Abacus: Lessons From Stockton, California
NICK OTTO
The idea of a Universal Basic Income has found its way onto the agenda as a possible solution to a plethora of socio-economic problems including wealth inequality, a flatlining minimum wage, affordable housing shortages and more. With that, nations around the world have begun to experiment with the idea of installing a guaranteed income. The US is no different, with localities serving as a test tube for this radical policy. Most recently, Stockton, California decided to give some 125 randomly selected residents $500 a month for two years, no strings attached. The results are surprising.
The idea of a UBI ( a social safety net that offers a guaranteed amount of money to every citizen, paid out by the government without strings attached) is in no way new, with the concept popping up as early as 1796 in the work of Thomas Paine. Although the policy has been explored in the US in the past, the idea of a fully funded and truly “universal” basic income found its footing within the short-lived, but widely publicized, campaign of Andrew Yang (the impacts of which he is currently redirecting towards an NYC mayoral run). Yang’s plan, the “Freedom Dividend” proposed a $1,000 payment per month to every adult.
Among the possible benefits of a UBI’s implementation, security from an automated future is one of the most promising. According to a Oxford University’s School of Economics report, almost 20 million jobs will be replaced by automated processes by 2030. These manufacturing jobs will be gone for good and without large-scale retraining programs (which are often found not to work), the unemployment will be long term. A UBI would create economic security for workers in this transition, allowing them the space for possible entrepreneurial ventures or higher education.
Along with this new economic security against automation, a UBI has the potential to spur large-scale economic growth. In a study conducted by the Roosevelt Institute, two different forms of full-scale UBIs offering $12,000 a year to every citizen were modeled. One, funded by expanding the national debt, sees the GDP expanded by almost 2.5 trillion come 2025. The other, funded by tax increases on those making more than $150.000 a year, grew the economy more modestly at around 2.6%. The growth displayed by these models relies on the assumption of a multiplier effect in which recipients of the UBI spend it quickly, which is seen as the benefit of unrestricted transfers to working-class people who do not have the luxury to save the money, which sees it spent again by its recipient etc. etc. This chain of spending is what results in the healthy growth shown in both models.
Another of these possible benefits is the efficiency of cash transfers. Economic literature is moving towards the assumption that no strings attached cash transfers are the best way to lift people out of poverty. The poor’s tendencies to spend rather than save help create a multiplier effect that is beneficial while also removing much of the red tape that makes the current welfare system not only expensive but inefficient. Since Clinton era welfare reform, welfare spending has been moving further and further away from cash transfers and towards niche government programs that are full of regulation, including work requirements. A UBI’s foundation in this efficiency, and its no strings attached nature, is one of its greatest advantages.
These programs are not without detractors. One of the most common points of contention is the idea of inflation. If every citizen suddenly had $1000 more dollars a month, and everyone knew this, businesses around the country would have good reason to raise prices. In fact, prices on all goods nationwide are likely to increase. A recent UBI study in Finland saw exactly that. Another unavoidable side-effect of a UBI would be fluctuations in the labor market. The first of these effects would likely be a devaluation of the workforce. As described by Dr. Luke Martinelli at the University of Bath, the UBI could effectively be viewed by employers as a subsidy on wages, resulting in smaller salaries and nullifying the work a UBI could do in terms of poverty eradication. Further, workers may be disincentivized by the UBI. This argument is one of the classic rebuttals for this policy and most welfare programs generally.
This is where the data from the Stockton study could shine a light on the real outcomes of guaranteed incomes. Two of the most important findings were that the payments increased worker mobility. Many of the recipients who were working part-time were dependent on their current incomes, unable to engage in training to better their position. In many cases, these $500 payments allowed workers to quit their job, acquire internships and move on to full-time, higher-paying positions. This in many ways echoes the advantages that a UBI could offer in the future as automation further transforms markets. Also, a common criticism of welfare programs, that the money is wasted or that the financial immaturity that caused these recipients to be poor in the first place will result in these government transfers being spent on non-essential goods, was shot down in this small sample where almost 70% of these transfers were spent on food, utility bills, and car payments.
The study itself is not without its flaws, however. Its small scale makes the results hard to extrapolate to the nation at large. Beyond this, the payments were funded in large part by the Economic Security Project. This allows the results to be detached from one of the largest barriers regarding the implementation of a UBI, its fiscal cost. The most recurring question regarding UBI is always, “How would we pay for it”. Funding from donor organizations certainly has helped create small-scale experiments that shine a light on the ability of a guaranteed income to alleviate financial stresses, but in reality, the sheer costs of such a program would be hard to reconcile. Yang’s plan was reliant on a new Value Added Tax, revenues generated from the economic growth, and a rollback of other welfare programs but the question of cost still looms large over the UBI dream; a UBI is sure to cost upwards of 3 trillion dollars a year if implemented nationally at just $2000 a year.
In the long term, the universal nature of a UBI is both its greatest strength and its greatest weakness. In creating a policy that is universal, the targeted nature of welfare is lost. The fact that these transfer payments are given to every citizen allows the stigmas associated with welfare to fade. However, payments going to everyone, opposed to just the impoverished that qualify in the current welfare paradigm could be its biggest problem. According to a UBI study done by UK think tank Compass, when a full scheme UBI is implemented that replaces current welfare programs, poverty among adults increased 3% and children around 10%. This comes as a result of money that was specifically targeted towards the poor being redistributed to the entire population, because of this, the model used showed welfare losses at the bottom end that the policy was meant to help.
Mayor of Stockton, Michael Tubbs, noted that the pandemic has revealed just how many people were living on the financial brink. His own city had faced problems with unemployment and falling revenues. While a UBI offers up the chance for financial security, increased worker mobility, and efficiency in the face of evermore controversial traditional welfare, the results of studies around the world still reveal the roadblocks that prevent full-scale implementation. As Matt Zwolinski of the University of San Diego pointed out to the Associated Press, “[the Stockton study] is really more about storytelling than it is about social science”. In rejecting many of the claims about how the poor spend their money and, illuminating the realities of poverty and the trapping of minimum wage work, Stockton, California has helped to shift the narrative around social welfare. I think everyone agrees on the basic rejection of poverty, but the best way to fight it is still up in the air.
