Weekend Economists Volvemos a Puerto Rico May 22-25, 2015

[Demeter]

48. Basically unaffordable Replacing welfare payments with “basic income” for all alluring but expensive

EXPENSIVE FOR WHOM? THE RICH, WHO CAN AFFORD IT? OR THE POOR, WHO DESPERATELY NEED A FLOOR UNDER THEIR FEET?

http://www.economist.com/news/finance-and-economics/21651897-replacing-welfare-payments-basic-income-all-alluring?fsrc=scn/tw/te/pe/ed/basicallyunaffordable

WITH cash-strapped governments around the world looking for ways to cut welfare bills and reduce deficits, it might seem an odd time to consider a generous new universal benefit. Yet the basic income—a guaranteed government payment to all citizens, whatever their private wealth—is creeping onto the policy agenda. The Swiss will soon vote on a proposal for a basic income of 2,500 francs ($2,700) per month, following the success of a national petition. Amid turmoil in Greece, Yanis Varoufakis, its finance minister, has hinted that he is a fan. Britain’s Green Party has adopted a version of the policy. Turning it into a substitute for all welfare payments would be prohibitively expensive. But it might work as one element of the safety net.

The idea has a long intellectual heritage. In 1797 Thomas Paine, one of America’s founders, penned a pamphlet arguing that every person is entitled to share in the returns on the common property of humanity: the earth’s land and natural resources (today, you might include radio spectrum or the profits of central banks). Paine suggested paying citizens the equivalent of around $2,000 in today’s money—which was then over half the annual income of a labourer—on their 21st birthday, in lieu of their share of the planet. The benefit would be granted to all, to avoid creating “invidious distinctions” between rich and poor. Since Paine’s proposal, the idea of universal payouts—whether one-off or recurring—has periodically attracted support from both sides of the political aisle.

The left has usually viewed such policies as a way of beefing up the social safety net and fighting inequality. That is particularly appealing in a world where technology creates unimaginable riches for some, but threatens the jobs of others. As early as 1964 James Meade, an economist, argued that technological progress could reduce the demand for labour so much that wages would fall to intolerable lows. In a world where a computer can suddenly make a profession redundant, those who have worked hard cannot be certain of a decent standard of living. That may justify more generous state support.

For their part, right-wing advocates of the citizen’s income view it as a streamlined replacement for complicated meanstested welfare payments. A system where everyone receives the same amount requires fewer bureaucrats to administer. Existing schemes withdraw benefits from low earners as they earn more, discouraging work and so trapping some in poverty. For this reason, Milton Friedman, an economist known for his laissez-faire beliefs, wanted to replace all welfare with a simpler system that combined a guaranteed minimum income with a flat tax.

Although the basic income has so far failed to take off, it does have a commonplace cousin: the tax-free allowance. In Britain, for example, workers can earn £10,600 ($16,500) before income tax is levied on subsequent earnings (starting at 20%). The exemption is worth just over £2,000 a year to the 92% of taxpayers who earn more than the threshold. For them, there would be no difference if the government replaced the allowance with a payment of similar magnitude. Making the payment universal would be costlier, but could be paid for by paring other welfare payments...