Starting the Conversation: The Economics of a Universal Basic Income

August 31, 2017

Our colleagues at the Roosevelt Institute, together with the Levy Institute, just published an exciting new paper entitled, “Modeling the Macroeconomic Effects of a Universal Basic Income.” The paper takes a major step forward in answering an important question: How would a massive federal spending program like a “universal basic income” (UBI) affect economic growth and economic inequality?

We live in a time when many big new economic policy ideas are suddenly on the table—from unconditional cash assistance programs like UBI; to single-payer health care, which would have the federal government as our sole medical insurance system; to significant increases in both individual and corporate taxes. At Roosevelt, we do our best to use data and analysis to understand who would benefit from new policies, who would lose, and how the economy as a whole—our institutions and the power relationships among them—would change as a result. So it is exciting to see our report on UBI, one of the biggest proposed game-changers, generate thoughtful media coverage.

All models, of course, have baked-in assumptions, which are important to unpack. So, the rest of this post explains a little more about what those assumptions are; why many Roosevelt economists and researchers believe those assumptions have merit; and why we are proud members of the UBI research community. But we should note up front: We view this as part of a much larger conversation about UBI and other associated questions, including our assumptions about just how much the economy still has room to grow. Our paper shouldn’t be read as pro- or anti-UBI. We believe strongly in the goals that many UBI adherents have: the importance of alleviating poverty and suffering, the importance of giving workers and other low-income people more power and greater tools for self‑determination, and the importance of economic security for all Americans. But our position is that we still have a lot to learn about UBI, cash assistance, and improving the social safety net.

The Levy model and what we tested

The paper explores the macroeconomic effects of a UBI using the Levy Institute’s macroeconomic model. Important note: Economic models are simply stylized approximations of how our economy works, and we should be careful not to conflate what the model says with reality. The Levy model was developed over the course of years by comparing the model’s predictions to what actually happened in the real world. Through this iterative process, each round honing in on a “truer” picture of the economy, the team at Levy developed a baseline forecast—a prediction of what would happen to important components of the macro economy (e.g. household wealth and income and the government’s net debt) if nothing else changed and the Congressional Budget Office’s overall GDP forecasts came true. By comparing the effects of different sized UBIs to the Levy baseline, we can roughly predict how huge amounts of federal spending would affect inflation and other macroeconomic outcomes.

In the paper, we examine three versions of a UBI: $1,000/month for all adults, $500/month for all adults, and a $250/month child allowance. The headline result is that the model predicts that if we funded a UBI without raising taxes, GDP would grow—an eye-catching 12.56%, in the case of the full $1,000/month UBI. The model also predicts that even in tax-financed UBI scenarios, the economy would grow (because we incorporated the assumption that an extra dollar going to a poorer household is more likely to be spent rather than saved, something wonks call “the marginal propensity to consume.”) Dylan Matthews at Vox did a great job of explaining all of the results, so we won’t go further here, but it is worth reading his piece and the paper itself for the detail.

Economic worldview, and why it matters

We did want to emphasize the big-picture context here, because it’s important. The Levy model, and the results it offers us about the macroeconomic effect of a UBI, is situated in a larger worldview that many of our Fellows, including Mike Konczal and Marshall Steinbaum, hold: that there’s a lot of room to grow in our economy. Crucially, this is a Keynesian view, assuming that total spending is what determines economic output. As such, the model holds that policies that would increase total spending, like UBI, will grow the economy. The model also makes two other important assumptions that adhere to the broader perspective that the economy is not operating near potential output. First, unconditional cash transfers do not mean that people stop working, which our recent paper by Ioana Marinescu, surveying extensive empirical evidence, demonstrates. Second, the paper takes seriously the idea that when the government takes away an additional dollar of a rich household’s income through taxes, the household doesn’t respond by dropping out of the labor force. Instead, we believe that each marginal dollar taxed away reduces rich households’ incentives to bargain for a larger share of the economic pie. Our belief about this “bargaining elasticity” derives from important work by Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, who show that the bargaining effect trumps the labor supply effect—it isn’t even close. This means that high progressive tax rates could have a very positive effect on reducing inequality, without harming growth. This is a big assumption, and we fully recognize that.

Implications and today’s economic debate

The fundamental idea that there’s a lot of room to grow in our economy—and as a result, a lot of room to think bigger about our social safety net—has implications for problems far beyond what a UBI is designed to address. What is the optimal interest rate? What is the best trade off between inflation and unemployment? What are the most effective ways to increase long-stagnant wages? The answers to each of these questions stem from one’s view of whether the economy is operating at its fullest capacity.

Further, the UBI conversation happening right now is important because it forces us to tackle big questions head on: If we can do more to expand the social safety net, what should that expansion look like? Who should get that expansion? Workers? What does it mean to work? Does going to school or raising a child count as “working”? Who is deserving of government support? We are privileged to be a part of the UBI community—one that enthusiastically tries to answer these very big questions, and, as a result, ends up breaking past all kinds of constraints in the way we think about how our economy and society are structured.

Of course, today’s political destabilization produces deep anxiety, and indecisions, or bad decisions, on the part of our current political leadership has caused real suffering in the lives of real people. But in one respect, our political era is liberating. We are now talking not just about a guaranteed cash income, but also about job guarantees (the idea that everyone who wants to work will have paid work to do); baby bonds (wherein all children, at birth, would be given a bond that would come due when that child became an adult—and thus all, regardless of their family wealth, would have some economic security); much higher tax rates on the wealthy; and innovative ways to break up monopoly companies that may be choking our economy and our workers: These are all real conversations today. And they are all radical ideas that embrace the concept that we as a society are able to solve big problems. We hope that this paper contributes to this ongoing conversation, and serves as one more piece of evidence that thinking bigger is not foolhardy, but rather, imperative.