Is universal basic income scheme a recipe for disaster? Swaminathan Aiyar decodes – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/is-universal-basic-income-scheme-a-recipe-for-disaster-swaminathan-aiyar-decodes/articleshow/83554204.cmsSynopsis

UBI is impractical — and, in my view, immoral. But cash grants have become part of India’s subsidy politics and are here to stay. Some think they will lay the ground for an eventual UBI. More likely, they will join the estimated 950 subsidies already announced over the years that have done some good, but failed to make India prosperous.

Swaminathan S Anklesaria Aiyar

Swaminathan S Anklesaria Aiyar

ET Consultant EditorIn the debate about a universal basic income (UBI), opponents fear many citizens will work less or not at all. Proponents deny this. There is no space in this column to discuss the pros and cons of UBI. So, it will focus just on whether a substantial cash dole affects willingness to work.

New light has been shed on this by huge US government spending to combat the Covid-induced recession. Unexpectedly, the US today has a serious labour shortage. The economy is recovering, but a record 9.3 million job vacancies remain unfilled. Since Covid proved that working from home was feasible and cut costs, economists feared that the end of lockdowns would mean fewer jobs and more unemployment. In fact, US employers cannot find enough workers despite substantial unemployment.

No Work, Know Pay

Both Democrat and Republican legislators are proposing incentives to persuade people to return to work, such as worker-hiring bonuses or expanded tax credits for employers. Republicans have suggested states should be allowed to use federal unemployment aid to make one-time payments of up to $1,200 to people on unemployment benefits who start working.

US unemployment peaked at 14% in May 2020, then fell sharply as lockdowns eased. It was down to 6.5% by October 2020, but after that declined only gradually, and at 5.8% remains well above the 3.5% before Covid. Never in history have unemployed workers been so slow to take up job offers. The labour force participation rate is down 1.7% from its pre-Covid level.

Why so? First, despite vaccination, several workers worry about catching Covid if they restart working. Second, labour mismatches are widespread: unemployed actors and journalists are unwilling to take up jobs as waiters or pizza deliverers. Labour mismatches are not unusual, but Covid has made them exceptionally stark.

A third major reason is that large cash doles allow unemployed people to live fairly well without working. The Coronavirus Aid, Relief and Economic Security (CARES) Act in early 2020 provided unprecedented unemployment relief. Unemployment benefits were extended from 13 weeks to 39 weeks. In most states, unemployment benefits used to be around $400 per week, and CARES now provides an additional $600 per week (reduced recently to $300 a week).

Even if the dole is somewhat less than earlier income, it comes with total leisure. There is a time limit for unemployment benefits (though this may well be extended in many states), and this limits the disincentive to work. But, clearly, the availability of so much unconditional cash — a sort of UBI — has meant that millions happily stay unemployed rather than seek work. When Ronald Reagan was president, he denounced cash welfare payments as excessive, as encouraging people to stay unemployed and just do occasional informal jobs yielding income free of income-tax, social security or Medicare deductions. Single women with children received especially high benefits and Reagan denounced them as ‘welfare queens’.

Welfare was reformed in the mid-1990s by Bill Clinton at a time when both houses of Congress were Republican-controlled. Welfare payments to mothers with children were limited to those actually working or joining work-training programmes. This was called ‘workfare’, as opposed to traditional welfare. It helped create a big jump in women working or training. Part of the jump could be ascribed to a booming economy. But a 2001 study by fellow ET columnist Neeraj Kaushal and Robert Kaestner, ‘From Welfare to Work: Has Welfare Reform Worked?’ showed that at least one third of the jump could be attributed to the workfare reform. Lesson: large, unconditional cash doles discourage people from working. The same would be true of any UBI.

Give Us Our Pocket Money
Abhijit Banerjee, Rema Hanna, Gabriel Kreindler and Benjamin A Olken in their 2015 study, ‘Debunking the Stereotype of the Lazy Welfare Recipient’ (bit.ly/3iIwK0A), analysed government cash transfer programmes in Honduras, Morocco, Mexico, the Philippines, Indonesia and Nicaragua, and found that there was no significant drop in the workforce due to these programmes. Similar results came from a pilot project in Madhya Pradesh.

How do we reconcile this with the US experience? First, if transfers are small relative to income, the disincentive to work may be small. So, universal pocket money (UPM) will not discourage work, and will indeed be just one more of dozens of subsidies already handed out by governments. But a dole large enough to constitute a living wage would distort labour markets, and anyway be unaffordable fiscally.

Political parties in India compete fiercely in promising freebies and subsidies. The resultant multitude of subsidies means wasteful administrative expenditure, corruption and diversion to the non-deserving. If most subsidies could be abolished and replaced by a cash transfer, I would be among those strongly in favour. Alas, political competition means that cash transfers will typically be in addition to, not in place of, existing freebies. This is evident in enormous cash grants to farmers given first by state governments in Telangana and Odisha, and later by the central government.

UBI is impractical — and, in my view, immoral. But cash grants have become part of India’s subsidy politics and are here to stay. Some think they will lay the ground for an eventual UBI. More likely, they will join the estimated 950 subsidies already announced over the years that have done some good, but failed to make India prosperous.

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