Introduction – a good policy in bad times
Sometimes bad policy in good times is good policy in bad times.
A Universal Basic Income (UBI) is one such policy. The idea of providing every individual (Universal) a low and unconditional common (Basic) level of cash (Income) is an idea that has roots on both the left and right of the political spectrum. Those on the left have typically been attracted to alleviating poverty for everyone — universality. Those on the right have typically been attracted to the efficiency of a single program for the poor to replace the myriad of programs that exist today — unconditionality.
They’re both wrong. As we shall see no society – certainly not ours – produces enough to provide enough income to every citizen to eliminate poverty. And targeting programs to the needs of individuals makes sense in a world where the needs of those with low income is so different.
Yet I believe a Crisis Basic Income (CBI) – the immediate payment of $2,000 to all Canadians who filed an income tax form last year, which is then clawed back on next year’s tax form – has to be a critical piece of the short-term federal government response to the COVID-19 crisis. And it is precisely what makes a UBI a bad idea in good times that, as I will now argue, makes a Crisis Basic Income such a good idea in the current crisis.
Universal Basic Income: Bad
The following sections will tease out a number of design and implementation issues around a UBI – and why it is a bad idea. This will set up the subsequent discussion on a Crisis Basic Income – and why it is a good idea. The point is not to write a definitive and substantive critique of the basic income, rather it is to summarize the most common critiques in order to set up the subsequent discussion on the CBI.
Universal
One thing that makes a UBI seem attractive is its apparent simplicity. In Capitalism and Freedom, Milton Friedman proposed a “negative income tax” where every taxpayer would be given a percentage of the difference between their income and a threshold. This is conceptually similar to a UBI, which is normally conceived of as an up-front payment that gets clawed back. In either case, people who are working would earn more than those who don’t, but incomes would never fall below a pre-determined level. So, under a negative income tax, if the income cut-off was $40,000, the percentage (or tax-back rate) was 50 percent and you earned $20,000, you would get $10,000. If you earned nothing, you would get $20,000. Friedman proposed that this would replace all welfare programs.
This could be done on an individual or a family basis. But that already highlights the rub. Do we do this for individuals or families? What about childcare expenses? What if you have cash or other assets that didn’t generate any income? What if you are disabled? Do those who live in downtown Toronto or Vancouver get the same benefit as those who live in Lethbridge, Alberta or Timmins, Ontario? And should we provide dental benefits to the poor, or should they buy their own out of that minimum $20,000 in income? And should there be other conditions to payments, such as work requirements or asset tests?
It becomes clear very quickly that there is a good reason why we have a plethora of programs addressing the poor – there is no one-size fits all poverty profile so there shouldn’t be a one-size fits all poverty program.
Affordability
The numbers above are fanciful because the cost of doing a substantial negative income tax or UBI at those levels is simply not in the fiscal cards.
Kevin Milligan has done the numbers, and it is worth quoting his math:
If we took the existing income transfer envelope of $165 billion and handed out per-capita cheques to each Canadian… the resulting basic transfers would be small—less than $400/month each…
Instead, we could try a universal $1,500/month basic transfer without income testing. But, this plan would bust the treasury at a cost over $600 billion, nearly four times the existing $165 billion transfer system.
A third option fits the $1,500/month payment within the existing $165 billion envelope through income testing. Unfortunately, even a steep 75 percent phaseout rate would leave us tens of billions of dollars above the existing system’s cost…
A substantial universal basic income would simply cost so much more than our current income support expenditures — making it fiscally irresponsible.
Needs
Even if we could eliminate existing income support expenditures for a UBI, would we want to?
If we took all of the income support we currently provide seniors and spread that more thinly among the general population, the result would be less money for seniors. It would be a brave politician who would propose such a move.
Or as Sean Speer and Brian Lee Crowley argue:
But a real perversity is that providing everyone with a basic income may preclude the government from directing more generous, targeted benefits to those in need such as Canadians with severe disabilities. Spending less on people in real need so we can spend more on able-bodied, working-age people is far from compassionate. It is an indefensible use of scarce public resources.
Making income support for those not living with a disability more difficult and less generous allows our income support system to make income support for those who really need it less difficult and more generous.
Our income support system is needs-based. We provide different programs for the employed, seniors, disabled and numerous other categories of individuals. And that differentiation is a feature, not a bug.
Churn is good
We not only provide different programs for different types of Canadians, we actively provide less generous and/or more conditional programs to those not living with a disability.
And for good reason.
Our labour markets thrive when they are flexible. We need to maximize incentives for Canadians to remain in the labour market. As I discovered in my study of Alberta’s remarkable welfare reforms in the early 1990s, making welfare programs administratively difficult drove Canadians who could work back into the labour force, and into jobs.
Income support for younger individuals not living with a disability should be miserly and difficult to get.
Unconditional
Many welfare programs and Canada’s unemployment system go beyond miserly and difficult-to-get. They also place conditions on receiving benefits.
Welfare programs are sometimes dubbed “workfare” programs with the explicit aim of assisting people to get back to work. Ontario’s welfare program, Ontario Works, requires that participants complete and fulfill a Participation Agreement, “an action-oriented plan that identifies the approved employment assistance activities the applicant or participant will undertake in order to prepare for, find and maintain employment.”
The federal Employment Insurance program requires participants to complete bi-weekly reports proving that they continue to be eligible including the requirement that they are “available to work.”
These work and other benefit requirements run contrary to the idea of an unconditional and universal UBI.
Work Incentives
Numerous studies have examined work incentives under a UBI, enough that both proponents and opponents can find things they like to hear. For a summary of the opponent view, see Sean Speer and Brian Lee Crowley, who conclude:
The results of these experiments indicate that basic income can reduce people’s desire to work and reward from work. The exact magnitude of the impact is less certain and partly depends on program design (including the amount of the basic benefit and reduction or “claw-back” rate). But the important take-away is that a cash transfer without any work requirements leads recipients to reduce the amount that they work.
Typical of proponents is a piece in Vox that makes a virtue out of any work disincentives, should they exist:
In total, the evidence suggests that a nationwide basic income or negative income tax in the United States would have either zero or a modest effect on work. And there are reasons why we might want to root for a modest effect, rather than zero effect. If a basic income did discourage work, it would also encourage education and longer, better job searches, and it would raise wages.
Backstop
Thus far I have been evaluating a stylized version of the UBI, one that is introduced as a replacement for all existing income support programs. But a UBI has also been proposed as a more modest backstop to foster entrepreneurship in the so-called “gig economy.” The basic idea is that the UBI doesn’t do all the work of replacing existing programs, so much as it is a backstop for the existing income support infrastructure, and/or is there for some other policy reason.
This runs into some of the same criticisms noted above, including: why would you want a new program rather than just adjusting existing programs? And why design a program with universal reach when the focus of the challenge is on workers in a particular sector (such as in the gig economy)?
Enacting a UBI as a backstop just looks like a way to end-run individual evaluations of existing programs, or as a lazy way to address a new challenge.
Crisis Basic Income: Good
The current COVID-19 health and economic challenges are unprecedented. The pause being imposed on the Canadian and global economy is already resulting in significant dislocation and large short-term costs, and will likely impose numerous long-term challenges as well. The challenges for governments are also without precedent, as Yuval Levin lays out here.
Universal
Governments facing the current crisis simply do not know how deep and wide the current economic dislocation will be as a result of the COVID-19 economic pause. It cannot forecast with accuracy which particular groups of Canadians will face an immediate economic loss. It only knows that this will be large.
In a COVID-19 world, Canada needs a policy that, by design, overshoots – a policy that is as universal as possible. A Crisis Basic Income will do that. And next year we can use the tax form to do a reconciliation, as proposed by Greg Mankiw.
Pay universal benefits now to minimize the uncertainty and the chance of missing a group who needs support. Reconcile later.
Affordability
Canada can afford large measures to deal with COVID-19. Indeed, it cannot afford not to.
But Canada is in better shape than most – particularly our federal government. Since the early 1990s successive federal governments have been fiscally prudent and have created a large cushion that we can now plop down on.
Canada approached the 2008-09 crisis by running large, albeit sustainable, deficits. And we got back on track with the crisis passed. That must be the model for the present time as well.
As Kevin Milligan writes, How to fit these new expenditures into a sustainable fiscal framework? I propose a compromise: we set aside fiscal targets for a year and spend what is needed now, but we do so with explicit end-dates for each of the new spending items.
We cannot take the risk of building a bridge that is too small or too short, lest our economy suffer permanent harm. After the crisis abates, we take stock, set a renewed path to fiscal sustainability, and repair the fiscal damage.
Needs
COVID-19 has placed diverse pressures on households and companies, and governments are scrambling to address this wide variety of pressures. As this crisis goes on, and as we start to turn our attention to hitting play rather than the implications of hitting pause, we will need to develop appropriate policy responses to these diverse pressures and challenges.
Yet the most pressing need — and where we need to act with the most speed — is to address the rapid and immediate drop in incomes across the country. Without minimizing any of these other diverse pressures, nothing trumps the challenge of Canadians who cannot purchase groceries or cover their rent in the coming weeks.
A universal, quickly delivered cheque for $2000 can be the bridge to addressing these other needs.
Churn
As we move through this crisis, we want Canadians to return to the jobs they had, where at all possible. Providing an income bridge through a UBI can allow employers to reduce their payroll, while maintaining their relationship with their employees when better times return.
William Robson and Grant Bishop make a strong argument, for example, in favour of subsidizing firms to retain employees rather than providing Canadians with cash payments. As we saw through the difficulties in rolling out the Canada Emergency Wage subsidy, this is hard to operationalize, and open to abuse. It is one thing, as the current policy proposes, for firms to hold back remittances they owe the federal government. It is quite another for the federal government to turn around a provide cheques to firms to cover payroll.
Unconditional
If there was ever a time for the federal government to provide unconditional payments, it’s now. With the widespread and rapid deterioration of family incomes across the country, income replacement should be the first priority.
Further, providing this cash on an unconditional basis will allow individuals to bypass the conditions placed on existing programs — like the bi-weekly EI reports — that will be meaningless in the current context (There has been some discussion of temporarily waiving these requirements, but at the time of writing no official announcement has been made). Further, and related, this Crisis Basic Income can be deducted from these existing programs using existing mechanisms. So our Employment Insurance system can handle a Crisis Basic Income, in the same way as it deals with any other income of a recipient.
The federal government should be clear, however, that it intends to claw the benefit back from Canadians who do not need it.
Work Incentives
If there is one place where the Crisis Basic Income shines, this is it. We want, in this COVID-19 health crisis, for the incentives to be pointed at getting employees to stay home. What is a bug in a UBI becomes a feature for a CBI – we want to pay people to stay home.
An unconditional and speedy Crisis Basic Income can therefore be an economic tool with a concurrent public health benefit.
Backstop
The Crisis Basic Income should be viewed as a “Frontstop” program. It is something we can put in place for all Canadians (or better, the 28.5 million Canadians who filed a tax form last year, compared to 30.5 million Canadians over the age of 15) that can bridge us to the time when we can address the numerous specific policy challenges we will face.
A Crisis Basic Income paid out in the next few weeks can be the bridge to get Canadians and their governments to the medium term.
The biggest challenge governments are currently facing is not the “what” but the “how”. There are so many things that need to be, or should be, done, but the policy mechanisms will take time to develop, test and refine. The deeper the short-term COVID-19 challenge gets, the less we need a myriad of targeted, overlapping measures, some or all of which may fail to launch, fail to deliver, or leave gaps.
That is the advantage of the Crisis Basic Income – it’s as close as we get to a helicopter dropping cash during the crisis. The analogy is apt, because the pause, caused by the public health emergency, has done the reverse — vacuumed up cash. It’s a single program — everyone who filed last year gets an electronic or physical cheque.
Conclusion
What makes a Universal Basic Income a bad idea in good times makes it a good idea in bad times — and in particular during the challenges we are facing during the COVID-19 crisis. What we need now is universal and unconditional cash going to as many Canadians as possible as quickly as possible.
Ken Boessenkool is a public policy economist who has spent 25 years writing and providing public policy advice to political leaders in Canada.
