Mayor Ras Baraka announced last week a plan to test the feasibility of a universal basic income (“UBI”) for residents of Newark, New Jersey. In making this announcement, Mayor Baraka noted that “one-third of the city still lives in poverty.” Poverty in Newark, as in many urban areas, is excessive. According to the U.S. Census Bureau, 28.3 percent of Newark’s residents live in poverty versus 10 percent for New Jersey overall.
The programs in place to help the poor – such as Section 8 public housing, Medicaid, and SNAP benefits (food stamps) – are often difficult to navigate and unduly expensive. Our welfare system is in dire need of reforms, but such reforms must come at the federal or state levels as mayors have limited ability to implement needed reforms. Mayor Baraka’s desire to independently explore alternatives is understandable but, is UBI really the best or even a workable solution?
Mayor Baraka provided no details about a possible UBI initiative. But as the adjective “universal” implies, such programs generally apply to everyone. This would include those who are unable to work, those who are able to work but choose not to, and those who are working but unable to find a good paying job. Unfortunately, as with most one size fits all solutions, UBI sounds good but fits poorly.
We all feel compassion and a desire to help those who are unable to work or care for themselves and their families. However, previous experiments with UBI have proven ineffective at lifting such individuals out of poverty. Ontario, Canada implemented a three-year UBI. It only covered individuals with low incomes and the benefits replaced unemployment insurance, the state pension and disability payments. The city canceled it after 15 months citing high costs.
Here in the U.S., even with significant reforms to existing welfare programs, it is difficult to see how any government entity could sustainably finance a UBI that would actually lift people out of poverty. Costs certainly would be a problem for cities such as Newark that have faced and still face serious financial challenges. A program that is all but preordained to fail won’t help anyone.
There is perhaps less compassion for those who are able but choose not to work. Very few people working to support themselves and their families want to additionally support people who could work but would rather not. Finland had a UBI program considered cutting edge at the time. The number of Finns who supported the program dropped from 70 percent to 35 percent when they were told it would increase their taxes. They terminated their UBI program, replacing it with a program that encourages work. Laziness is not a virtue people generally want to underwrite.
Well intended welfare programs can also create situations where not working pays better than taking an entry-level job. Intended as a safety net, such programs may become barriers to upward mobility by discouraging people who might otherwise chose to work from entering the labor force. The only way to get on the ladder of opportunity is to get a job. The independence, self-respect and the dignity that come with doing a job well and being rewarded for it are attributes any welfare program should encourage, not discourage. It’s difficult to see how a UBI could avoid this pitfall.
Even our current welfare system can punish people who work because, as a person’s income from work reaches the cutoff point for benefits, a slight increase in income may result in a severe decrease in those benefits. Policy wonks call this the welfare cliff. As a result, the system can compel benefit recipients to forgo wage increases or promotions, trading opportunity for safety and preventing them from realizing the independence and self-reliance that come with personal success and a job. This isn’t a criticism. Such individuals are simply making economically rational decisions. For individuals who are working and receiving benefits, a municipal level UBI could similarly lift such individuals’ incomes above the cutoff levels reducing benefits to which they would otherwise be entitled.
Fortunately, there is an existing and proven solution that lifts people out of poverty while allowing them to work and improve their lives. It’s known as the earned income tax credit (“EITC”). Eligible EITC recipients receive government assistance to supplement their wages. As their income from work rises, their government assistance declines until it is no longer needed. However, the decline is never so steep that it reduces their total income. The more you work, the more you make.
According to the nonpartisan Center on Budget and Policy Priorities, the federal EITC “lifted about 5.8 million people out of poverty” in 2016, “including about 3 million children” and “reduced the severity of poverty for another 18.7 million people, including 6.9 million children. A growing body of research ties the EITC to improvements in infant health, school performance, college enrollment, and potential earnings in adulthood, thus reducing poverty both in the near and long term.
States have enacted their own EITCs to supplement the federal benefits. While Mayor Baraka’s heart is in the right place, perhaps a better approach would be for Newark to become the first major city to enact its own EITC supplement as the means to both encourage work and reduce poverty.