The OECD says universal basic income could make poverty worse

Would the UBI make most people better off?
Would the UBI make most people better off?
Image: AP/LM Otero
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Universal Basic Income (UBI) is a hot idea in economic policy circles. Supporters of the idea, an unconditional cash payment given to everyone in a country instead of tax benefits, grants, or other social programs, include Elon Musk and Mark Zuckerberg. They see it as an effective way to fight rising inequality and protect workers in an increasingly automated  and unstable labor market.

The Organisation for Economic Co-operation and Development (OECD) wants to cool the excitement down. In a recently released report (pdf), the Paris-based economic forum for rich nations found that, for most high-income countries, a UBI could actually increase poverty. Their conclusion is based on analyzing the effects of a scenario in which all existing cash and tax benefits for those under 65 would be converted into a UBI in 35 OECD member countries.

Basically, the report argues for the efficiency of means testing—the idea that government should make benefits conditional on a test of an individual’s needs. The OECD analysis makes it clear that governments, for the most part, do a good job of targeting the poor with social support programs, and that a UBI would make that targeting less precise.

The OECD did a particularly close analysis of how UBI would impact four of their member countries: Finland, France, Italy, and the United Kingdom (Finland is currently in the middle of an actual UBI pilot experiment, but data from that experiment wasn’t factored into this analysis). In three of the four countries, they find that their hypothetical UBI would actually raise poverty rates by at least 1%.

UBI proponents might argue that the OECD’s hypothetical is an unfair test. Most supporters believe a reasonable UBI would almost certainly have to be funded by increased taxes or cuts to other government programs, like the military or old age pensions, and that analyzing the impacts of a paltry UBI only funded by cash and tax benefits fundamentally misses the point.

Duke University economist Mike Munger told Quartz that the OECD report also doesn’t take into account one of the major possible benefits of a UBI: improving incentives for the poor who want to work. Currently, the design of social programs in some countries provides a disincentive to work (pdf) by taking away benefits once an individual or household reaches a certain income threshold—economists refer to this as the “cliff effect.” There is no cliff under a UBI because both employed and unemployed receive the cash.

Still, Munger believes the OECD’s report is useful for showing that funding a large UBI will be politically challenging because someone is going to have to pay for it. In other words, as economists are fond of saying, “there is no such thing as a free lunch.”