Keeping the Pitchforks at Bay:

The Value of a Universal Basic Income as a response

to Job Automation and Income Inequality

Abstract: The creation of a Universal Basic Income, or an unconditional cash transfer to

every resident of the United States, could help alleviate the challenges of increasing
income inequality and job automation without distorting the economy or removing the
incentive to work.

Devin Glaser
Government Finance
Final Paper
6/11/2015
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Introduction:

A Universal Basic Income, or an unconditional cash transfer given to every

person in the country, could provide a simpler and more effective social safety net than

the disconnected programs we utilize today. While such a program would be beneficial

immediately, it will grow even more necessary as workers in the United States continue

to lose employment opportunities as jobs are lost to automation. Such a system would

begin to address income inequality, be simple to implement, economically efficient, and

would not have a negative impact on national productivity.

A History of Displacement:

Just over 200 years ago, hundreds of displaced workers assembled in Nottingham

marketplace, located a stone’s throw from Shorewood Forest, the mythical home of

Robin Hood (O'Rourke, et al., 2013)(Conniff, 2011). They came together under the

banner of General Ludd (Linton, 1992), an invented character created to mock and terrify

factory owners who had recently laid off a number of skilled cloth workers and replaced

them with machines. The displaced workers were angry, the jobs they lost to automation

were highly paid and prestigious positions, requiring hard work and lots of skill. They

came together and attacked the factories in which they had once worked, destroying the

machines that replaced them (O'Rourke, et al., 2013) and burning down the factories of

those who resisted them (Kestenbaum, Goldstein 2015).

The British government responded violently, making machine breaking a capital

offense (Linton, 1992), shooting workers as they attacked factories and publicly hanging

those who were captured in the disputes (Kestenbaum, Goldstein 2015).

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Today these protesters are called “Luddites”, and are remembered for their battles

against technology. But the Luddites were not fighting technology based on some

romanticized idea of the natural world. Instead they fought and died to guard against

automation, to protect their jobs, jobs that eventually disappeared and were never fully

replaced (Kestenbaum, Goldstein 2015).

The benefits of the Industrial Revolution are still felt today. Beyond cheap

clothing, consumers today have access to automobiles, airplanes and jobs that would not

have existed without machines replacing human labor. But for the Luddites, and for

generations after them, the lost wages were never replaced.

“It was certainly I think in their interest to wreck machines,” said Bob Allen, a

Professor of Economic History at New York University, Abu Dhabi. “They were acting

rationally, and I think to say that they were irrational and opponents of progress and

deluded is a big mistake. (Kestenbaum, Goldstein 2015).”

Automation Today:

The economic boom following World War II lifted up most workers in the United

States and other industrialized countries (Hughes 2014). The machines that replaced jobs

in the early 19th century came to be the commonplace tools of production in the 20th

century. But even prior to the global recession of 2008, companies began using new

technological innovations to replace workers with computers or software programs. As

the global economy recovers from the great recession, corporate productivity and profits

are increasing while overall employment and wages stagnate or fall (Shierholz, Mishel
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2013). This structural deficiency is so large that in the “United States the employment-

to-population ratio has now declined to a thirty-five year low (Hughes 2014).”

Looking into the near future, we are likely to replace even more living-wage jobs

with automation. The adoption of self-driving trucks will replace approximately 3.5

million middle class jobs dispersed throughout mostly rural areas of the United States

(Santens 2015). The 2014 Census reported “Truck, delivery, and tractor drivers” to be

the most common occupation in 29 states (Bui 2015). The effect of this automation will

be felt in states already hurting from the loss of factory jobs. This same self-driving

technology will likely replace the 233,000 taxi and chauffeur jobs located within big

cities throughout the United States (BLS 2015).

The United States is arriving at a moment in time in which structural

unemployment will look a lot like the unemployment that led to the Luddite movement.

But there is a simple economic solution that could prevent ragtag armies of unemployed

truck and taxi drivers from amassing in our National parks intent on destroying the

machines that have replaced their jobs. A Universal Basic Income.

Defining a Universal Basic Income:

A Universal Basic Income would be an unconditional cash transfer given to every

resident or citizen of a country. The same amount of money would be given to the rich

and the poor alike, and would be sufficient to cover basic necessities. This basic income

would be in addition to any money earned from other sources, combining “the income

security of socialism with capitalism’s incentives” (Butler, 2005).

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In 2015, the poverty guideline for a single person was $11,770 (U.S. Census,

2013). While this represents a low threshold for actual subsistence, a Universal Basic

Income set at this amount would end poverty as we measure it. An even higher income

guarantee could ensure all citizens were able to afford basic necessities such as food,

transportation, clothing and housing.

Who has proposed it in the past?

The idea of a Universal Basic Income has been discussed by conservative and

liberal economists for centuries. Libertarian economist Milton Friedman supported

creating a “negative income tax” (Frank 2006). Friedman believed in the power of the

market but not in its ability to distribute enough income to meet basic human needs.

Famed classical liberalist Freidrich Hayek wrote of creating a “minimum income for

everyone, or a sort of floor below which nobody need fall even when he is unable to

provide for himself (Hayek 1981).”

Nobel prize winning economist James Tobin supported the idea as a campaign

platform in George McGovern’s 1972 presidential campaign (Groot 2012). Martin

Luther King Jr. endorsed the idea himself, writing “I am now convinced that the simplest

approach will prove to be the most effective -- the solution to poverty is to abolish it

directly by a now widely discussed measure: the guaranteed income (King 1967).”

Where is it currently being done?

The world’s only current Universal Basic Income is the Alaska Permanent Fund.

The fund, in existence since 1976, provides each Alaskan with a dividend from
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investments of the state’s oil and mineral revenues. In 2008, before the great recession,

the fund paid out $2,069 to every resident of Alaska who had lived there the previous

year (Alaska Department of Revenue, 2012). That’s an extra $6,207 for a single mother

with two children. The fund was damaged by the great recession, but still paid out $900

to every resident in 2013.

This guaranteed income has not only helped reduce poverty, but has also lowered

income inequality. In 2012, Alaska’s poverty rate was 10.8%, the fifth lowest in the

nation (U.S. Census Bureau, n.d.). In 2013, Alaska had the lowest levels of inequality

(measured using the GINI index) of all 50 states (U.S. Census Bureau, 2014).

Removing the “Welfare Trap”:

Unlike current assistance, benefits are not lost as an individual enters the

workforce and moves out of poverty. This eliminates a common welfare trap that occurs

when rising incomes decrease total benefits. A Universal Basic Income should lead to

higher rates of employment for those at the bottom of the earnings scale, “because they

can retain their basic income when working, their effective marginal rate of tax is

reduced, the return on their effort increases, and they are no longer trapped in poverty by

the fear of having their benefit withdrawn.” (Van Parijs, 2013).

Improving Economic Efficiencies:

One of the most successful tools we currently have to fight poverty is the

minimum wage. The minimum wage lifts many low-skilled workers out of poverty and

boosts local economies through increased spending. At the same time, the minimum
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wage is a price floor, which has the potential to create structural unemployment

(Krugman, et al. 2014).

Classical economics predicts that as wages rise, more employees are willing to

work and fewer employers are willing to hire them. This can lead to a number of workers

who are unable to find employment at the current wage rate. Of course, without a

minimum wage, there is no guarantee that the equilibrium wage rate will be enough to

keep workers alive.

A Universal Basic Income set adequately high could replace the minimum wage.

Instead of requiring employers to pay a wage rate intended to keep employees out of

poverty, the government would ensure each citizen had access to a baseline income.

Without the minimum wage as a labor floor, employees and employers would be able to

bargain over wages freely. If an employee found enjoyment in a job that paid less than

the minimum wage, they would be free to take such job without violating labor laws.

Conversely, an individual employee’s ability to bargain for higher wages increases, as

they are no longer faced with the threat of starvation or homelessness if they fail to accept

an unreasonable job offer. “A basic income would give [employees] the power of

refusal, that’s essential in any economic transaction, thus beginning to correct the power

imbalance between employer and employee” (Butler, 2005).

Funding A Universal Basic Income:

There are many ways to fund a Universal Basic Income. Scott Santens, a basic

income advocate has suggested providing every adult $12,000 and every child $4,000 a

year to eliminate poverty regardless of household size (Santens 2015b). According to

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Census data (Kids Count Data Center 2014), there were 73,585,872 children and

242,542,967 adults in the United States in the year 2013. Providing the abovementioned

basic income to each would amount to $3,204,859,092,000 or just over $3.2 trillion a

year.

A Universal Basic Income will be able to replace many of the means-tested

programs we currently use to provide aid to the poor. Our Supplemental Nutrition

Assistance Program (SNAP), housing vouchers, unemployment insurance, Temporary

Assistance for Needy Families, and many other programs can be rolled into the Universal

Basic Income stream. (Programs that benefit from the collective buying and bargaining

power of the Federal Government, such as Medicaid or Medicare, would not be wise to

roll into the Universal Basic Income fund.) By providing the fund to every citizen or

resident of the country, the money spent on the bureaucracies necessary to manage these

programs can also be rolled into this revenue stream. These savings and consolidations

could pay for approximately $1.5 trillion of the Universal Basic Income (Santens 2015b),

bringing the cost down to $1.7 trillion a year.

Total aggregate household income in the United States was approximately $8.5

trillion dollars in 2013 (Census n.d.). Extracting and redistributing $1.7 trillion a year

from households making a total of $8.5 trillion a year may appear distortionary, but those

same households will be receiving the Universal Basic Income. While an ideal income

tax to fund the program would be leveraged solely on high-earners, even a flat 20% tax

would be unnoticed by most taxpayers, as the difference would be negated by the

Universal Basic Income distribution.

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Yearly Income $20,000 $36,055 $50,000 $100,000 $500,000 $1,000,000

Single Filer - No Kids
Adjusted Gross Income (Median)

Universal Basic Income $12,000 $12,000 $12,000 $12,000 $12,000 $12,000

20% Additional Tax $4,000 $7,211 $10,000 $20,000 $100,000 $200,000

Net Tax Difference $8,000 $4,789 $2,000 -$8,000 -$88,000 -$188,000

Families making $20,000 a year would not see their taxes rise, as the additional

$4,000 they would owe in taxes would be deducted from the $12,000 they were

guaranteed, leading to a net Universal Basic Income payment of $8,000. Using this

calculation, taxpayers would not see a tax increase until their yearly income went over

$60,000. As the United States median adjusted gross income was $36,055 in 2012 (IRS

2014), this would be a tax deduction for the majority of taxpayers.

Other Funding Sources:

A flat income tax would be a simple means of funding a Universal Basic Income,

but there are other sources of taxation that would bring positive externalities. Nobel

Prize winning economist Joseph Stiglitz suggests taxing rent seeking behavior, a term

describing when individuals seek out favorable government policy to increase wealth

without creating it. Rent-seeking behaviors distort market efficiencies in the form of

corporate subsidies, favorable tax treatment, monopoly power, and natural resource

acquisitions at below their fair market value. As Stiglitz (2013) wrote, “Taxing work

and savings can weaken incentives; in contrast, taxing the ‘rents’ on land, oil, or natural

resources won’t make them disappear” (p. 49). Ted Halstead (1999), estimated charging
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the fair market value for the use of public assets such as “the oil and coal in the ground,

the trees in our national forests, the airwaves and the electro-magnetic spectrum and the

rights to pollute our air” could raise trillions of dollars (as cited in Butler, 2005). A tax on

pollution would help fund a Universal Basic Income while simultaneously benefiting the

environment. A carbon tax of $30 per metric ton of carbon dioxide emitted is estimated to

raise $145 billion a year in the United States (Bauman & Hsu, 2012).

Criticisms:

The most common criticism of implementing a Universal Basic Income is that it

will remove individual’s will to work. The United States and Canada both ran

experiments in the 1960s and 1970s to determine the effect of a Universal Basic Income

on individual’s desires to work (Hum, Simpson 1993). In 1968, the New Jersey

Graduated Work Incentive Experiment was introduced to measure the effects of a

Negative Income Tax, followed shortly thereafter by other studies in Gary, Indiana,

Seattle, Washington and Denver, Colorado (Hum, Simpson 1993). Canada followed suit

shortly thereafter with the Manitoba Basic Annual Income Experiment “Mincome”.

The only statistically significant results from the studies found that men reduced

the number of hours worked by 7-8%, married women reduced their total work hours by

22%, and single women with children by 15-16% (Hum, Simpson 1993). Families with

preschool-age children in the household saw men continue to work more hours, while

women worked less (the studies did not measure housework and child rearing as labor).

Put in the context of a 40-hour week, this means men left work less than three hours early

on a Friday, married women essentially worked one day less a week, and single mothers
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spent six hours less at the job, hardly the picture of a bunch of indolent moochers

unwilling to work.

Conclusion:

A Universal Basic Income guaranteed to all is the most economically efficient

means to combat poverty, providing an income floor against destitution. Such a system

would not only be fair and easy to administer, but would provide a safety net as the

United States continues to automate away jobs previously held by humans. Funding this

Universal Basic Income would be simple and painless for many, and will not have a

negative effect on the country’s overall productivity.

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