Otto Lehto, Basic Income around the world

Otto Lehto, Basic Income around the world: The unexpected benefits of unconditional cash transfers, Adam Smith Institute, 2018, 49 pp, free to download

In 2015, the Adam Smith Institute published a paper on Negative Income Tax written by Michael Story. This understood the benefits of free trade and automation, recognised the effects of free trade and automation on the income security of lower skilled workers in developed countries, showed that current government benefits policies trapped people in poverty, and recommended a Negative Income Tax. On the bases that a Negative Income Tax could generate the same relationship between earned income and net income as a Citizen’s Basic Income, and that a laboratory experiment had shown that labour supply could be higher with a Negative Income Tax than with a Citizen’s Basic Income of the same value, Story recommended a Negative Income Tax rather than a Citizen’s Basic Income. What the paper did not recognise was that in the context of today’s increasingly diverse employment market a Negative Income Tax would not be anything like as easy to administer as a Citizen’s Basic Income. Administration of a Negative Income Tax would necessarily involve both the Government and employers in the calculation and payment of the Negative Income Tax, and would therefore encounter the same problems as today’s Universal Credit.

Lehto sets off from the same place as Story: the benefits of automation and globalisation, and their unfortunate effects on employment and income security. This means that protectionism must be avoided, and that

the crucial task is to design a safety net that provides economic security without slowing down economic, social and technological development. (p. 7)

Lehto rehearses the history of the neoclassical idea that a non-intrusive universal income in a context of free and open markets can be efficient both for society and for the economy:

Consistent and sustainable UBI models recognise the value of cash in mediating people’s preferences and increasing distributive efficiency. (p. 12)

Lehto studies the effects of both conditional and unconditional cash transfers implemented, either permanently or temporarily, in a variety of countries, and finds both of them preferable to in-kind transfers. He finds conditional cash transfers preferable for children, and unconditional cash transfers preferable for adults. He questions the value of the results obtained from minimum income experiments in Canada and the USA during the 1970s, finds evidence from Alaska and Iran not to be generalisable, and finds evidence from the Namibian and Indian pilot projects interesting. He recognises the limitations of the current experiment in Finland, but sees it as ‘heralding the way for an audacious string of global experiments’ (p. 30). He is looking forward to results from experiments in Canada, the USA, Scotland, Uganda, and Kenya, but has not understood that the project in Ontario is a long way from being a Citizen’s Basic Income experiment.

Lehto finds that a Citizen’s Basic Income would have ‘the lowest chance of being hijacked by special interests, and the highest chance of being useful to its beneficiaries regardless of the circumstances’ (p. 36), understands that implementation might pose challenges (although like Story does not understand how easy a Citizen’s Basic Income would be to administer in comparison to a Negative Income Tax), and concludes that a Citizen’s Basic Income ‘is politically feasible, socially desirable and financially sustainable’ (p. 36). Lehto’s final three paragraphs are worth quoting in full:

The incentives for higher productivity and innovation sustained by the market order should be rightly seen as the greatest and unacknowledged tool of welfare creation at our disposal. To sustain popular support for the invisible hand of the market – the mother of all welfare creation – we need the visible hand of the government. A limited and equitable government, knowledgeable about its own limits as well as its powers, can give people the confidence to pursue their own lives by endowing them with sufficient access to universal opportunities for personal flourishing.

Give everybody a little bit of money every month and tax it away (smartly and efficiently) from those who can afford it. If it sounds too good to be true, it’s only because we have been conditioned to accept the premise that complexity in life situations requires complexity in governance. In fact, the very opposite is true: simplicity in welfare legislation is the best fit for a complex world. A modest UBI, while it may generate moral resentment and ideological resistance, would increase the welfare and liberty of the citizenry without imposing unreasonable costs on taxpayers. Replacing in-kind benefits with unconditional (or minimally conditional) cash transfers is likely to increase the efficiency of the benefit system for all parties concerned in rich and poor countries alike.

Counterproductive policy recommendations, like trade protectionism and excessive welfare paternalism, are likely to dominate the discussion for a long time to come. People are hungry for solutions, populists are ready to sweet-talk them into submission. Rapid social transformations are scary and can cause counterreactions. Only a combination of robust markets and a robust safety net can give people the incentives to take more risks, set up businesses and take up various jobs, in the knowledge that their basic security is taken care of, regardless of how creative – or destructive – the Schumpeterian maelstrom of global capitalism becomes. (p. 37)

Lehto has offered us a highly competent libertarian argument for Citizen’s Basic Income.