COVID-19 relief blows holes in UBI myths
Expanded unemployment benefits minimize coronavirus damage, don’t deter return to work — especially in Illinois
The coronavirus pandemic is giving economists a chance to study the possible workings of Universal Basic Income. (Shutterstock)
By Ted Cox
Talk about your silver linings: the COVID-19 pandemic might be giving economists an opportunity to genuinely study the possible effects of a proposed Universal Basic Income in a real-world setting.
A Bloomberg News opinion piece this week drew parallels between Universal Basic Income — in which people are simply given a certain amount of cash — and the expanded federal unemployment benefits under a COVID-19 relief package granting idled workers an extra $600 a week.
One of the persistent conservative criticisms of UBI — from the moment University of Chicago economist Milton Friedman first proposed it in the ‘70s as a “negative income tax” — is that it would discourage people from working. U. of C. economist Allen Sanderson has more recently said, “It has to be a support,” above a base employment income. “It can’t be the end-all and be-all.”
Expanded unemployment benefits under the CARES Act COVID-19 relief package, however, have approached just that. As Noah Smith pointed out in Bloomberg News, the expanded benefits granted an idled breadwinner in a family of four $4,100 a month, in the same ballpark as the country’s median monthly family income of $4,920.
Smith cited a recent working paper out of — you guessed it — the U. of C.’s Becker Friedman Institute that found that poverty actually decreased as the economy suffered the pandemic’s impact.
“Our initial evidence indicates that at the start of the pandemic government policy effectively countered its effects on incomes, leading poverty to fall and low percentiles of income to rise across a range of demographic groups and geographies,” the paper stated. “Our evidence suggests that income poverty fell shortly after the start of the COVID-19 pandemic in the United States. In particular, the poverty rate, calculated each month by comparing family incomes for the past 12 months to the official poverty thresholds, fell by 2.3 percentage points from 10.9 percent in the months leading up to the pandemic (January and February) to 8.6 percent in the two most recent months (April and May). This decline in poverty occurred despite that fact that employment rates fell by 14 percent in April — the largest one-month decline on record. The declines in poverty are evident for most demographic groups, although we find some evidence that poverty declines most noticeably for those who report their race as neither White nor Black.”
It’s a sad state of affairs when going on unemployment lifts a working family out of poverty, and suggests how important it is to raise the minimum wage, which only just went up to $10 an hour in Illinois on the way to reaching $15 in 2025.
In any case, that served to keep the economy going as well as it did, and kept workers employed. Smith cited other research finding that “states where unemployment benefits were higher relative to lost wages actually saw less of a drop in employment. In other words, more generous payouts haven’t been associated with more job loss.”
Economist Jesse Rothstein tweeted: “Shelter-in-place orders contributed to the job loss, but their effect was minor relative to changes in consumer demand for in-person services,” meaning that it was lowered demand in the pandemic — and the limited ability to pay for goods and services — that drove most unemployment. He added: “Higher (unemployment-insurance) replacement rates are associated with milder declines and recoveries. We find no evidence for disincentive effects to date. There’s some sign that states receiving more (Paycheck Protection Program) loans fared better.”
In short, giving people money to spend did much to minimize the economic impact from the shutdown meant to curtail the spread of COVID-19.
Smith concluded: “Reducing poverty without deterring work sounds like a great deal. So basic-income advocates are looking at this success and asking: if giving people money reduces poverty during a pandemic, why not do it in normal times, too?”
Now, conservatives have claimed that the extra $600 a week in unemployment is discouraging people from returning to work. In fact, U.S. Senate Republicans have argued against extending the $600 a week when it expires at the end of this month, and are thus far adamant about including it in any subsequent coronavirus relief package, such as the HEROES Act, which has passed the House, but is gathering dust on the desk of Senate Majority Leader Mitch McConnell.
What’s clear is that that extra money enabled more families to pay their bills, rents, and mortgages in the midst of the economic collapse stemming from the pandemic. That situation is already dire for many people, but it would now be much worse without it — and may yet be if Congress fails to extend it and the recovery lags.
As Rothstein put it, this time in an article for CNBC: “We needed to support families, and dramatically scale up the amount of benefits. It would have been much, much worse without something like this.”
Which brings us back to Illinois. That CNBC article reported: “The average worker in more than half of states stands to collect more from unemployment than from their prior job, according to an analysis conducted by Ernie Tedeschi, an economist at Evercore ISI.”
Is that slowing the return to work as states reopen their economies? Thus far, the answer would appear to be no. After the U.S. Bureau of Labor Statistics reported the loss of 20 million jobs in April, which inflated the national unemployment rate to 14.7 percent, it touted 2.5 million jobs regained in May, lowering the unemployment rate to 13.3 percent, and another 4.8 million jobs added in June, lowering the rate to 11.1 percent.
What’s more, CNBC reported that Illinois was among the bottom 10 states across the nation in the percentage of employees making more money on unemployment than from working a job, at about a third. (In Arizona and Kansas, it was more than half.) Understand, that’s including the extra $600 a week, which brought the average Illinois idled worker’s benefits from about a third of what he or she was making on the job to about 90 percent — still leaving the state one of only 10 that failed to match full employment income in augmented benefits. (Only New York and New Hampshire offered lower percentages.)
And keep in mind, Illinois still requires workers on unemployment not to turn down offers to work, although that requirement has been undercut somewhat by federal relief rules allowing a little more leeway, for the moment, in the midst of the pandemic.
As Smith concluded in his opinion piece: “Although the case for basic income is not yet a slam dunk, pandemic relief benefits add circumstantial evidence in favor. The idea deserves more serious attention than it has received so far.”