Canadian Test Shows Income Guarantees Don't Work

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”
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A follow-up on this morning's post on guaranteed incomes: I'm reminded that Jim Manzi wrote two excellent pieces outlining the data we have on experiments with a guaranteed income. Here's his summary of a Canadian experiment that topped off the incomes of folks who worked so that they retained more of their benefits and income than they otherwise would have:

People respond to incentives. During the period of the reduced marginal tax rate, reported work earnings and reported income rose for the test group versus the control during the experimental period. Score one for the supply-siders (and common sense).

Marginal is not average. At the peak effect of the program (16 months after random assignment), about 30 percent of the treatment group were employed full-time versus 15 percent of the control group. Anecdotes about X heroic poor person, or your self-analysis of your likely response to a change in marginal rates, or your speculations about what you would do if you were an entrepreneur, doctor or dockworker don't mean much. The whole effect here is driven by 15 percent of the treatment population -- the vast majority did very little different than they would have done otherwise, yet the aggregate effects are material. The same thing applies to discussion higher up the income scale.

This costs taxpayers more money, not less. In round numbers, as compared with the control, the treatment increased total reported take-home earnings by about $200 CD (about $190) per month, about $100 CD of which was greater reported wage income, and about $100 CD of which was the supplemental cash transfer from the government (i.e. all the people in Canada who pay taxes) used to reduce the effective tax rate for the welfare recipients in the program.

The effect disappeared after the program ended. After the program period (for complicated reasons, about five years after program entry), the treatment group had about the same level of reported employment and income as the control group. On one hand, this is further evidence that marginal tax rates matter for people in this situation, but on the other, it also indicates that the program failed to achieve its stated goal of "lift off" into self-sufficiency -- that is, transition off the dole and into the workforce. This implies that applying this program as an operational policy would result in a perpetual increase in the welfare cost per family, in return for more work.

And here's Jim on the results of studies of a Negative Income Tax in the U.S. Takeaway: It reduced work hours, rather than increasing them.

Overall, I will be very interested to see what will happen if Switzerland passes a law to guarantee a substantial income to every Swiss citizen. But it seems reasonable to expect one of the results to be less work output.

And even if it works in Switzerland, it doesn't mean that we can import it. As a number of commenters noted in the post on Switzerland, a substantial basic income is simply and obviously incompatible with making it relatively easy for people from poor countries to become citizens. A path to citizenship for legal immigrants is one of the foundational values of American society; we are Americans because we are born here or we choose to come here, not because of some ethnic heritage. We couldn't get rid of it even if we wanted to; the idea that anyone born on American soil is an American is enshrined in our constitution.

And of course, if you had to choose between a basic income, and relatively easy immigration, the choice is obvious -- at least if you're interested in improving human welfare. The benefit that poor Guatemalans get by coming here is far greater than the benefits poor Americans would get from a basic income. It's an experiment we've been running pretty successfully for well over 200 years.

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