Life’s no picnic
An unconditional basic income is pure nonsense

Von Norbert Berthold am 15. März 2014
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Norbert Berthold
Julius-Maximilians-Universität Würzburg

“The attempt to make heaven on earth invariably produces hell. “ (Karl Popper)

Is the European welfare state facing revolution? It seems traditional socio-political doctrines no longer apply; some are even dreaming once more of an unconditional basic income. In Germany it has certainly been difficult, until now, to move beyond theoretical discussions. Switzerland; however, is already one step ahead, as an upcoming referendum will decide this issue. In Germany, monthly amounts between 500 and 1,000 Euro per person are being proposed. And that’s just the beginning. In the future, it may be as much as 1,500 Euros. Swiss advocates are asking for even more, envisioning 2,500 Swiss Francs for adults and 625 for children. A family with two children would theoretically have a secured yearly income of 75,000 Swiss francs, without having to provide consideration in return. Are we finally seeing the end of the war on poverty?

Is the traditional welfare state failing?

The renaissance of the Stone Age idea of a negative income tax is not a coincidence. Globalization and recent technical advancements have done more than just increase prosperity worldwide, they have also ensured that income is unevenly distributed. Above all, income has increased for the wealthy while income for lower earners has more or less stayed the same. Meanwhile, relative poverty has continued to grow. And that’s hugely important in a democracy. Advocates of an unconditional basic income name the traditional welfare state as the reason this issue has not yet been solved. They also fault the welfare state for verifying the exact need of recipients, finding it to be “degrading,” unpleasant and generally restrictive of human freedom.

The bureaucracy of the social state attracts even further criticism. Namely, it is thought to be inefficient and less than accurate.  Indeed, the redistribution by the government is complicated and its goals are simply incompatible. Almost 40 authorities offer more than 150 social services. The approval process, as well as financial auditing, is time-consuming and extremely bureaucratic, often at the expense of those claiming benefits. Often non-harmonized income limits provide an individual with fewer benefits, if their earnings increase only slightly. Furthermore, the incentives for the labor supply are devastating. An unconditional, livelihood-securing basic income would theoretically solve all these problems with one fell swoop.

The establishment of a basic income would essentially turn the main principles of the welfare state upside down, namely the principle of subsidiarity and just distribution of benefits according to performance. Personal responsibility is of utmost importance; the welfare state steps in only when an individual is unable to support themselves and cannot be assisted by family. An unfair distribution of income is; however, acceptable due to the principle of just benefits. The welfare state only guarantees a minimum subsistence level, regardless of whether the individual’s financial difficulties are of his own doing or not. Instead, benefits are only granted in case of need; the help of the state is not for nothing. Those receiving benefits must also provide equal consideration. It is also expected that recipients that are fit for work accept any offered positions and by doing so, avoid burdening the community further.

The allocative risks and side-effects associated with the government’s guarantee of a minimum subsistence level are largely problematic. The German unemployment benefit (ALG II) is a prime example. It is granted to all who are able to work, regardless of whether they are actively searching for employment or not. Here the incentive to work is low. A benefit withdrawal rate between 60 and 85% further reduces the incentive. The conflict between allocation and distribution is unresolved; it is hard to escape the poverty trap. The American earned income tax credit, or EITC, is beyond this problem. Income is only increased if concrete steps to secure gainful employment are taken. Otherwise, an individual receives much less social assistance and is required to participate in programs designed to increase job prospects (workfare). However, there is also a five-year lifetime limit on the receipt of federal assistance.

Elements of an unconditional basic income

Proponents of an unconditional basic income believe it is possible to kill two birds with one stone. The issue of poverty would be finally solved and at the same time, the labor supply would also not be adversely affected. The conflict of interest between allocation and distribution, which has occupied generations of economists, would be solved for once and for all. What is; however, the true nature of this socio-political silver bullet? It certainly has a hard core. It consists of a specific amount that everyone is eligible to receive from the state. The proposals for Germany are between 500 and 1,500 Euros per person; in Switzerland higher sums are planned. The financial state transfers are designed to be paid out either as social dividend or as negative income tax. The distributive effects are more or less identical.

With this amount, most tax and contributory benefits of the social state will be settled. This applies not only to lawful unemployment, retirement, and long-term care benefits but also to social benefits such as housing assistance, child allowances, federal student aid, and parental and child-raising allowances. In most proposals, the unconditional basic income does not replace the benefits of health insurance and accident insurance. Some advocate a basic compulsory insurance premium and lump sums; others suggest a tax-financed health care system. Some provide for governmental benefits in case of special need, such as disabilities, special circumstances, or accommodation costs.  Thus, the unconditional basic income does not replace the traditional welfare state completely.

In addition to the hard core of state transfers, the proposals differ in how they intend to shape the fiscal, social and labor market policy environment. The biggest hurdle for an unconditional basic income is funding. Some of the additional expenditure is financed by a decrease in governmental social spending; the remainder is applied through higher taxes. Regarding income tax, a flat tax (single-stage income tax with a constant marginal tax rate) is usually advocated. A wide assessment base, brought about by reducing tax exemptions, will keep tax rates under control. The necessary tax rates depend on the level of the unconditional basic income. In Germany, it is between 50 and 80%. Higher consumer taxes are an alternative, which would require a significant increase in sales tax. Currently rates of up to 50% are being discussed.

It is unclear what the job market will look like in the new world of an unconditional basic income. Many proponents of an unconditional basic income believe that sooner or later, the work in commercial sectors will run out. It is necessary that we take the right steps now, in order to pave the way for other equally socially important areas such as families, the social sector and the arts. An unconditional basic income frees people from the pressure of gainful employment. While employment is of course necessary, high minimum wages guarantee an adequate income. Other advocates of an unconditional basic income see these proposals as unrealistic. They argue for a basic deregulation of the labor market. With this type of labor market policy, they are also attempting to improve future employment rates.

How does an unconditional basic income work?

Proponents of an unconditional basic income are not taking the economy seriously. For generations, it has been common knowledge that institutional arrangements offer incentives for human behavior. That also applies for institutional designs of governmental guaranteed income. All distributive attempts to guarantee a universal living wage have allocative risks and side-effects; there is no single institutional solution that is able to completely resolve all conflict of interests. In any case, unintended allocative consequences can only controlled if an individual recipient provides a return in exchange for governmental assistance. An unconditional basic income deliberately tears down this barrier. The game of “the wishing table” erodes the economic basics and an unconditional basic income is ultimately self-sabotaging.

Economic progress does not grow on trees. It requires at least three things: work, savings, and investments. An unconditional basic income drastically decreases incentives to work. History demonstrates that generosity on the part of unemployment insurance noticeably reduces the willingness to work. In Germany, many who are unemployed are only ready to work if potential earnings are higher than earnings at a previous job. That applies above all for low-skilled workers. The social minimum wage is effective. New empirical studies show, that in the USA a majority of persistent increases in the unemployment level during the “ big recession” were caused by unemployment benefits. Even the relatively low benefits of German unemployment benefits (ALG I and ALG II) directly reduce willingness to work. A much more abundant unconditional basic income would further reduce incentives to work, particularly in lower income brackets.

Such a development would be fatal for the development of prosperity. Already more than 15% of German businesses are complaining about a shortage of qualified workers, which will only worsen in the future.  Highly qualified workers with backgrounds in math, informatics, science and technology are in high demand. The German Institute for Economic Research in Cologne predicts that by the year 2030, there will be a gap of over 1.8 million graduates in these fields.  The introduction of an unconditional basic income would decrease incentives for education and the lack of qualified workers would only worsen. A key factor in the international competitiveness of German businesses would be lost. The “German business model” would skid out of control.

In the land of plenty an unconditional basic income also changes individual saving patterns. As the incentive to work shrinks, the ability to save also decreases. An unconditional basic income reduces the tendency to prepare for the future, as well, as the state relives individuals of this task. The “comfortable stable-feeding” (Wilhelm Röpke) produces dependency and contributes to a loss of freedom. This applies to all, especially lower income segments. If the unconditional basic income is so generously handed out, that it—as in Switzerland— is above the median income, the virus of laziness also attacks the middle class. This means individual savings patterns change across the board.  An unconditional basic income creates a society of consumers and the incentives to work, to save, and to invest wither away.

An unconditional basic income affects patterns of investment, as well. In particular, new businesses would have barely any incentives to invest in human capital. With a scarcity of well-paid positions, businesses lack the human capital basis for innovation. Taxes skyrocket and put a damper on growth and employment. Higher direct taxes decrease individual willingness to invest in human capital and are also responsible for the fact that investors in real capital are leaving the country in droves. The innovative momentum wanes, productive jobs are lost en masse. Higher consumption taxes are not a solution as they also burden economic growth. Worker incentive to move into the underground economy rises. It should also be mentioned that unwanted distributive side effects pave the way to higher consumer taxes.

The welfare state’s shortcomings: is an end in sight?

Advocates of an unconditional basic income would of course know all this, if they were not fools when it comes to economics. The argument that with such a step, the distributed welfare state would become more transparent is without a doubt correct. Further advantages are that costly controls would disappear and costs of social bureaucracy would decrease.  All this only applies; however, only if the unconditional basic income replaces the traditional welfare state. In actuality, the current proposals suggest something else. With an unconditional basic income a large part of health and care insurance also remains in place. What’s more, even more individually customized benefits in certain circumstances are being planned.

Large beneficial financial effects resulting from the “decommissioning” of large parts of the traditional welfare state are only illusions. This is particularly true for social security programs. The welfare state produces “social security” and “social justice”; however, in reality, the opposite is the case. From an economic perspective, it is foolish to finance expenses by eliminating the relatively efficient production of “social security.” It would make much more sense to produce both separately, as the loss allocation would be lower. Where it is not yet the case, the principal of equivalence should be strictly implemented in the social security system. On the other hand, the establishment of “social justice” should be financed through taxes. A cross-subsidization of an unconditional basic income with social security is simply inefficient.

However, this ridiculous maneuver will not succeed. The contributor’s claims in the social security system are protected by legal proprietary rights. This is true, at least, of the statutory pension insurance. In a quickly aging society, it is simply not possible to expropriate retirees in order to finance the project of an unconditional basic income.  Furthermore, the spiraling costs of an unconditional basic income would increase faster for two additional reasons. First, free movement in the EU would open Germany for leisure lovers from all over Europe. Second, the huge differences in income worldwide would increase welfare immigration. Horst Siebert wrote that an unconditional basic income would set an unprecedented mass migration from non- European countries in motion. No other countries would be so stupid as to establish an unconditional basic income.

The fundamental mistake made by proponents of an unconditional basic income is the fact that they base their calculations on a fixed real national product, which can be redistributed freely. This is a huge fallacy. In reality, all distribution policies have a more or less strong influence on the level of output. The conflict between allocation and distribution cannot be stopped. At best, it can be reduced by well-planned institutional arrangements. This is also true of a basic income, especially if it is unconditional, which creates strong disincentives to the important drivers of economic growth: labor supply, savings and investments. This applies to the performance and the financing side of the unconditional basic income, as well. The risk is high that an unconditional basic income will drastically shrink national output, thereby destroying itself and free society.

Conclusion

The idea of an unconditional basic income is a hare-brained notion. With an unconditional basic income, it is not possible to manage the many shortcomings of the current welfare state.  On the contrary, a socio-political revolution will end in an economic, political and personal disaster. The world will not become fairer, nor will the welfare state become more efficient. Prosperity will shrink dramatically as the state assumes more command. In society, a claim spiral will be set in motion. Claims for more and more government services without individual consideration will pop up like mushrooms out of the ground. The state teaches people to be dependent and any individual freedom is lost. In the end, the illusion of the distributive “wishing table” is really „the cudgel in the sack.” An unconditional basic income is definitely something to be avoided.

Hinweis

Dieser Beitrag ist die englische Version von „Des Läba isch koin Schlotzer. Ein bedingungsloses Grundeinkommen ist grober Unfug“, der am 12. Februar 2014 in „Wirtschaftliche Freiheit“ erschienen ist. Er wurde von Margaret Sloop übersetzt. Herzlichen Dank!

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