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A UBI will not eliminate poverty

Summary:
Bryan Caplan recently gave Charles Karelis an opportunity to offer some thoughts on poverty. Karelis had this to say about a Universal Basic Income program: UBI has negatives too. It would be way, way more expensive, pushing US tax rates into the middle of the EU pack. There would be no positive substitution effect, since it’s not work-contingent. The pros are that it would eliminate the class antagonism inherent in EITC, since everybody would get it. What’s more it would be easy to administer and receive. Above all, it would eliminate poverty, which is a miserable condition and an embarrassment to a rich country like ours. And as a cash program, it would get government out of the business of telling people what their spending priorities should be. People could

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Bryan Caplan recently gave Charles Karelis an opportunity to offer some thoughts on poverty. Karelis had this to say about a Universal Basic Income program:

UBI has negatives too. It would be way, way more expensive, pushing US tax rates into the middle of the EU pack. There would be no positive substitution effect, since it’s not work-contingent. The pros are that it would eliminate the class antagonism inherent in EITC, since everybody would get it. What’s more it would be easy to administer and receive. Above all, it would eliminate poverty, which is a miserable condition and an embarrassment to a rich country like ours. And as a cash program, it would get government out of the business of telling people what their spending priorities should be. People could spend their money on health care, or education, or leisure, or whatever they themselves thought was most valuable.

I agree with much of that, but not the part about eliminating poverty.  If I thought a UBI would eliminate poverty, then I’d support the program.  Instead, I favor low wage subsidies.

There are at least three ways of thinking about poverty, and in each case a UBI program would fall short.

1. Perceptions of consumption:  Poor people might be defined as those who seem to have very low levels of consumption.  Even with a UBI, there would be plenty of people who make poor (or unusual) choices and thus end up with a consumption bundle that looks inadequate.  Some would end up homeless, for instance.

2. Relative poverty:  Some argue that the poverty line is a moving target, and as we become richer we redefine poverty to include real incomes that were formerly viewed as adequate.  A UBI will not eliminate relative poverty because the concept will simply be redefined in the public’s mind to reflect UBI incomes.  Think about how the term “minimum wage job” implies a lousy job, regardless of where the minimum wage is set.

3.  Absolute poverty:  A UBI will require European-style tax rates, as Karelis correctly points out.  I’d expect these to eventually lead to European levels of GDP/person.  (Not right away.)  Thus America’s GDP/person will fall by roughly 25%. When that occurs, the UBI payments will have to be scaled back to levels that are lower than anticipated, and absolute poverty will reappear.

This doesn’t mean the UBI is a bad idea, but we should not expect it to eliminate poverty.

A UBI will not eliminate poverty

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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