A neoliberal case for a basic income, or something like it

If I’d never encountered the idea of a basic income before reading Laurie Penny’s recent article on it, I’d come away hating it. For Penny, it’s about replacing capitalism with something better. For me, it’s about improving the capitalism we already have.

Penny thinks that the idea is ‘blasphemy to conventional, liberal, “free-market” economists’. It’s not: we here at the Adam Smith Institute have proposed something along these lines for a couple of years, and Milton Friedman proposed a similar Negative Income Tax way back in 1962.

I suspect her utopianism will be off-putting to most people. She asks, “What would society look like if that sort of freedom were available to everyone: if advances in technology and productivity could benefit not only the very rich, but all of us?”, but most people actually benefit quite a lot from advances in technology and productivity already. 66% of British adults own a smartphone (also known as “the sum of all human knowledge, in your pocket”); wages are up by over 62% in real terms since 1986; and that doesn’t even mention the enormous global reduction in poverty in the age of neoliberalism.

Penny says that “unconditional basic income is a proposal that requires us to rethink the economic and ethical framework of neoliberal capitalism that has governed our lives for generations”, and for a basic income to work, “all that it requires is that we trust one another.” Er, thanks, but no thanks.

I’m a capitalist, neoliberal advocate of a basic income, or something like it. I don’t think it’s perfect, I don’t think it will solve every problem. I just think it would be an improvement, for three main reasons:

  1. It addresses in-work poverty well.
  2. It reduces complexity in the welfare system.
  3. It facilitates other reforms that would raise overall living standards.

1. It addresses in-work poverty. Our existing welfare system is designed for a world where finding a job would be enough to give most people a tolerable standard of living. But in-work poverty is an increasing problem, particularly as good jobs for poorly educated workers become unviable, and the welfare system that we have at the moment isn’t well built for that.

This is where the robots come in. I’ve heard it said that automation of the economy is a lot like going to Australia – it’s great when you get there, but it can be a difficult journey. As robots replace them we probably will think of new things for people who used to work in law firms, factories, call centres and hospitals to do, but it might take some time.

Automation and globalization will both raise overall living standards, and in the case of globalization it will make very poor people in the developing world a lot better off, but we cannot guarantee that the jobs people get instead will be as good as their old ones. Working tax credits already begin to tackle this issue, but a basic income would reorient the whole system towards helping people who don’t have enough money, irrespective of why that is.

2. It reduces complexity in the welfare system. Our existing welfare system has built up a large amount of unnecessary complexity that could be streamlined. Like much public policy welfare is ‘path dependent’ – no two country’s welfare systems are the same, even if their welfare problems are. Much of the complexity in the welfare system has built up over time and exists only because of loss aversion: once we’ve started giving winter fuel payments to pensioners it’s quite difficult to stop.

Many but not all of these benefits are fundamentally about giving money to people who do not have enough of it. Housing benefit, the pension credit, jobseeker’s allowance, income support and tax credits all do this. But the case for a basic income does not need to stand or fall on whether we could replace all benefits with it. Some people inherently need more money to live decent lives, like the disabled, infirm and elderly. Reducing complexity is valuable but not the only, or indeed the main, appeal of the basic income.

3. It facilitates other reforms that would raise overall living standards. Many other policies that would increase total wealth are not very progressive, distributionally speaking. Tax systems are better when they do not tax things like investment and when they don’t exempt certain things from consumption taxes (like VAT), but doing these things ends up making lower earners pay more tax than we would like. One objection to immigration is that even though it makes natives richer overall, it has a small, temporary negative hit to the poorest natives. An easy way to correct that would be to redistribute the overall wealth gain to those poor natives so that they too are made better off in the short run as well as the long run.

Some pernicious government policies are ones that attempt ‘off balance-sheet’ redistribution. The minimum wage, for example, is hoped to be a redistribution from consumers and shareholders to low-paid workers – profits fall and prices rise to pay for their new, higher wages. The problems with it are that it has other unintended consequences, like causing unemployment for some workers, and that higher prices may hurt the poor as well. There’s no free lunch here – it would be more effective to tax people and then redistribute it directly to poorer workers. A basic income could replace policies like this.

I’ve used the words ‘basic income’ and ‘negative income tax’ interchangeably for a long time, because at their core they are both pretty much the same thing. The basic income is certainly better known than the negative income tax. But the problem with it is that for equal levels of basic income and negative income tax, a basic income would require large headline tax hikes.

We couldn’t just take all existing welfare spending and divide by the population – that would mean taking loads of money from people currently on welfare and giving it to people on higher incomes. We’d need to set the level quite high to avoid this outcome, and then ‘claw it back’ in the form of higher taxes.

Since people are getting the money back we wouldn’t actually be taxing anyone any more, but there would probably be large deadweight losses to reckon with, as there usually are with higher marginal taxes. Even if we could reckon with them, it would be a difficult proposition politically. (Perhaps it would work if we did a huge one, as Charles Murray has proposed, that replaced most of the state's activites altogether with cash payments - that means scrapping the NHS and education systems and giving people the money instead.)

So, even if it is a simpler concept to explain, the ‘basic income’ might be a hard sell. The very similar Negative Income Tax, which tapers away as the recipient’s earnings rise, could be a simpler solution that avoids utopian pitfalls like the ones Laurie Penny has stumbled over.