Basic income – an interesting idea, but its macroeconomic impact is still largely unknown

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The idea of an unconditional basic income has gained renewed momentum since the outbreak of the corona pandemic. It is quite possible that various forms of unconditional transfers will become a reality more often than was thought before the pandemic. However, truly unconditional and living wage basic incomes, as they are often discussed, are unlikely and probably also not goal-oriented. Above all, too little is known about the macroeconomic effects of an unconditional basic income and the risks involved.

During the corona pandemic, transfer payments with few and simple conditions were adopted in various countries in order to be able to distribute funds to people quickly and without bureaucracy. Such low-condition transfer payments are similar to an unconditional basic income, but are tied to certain conditions – such as the amount of income or the way it is used – and are usually insufficient in amount to cover living expenses.  The best-known example is the total of $3200 that low- and middle-income individuals in the United States have received in three installments since March 2020. 

It has been argued in various quarters that such low-condition transfer payments or even an unconditional basic income could also play a more important role in the future – for example, to cushion the consequences of technological change. Job profiles are changing, partly because the pandemic is currently acting as a kind of catalyst, accelerating technological and social change. Forms of home-based work, digital education, or telemedicine will remain in part even after the pandemic hopefully subsides permanently. In addition, there are repeated warnings that robots or artificial intelligence could take more and more work away from people and cause higher unemployment among some population groups, at least temporarily. 

Structural change as a challenge for people

Such structural change is a challenge for people and the welfare state. Existing knowledge and skills acquired in the past may be rapidly devalued. To be sure, as with past technological changes, many new jobs will probably be created, which should more than compensate for the loss of other jobs.  However, at least temporarily, unemployment may rise in some sectors and social tensions may arise in society. In addition, flexible forms of employment such as on-call work and project-based work are on the rise. For these forms of employment, however, social security is usually worse than for permanent employees.

It is therefore important that social systems are restructured not so much with a view to possible job losses due to automation, but above all with a view to structural change that alters job profiles. In a broader sense, a social system is part of a country’s infrastructure and should be continuously renewed. Low-condition transfers could be an instrument for this and mean not only economic security but also more freedom for people. For example, by enabling them to pursue further education more flexibly. The individualization of life circumstances could be another reason for more low-condition transfers. People are increasingly taking time off from work or part-time work in very different ways in order to do unpaid work in the form of childcare or caring for relatives.

Unconditional basic income unlikely in the near future

These different work and life models make it difficult to adapt conventional social benefits to individual needs. Forms of unconditional transfers have several advantages because they quickly and easily reach many of the people who need them. However, it is unlikely that countries will introduce comprehensive and living wage forms of basic income. A rapid and radical transformation of social security systems would be too complex and risky. Ambitious ideas for an unconditional basic income – such as the 2016 popular initiative in Switzerland – have repeatedly failed because they would have led to drastic changes in the welfare state and society that were difficult for people to assess. In particular, questions of financing and incentives to work were not clarified convincingly enough. Most importantly, it is also largely unknown what the macroeconomic effects of an unconditional basic income would be. It is conceivable that unintended side effects could occur. For example, aid payments in the U.S. have – quite intentionally – stimulated aggregate demand. At the same time, however, inflation has probably also risen significantly as a result of these aid payments, which is now prompting the U.S. Federal Reserve to become much more restrictive in its monetary policy than was recently expected.

It is quite possible, however, that more and more forms of low-condition transfers will emerge. For example, low-condition support for training could become more popular, since in a world with uncertain future and employment prospects, investment in training is associated with high uncertainty and existing skills could quickly lose their value. For example, it could be determined that each person can draw a certain amount that covers continuing education costs. It is also conceivable that people with low incomes could receive a certain amount without conditions, for which they would not have to account. Higher levels of support would still be conditional.

Be open to experimentation

At present, there is still too often a belief that changes in the welfare state do not even need to be discussed in detail. This is dangerous. It is possible that our working world will not change as much as we think, but we should be better prepared for possible developments in the future. We should discuss it more. However, because of the unclear macroeconomic effects, it is better to experiment with limited low-condition transfers at the local level.

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