The possibilities of a global basic income

PNRJ development economics, inequality, public policy, Uncategorized, , , , , , , , , , , , ,

JDN 2457401

This post is sort of a Patreon Readers’ Choice; it had a tied score with the previous post. If ties keep happening, I may need to devise some new scheme, lest I end up writing so many Readers’ Choice posts I don’t have time for my own topics (I suppose there are worse fates).

The idea of a global basic income is one I have alluded to many times, but never directly focused on.

As I wrote this I realized it’s actually two posts. I have good news and bad news.
First, the good news.

A national basic income is a remarkably simple, easy policy to make: When the tax code comes around for revision that year, you get Congress to vote in a very large refundable credit, disbursed monthly, that goes to everyone—that is a basic income. To avoid ballooning the budget deficit, you would also want to eliminate a bunch of other deductions and credits, and might want to raise the tax rates as well—but these are all things that we have done before many times. Different administrations almost always add some deductions and remove others, raise some rates and lower others. By this simple intervention, we could end poverty in America immediately and forever. The most difficult part of this whole process is convincing a majority of both houses of Congress to support it. (And even that may not be as difficult as it seems, for a basic income is one of the few economic policies that appeals to both Democrats, Libertarians, and even some Republicans.)

Similar routine policy changes could be applied in other First World countries. A basic income could be established by a vote of Parliament in the UK, a vote of the Senate and National Assembly in France, a vote of the Riksdag in Sweden, et cetera; indeed, Switzerland is already planning a referendum on the subject this year. The benefits of a national basic income policy are huge, the costs are manageable, the implementation is trivial. Indeed, the hardest thing to understand about all of this is why we haven’t done it already.

But the benefits of a national basic income are of course limited to the nation(s) in which it is applied. If Switzerland votes in its proposal to provide $30,000 per person per year (that’s at purchasing power parity, but it’s almost irrelevant whether I use nominal or PPP figures, because Swiss prices are so close to US prices), that will help a lot of people in Switzerland—but it won’t do much for people in Germany or Italy, let alone people in Ghana or Nicaragua. It could do a little bit for other countries, if the increased income for the poor and lower-middle class results in increased imports to Switzerland. But Switzerland especially is a very small player in global trade. A US basic income is more likely to have global effects, because the US by itself accounts for 9% of the world’s exports and 13% of the world’s imports. Some nations, particularly in Latin America, depend almost entirely upon the US to buy their exports.

But even so, national basic incomes in the entire First World would not solve the problem of global poverty. To do that, we would need a global basic income, one that applies to every human being on Earth.

The first question to ask is whether this is feasible at all. Do we even have enough economic output in the world to do this? If we tried would we simply trigger a global economic collapse?

Well,if you divide all the world’s income, adjusted for purchasing power, evenly across all the world’s population, the result is about $15,000 per person per year. This is about the standard of living of the average (by which I mean median) person in Lebanon, Brazil, or Botswana. It’s a little better than the standard of living in China, South Africa, or Peru. This is about half of what the middle class of the First World are accustomed to, but it is clearly enough to not only survive, but actually make some kind of decent living. I think most people would be reasonably happy with this amount of income, if it were stable and secure—and by construction, the majority of the world’s population would be better off if all incomes were equalized in this way.

Of course, we can’t actually do that. All the means we have for redistributing income to that degree would require sacrificing economic efficiency in various ways. It is as if we were carrying water in buckets with holes in the bottom; the amount we give at the end is a lot less than the amount we took at the start.

Indeed, the efficiency costs of redistribution rise quite dramatically as the amount redistributed increases.

I have yet to see a convincing argument for why we could not simply tax the top 1% at a 90% marginal rate and use all of that income for public goods without any significant loss in economic efficiency—this is after all more or less what we did here in the United States in the 1960s, when we had a top marginal rate over 90% and yet per capita GDP growth was considerably higher than it is today. A great many economists seem quite convinced that taxing top incomes in this way would create some grave disincentive against innovation and productivity, yet any time anything like this has been tried such disincentives have conspicuously failed to emerge. (Why, it’s almost as if the rich aren’t that much smarter and more hard-working than we are!)

I am quite sure, on the other hand, that if we literally set up the tax system so that all income gets collected by the government and then doled out to everyone evenly, this would be economically disastrous. Under that system, your income is basically independent of the work you do. You could work your entire life to create a brilliant invention that adds $10 billion to the world economy, and your income would rise by… 0.01%, the proportion that your invention added to the world economy. Or you could not do that, indeed do nothing at all, be a complete drain upon society, and your income would be about $1.50 less each year. It’s not hard to understand why a lot of people might work considerably less hard in such circumstances; if you are paid exactly the same whether you are an entrepreneur, a software engineer, a neurosurgeon, a teacher, a garbage collector, a janitor, a waiter, or even simply a couch potato, it’s hard to justify spending a lot of time and effort acquiring advanced skills and doing hard work. I’m sure there are some people, particularly in creative professions such as art, music, and writing—and indeed, science—who would continue to work, but even so the garbage would not get picked up, the hamburgers would never get served, and the power lines would never get fixed. The result would be that trying to give everyone the same income would dramatically reduce the real income available to distribute, so that we all ended up with say $5,000 per year or even $1,000 per year instead of $15,000.

Indeed, absolute equality is worse than the system of income distribution under Soviet Communism, which still provided at least some incentives to work—albeit often not to work in the most productive or efficient way.

So let’s suppose that we only have the income of the top 1% to work with. It need not be literally that we take income only from the top 1%; we could spread the tax burden wider than that, and there may even be good reasons to do so. But I think this gives us a good back-of-the-envelope estimate of how much money we would realistically have to work with in funding a global basic income. It’s actually surprisingly hard to find good figures on the global income share of the top 1%; there’s one figure going around which is not simply wrong it’s ridiculous, claiming that the income threshold for the top 1% worldwide is only $34,000. Why is it ridiculous? Because the United States comprises 4.5% of the world’s population, and half of Americans make more money than that. This means that we already have at least 2% of the world’s population making at least that much, in the United States alone. Add in people from Europe, Japan, etc. and you easily find that this must be the income of about the top 5%, maybe even only the top 10%, worldwide. Exactly where it lies depends on the precise income distributions of various countries.

But here’s what I do know; the global Gini coefficient is about 0.40, and the US Gini coefficient is about 0.45; thus, roughly speaking, income inequality on a global scale recapitulates income inequality in the US. The top 1% in the US receive about 20% of the income. So let’s say that the top 1% worldwide probably also receive somewhere around 20% of the income. We were only using it to estimate the funds available for a basic income anyway.

This would mean that our basic income could be about $3,000 per person per year at purchasing power parity. That probably doesn’t sound like a lot, and I suppose it isn’t; but the UN poverty threshold is $2 per person per day, which is $730 per person per day. Thus, our basic income is over four times what it would take to eliminate global poverty by the UN threshold.

Now in fact I think that this threshold is probably too low; but is it four times too low? We are accustomed to such a high standard of living in the First World that it’s easy to forget that people manage to survive on far, far less than we have. I think in fact our problem here is not so much poverty per se as it is inequality and financial insecurity. We live in a state of “insecure affluence”; we have a great deal (think for a moment about your shelter, transportation, computer, television, running water, reliable electricity, abundant food—and if you are reading this you probably have all these things), but we constantly fear that we may lose it at any moment, and not without reason. (My family actually lost the house I grew up in as a result of predatory banking and the financial crisis.) We are taught all our lives that the only way to protect this abundance is by means of a hyper-competitive, winner-takes-allcutthroat capitalist economy that never lets us ever become comfortable in appreciating that abundance, for it could be taken from us at any time.

I think the apotheosis of what it is to live in insecure affluence is renting an apartment in LA or New York—you must have a great deal going for you to be able to live in the city at all, but you are a renter, an interloper; the apartment, like so much of your existence, is never fully secure, never fully yours. Perhaps the icing on the cake is if you’re doing it for grad school (as I was a year ago), this bizarre system in which we live near poverty for several years not in spite but because of the fact that we are so hard-working, intelligent and educated. (And it never ceases to baffle me that economists who lived through that can still believe in the Life-Cycle Spending Hypothesis.)

Being below the poverty line in a First World country is a kind of poverty, but it’s a very different kind than being below the poverty line in a Third World country. (I think we need a new term to distinguish it, and maybe “insecure affluence” or “economic insecurity” is the right one.) A national basic income could be set considerably higher than the global basic income (since we’re giving it to far fewer people), so we might actually be able to set $15,000 nationally—but to do that worldwide would use up literally all the money in the world.

Raising the minimum income worldwide to $3,000 per person per year would transform the lives of billions of people. It would, in a very real sense, end poverty, worldwide, immediately and forever.

And that’s the good news. Stay tuned for the bad news.

11 thoughts on “The possibilities of a global basic income”

  1. Interesting, provocative post. You suggest that if people were assured of a basic income, we could end poverty immediately and forever. This assumes that individuals, given that support, would use it rationally to cover their basic needs. But we still have people who would fritter their money away (alcohol, drugs, gambling …) and we have people who would be fleeced by predators. This does not gainsay your arguments, but I’d guess that at least 10% of the population would thereby still slip through the cracks.

    Like

    Reply

    • Obviously some people will spend the money more responsibly than others; that’s inevitable. But there are a few reasons I’m not actually too worried about people “slipping through the cracks” as you say.

      1. Because this is an ongoing income rather than a one-time wealth transfer, wasting it a few times will not be catastrophic, and people will have an opportunity to learn better spending habits.

      2. Many wasteful behaviors are actually coping mechanisms people use out of desperation. Drugs are an escape from a hopeless situation; gambling provides a small hope of salvation; predatory lenders are a last resort when no other source of funds is available. With a basic income in place, these behaviors no longer become necessary, and most people will stop doing them.

      There has been a recent paradigm shift in addiction research showing that even rats are more sensitive to environmental conditions in their drug use than previously thought:
      bit.ly/1MQ502z

      3. In empirical studies, most people who are given unconditional cash transfers spend them quite responsibly, and welfare improves substantially:
      bit.ly/1sqxhoR
      bit.ly/1niQqrY
      on.cfr.org/1JKSiUj
      bit.ly/1OrelvW
      bit.ly/1J3gGAE

      One possible downside I hadn’t really thought of before is that many of the negative attitudes conservatives have toward the poor (they are lazy, irresponsible, unwilling to work, etc.) would actually become true in a basic income system: Once a basic income has been in place for a long time, the only people who remain in poverty will be those who actually are lazy, irresponsible, or mentally or physically disabled. So it could sort of reinforce these attitudes, by making them much more accurate. But it would certainly dramatically reduce the number of people in poverty, and since people already have these attitudes anyway, I think this is an acceptable downside.

      Like

      Reply

  3. In your subsequent post, you focus on the need to militarily overthrow dictators who would stand in the way global income. The following quote from this post probably presents a much greater challenge: Convincing people in the First World to voluntarily and substantially reducing their own standard of living in order to make a global income possible.

    “Well, if you divide all the world’s income, adjusted for purchasing power, evenly across all the world’s population, the result is about $15,000 per person per year. This is about the standard of living of the average (by which I mean median) person in Lebanon, Brazil, or Botswana. It’s a little better than the standard of living in China, South Africa, or Peru. This is about half of what the middle class of the First World are accustomed to, but it is clearly enough to not only survive, but actually make some kind of decent living. I think most people would be reasonably happy with this amount of income, if it were stable and secure—and by construction, the majority of the world’s population would be better off if all incomes were equalized in this way.”

    Like

    Reply

    • No significant reduction of First World standard of living would be necessary. Possibly some, depending on how exactly the global tax is collected; but mainly the transfer of wealth would come from the richest people, and overall economic growth would almost certainly improve.

      You completely misunderstood (or ignored) the context of that paragraph. I was not saying that we should actually equalize income for everyone to $15,000 per year. Indeed, in the very next paragraph I explicitly explain that this would be a terrible idea; in the next few paragraphs I go on to explain precisely why, and how that level of redistribution of wealth is absurd.

      The global basic income I’m proposing is $3,000 per year—and actually the idea is that it would be somehow adjusted for purchasing power, though that is trickier than it sounds. Make the adjustment too quickly and you get the same effect of indexing to inflation, which can trigger more inflation. I think something like a five-year moving average of purchasing power could be used to make the adjustment; or maybe it would be simplest to actually use market exchange rates (this would mean that in real terms the basic income goes further in poor countries, but that’s not necessarily a bad thing).

      This would still cost $21 trillion per year, and at least at first this means a 20% reduction in overall income—on average. But income is not distributed on average. In a country as unequal as the United States, we could get most of the income from the top 1%, some from the top 10%, and then 90% of the population would be unaffected. You do have to make the tax incidence work out so that it doesn’t damage the First World economies, but I think that’s actually quite feasible. As I say in the paragraphs you didn’t seem to read, we had a 90% marginal rate on income at the top 1% in the 1960s, and our economic growth was stronger then than it is now. More equal countries like Denmark might have to spread the tax more evenly, but part of why they are more equal is that they are more willing to share wealth.

      I’d also be quite willing to phase the basic income in over time; even a very small basic income that First World people wouldn’t even notice—say $100 per person per year, $700 billion total, 0.7% of the world’s GDP, about the size of the US military budget—could be life-changing for the world’s poorest people. Then next year we could raise it to $200, then $300, and so on. By the time it gets to the planned $3,000 in 30 years, world economic output per capita could well have doubled—it only would need to grow 2.3% per year for that to happen.

      But to be perfectly honest, my main goal here is actually to shift the Overton Window. I’m tired of our current pitiful level of foreign aid being treated as the far-left option, where the “centrist” option is to do nothing and the right-wing option is to bomb everyone for no reason. I’m tired of people complaining that we spend “so much” on aid and get “no results”—when spending less than 1% of our income has already cut the world’s poverty in half in a generation. Our current level of foreign aid should be considered the bare minimum for basic human decency—maybe not even—and we should be talking about whether we need to expand it by 10 times or 100 times.

      Like

      Reply

      • We (the USA) spend virtually nothing on foreign aid. Foreign aid has had virtually no impact on global poverty rates. Instead, hasn’t the global poverty rate been declining significantly since about 1980…and isn’t that due primarily to globalization? Why won’t that trend continue?

        Like

  4. Foreign aid, spent properly, has a much larger impact on poverty than is commonly appreciated. I am in an inconvenient place right now, but I can get you sources to support that at a later time.

    Yes, global poverty is decreasing, and yes, the trend will probably continue. I’m not convinced that globalization is really the cause, but it could be, or more precisely the shift from predatory colonialist globalization to libertarian mutualist globalization could be. (Europe has been getting resources from Africa and Asia for centuries. What changed is that they finally started paying for things instead of just taking them.)

    But the fact that the patient may eventually recover on their own is not a reason to withhold medicine. If we have reason to think that increased foreign aid would be ineffective, or too expensive (in real opportunity cost of course), that would be a reason not to do it. But I believe that it could be made highly cost-effective, indeed dozens of times more cost-effective in QALY per dollar terms than any domestic spending. I will provide citations later to support this.

    Like

    Reply

Leave a comment