Universal Basic Income in California
In the 2020 presidential election, candidate Andrew Yang ran on a campaign of Universal Basic Income (UBI) in which he proposed a “Freedom Dividend” where all U.S. adults would receive $1000 a month. Many critics said that this plan was not feasible and would be too expensive. Once the pandemic hit in March of 2020, business closed suddenly along with the main source of income for hundreds of thousands of Americans, and the idea of a guaranteed income and its benefits became more tangible. This concept of a guaranteed income, sometimes called universal basic income or basic income (although a slight bit different), is a form of an unconditional cash transfer where recipients receive direct cash payments with no conditions or strings. It has gained interest in the nonprofit and development world as a poverty alleviation tool through organizations like GiveDirectly and was studied in numerous trials internationally in the 1970s. It has also been considered to address the changes in employment opportunities driven by automation, AI, and machine learning.
Most recently in the U.S., Former Mayor Michael Tubbs, the youngest mayor of a city with over 100,000 residents, piloted a universal basic income program called SEED in his mayoral and hometown of Stockton, CA. 125 residents received $500 for 24 months funded by private donations. This was extended beyond its original mandate because of the pandemic. Tubbs has since built a coalition of mayors who support “a guaranteed income”, and pilot programs similar to the one in Stockton are starting to rise up in many cities across the U.S. In 2021, Tubbs became the special advisor for economic mobility and opportunity for California Governor Gavin Newsom, whose state has a proposed guarantee income bill on the table – AB2712 or CalUBI would provide $1000 monthly to all residents that meet a few requirements[i]. Tubbs’ pilot program in Stockton has yielded positive results, but it will be important to analyze how this statewide program will operate as well as its benefits and challenges.
UBI or Guaranteed Income
As aforementioned, universal basic income (UBI) is an unconditional cash transfer, meaning recipients of these transfers are able to use the money for whichever purchases they decide. This is different than conditional cash transfers or restricted transfers that require certain tasks to be completed before money can be provided or provide the money in a way such that it can only be used for a specific, pre-determined use. UBI is a critical safety net because the world is plagued with uncertainty, and UBI provides a flexible support that can help navigate these uncertainties with more of a cushion and reduced volatility. It encourages consumption smoothing by providing a consistent and guaranteed stream of income. Currently, even minimum wage payments do not cover the cost of living in any state based on a report from the Massachusetts Institute of Technology[ii]. Additionally, according to Charles Schwab, about 59% of Americans live paycheck to paycheck[iii], and they may not have extensive savings because of this. The lack of savings or sufficient income stretches many Americans thin on finances, increases stress, and reduces resilience. One tragedy, parking ticket, or medical expense can wipe out any available savings and leave people at risk of homelessness or eviction. UBI can be a more suitable policy than expanding certain public social safety nets because the flexibility allows recipients to respond to what is most pressing or even plan for the long-term, like saving for a rainy day. Vouchers and grants often have specific requirements for how and where the money can be spent, which may not appropriately accommodate an individual/family’s preference for different services. A “guaranteed income” allows for all different types of preferences and indifference curves to be accommodated and increases choice.
Reach of UBI
Guaranteed income programs are growing across the U.S. The members of the 40-city strong group “Mayors for a Guaranteed Income” have been paving the way for guaranteed income in the U.S. recently. This organization, started by Michael Tubbs in 2020, has seen at least nine pilot programs launched, likely fueled by the challenges we have seen in employment and economic stability with the pandemic. Members can apply for up to $500,000 in funding for their city to implement these programs due to a $15 million grant from Jack Dorsey, former CEO of Twitter. Most of these programs are also supported or solely supported by private donations, however, recently some cities like Chicago are planning to leverage funds from the American Rescue Plan. Ultimately, California cities have taken the lead, which makes California’s guaranteed income proposal no surprise. In addition to Stockton, Oakland, Compton, Los Angeles, Marin County, and most recently Santa Clara County, have all proposed and/or begun to implement some form of a basic or guaranteed income program[iv]. Each program varies slightly in size of grant and selection criteria, but it is largely geared towards those with incomes below the poverty line; some focus on caretakers specifically, while in others, participants are selected at random.
Implementation and Evaluation
An extra $1000 for residents in need can be life-changing. These funds can go towards rent, reducing the need to stretch expenses elsewhere, and allow residents to move into higher-income neighborhoods, increasing access to more services and resources. Additionally, residents can invest more in themselves through better nutrition, professional development, and health. However, if the program will be funded through cuts in existing benefits, lower-income people stand to lose more in the value of benefits than they will gain in the cash they receive.
Challenges in implementation would be financial sustainability in the long-term and determining the proper set of recipients. Determining what percent of the median income is the cutoff, the constitutionality of residency requirements[v] and other selection criteria will face strong criticism. Dealing with duplicities across different social programs, especially as the expansion of a guaranteed income may lead to cuts in other benefits, can cause political battles for funds, and overall general administration will be a significant challenge given the size of the program. Additionally, as administrations change, there is risk to the funding structure, particularly if corporations decide to push back on an increased corporate tax. Another final challenge would be finding the most effective ways to provide cash resources to residents who are unbanked, although other existing social service programs may have already discovered a solution to this.
The government should ensure there are some clear metrics for success that are tied to economic growth and advancement. This can be related to reducing the rate of homelessness, rate of evictions, health outcomes, savings increase, income volatility, and debt paydown. An evaluation of Stockton’s SEED program has shown a positive impact from the program on some of the metrics above. In the baseline study, 25% of recipients were able to pay for an unexpected $400 emergency expense with cash or a cash equivalent, and a year later, 52% were able to pay this expense with a cash or cash equivalent[vi]. The risk of suffering from a mild mental health disorder, such as a panic attack or anxiety, also reduced significantly over the year[vii].
The looming question around a guaranteed income is often how will this program be funded. Most existing programs are funded through private donations from foundations or high net worth individuals like Jack Dorsey, who has been a fierce advocate with his $15M funding of the Mayors for a Guaranteed Income. However, some cities have found innovative ways to finance this type of program. Chicago is planning to use funds from the American Rescue Plan, and Los Angeles has shifted $6 million away from the Los Angeles Police Department to help fund its BIG LEAP – guaranteed income plan. However, these programs are also finite – often lasting a few years or only targeting a small subset of participants. For more sustained programming, longer-term sustainable financing is imperative. California’s bill is still determining how to fund this project and is considering different types of taxes. These considerations include an expanded VAT tax, increasing corporate tax, or other service tax. Ryan Stager from the Jurist notes that while no official estimates currently exist, the program could cost as much as $200-$300 billion annually,[viii] and this is compared against California’s entire projected budget of $137 billion which creates a challenging situation in terms of funding.
Externalities and Wealth Redistribution
One proposal is an increase of 10% VAT that would place California at the upper end of taxes. It is important that these taxes target large-scale companies in redistributing resources and not the many mom and pop shops that are prevalent throughout California. This may “repel” consumers and businesses and ultimately decrease revenue that could fund this guaranteed income program. Additionally, VAT taxes are regressive, meaning that lower-income people will be more disproportionately affected by that. However, the bill notes that funding this bill can also be supported by reducing current benefits or excluding individuals who currently receive benefits from certain welfare programs like Medi-Cal, CALFresh, or unemployment insurance. If the program is funded by redirecting existing social services, it is unclear if the program would adequately redistribute resources or merely shuffle them. Depending on the requirements and how that aligns with the current profile of welfare programs, this program could remove targeted social service programs and redistribute this money to a wider range of people who may not have qualified for the original welfare programs and reduce the amount of overall welfare that those most in need will receive. Lower middle-income folks may benefit in that they are just beyond the threshold of welfare programs but are still stretching their finances each month. Higher-income people are not likely to be included as recipients, however, they may pay more through other service tax or as a part of corporate tax if they own corporations. They could also decide to relocate from California, reducing the tax base and tax revenue. Business may raise their prices knowing residents are more likely to receive the funds, negating the impact of the program.
Most of these programs have been implemented at a city or county level through mayors and county representatives. At this smaller level, a guaranteed income program is likely dealing with one administrative jurisdiction and a smaller set of potential recipients. At a state-level, administrative costs increase, and city and county level officials may battle over receiving funds. Compared to the private or non-profit sector, governments, however, have a greater ability to triage and manage large, unbiased sets of people with an extensive amount of data on them as well as distribute money in a cost-effective format. Additionally, as administrations change, this program may be at risk, in terms of who will be receiving the funds and how much.
A guaranteed income program can provide a flexible leg up for people and smooth consumption over time. By reducing volatility, people can plan better for the future, and with more disposable income, they can increase their budget and pursue a bundle of goods that supports greater utility in their lives. Funding this plan in the long-term will be challenging and may redistribute wealth away from the most needy, but with careful planning, this policy could help increase disposable income and provide a safety net to protect from the uncertainty of life and support the pivots that life will bring.
[i] AB-2712 California Universal Basic Income (CalUBI) Program. California Legislative Information. May 2020. https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB2712
[iii] Modern Health Survey 2019. Charles Schwab. May 2019. https://content.schwab.com/web/retail/public/about-schwab/Charles-Schwab-2019-Modern-Wealth-Survey-findings-0519-9JBP.pdf
[iv] “Every U.S. city testing free money programs.” Mashable. May 2021. https://mashable.com/article/cities-with-universal-basic-income-guaranteed-income-programs/
[v] Stagar, Ryan. “Can Universal Basic Income Fix California’s Poverty Crisis?” The Jurist. October 2020. https://www.jurist.org/commentary/2020/11/ryan-stygar-california-income/
[viii] Stagar, Ryan. “Can Universal Basic Income Fix California’s Poverty Crisis?” The Jurist. October 2020. https://www.jurist.org/commentary/2020/11/ryan-stygar-california-income/