Universal Basic Income Isn’t a Magic Bullet but It’s a Start

In fact, Americans use far fewer benefits than they are eligible for. Many programs have 2 percent take-up rates. Lots of people eligible for Medicare, Obamacare subsidies, disability, food stamps, welfare, home heating subsidies, and so on, and so on, all the way down to Palo Alto’s income-based parking-permit system, don’t take advantage of the benefits. If each American took advantage of every subsidy and social program to which he or she is entitled, the country would be bankrupt in about 10 minutes.

Why are such programs underused? Well, filling out the forms is a pain. And, more importantly, most people really do use social programs for a limited time. Chalk it up to a stubborn ethic of independence or some remaining stigma attached to taking assistance; it’s an observable phenomenon. For now. I fear that welfare states fall apart when the social stigma of taking the money fades.   

For now, the costs of participating in these social programs act to limit moral hazard. If it takes a few hours and trips down to an unpleasant bureaucratic office to get help, only people who really need it are likely to seek it. If there is some remaining social stigma to getting help, only people who really need it are likely to ask for it—and they’re more likely to get out as fast as possible.

If that sounds heartless, remember the objectives: money is limited. We want to use it to help people who really need it, and if we can do something to keep out the people who don’t really need it, we can be a lot more generous to those who do. If we impose some cost to getting help, we reveal who really needs it, and we can help those people a lot more.

So, my major suggestion for the project of UBI is: please, don’t automatically send the check to every American the minute they turn 21! Don’t send it to my kids! At least make people go down to a dull and dirty office, stand in line, fill out a long form, and repeat once a year.

We do have some experience with communities that live off government checks. We have more experience with places where lots of people don’t work. Welfare neighborhoods in the US in the 1970s through the mid-1990s. Europeans living on the dole. Molenbeek, Belgium. Saudi Arabia. By and large, places where most people live on government checks, or where large numbers of people don’t work, are not happy places. 

UBI also threatens progress on the agenda to integrate people to markets. Labor markets are more and more regulated and restricted. Well, if people can all get $10,000 from the government, why fight for lower minimum wages for entry-level workers, looser occupational restrictions, and so forth? Keeping our current, highly restricted labor markets, and our awful education system for low-income people, and then sending those people checks because they’re not qualified to do legal work is what supposedly caring progressives advocate. But what an awful and hopeless life they leave people with. 

A big trade remains attractive. Substantial cash grants and vouchers in place of many current programs—in place of middle-class subsidies, in place of corporate subsidies—offer substantially more help to people who need it, with far fewer distortions. But let’s not pretend a big trade will cure social ills. It very well could be an improvement; it would not be a panacea.

John H. Cochrane is distinguished senior fellow at Chicago Booth and a senior fellow of the Hoover Institution at Stanford University.

This essay originally appeared as a post on The Grumpy Economist blog, at johnhcochrane.blogspot.com.