On the (big) conditions for a BIG

This week, EconTalk featured a podcast between Russ Roberts and Michael Munger (he of the famous Munger-proviso which I live by) discussed the Basic Income Guarantee (BIG). In the discussion, there is little I ended up disagreeing with (I would have probably said some things differently though). However, I was disappointed about a point (which I made here in the past) which economists often ignore when discussing a BIG: labor demand.

In all discussions of the BIG, the debates always revolve around the issue of labor supply assuming that it will induce some leftward shift of the supply curve. While this is true, it is irrelevant in my opinion because there is a more important effect: the rightward shift of the labor demand curve.

To make this argument, I must underline the conditions of a BIG for this to happen. The first thing to say is that a) the social welfare net must be inefficient relative to the alternative of simply giving money to people (shifting to a BIG must be Pareto-efficient); b) the shift mean that – for a fixed level of utility we wish to insure – the government needs to spend less and; c) the lower level of expenditures allows for a reduction in taxation.  With these three conditions, the labor demand curve could shift rightward. As I said when I initially made this point back in January 2016:

Yet, the case is relatively straightforward: current transfers are inefficient, basic income is more efficient at obtaining each unit of poverty reduction, basic income requires lower taxes, basic income means lower marginal tax rates, lower marginal tax rates mean more demand for investment and labor and thus more long-term growth and a counter-balance to any supply-side effect.

As I pointed out back then, the Canadian experiment (in Manitoba) with a minimum income led to substantial improvements in health outcomes which meant lower expenditures for healthcare. As a result, b) is satisfied and (by definition) so is a). If, during a shift to a BIG, condition c) is met, the entire discussion regarding the supply effects becomes a mere empirical issue.

I mean, equilibrium effects are best analyzed when we consider both demand and supply…

P.S. I am not necessarily a fan, in practice, of BIG. Theoretically, the case is sound. However, I can easily foresee policy drifts where politicians expand the BIG beyond a sound level for electoral reasons (or even tweak the details in order to add features that go against the spirit of the proposal). The debate between Kevin Vallier (arguing that this public choice reasoning is not relevant) and Phil Magness (who argues the reverse) on this issue is pretty favorable to Magness (in my opinion). UPDATE: Jason Clemens over at the Fraser Institute pointed to a study they made regarding the implementation of a BIG in Canada. The practical challenges the study points too build upon the Magness argument as applied in a Canadian perspective. 

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4 thoughts on “On the (big) conditions for a BIG

  1. The “BIG” is likely to have its major effect upon those who would otherwise very likely never rise very far economically. Employers of marginal, (minimum wage) workers would likely be the most effected. The employers of those who must meet higher educational and knowledge levels wouldn’t see much change. “McJob” employers probably would have labor forces made totally of “part timers” who might drift in and out of paid employment depending upon their needs for more money than the “BIG” provides. Assuming the “BIG” provides the same amount regardless of where you live, there would be a great exodus from the high cost of living parts of the country to the low cost of living parts of the country. I expect that the southern states would gain in population while the northern states, especially the high cost coastal regions will lose considerable amounts of their population.

      • There would likely be a strong incentive to automate as far as is technologically possible. Self driving cars replace taxi drivers. Restaurants switch to a system where you make your selections on a touch screen. A robotic cart brings you the food. Payment is by credit or debit card. No more waitresses. Whether or not a robot can prepare meals is a question. Clean up is another question. But a lot of jobs can be “automated”.

        Net result is far fewer people necessary to provide services. The number of which will decrease with time. Part time work will become the norm.

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