Universal basic income (UBI) is becoming respectable. Less than a decade ago, its principal supporters were weed-smoking hippies and Star Trek aficionados: “serious people” either laughed or sneered at it. But now, it counts among its supporters a growing number of top economists, entrepreneurs and financiers. Governments around the world are evaluating its use, and some are embarking on pilot studies. Businesses are partnering with not-for-profit organizations to conduct serious research into the costs and benefits of UBI.
And now, the IMF has joined the party. In its latest Fiscal Monitor, it says UBI could reduce income inequality and protect people affected by technological change and globalization.
Income inequality between countries has fallen significantly, especially in the last decade, but this has been offset by rising inequality within countries. The IMF says that 53% of countries have experienced widening income inequality: this includes most advanced countries, where rising inequality is driven by very large rises in the income of the top 1%. Over time, persistent income inequality inevitably causes wealth inequality.
But why do we need to reduce inequality? If everyone’s income is rising, why worry about some incomes rising faster than others? After all, “a rising tide floats all boats”, as the saying goes. Furthermore, since the savings of rich people can be deployed into productive investment, benefiting poorer people through more and better-paid employment, tax and transfer programs that take money from the rich to give to the poor could reduce investment, which over time would hurt the poor instead of helping them. In many countries, fiscal reforms since the 1980s have concentrated on reducing the tax burden of richer people to encourage them to invest productively, thus benefiting poorer people. This is the famous “trickle-down economics” popularized by President Reagan (and dubbed “voodoo” by the first President Bush).
Prosperity in much of the world has improved since the Reagan-era tax cuts. But in recent years, the incomes of low to middle income people in advanced countries have stagnated while those of the top 1% have continued to rise. Now, there are deep political crises on both sides of the Atlantic as the anger of those who see themselves as losing out fuels populist movements. Political instability threatens global growth and prosperity, already damaged by a financial crisis from which the world has been slow to recover. No wonder the IMF is concerned about rising inequality.
Chapter 1 of the IMF’s Fiscal Monitor discusses ways of reducing income inequality within countries. It considers taxes and transfers together as a framework for redistribution. Crucially, it says, taxes and transfers aimed at reducing inequality should not hamper growth, since growth is important to those at the bottom of the income scale. But it also observes in a footnote that since people at the bottom of the income scale tend to spend more of their income than richer people, raising their income can increase aggregate demand and hence spur growth. Carefully calibrated tax and transfer policies can therefore, by increasing economic growth, benefit everyone.
UBI is one such policy. The IMF describes it as a "forward-looking idea for addressing current tax and transfer system weaknesses....particularly attuned to how labor markets and social contracts may continue to evolve with technological change". But its costs and benefits have not as yet been firmly established, and it is fiercely opposed in some quarters. The IMF has therefore created an economic model to evaluate its potential.
The IMF divides countries into three groups:
- Countries with minimal or no transfer systems (e.g. Egypt, Bolivia)
- Countries with comprehensive and progressive transfer systems (e.g. France, United Kingdom)
- Countries with patchy or insufficiently progressive transfer systems (e.g. Brazil, United States)
For each group, the IMF asks the following key questions:
- Is there a case for the adoption of a UBI?
- Under what circumstances could a UBI be desirable, and how could it be financed?
- Or should governments focus on strengthening their capacity to use means-tested transfers?
The IMF gives qualified support to UBI for countries in Group 1, many of which have high levels of poverty. “UBI can be a powerful instrument for combating poverty and extreme poverty,” says the Fiscal Monitor. But UBI needs to be accompanied by other reforms such as introduction of progressive taxation and elimination of distortionary subsidies. The IMF is particularly keen on UBI as a replacement for energy subsidies in oil-exporting developing countries.
Conversely, for countries in Group 2, the IMF says that replacing existing transfer systems with UBI could mean large losses for some groups, resulting in higher poverty – precisely the opposite of the effect it is intended to have. For these countries, the IMF recommends improving existing transfer programs rather than replacing them with UBI.
Some in the UK are no doubt now scratching their heads at the IMF’s description of the UK’s transfer system as “functioning well”, given the complete dog’s breakfast the government is making of Universal Credit. Universal Credit was supposed to consolidate several different transfers into one, thus streamlining the system. But a cash-strapped government turned it into a cost-saving exercise, and now persistent staff shortages and distributional inefficiencies are causing terrible problems. The trouble is that the IMF’s evaluation was in 2011, which was before the shredding of the UK’s social safety nets really got under way. Had the evaluation been conducted more recently, the UK might have found itself in Group 3 rather than Group 2. What a mess.
Group 3 countries present something of a challenge. Replacing inefficient and inadequate transfer systems with UBI could benefit a lot of people, but some existing beneficiaries would lose out, and there might be greater benefit from improving existing systems. For the United States, for example, the IMF’s model shows that people at the lower end of the income scale would benefit more from upgrading earned income tax credits (EITC) than from UBI. But for India, replacing the Public Distribution System (PDS) operational at the time of the evaluation (2011) with UBI would have substantially improved support of low-income groups.
However, the fact that the IMF was shooting at a moving target caused something of a problem here, too. India has substantially revamped its transfer arrangement recently, and officials were upset that the IMF appeared to be recommending completely replacing it. The IMF’s Director of Fiscal Affairs, Vitor Gaspar, hastily reassured them:
“No! The goal was not to advocate UBI. It was to use the UBI as an illustration of how one could replace existing large and macro economically significant schemes that are inefficient and inequitable.”
And he went on to congratulate India on the transformation of its transfer system since 2011.
The IMF’s recommendation that for Group 2 and some Group 3 countries, improving existing systems would be better than replacing them with UBI comes as no surprise. A universal flat-rate payment can never be as efficient as well-functioning targeted transfer payments. However, the IMF warns that means-tested solutions can be difficult to administer. It is also clear from the UK's experience that complex transfer systems are vulnerable to political interference. Wrecking social safety nets in the name of "making work pay" may be bad economics, but it can be excellent politics.
But at the end of its evaluation, the IMF put its finger on the real value of UBI for advanced countries:
In an economic environment in which job insecurity is increasing (for example, because of job market disruptions associated with technological progress), expanding available insurance mechanisms may become an important policy objective. A UBI could provide a stable source of income to individuals and households and therefore limit the impact of income and employment shocks.
UBI can support vulnerable people as traditional jobs disappear and are replaced with – well, who knows what. Bring it on.
