Although the idea is getting momentum and is even being tested in some countries (Finland, the Netherlands, or Canada), it is often viewed rather as a utopian dream of leftist economists. However, it is not just the egalitarian part of BIG which appeals to many in the economic profession and beyond, it is also the political economy bringing support from the right. Even Mike Munger from Duke University, a libertarian candidate for governor and member of Cato Institute, recently expressed his support for BIG.

As one might guess, the praise of the unconditional income coming from the classical liberal scholars is based on two pillars: individual incentives and market distortions. The current welfare system sometimes disincentivizes people to provide for themselves. For many government programs, people are eligible only if they earn less than a certain level of income. Crossing this threshold means the marginal tax rate is larger than 100 percent. There is no reason for people in such a situation to look for any incremental source of income.

One example of such policy are disability benefits. Although working conditions gradually improve in all sectors of the economy, more and more people are eligible for disability benefits. This increase can be tracked to regions with former presence of heavy industry. Data shows that disability benefits in fact serve as a transfer from the prosperous regions to those negatively affected by advancing technology and trade. Without judging the necessity, form or magnitude of the transfers, it is clear that policies which disincentivize work are among the worst ways to help lagging regions. BIG would solve this incentive problem and would thus be a viable substitution of disability benefits and related welfare programs trying to cope with such global dynamics.

The other perk of BIG is that it creates minimal distortions in the economy. Unconditional income is essentially a negative head tax. Although not acceptable from a social point of view, head tax has been identified as the most efficient form of taxation. It hardly affects prices and hence keeps the information flow in the economy intact causing virtually no market distortions. Thanks to BIG, it would be also possible to scrap policies such as minimum wage or unemployment benefits. Young workers would be able to gain their first job experiences disregarding their productivity relative that associated with the minimum wage.

Does BIG have any downsides, any obstacles preventing its implementation? It surely does, but those will be addressed in the next article. Until then, hurray for the BIG!

Reference: Munger, W. C. (2015). One and One-Half Cheers for a Basic-Income Guarantee. Independent Review, 19(4). Available here

Leave a Reply

Your email address will not be published. Required fields are marked *