Jan 17, 2020 - Knowledge@Wharton
Democratic presidential candidate Andrew Yang grabbed headlines early on the campaign trail with his pledge to give every adult American a “freedom dividend” of $1,000 a month, no strings attached. Instead of being regarded as a wacky proposal from a longshot contender, his idea is gaining traction. Fellow Democratic candidates Elizabeth Warren, Tulsi Gabbard and Pete Buttigieg have said they are willing to explore some form of universal basic income, which is a model to reduce poverty by providing all citizens, regardless of wealth, with a guaranteed sum. And several Congressional members have floated bills in recent legislative sessions that contain some variation of UBI.
If policymakers need some direction, they need only look at the impoverished city of Stockton, California, where a pilot program has been underway since February 2019 to determine whether giving residents $500 a month can help solve income insecurity and change their lives. The Stockton Economic Empowerment Demonstration (SEED), which will conclude with a final report in July 2021, is being evaluated independently by Amy Castro Baker, assistant professor at Penn’s School of Social Policy and Practice, and Stacia Martin-West, assistant professor at the University of Tennessee’s College of Social Work.
“Stockton was not just hit by bankruptcy, but it was also the epicenter of the foreclosure crisis. It’s one of the places where we saw what we often say is the worst capitalism has to offer,” Castro Baker said during an interview with the Wharton Business Daily show on Sirius XM. “It’s not just the fact that we have income volatility, it’s also the fact that we have a housing crisis. Pairing those two things together in that space can help us hopefully come up with some stronger ideas that can move us forward.”
The concept of a universal basic income is nothing new; politicians and economists have flirted with it for centuries. Revolutionary Thomas Paine advocated the underpinnings of UBI in the late 1700s. In the 1960s, Republican President Richard Nixon proposed a guaranteed annual income of $1,600 for families with children, but his controversial legislation didn’t make it out of the Senate. In the decades that followed, UBI became more polarizing as liberals and conservatives moved farther apart. But there is renewed momentum for the policy now, driven by a wealth gap that’s widening even in the midst of a strong economy, according to the scholars.
“We talk about UBI as an idea whose time has come,” Martin-West said during the radio segment. “I absolutely agree with Amy, that we saw this very slow recovery after the Recession, and we also know that some of the social safety net programs that we have in place are not being accessed by the people that need them most. We also know that [these programs] tend to control spending and not allow folks to make decisions about what works best for their family.”
According to Castro Baker, people struggle with UBI because creating a safety net “flies in the face” of free-market capitalism, which doesn’t accept that everyone is worthy of not falling through an income floor. But the fact that many Americans still haven’t recovered from the Great Recession is spurring interest. That’s why an independent analysis of the Stockton program is so critical.
‘Rooted in Evidence’
“From a research perspective, we really don’t know yet who it works best for and how, and that’s what we want to see,” Castro Baker said. “We want to have policy proposals that are rooted in evidence, that are rooted in empiricism, before we start scaling something out when we don’t exactly know yet how well it works and what it may or may not do with things like employment.”
The $3.1 million program is a collaboration led by Stockton Mayor Michael Tubbs and funded entirely through donations, including $1 million from a Silicon Valley organization called the Economic Security Project. Here’s a look by the numbers:
A dashboard created to share results with the public tells the tale so far. Data collected from June to December reveals that participants are spending about 40% of their extra cash on food; 25% on general merchandise from discount retailers like Walmart (food may be part of those purchases); and about 9% is spent on fuel and vehicle maintenance. The remaining 26% is made up of smaller categories.
The professors emphasized that they aren’t tracking the money through receipts to figure out how each dollar is being spent. “Rather, it’s about seeing how rational people are with the money,” Castro Baker said. “What we’re learning is that people know how to stretch these funds, and they know how to stretch them really well.”
Those preliminary findings seem to bolster the premise laid out in the project’s executive summary, which advocates that unconditional cash can meet the most urgent needs of residents.
“A hand-up, rather than a hand-out, SEED seeks to empower its recipients financially and prove to supporters and skeptics alike that poverty results from a lack of cash, not character,” the summary states. “Sometimes people require more than food, housing, and medical insurance; they need a new car battery to get to work the next day, or they need cash to pay an unanticipated bill that might otherwise trigger a downward spiral. In these ways, unconditional cash mitigates the capriciousness of life and provides certainty in the midst of chaos.”
Impact on the Economy
The executive summary notes previous research on UBI, including work done by The Roosevelt Institute that determined such policies would have a minimal negative effect on the economy. But research from The Wharton School offers a different conclusion.
The Roosevelt Institute estimated that a deficit-financed payment of $500 a month to every adult in the U.S. would increase consumption, thereby raising the GDP by up to 6.8% by 2027. However, Wharton economics and public policy professor Kent Smetters and his colleagues used a richer dynamic model to estimate the same UBI plan would increase the federal debt by more than 63.5% by 2027, while GDP would fall by 6.1%. By 2032, the debt grows by 81.1% and GDP falls by 9.3%. The smaller tax base also sharply reduces Social Security revenue by 7.1% by 2027 and 10.4% by 2032.
“A Universal Basic Income program would provide a guaranteed income for each American, but it would substantially lower GDP, regardless of how the program is financed,” the researchers said in their 2018 policy brief, “Options for Universal Basic Income: Dynamic Modeling.”
The dynamic model considers three methods for funding a universal basic income: deficit financing, an 11.25% payroll tax or external financing. Deficit financing dramatically adds to the national debt, which reduces private capital service formation over time. The payroll tax approach distorts household labor supply decisions by increasing marginal tax rates. And external financing, like a program being conducted in Alaska using royalties from mineral extraction rights, is a nonstarter. Such financing is “implausible on a national scale,” the researchers said.
Although debated by academics, universal basic income is resoundingly unpopular among labor leaders who argue that it undermines the average worker.
“This concept of universal basic income is a surrender to a kind of grim Dickensian view of the future, frankly, in which people are robbed on the dignity of work,” Barry Broad, chair of the California’s Employment Training Panel, said in an interview with the Los Angeles Times. “It’s naive to think universal basic income is going to pay the bills. It’s going to at best give people a poverty wage.”
While merits of UBI continue to be contested across the political spectrum, it’s clear that the conversation isn’t going away. Experiments with UBI are underway in Finland and Canada. And the city of Milwaukee, Wisconsin, is considering a trial based off the pilot in Stockton. Castro Baker and Martin-West say there’s a sense of urgency to find ways to help the most vulnerable citizens so they, too, can fully participate in society.
“I think in many ways the American dream has been threatened…where we have a situation where this generation will not do as well as their grandparents, and in fact it has not,” Martin-West said. “We have to look at new policy solutions to address the new economy.”