Universal Basic Income Fails to Get to the Root of Urban Poverty

In an effort to reduce poverty in their cities, eleven mayors have signed on to a push to guarantee a basic income for the more than 5 million people they collectively represent.

The first U.S. city to move forward on this initiative was Stockton, California, but the effort has gained more steam given the unemployment uptick due to Coronavirus-related government shutdowns of the private sector.

While the policy is well-intentioned, it’s far from the most effective way to eradicate poverty in America’s cities and, in the long-term, could have unintended consequences on the exact people the mayors hope to help.

As COVID-19 began to wreak havoc across the country, state and local governments started shutting down businesses within their borders and economists predicted a massive uptick in unemployment and ultimately poverty rates.

Unemployment did increase, but because of an influx of government aid, we have yet to see a corresponding increase in poverty rates. But that is just a delay, not a fix, those rates will increase as government aid starts to trail off. To combat that, a group of mayors have started the push for a guaranteed income within their cities.

The effort is led by Stockton’s mayor, Michael Stubbs who implemented the program in 2019.

Stockton’s program provides roughly 130 residents in the city, who make below the median income, a $500 monthly no-strings-attached stipend. Initial research shows that most of those who received the funding spent it on day-to-day expenses such as transportation, utilities, healthcare, and debt.

Following Stubbs’ lead, the mayors of Newark, NJ; Columbia, SC; Atlanta, GA; Compton, CA; St. Paul, MN; Los Angeles; Jackson, MS; Shreveport, LA; Oakland, CA; and Tacoma, WA have all formed the Mayors for a Guaranteed Income coalition.

Chicago, Newark, and Atlanta have formally formed task forces to explore the issue and Milwaukee city council approved a guaranteed income pilot program.

One glaring problem with allowing this program to exist for any extended period of time is that, unless it is privately funded, it would be too expensive to maintain and would require substantial tax increases across the board.

The group’s page even admits that, saying, “there’s a number of ways to pay for guaranteed income, from a sovereign wealth fund in which citizens benefit from shard national resources like the Alaska Permanent Fund, to bringing tax rates on the wealthiest Americans to their 20th century historical averages.”

Tax increases on businesses and wealthy individuals could lead to a reduction in investment in other areas like skills training which can, in turn, lead to a less skilled workforce as noted in a study by the National Bureau of Economic Research.

Cities issuing fewer building permits limit housing supply, mandating minimum parking requirements on new development reduces the amount of square footage for a home or business, and minimum lot size requirements prohibit large lots from being subdivided for multiple units. All of these drive up the cost of development which is then passed on to a renter or buyer.

The other problem is that while the initial amount may lower today’s burden on cash-strapped families, as housing costs continue to increase in these cities and metropolitan areas, the cost of living will increase as well. So, unless the guaranteed income tracks with cost of living, in just a few short years it will be of little effect to the families who need the support the most.

As noted in Urban Reform Institute’s annual Standard of Living Index, 80 percent of cost of living can be attributed to housing costs, and housing costs are driven up by excessive regulation, especially in major metro areas.

The ever-increasing cost of housing is often blamed on the “market,” but in most metropolitan areas it truly isn’t a free market, instead it is a market artificially inflated by government regulation.

Cities issuing fewer building permits limit housing supply, mandating minimum parking requirements on new development reduces the amount of square footage for a home or business, and minimum lot size requirements prohibit large lots from being subdivided for multiple units. All of these drive up the cost of development which is then passed on to a renter or buyer.

In many areas of the country, like San Jose, San Francisco, San Diego, and Los Angeles, regulations have driven up costs so much that few middle-income households can even qualify for a mortgage on a median priced house.

A $500 per month guaranteed income doesn’t reduce the cost of living, it acts as a substitute that draws attention away from the actual problem.

Mayors across the country have the tools to address the cost of living and increase the standard of living for constituents in their area and until they act on that, no amount of government funding or subsidies will eradicate poverty within their borders.

This article was reprinted with permission from Urban Reform.

Charles Blaine

Charles Blaine is the founder and executive director of Urban Reform, a Houston-based non-profit focused on free-market solutions to urban issues.

This article was originally published on FEE.org. Read the original article.

Finland Ends Its Experiment with Universal Basic Income

I’m conflicted.

I’ve repeatedly expressed skepticism about the idea of governments providing a “basic income” because I fear the work ethic will (further) erode if people automatically receive a substantial chunk of money.

Moreover, I also fear that a basic income will lead to an ever-expanding burden of government spending, particularly once net beneficiaries figure out they can vote themselves more money.

Given these concerns, I should be happy about this report from the New York Times.

For more than a year, Finland has been testing the proposition that the best way to lift economic fortunes may be the simplest: Hand out money without rules or restrictions on how people use it. The experiment with so-called universal basic income has captured global attention… Now, the experiment is ending. The Finnish government has opted not to continue financing it past this year, a reflection of public discomfort with the idea of dispensing government largess free of requirements that its recipients seek work. …the Finnish government’s decision to halt the experiment at the end of 2018 highlights a challenge to basic income’s very conception. Many people in Finland—and in other lands—chafe at the idea of handing out cash without requiring that people work. …Finland’s goals have been modest and pragmatic. The government hoped that basic income would send more people into the job market to revive a weak economy. …The basic income trial, which started at the beginning of 2017 and will continue until the end of this year, has given monthly stipends of 560 euros ($685) to a random sample of 2,000 unemployed people aged 25 to 58. Recipients have been free to do as they wished… The Finnish government was keen to see what people would do under such circumstances. The data is expected to be released next year, giving academics a chance to analyze what has come of the experiment.

The reason I’m conflicted is that the current welfare state—both in the United States and other developed nations—is bad for both taxpayers and poor people.

So I like the idea of experimentation. There has to be a better way of alleviating genuine suffering without trapping poor people in dependency or punishing taxpayers.

Indeed, one of my arguments for radical decentralization in America is that states will try different approaches and we’ll have a much better chance of learning what works and what doesn’t.

And maybe we’ll learn that there are some benefits of providing a basic income. But, as reported by the U.K.-based Guardian, it’s unclear whether the Finnish experiment lasted long enough or was comprehensive enough to teach us anything.

The scheme—aimed primarily at seeing whether a guaranteed income might incentivise people to take up paid work by smoothing out gaps in the welfare system …it was hoped it would shed light on policy issues such as whether an unconditional payment might reduce anxiety among recipients and allow the government to simplify a complex social security system… Olli Kangas, an expert involved in the trial, told the Finnish public broadcaster YLE: “Two years is too short a period to be able to draw extensive conclusions from such a big experiment. We should have had extra time and more money to achieve reliable results.”

I will be interested to see whether researchers generate any conclusions when they look at the two years of data from the Finnish experiment.

That being said, there already has been some research that underscores my concerns.

The OECD is not my favorite international bureaucracy, but its recent survey on Finland included some sobering estimates on the cost of a nationwide basic income.

In a basic income scenario, a lump-sum benefit replaces a number of existing benefits, financed by increasing income taxation by nearly 30% or around 4% of GDP. …the basic income requires significant increases to income taxation. …Financing a basic income at a meaningful level thus would require considerable additional tax revenue, and heavier taxation of income would at least partially undo any improvement in work incentives.

And in a report on basic income last year, the OECD poured more cold water on the idea.

…large tax-revenue changes are needed to finance a BI at meaningful levels, and tax reforms would therefore need to be an integral part of budget-neutral BI proposals. …abolishing tax-free allowances and making BI taxable means that everybody would pay income tax on the BI, and on all their other income. Tax burdens would go up for most people as a result, further increasing tax-to-GDP ratios that are currently already at a record-high in the OECD area. …There are also major concerns about unintended consequences of a BI. An especially prominent one is that unconditional income support would reduce the necessity for paid work.

Indeed, it’s difficult to see how work incentives aren’t adversely affected. Why go through the hassle of being employed when you can sit at home and play computer games all day?

P.S. Given the option of voting on a basic income in 2016, Swiss voters overwhelmingly rejected the notion.

P.P.S. Former Vice President Joe Biden actually agrees with me about one of the downsides of basic income.

Reprinted from International Liberty.

Daniel J. Mitchell


Daniel J. Mitchell is a Washington-based economist who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

This article was originally published on FEE.org. Read the original article.