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Silicon Valley's Basic-Income Experiment Is Worth Watching

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Silicon Valley is famous for disrupting industries, but disrupting social problems is a different matter. Closely held companies that exist in highly competitive markets can easily hurt the bottom line by spending resources on helping the needy -- which is why government, not business, usually provides aid to the poor. But against the odds, a Silicon Valley innovator is disrupting poverty.

YCombinator, probably the most famous tech-company accelerator, is starting a pilot program to test the idea of universal basic income. Basic income is simply a certain amount of money given to every adult. Although the idea has struggled politically so far -- Switzerland on Sunday voted down a basic income program -- it has gathered increasing interest from unlikely corners of the political spectrum.

QuickTake Universal Basic Income

In its experiement, YCombinator will send between $1,000 and $2,000 a month to 100 families in Oakland, California, for between six months and a year. From the company’s website:

We want to run a large, long-term study to answer a few key questions: how people’s happiness, well-being, and financial health are affected by basic income, as well as how people might spend their time. But before we do that, we’re going to start with a short-term pilot in Oakland...In our pilot, the income will be unconditional; we’re going to give it to participants for the duration of the study, no matter what. People will be able to volunteer, work, not work, move to another country—anything...If the pilot goes well, we plan to follow up with the main study.

This is great. We need more policy experiments like this. There are many competing theories about what will help poor people, so the only way to find out what really works is to try stuff. And unlike many policy experiments, this one might turn out to have fewer downsides than existing programs to help the poor.

This isn't the first experiment with unconditional cash transfers to poor people. Development economists often conduct these kinds of studies in very poor countries, where they’re much cheaper to run. They find that giving people money is effective in reducing poverty, and recipients don’t tend to spend the money on things like alcohol and tobacco. In rich countries, economists have to use natural experiments -- random changes in government policy that affect some groups but not others -- to estimate the effects of cash handouts. These have also yielded encouraging results -- giving people money improves their economic and psychological well-being.

However, YCombinator's experiment and others like it are inherently limited, because they're short-term. Economists have long realized that people’s behavior depends not only on the present, but on their expectations of the future. For example, Milton Friedman hypothesized that people’s consumption depends not just on their current income, but on their permanent income, or their expected lifetime earnings. Studies  later indicated that though this doesn’t describe all of people’s behavior, it does represent a sizeable chunk.

So to really know how cash transfers affect people’s consumption, we would need the program to be longer-term. This also applies to people’s work behavior. The main danger of basic income is that by raising poor people’s income, it would reduce their incentive to work. I don’t really worry about this danger, since I think the good that’s done by eliminating deprivation would outweigh the drop in economic output that would come from poor people being idle. But if you did worry about this, you would want a longer-term experiment than what YCombinator is able to perform.

The real question, of course, is whether basic income can be a long-term substitute for work itself. Despite much public pooh-poohing of the notion that technology will make most human labor redundant, many people are worried that this time could be different. The worry isn't that humans would be worthless, but that wages and wealth would diverge enormously between those who can work well with machines and those who can’t. In that world, basic income might be our last-ditch defense against extreme inequality.

Silicon Valley’s tech titans believe strongly in the power of their own creativity. They are also people who are paid to think long-term, and to seek blue-sky solutions. So it’s no surprise that the push for a basic income -- long a staple of science fiction -- should be welcomed by some in the tech industry.

The main objection to basic income, so far, is the cost. But as Vox’s Matt Yglesias notes, the program wouldn’t break the bank. Much of it would simply be a consolidation of various existing transfer programs into a single easy distribution system. The added cost might increase the size of government, but not to intolerable levels. By Yglesias’ calculation, a basic income of $10,000 per adult and $6,000 per child would raise government spending to about 55.5 percent of gross domestic product -- still less than France or Denmark. And that’s assuming that basic income doesn’t replace any other welfare programs.

The real danger of basic income, as I see it, ­is that work itself might address a basic human need for dignity. When many people feel that their labor has value, they have a sense of self-worth and a freedom that subsisting on government handouts doesn't provide. If basic income becomes the only thing standing between most human beings and the threat of dire poverty, then everyone will know that they exist and enjoy their lives only at the sufferance of a few rich taxpayers. If basic income makes people feel like the pets of the wealthy, they may turn to unhealthy behaviors.

Short-term experiments won’t be able to tell us much about that long-term psychological danger. When crafting our national policy, we should remember what studies like this can and can’t tell us.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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