Two Unknowns of a Guaranteed Minimum Income

Two people I respect, Dylan Matthews and Mark Kleiman, have both endorsed a guaranteed minimum income as a poverty fighting tool. Here is Dylan’s conclusion, which he draws after discussing the findings of negative income tax experiments undertaken by the Nixon Administration:

A negative income tax or basic income of sufficient size would, by definition, eliminate poverty. We still don’t know if there’d be much of a cost in terms of people working and earning less. If there is, the effect is almost certainly small enough that a negative income tax can offset the lost earnings and remain affordable. The worst case scenario is that we eliminate poverty but see a modest decline in employment. The best case scenario is we eliminate poverty at even lower cost and don’t see much of an effect on employment. That’s a gamble I’m willing to take.”

It sounds great, but there are two unknowns that could undermine the whole approach.

1. What is the effect on the employment decisions of people NOT eligible for the guaranteed income?

Dylan focuses quite appropriately on the labor participation data available from negative income tax research, namely whether the research participants who got the income boost worked less as a result. But what happens to the far larger number of people initially not getting the subsidy could be much more important.

Imagine someone who is working hard 2000 hours a year at $11/hour, generating an income of $22,000. Then the government creates a minimum income of $20,000, which the person could receive if s/he stopped working. The person is now working 2000 hours a year for an extra $2000, i.e., for $1/hour.

Some people would keep working at that low effective wage because they like their jobs or they think they will move up someday or they just believe in the moral value of work. But other people — potentially most people — would be glad to free up 2000 hours a year at such little cost.

When those people move from jobs paying just above the guaranteed income (and such people will exists regardless of the level of the guarantee — $20,000 is just an example) to taking the guaranteed income, two things happen. The fiscal demands on the income support program grow and the tax base to pay for it shrinks. Neither of these possible effects supports the program’s long-term viability.

2. What is the effect of a guaranteed income on inflation in goods that people need to survive?

A number of industries that produce essentials (e.g., food, clothing) pay the minimum wage or just above it to some of their workforce. But as explained in the above example, once there is a guaranteed minimum income, the effective return on working a low wage job (i.e., those offering under or just over the minimum guaranteed income) drops precipitously and could indeed be negative, reducing the incentive to work in such jobs. One might say “Good, that will teach those plutocrats! The minimum wage will have to triple!”. But follow that logic out such that you have an economy where a fruit picker can only be employed for $30/hour and someone who sews shirts together can only be employed for $35/hour and so forth, and you end up with sharply rising prices in the market for essential goods.

This inflation in the price of essential goods means that the basic guaranteed income has to be sharply raised concomitantly to keep it as a meaningful anti-poverty program. This makes the costs of the program per enrollee go up, and also exposes a large group of new people who are just above the new guaranteed income to a strong incentive to quit working. As some of them respond to that incentive, the number of enrollees grows and the tax base to support the program contracts at the same time. Rinse and repeat.

Maybe Dylan, Mark or some other advocate of a guaranteed income has evidence that would allay the worries raised by the above two questions, but barring that, I don’t see a scenario under which a program like this wouldn’t collapse under its own weight within a decade of being implemented.

[Cross-posted at The Reality-Based Community]

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Keith Humphreys

Keith Humphreys is a professor of psychiatry at Stanford University. He served as a senior policy advisor at the White House Office of National Drug Control Policy from 2009 to 2010.