Pandemic Creates Test Case for Universal Basic Income
Could COVID-19 cash lead to regular government assistance for all?
In 2019, when then-Democratic presidential candidate Andrew Yang became known for his proposal to give $1,000 a month to every adult in the U.S., it was a provocative idea from an improbable contender.
But then the world changed, and amid the widespread economic hardship caused by the COVID-19 pandemic, the vast majority of Americans were receiving cash payments as part of emergency government relief.
- The concept of universal basic income, or UBI, has taken on new relevance in the pandemic era
- UBI is ongoing government assistance for everyone—no strings attached
- Proponents of UBI say it would shrink the racial wealth gap and reduce poverty
- Critics cite the enormous cost of UBI proposals—at least $3 trillion a year—and argue it would discourage people from working
- Consumer support for UBI has increased in recent months, polls show
- The CARES Act, which sent checks to the vast majority of Americans, is somewhat of a test case for UBI, even if there are important differences
- Multiple cities are now experimenting with giving unrestricted, regular cash grants to residents
The COVID-19 crisis has given new relevance to the concept behind Yang’s campaign centerpiece—an idea known as universal basic income (UBI) in which everyone is guaranteed regular, unconditional government assistance. While Yang’s proposal stemmed from predictions that a third of all U.S. jobs will be lost to automated technologies within 12 years, the sudden loss of millions of jobs has created a far more immediate argument for something akin to UBI. Proposals for various forms of regular cash assistance are increasingly part of the political conversation. And in fact, the cash payments of 2020 are serving as something of a real-life test of the principles behind UBI, even if there are important differences.
“Moving in the UBI direction is something that certainly is going to be on the agenda of politicians and in the political discussion going forward,” said Dennis Hoffman, a professor at Arizona State University who specializes in macroeconomics.
While most people have yet to receive anything but a one-time $1,200 cash payment since the economic collapse, Congress has been debating a second round of broad-based stimulus, and some legislators have proposed paying out regular monthly checks for the duration of the pandemic. In June, a coalition of what is now 25 city mayors created an organization to spearhead pilots for UBI and other types of cash assistance, drawing a $3 million donation from Twitter CEO Jack Dorsey.
“What the pandemic taught us was that we are a community with a lot of struggles and a nation with a lot of struggles,” said Kamal Johnson, the mayor of Hudson, New York, where a pilot program for 25 residents will launch later this month.
No Questions Asked
In contrast to need-based subsidies, the idea behind UBI is that everyone is eligible—no questions asked. Advocates argue that by making the payments universal, there is no incentive to remain in a low tax bracket, no stigma associated with taking the funds, and no challenges accessing the money. The funds, which are doled out in cash, go on indefinitely and there are no restrictions on use or requirements to work.
Still other forms of government assistance that may fall under the umbrella of “guaranteed income,” “basic income,” or “cash transfers” are different from UBI (though sometimes mislabeled UBI) in that they are not universal, but instead target people in need, often under a certain income threshold. With these forms of assistance, one of the primary differences from traditional welfare programs such as food stamps is the freedom given to recipients to use the cash where they need it most.
Proponents say UBI would shrink the racial wealth gap and reduce poverty, and often (though not always) they propose it as a supplement to existing social safety nets like food stamps or Medicaid. It’s an idea that was long overdue even before the pandemic, advocates say, and now, with climbing rates of food insecurity and lack of universal healthcare, the need is even more clear.
“We already had a large portion of the population unable to pay if they had a sudden $400 bill,” said Halah Ahmad, policy lead for the Jain Family Institute, a research organization that studies UBI and other forms of basic income. “Suddenly you have 35 million people filing for unemployment and a massive uptick of people reaching desperation and food insecurity.”
Of course, there are some pretty powerful arguments against it, too. For one, the cost. Depending on whether children are included, studies estimate a $12,000 a year UBI like Yang’s would cost $3 trillion to $3.8 trillion a year, or as much as 78% of all tax revenue and contributions to government social insurance programs.
And then there’s the simple and unavoidable question: If you are being paid regardless of whether or not you work, why would anyone work? Skeptics say UBI would discourage working, hinder personal responsibility, and allow people to potentially misuse the money on unnecessary expenses.
“We will get back to normal at some point, and one major stumbling block is a cultural one,” said Arne Kalleberg, a professor of sociology at the University of North Carolina at Chapel Hill who’s been involved in more debate about UBI among scholars recently. “We have a sense that people should earn their money. And there is a very strong feeling among some people that some people are freeloaders and get stuff for nothing.”
A Test Case
While critically different from universal basic income on a couple of fronts, the U.S. response to the pandemic has nevertheless given economists and researchers the opportunity to study what happens when the government distributes cash with few strings attached.
The CARES Act, enacted on March 27, provided one-time economic impact payments of as much as $1,200 per person and $500 per dependent to most adults, with the amount gradually phasing out for those with annual incomes exceeding $75,000 ($112,500 for heads of household) and nothing going to those with incomes of $99,000 or more ($136,500 for heads of household.) It also afforded anyone collecting state unemployment benefits an extra $600 a week through July.
“It is in some ways a test case for certain aspects of cash transfers,” said Ahmad of the Jain Family Institute.
Leading up to the passage of the CARES Act, her organization had conversations with multiple lawmakers’ offices about how cash transfers work and the known effects of past programs, she said. Since the pandemic, there have been at least 22 proposals put forward by U.S. lawmakers and federal officials that include some form of direct cash transfer, according to Max Ghenis, a former data scientist for Google who founded the UBI Center, a non-profit research firm, in 2019. Some even proposed universal eligibility or monthly payments.
“Now we are seeing very fast economic changes that can happen to anyone,” Ghenis said. “There is also a lot more insecurity than I think people realized.”
Indeed, the payments in the proposal that finally passed had commonalities with UBI. For one, they were given to a vast swath of the population, even those with relatively high incomes. Plus, the additional unemployment benefits were fixed at $600 a week, rather than being offered on a sliding scale.
Effects on Poverty
One study published in June determined that the two types of transfers—the one-time stimulus and the extra unemployment—may have dramatically curtailed the pandemic’s impact on the poverty rate.
Without them, the annual poverty rate would have increased to 16.3% from a pre-crisis level of 12.5%, given the April unemployment rate of 19.7%, the study by Columbia University’s Center on Poverty and Social Policy found. Instead, the provisions may have kept annual poverty rates at 12.7% or even lower, depending on how available the transfers actually ended up being.
The estimated effect is even more pronounced when broken down by racial demographics. For Black people, instead of rising to 25.3% from 19.8%, the poverty rate may end up being 20.2% because of the CARES Act. For White people, the pandemic may have barely moved the needle, raising the poverty rate from 8.6% to 8.7% rather than 10.9%.
But the researchers also pointed out that an annual poverty rate analysis likely understates the hardships many are facing because of the short-term nature of the funding and the potentially long wait for unemployment benefits.
A separate study by the Institute on Assets and Social Policy (IASP) at the Heller School for Social Policy and Management at Brandeis University estimated that if every household received a $1,000 a month for each adult and $250 a month for each child, the overall U.S. poverty rate would drop to 2% from 12%, with Black and Latino households experiencing the biggest benefits.
A Deterrent to Working?
Then there is the insight gained from investigations into whether the additional unemployment benefits have discouraged recipients from working. Because it was an extra $600 per week, some 76% of unemployed workers were eligible to get more in total unemployment benefits than they would have gotten in their paychecks, according to a University of Chicago study released in August. In fact, the average was 45% more.
This kind of statistic underscores the criticism that basic income can deter people from working. Arguing against proposals to extend the extra $600 a week, Republican Senate Majority Leader Mitch McConnell said on the Senate floor in July: “We should not pay people more to stay home than we pay the people who continue working."
But did the extra cash distributed by the government actually discourage job-seeking? An analysis by Yale University researchers published in July used weekly data from Homebase, a private software firm for small businesses, to test whether the degree of additional benefits someone received correlated to their employment, both when they first got the extra money, and as time went on.
The study found that workers who had larger increases in their overall unemployment checks didn’t have larger declines in employment over the next two months, and in fact, they “appear to be quicker to return to work than others, not slower.”
Importantly, however, researchers said their results don’t speak to whether expanded unemployment insurance would affect job seeking in more normal times. “The severity of the decline in labor demand and the health risks to workers make the current pandemic different,” they wrote in their report.
How Money Gets Used
Other studies show how differently the one-time stimulus payments were used, depending on income and savings levels. Researchers at the Kellogg School of Management at Northwestern University found that within the first 10 days after receiving their stimulus payments, people with less than $500 in their bank accounts spent almost half of it, while people with more than $3,000 in their accounts spent virtually none of it.
Spenders often used the money to buy groceries and catch up on rent and bills, according to the study, which relied on data from SaverLife—a nonprofit group that made an app to help people budget and track their spending habits.
While one of the core tenets of UBI is that everyone is eligible, Kellogg’s Scott R. Baker, a professor of finance who co-authored the May study, said the results suggest expanded unemployment benefits may be a better way to stimulate the economy precisely because they do target people with lower wealth and income.
Hoffman, the ASU economist, makes a similar argument. Without means testing of some sort, much of any liberally distributed stimulus will inevitably go to those who already have good incomes and will therefore decide just to save the extra money. Government reports back up Hoffman’s observation: the U.S. personal savings rate more than doubled after the vast majority of the stimulus checks had been distributed, skyrocketing to 33.7% from 12.9% between March and April of 2020.
“I prefer steps towards social welfare that are a bit more targeted or surgical than just raining money, effectively out of helicopters,” Hoffman said. “The visual is that you take the helicopter over town and just dump money and require that everybody gets roughly the same share. Frankly, some of us don’t need it.”
Costlier than the New Deal
The fact that not everyone needs the money may in fact be one of the hardest factors to overcome, given the cost argument against UBI.
To put the $3.8 trillion a year cost estimate in context (a figure from a 2018 analysis by investment firm Bridgewater Associates) the CARES Act—with an estimated cost of $1.7 trillion, was the most expensive stimulus bill in the nation’s history—significantly larger than the 2009 stimulus, which in turn was pricier than the entire New Deal, factoring in inflation.
More importantly, each of those was a one-time expense, while UBI would require funding year in and year out. Yang proposed that his UBI, called the Freedom Dividend, would have been paid for by consolidating existing welfare programs and assessing a 10% value-added tax. Welfare recipients would have been given a choice between their current benefits or the UBI, a concept that has drawn criticism from some liberals who don’t want existing welfare programs to be replaced by a plan that awards money to the wealthy.
Still other plans propose using funds from carbon taxes or simply having the U.S. Treasury mint money.
An Old Idea
Proposals for some form of cash transfer go back to the early days of the U.S. when revolutionary Thomas Paine put forward the idea of collecting taxes from landowners and redistributing the money to everyone upon reaching adulthood.
In the 1960s, figures as diverse as civil rights leader Martin Luther King Jr. and conservative economist Milton Friedman proposed similar ideas such as a negative income tax, and in the early 1970s, a bill to replace anti-poverty programs with a guaranteed income scheme earned the support of Republican President Richard Nixon.
Over the last few years, fears about the impact of automation rekindled the debate over UBI, but despite drawing the interest of Yang, Dorsey, Elon Musk, and others in Silicon Valley, it remained a fringe idea most Americans had never heard of.
Then the COVID-19 shock to the economy triggered an unprecedented level of government assistance. In June, Michael Tubbs, the mayor of Stockton, California, founded Mayors for a Guaranteed Income, which now includes mayors from 25 cities including Los Angeles, Philadelphia, Atlanta, and St. Paul. Stockton is conducting a two-year pilot program giving $500 a month to 125 randomly selected residents in lower-income neighborhoods.
Despite numerous other holdups in passing a second package of stimulus and emergency relief, Democrat and Republican lawmakers alike have backed another round of one-time payments in response to the COVID-19 crisis.
Proposals for anything closer to UBI—mostly pushed by progressive Democrats—have had little traction, never making it out of committee.
Rep. Rashida Tlaib, a Democrat from Michigan, introduced a bill in April calling for every person in America to receive $2,000 initially and then $1,000 every month until a year after the COVID-19 crisis.
Vermont Sen. Bernie Sanders, who ran for the Democratic presidential nomination, along with Democrat senators Kamala Harris of California and Ed Markey of Massachusetts, introduced a bill in May that would provide up to $2,000 per month for every individual making less than $120,000 (beginning to phase out at $100,000.) It would be paid as long as the pandemic lasts and for three months afterward. Similar figures were proposed in a bill from Democratic Reps. Ro Khanna of California and Tim Ryan of Ohio.
Interestingly, Democratic presidential candidate Joe Biden, who has chosen Harris as his running mate, has forcefully criticized the concept of UBI in the past. “What Americans want is a good job and a steady paycheck, not a government check or a consolation prize for missing out on the American dream,” Biden wrote on a University of Delaware blog in 2018.
But that may be an outdated way of thinking, if polling of consumer attitudes are any indication.
Fifty-five percent of registered voters in an August Hill-HarrisX poll were in support of UBI, up from 43% in February 2019.
And rates of UBI support have reached 69%-75%, compared to a maximum of 55% prior to the COVID-19 crisis, according to three Stanford psychology professors who wrote an essay for Time about two of their online studies. One that tracked 2,300 Americans between late March and late April showed the greatest gains among conservative women, according to the professors.
“Why is COVID-19 increasing support for universal policies? Our new data suggest that one factor is the normalization of hardship. More and more Americans are experiencing need firsthand,” they wrote.
In Hudson, 600 people are waiting to hear whether they will be among 25 randomly selected town residents to receive a $500 check every month for the next five years from Yang’s charity, Humanity Forward. Residents must earn less than the town’s median annual income of about $35,000 to be eligible.
Johnson, the Hudson mayor, said he knows $500 a month isn’t enough to live on, but it might allow a working parent to quit a second job to spend more time with their children.
“People honestly feel like they just live to work, pay bills and die,” he said. “That shouldn’t be the way of life in the greatest country in the world.”