What is an appropriate level of Basic Income?

This is part 2 in an ongoing series.  See part 1 for a better overview of Basic Income, how we define it, and why we think it is important.

It is better to have a permanent income than to be fascinating.

-Oscar Wilde

Its pretty much pointless to talk about Basic Income without discussing the amount.  $1,000 per year and $50,000 per year are very different propositions, with likely very different effects.  In this blog post, we will attempt to answer the question: “What is an appropriate level of Basic Income today?”  

There is no “right” answer.  $7,000/year might be an appropriate “minimum Basic Income”, since people were considered quite wealthy in the “roaring 20s” and they made an average of $7,000/year adjusted for inflation.  However, we’d prefer a more rigorous approach.

We propose that the first target Basic Income in the US match the following criteria:

1. Be enough for basic necessities: food, water, sanitation, clothing, health care, & shelter in a reasonably inexpensive location in America.

2. Provide some capacity to improve one’s lot in life.

3. Be large enough to eliminate existing means-based social support programs, such as unemployment.

4. Be large enough to enable the elimination of regulatory disincentives to hire, such as minimum wages or minimum benefits.

5. Be small enough to provide incentives to work and the economy to flourish.

6. Increase over time to ensure automation improves the standard of living for the unemployable.

To find the right amount of Basic Income, we will first look at how the United States has traditionally defined poverty.  Then, we will complete a bottoms up calculation in order to determine a good target number for the appropriate level of Basic Income.

Assessing The US Poverty Line

The US definition of poverty was developed in the following way.  

1. In 1964, the US Department of Agriculture developed the “economy food plan” which was the least expensive nutritionally adequate food plans.

2. At that time, the average family spent 1/3 of their after-tax income on food.

3. The US set the “Absolute poverty line” at 3 times the “economy food plan”

4. The US adjusted this to the CPI over time.

This measure is interesting but fails to actually measure the costs of other basic necessities.  It simply assumes that all items add up to 2x the spending on food.  This assumption makes decreasing sense over time.  There are some specific problems that have emerged since the creation of this index in 1964.

1.  The average family now spends 34% less of their after-tax income on food, despite significant quality improvements.

(Source: USDA)

2. There have been several movements in food that affect the price of food more generally.  In fact, the organic and artisanal food movements would contribute more to US poverty than any other factor, using this model of calculating poverty.¹

3. The official poverty measure excludes non-cash benefits such as food stamps, housing assistance, refundable tax credits, or other government benefits.  These are clearly meant to decrease the rate of poverty, yet by definition it is impossible to for non-cash benefits to do so.  This is a definitional problem.  Non-cash benefits represent a significant and growing component of assistance, particularly for households that are not elderly or disabled, since 1970.²

4.  The poverty measurement assumes traditional nuclear family arrangements with an average of 2.5 related parties living in a home.  The 2014 US Poverty line is $11,670/year for an individual, and ~$4,060 for each additional person.³  It is strange to assume that some humans can live off of $11,670 and others can live off of $4,060.  

The net result of these problems means that the official US Poverty rate is not really sensible measurement of poverty in the US.

 

So How Should We Measure the Minimum Basic Income?

We propose the easiest way to assess the amount of Basic Income needed to satisfy the criteria we set out above is to do a grounds up analysis of what we think the minimum standard that everyone should be given if you are unemployable.  We think most people today would agree there are some people who are unemployable, due to mental or physical ability.  This population of unemployable people will increase as robots become increasingly sophisticated at both physical and mental tasks.  In other words, “What should people get if they can’t compete against a robot?”

Here is how we have measured a minimum Basic Income:

For reference, the US Poverty Line is $11,670 and the US currently spends an average of $20,610/year per individual below the poverty line to combat poverty.¹⁰

The above outline of Basic Income has several distinct opinions related to policy matters that may be controversial:

1. We only budget for a reasonable, low cost method of accomplishing a goal.  If there is a technologically free way to do something, we provide no budget to do that task another way.  The biggest example of that is transportation, with only $50 a month budgeted.  We feel there is very little necessary transportation today that is not related to work or entertainment, so is therefore excluded.  Any work related travel should be covered by work pay.

2. We assume living in a high cost area is a form of entertainment, and there is no preference given to someone who prefers to live in Santa Monica, with an average home value of $1,135,000¹¹ vs Wyoming, with an average home value of $191,000¹².

3. These numbers are absolute measures of poverty, not relative ones.

Is this too little?

It is never good to be poor, and we can strive to do much more than the above.  However, we think if we are looking to practically implement Basic Income, we need to make this as affordable and practical as possible.  While we are continuing to automate a wide range of job functions, we still need a large and motivated labor force.

If you think that this is not enough to have a high quality of life, we disagree.  You can have a great life on a low budget, and much of the world has proven that.  For reference, the average US per capita social security benefit is $12,666, and this Basic Income figure is actually higher than the national poverty rate.¹³  So implementing Basic Income at this amount would immediately eliminate poverty in the US.

Of course, living off $12,000 is not like living on a luxury cruise ship. We expect the amount of Basic Income would be increased over time, as we improve productivity and Per Capita GDP.

Is this too much?

For those that think this is too much, it is true that it is not as low as it could be.  We would challenge you to look closely at the assumptions and provide feedback about where we can cut.  In practice, Basic Income is designed to completely replace much of the social spending currently in place.  The bottom line is that this system would save costs over the current social spending network.  We are spending roughly double the poverty line on social spending programs.  This enables us to stop doing that.

Workers would be more incentivized to work and employers more incentivized to hire with Basic Income.  First, it eliminates the arguments for social regulations such as minimum wages or minimum benefits.  With a low or non-existent minimum wages/benefits, companies would have more flexibility to hire workers and labor participation would likely go up.  

Second, the means-based system of benefits like unemployment and food stamps means that as soon as you make more money you lose these benefits.  This is why the there is a significant population of the poor in the US with effective marginal tax rates of over 80%.¹⁴  Because means-based benefits would replaced with Basic Income, workers would be able to work for lower wages and still take home more, due to a much lower marginal tax rate.

Evidence suggests that people would not exit the workforce en masse at this level of Basic Income.  Individuals can already get many benefits from existing welfare programs while doing nothing, but most try to work.  Also, despite the fact that most working Americans could keep expenses low and retire young on a low income, few actually do.  In practice, most Americans work hard to build better lives for themselves.  Alternatively, Americans today could cut their standards of living greatly and reduce the number of hours they work…but they don’t.

The appropriate amount.

All of the information we laid out above gives us confidence that $12,000/year is an appropriate amount of Basic Income. Remember, we are aiming for “what we think the minimum standard that everyone should be given if you are unemployable”. We approached the issue from the bottom up and arrived at $12,000. This number has shown to not be too much or too little.  This level of Basic Income has shown to provoke the correct incentives. It is also a moving target. We know that the landscape will change through technology and innovation. As society progresses and grows, the amount of Basic Income needs to be reevaluated. 

Next Post: Can we really afford basic income?

Now that we have a baseline for talking about the right amount of Basic Income, we can start to look at the affordability in offering it.  In our next post, we will talk about how we can, in fact, easily afford Basic Income today.

1: http://www.freerepublic.com/focus/f-news/1130947/posts http://povertylaw.org/communication/webinars/food-insecurity

2: http://www.cbpp.org/cms/?fa=view&id=3629

3: http://aspe.hhs.gov/poverty/14poverty.cfm

4: “Quintiles of income before taxes”, Bureau Labor Statistics, http://www.bls.gov/cex/#tables

5: “Quintiles of income before taxes”, Bureau Labor Statistics, http://www.bls.gov/cex/#tables

6: Based off my average spending a month.  The 20% is technically $37 according to “Quintiles of income before taxes”, Bureau Labor Statistics, http://www.bls.gov/cex/#tables.

7: The spread of data was very high here.  For example, the mean Health Care spending (including insurance, drugs, & services) was $119 according to “Quintiles of income before taxes”, Bureau Labor Statistics, http://www.bls.gov/cex/#tables.  Actual healthcare spending across the US was $708, according to https://en.wikipedia.org/wiki/List_of_countries_by_total_health_expenditure_(PPP)_per_capita and $468 according to http://www.statisticbrain.com/health-insurance-cost-statistics/.  For our purposes, we will make the assumption that $119 is accurate in what consumers perceive to pay, but that the other numbers are more accurate for actual expenditures.  Assuming that the majority of much spending is adopted by the wealthier 80% of the population, we can assume a normal “livable” expenditure target to be $350, which is 50-75% of the “total spend” numbers and 294% of the perceived consumer spend

8: Assuming this is near zero.  This covers a bus pass in many regions.

9: Initially I had $50 as a somewhat random target.  For ease of understanding, I changed it to $71 because it has the benefit of making the number round to $1,000 per month.

10: http://www.cato.org/sites/cato.org/files/pubs/pdf/PA694.pdf

11: http://www.zillow.com/santamonica-ca/home-values/

12:http://www.zillow.com/cheyenne-wy/home-values/

13: http://www.ssa.gov/pressoffice/factsheets/colafacts2014.pdf

14: https://www.cbo.gov/sites/default/files/cbofiles/attachments/11-15-2012-MarginalTaxRates.pdf

 

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    An appropriate level in the United States would be $12,000 for those over the age of 18 and $4,000 for those under the...

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    This is an interesting idea that I really like. It is efficient, plausible, and fair.

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    Thoughtful exploration of what a minimum income would look like in the US. They conclude that $12k a year is about...

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