This is a guest post by Guy Standing, author of “Basic Income: And How We Can Make It Happen”, and “Battling Eight Giants: Basic Income Now”, arguing that a universal basic income is a better fit for supporting the economy during the coronavirus crisis than the current support packages on offer. (And yes, he would say that.)
As someone who has advocated basic income for over 30 years, and tested it in various communities, I am pleased by the recent conversion of longtime critics. Even the Pope has come out in favour of the concept, which is best described as a governmentally funded periodic payment delivered to all, unconditionally. The case for it is normally an ethical one. In normal times, the economy could theoretically survive without it. Not today, because no other policy can provide everybody with basic security and thus the personal resilience needed to help pull the economy out of what is a simultaneous demand and supply shock.
But do the support measures taken so far by the government make economic sense? As an economist, I ask of any policy: Does it reduce inequality? Is it ecologically sustainable? Does it distort labour markets or increase efficiency?
Take the government’s Coronavirus Job Retention Scheme (CJRS), whereby firms putting regular employees on furlough can apply for a grant covering 80 per cent of the average wage up to £2,500 a month, roughly the median wage. The TUC General Secretary and some in the Labour party support this.
But it is not clear policymakers have kept in mind four essential factors when designing the scheme: Are intended recipients aware of the programme? Do those who are aware of it know what to do to access it? How likely are they to apply? And how likely is it that those in need will complete the process and receive money? If you give optimistically a 0.7 probability on average for each question, expect under a quarter to receive help.
For any welfare scheme requiring people to apply for benefits, the figure could be lower. Indeed, the Department of Work and Pensions admits that nearly £16bn that should reach those eligible for means-tested benefits does not do so. And we should not be surprised that three weeks after the launch of the coronavirus business interruption loan scheme, only a tiny fraction of potentially eligible businesses had applied and only 1.4 per cent of those that had applied had received help. In the meantime, some have gone bust; others are at risk of doing so.
With the CJRS, the flaws are worse. Deliberately, it will pay employees not to do the work they were doing. This is the first time a government will pay people only on the condition that they do not work and do not try to work. I am not sure my economics training prepares me for justifying such a policy.
So, the CJRS will pay a firm to put workers on furlough rather than short-time work, and it will pay employees to do nothing rather than work part-time. Both sides have a financial incentive to declare employees are not working even if it makes more sense for them to keep the business ticking over.
Long-term damage for the labour market?
It seems likely the scheme will gridlock the labour market. Even a demand shock requires mobility of factors of production, from where there is no demand to where there is. But the CJRS encourages firms to keep workers on the payroll rather than make them redundant, while discouraging workers on furlough from changing jobs. It will also slow recovery, because demand will have to pick up a lot before it will pay to increase production and employment.
But the worst feature is its distributional design, in what I predict will turn out to be one of the most regressive labour market policies ever. Someone with a salary of £2,500 per month will receive £2,000 a month. Someone on £1,000 will receive £800. Someone in the precariat – on a zero-hours contract, for example, or reliant on tips to make up low wages – will receive very little.
One argument made in its defence is that it would help preserve pre-existing living standards. However, a one-fifth drop in income for somebody previously earning £2,500 is less threatening than for somebody earning £1,000, who is less likely to have savings and more likely to have unsecured debts. Exacerbating the unfairness, mortgage holders are being given a three-month payment holiday, while renters are not.
And for each case there will be at least three rounds of procedure – the firm applying, the government agency responding, the firm paying out. Predict headaches at each point.
There is a matching scheme for the self-employed, based on trading profits over the previous three years. However, this is hedged around with restrictions and the government has already said payments will not come through until June at the earliest. In the meantime, people facing hardship have been told to apply for universal credit, which has a built-in waiting time of five weeks and, in practice, often double that.
Already a disaster, the universal credit scheme will not be able to cope with the surge in demand for benefits unless it abandons the stringent conditions it now attaches to grant of benefits. So far the only concession has been to waive the requirement for claimants to attend jobcentres.
Meanwhile, the ‘standard allowance’ for a single adult receiving universal credit has been raised by a paltry £80 a month to £410. So the CJRS will pay a median wage earner nearly five times as much as an unemployed person receives. And perversely, the person given the much larger amount must not work, whereas the person receiving the pittance must do everything possible to obtain work.
The CJRS will also be vulnerable to fraud, as the head of HM Revenue & Customs has candidly admitted. It will not be possible to check the veracity of every claim or even most of them. Clever accountants will be overworked.
Why a basic income makes sense
The same resources could instead be directed to pay every legal resident a modest basic income of, say, £200 a week or more. This would stimulate aggregate demand and encourage spending on basic goods and services. It would be more comprehensive than the existing hotch-potch, which is vital, because if some groups are not helped, they will endanger not only themselves but the whole community.
A basic income would automatically be progressive, unlike the current medley of support packages. It could be made even more progressive if it were combined with a small increase in the higher rate of income tax, so that the proverbial Premier League footballer would not gain. But this route would be much more likely to reach the vulnerable. There would also be no poverty trap. You could work for more income and pay the standard rate of tax from that.
It would also be less expensive to administer. No application process, no form filling, no checking beyond identification, no checking on payrolls, no adjusting the amount for different groups at different times. This means exclusion errors would be minimal and the support could be injected swiftly.
Finally, it is not proposed that a basic income replace other benefits. But demand for basic goods and services must be revived. Unlike current measures, paying a basic income to everybody without requiring anybody to stop working would encourage people to do more care work, which is currently needed most.
By contrast, the government is penalising many who are doing good. Consider an employee in a profitable gambling firm, paid £2,500 a month. Does it make sense for the government to pay the employee £2,000, while the boss who earned over £300 million last year pays nothing, and while the three workers working eight-hour shifts caring for my 95-year-old mother-in-law will receive nothing? A basic income would compensate them equally and thus reduce inequality.
A basic income would have other beneficial feedback effects. It would help people service debts, lessening stress that is a strain on the NHS, and strengthen sorely needed social solidarity. The government should set up a Basic Income Commission so as to depoliticise a scheme that would strengthen resilience and which will be vital in the months ahead.