Universal Basic Income: Promising Idea, Disappointing Results

Contrary to the hype, a large-scale UBI pilot found that unconditional cash payments alone do not magically boost productivity or entrepreneurship.

Jul 30, 2024

The Facts

The concept of a universal basic income (UBI) has gained significant traction across the political spectrum, attracting support from both the left and the libertarian right. The idea of providing a regular, unconditional cash payment to all citizens has captivated the public imagination, particularly among tech leaders who envision a future where automation replaces traditional jobs. However, mainstream economists have been largely skeptical of UBI, highlighting the significant financial challenges associated with its implementation. Analyses have shown that either the level of the basic income would be too low to meaningfully address poverty, or the tax rates required to fund a reasonable income would be unacceptably high. As one OECD study found, "it would always require very substantial tax rises if it were to be set at a meaningful level." In the United States, for example, providing a $1,000 monthly payment to all 258 million adults would cost more than $3 trillion per year, roughly equivalent to the combined cost of Social Security, Medicaid, and Medicare.

Undeterred, UBI advocates have argued that the dynamic effects of a basic income would outweigh the challenges identified by static economic analyses. They contend that a guaranteed income would enable people to improve their skills, start businesses, and find better work, ultimately boosting productivity and offsetting the costs. Others have emphasized the potential mental health benefits and the improved overall well-being that a UBI could create.

The pandemic led to a surge in local basic income pilots in 2020, aiming to use cash for economic and racial justice, and to bolster the social safety net. The idea of direct cash transfers to low-income Americans has gained fast traction, with more than 150 local pilots in 35 US states testing the idea of "basic income." However, some states have passed laws to block these initiatives, and a lawsuit in Texas paused one program. Critics fear recipients will drop out of the labor force or use the money on vices.

To largest of these pilots, the OpenResearch project, funded by OpenAI CEO Sam Altman and others, launched a long-term randomized control trial in Texas and Illinois. The study recruited 3,000 participants and provided a third of them with an unconditional $1,000 monthly payment, while the remaining two-thirds received $50 per month. The initial results of the OpenResearch study, however, did not support the optimistic claims of UBI advocates. The findings showed that while the additional income led to increased spending and savings, it did not result in significant improvements in employment, education, or entrepreneurship. The study found that the recipients spent more time on leisure activities rather than investing in education or starting businesses. There was no evidence of "even small improvements" in the quality of employment or upskilling among the recipients. Similarly, the study found no significant improvements in physical health, and only a temporary boost in mental health during the first year.

The OpenResearch team emphasizes that the results do not mean that the poor are lazy or that redistribution is pointless. Raising the incomes of low-income individuals can indeed improve their lives and reduce poverty. The cash provided recipients with flexibility to address their specific needs and respond to changing demands, creating the possibility for increased agency. The OpenResearch pilot found participants used the funds for essentials like food, rent, and transportation, and reported cutting down on unprescribed painkillers and excessive drinking.

However, the study suggests that unconditional cash transfers alone are not a panacea for societal challenges, and that the benefits may be more modest than some proponents have claimed. The study's findings challenge the claims made by UBI supporters about the dynamic benefits of unconditional financial support.

The View

The findings from the OpenResearch study present a sobering reality check for the enthusiastic proponents of universal basic income. While raising incomes of the poor definitively improves their lives, unconditional financial support for everyone is not the magic solution to societal problems and may come at an exorbitant cost. Despite the idealistic promises and the support from influential tech leaders, the data has shown that unconditional cash payments alone do not magically transform lives or unleash a wave of productivity and entrepreneurship. The impact of cash transfers varies depending on recipients' starting incomes, family structures, and priorities. The key questions to ask about cash transfers are not whether they "work," but when and where they work, and what else can best support people. This study serves as a valuable reality check, reminding us that economic policies must be grounded in empirical evidence, not just ideological desires. The sobering findings should prompt a more sober and pragmatic discussion about the appropriate role of cash transfers within a broader social safety net, rather than relying on them as a silver bullet solution.

TLDR:

The concept of universal basic income (UBI) has gained significant traction across the political spectrum, but mainstream economists have been largely skeptical.
Analyses have shown that either the level of the basic income would be too low to meaningfully address poverty, or the tax rates required to fund a reasonable income would be unacceptably high.
UBI advocates argue that the dynamic effects of a basic income would outweigh the challenges identified by static economic analyses, but the evidence has been mixed.
The pandemic led to a surge in local basic income pilots in 2020, aiming to use cash for economic and racial justice, and to bolster the social safety net.
The largest of these pilots, the OpenResearch project, found that while the additional income led to increased spending and savings, it did not result in significant improvements in employment, education, or entrepreneurship.
The study's findings challenge the claims made by UBI supporters about the dynamic benefits of unconditional financial support and serve as a sobering reality check.
The impact of cash transfers varies depending on recipients' starting incomes, family structures, and priorities, suggesting that economic policies must be grounded in empirical evidence, not just ideological desires.