This paper was written for the course "Artificial Intelligence & the Future of Work."
Technological Development, Inequality, and Universal Basic Income: A Comparative Analysis of Two UBI Programs in Alaska and California
What do Richard Nixon, Elon Musk, and Martin Luther King, Jr. have in common? No, this is not the setup of a bad joke. The truth is that all three, representing very different points on the ideological spectrum, supported (or support) a universal basic income, or UBI. While nearly all other economic policy arenas in the U.S. are mired in ideological warfare and stake-claiming, UBI has, surprisingly, drawn support from up, down, and across the aisle. It has been heralded as the antidote to America’s economic woes from conservatives, libertarians, liberals, and progressives alike. Why has UBI garnered such praise from people with such different views on economics, and why haven’t its detractors been enthralled by its supposed promises?
This paper will first lay out the basic foundations of UBI, including a background on the economic conditions that necessitate policies such as UBI. This includes a discussion on the effects of automation, income and wealth inequality, and ethical and moral conversations surrounding UBI. Then, this paper will examine two specific UBI plans that have been implemented—the Permanent Fund Dividend in Alaska and Y Combinator’s UBI experiment in Oakland, California. These two specific proposals were chosen to highlight different approaches to UBI, both in the U.S.—the former being a state-level public initiative organized by the Alaska state government, the latter being a more localized, corporate initiative coordinated by the startup seed accelerator Y Combinator. This paper will evaluate what the outcomes of these policies have been thus far, looking at both intended and unintended consequences. The main takeaway from this analysis is that a wide variety of UBI experiments and pilot programs must be tested, in various contexts around the country, in order to determine if UBI may be a successful policy for addressing the economic issues of our time.
I. What is UBI?
UBI is not one specific policy proposal, but rather an umbrella term that refers to a range of plans with similar characteristics. At its most basic level, UBI is “a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement” (BIEN). According to the Basic Income Earth Network, UBI has five characteristics: they are periodic, meaning they are given at specific, regular intervals; they involve cash payments, a medium that grants the individual agency over how to spend it (in contrast to vouchers or services paid in kind); they are given on an individual basis; they are universal, given to everyone in a society without means-testing; and they are unconditional, meaning there is no requirement that the individual must be working or seeking work (BIEN). In all other measures, UBI varies greatly depending on specific plan. Thus, proposals differ in terms of how much money is allotted to each person, where the money comes from, whether it is intended to cover all necessary living expenses, and whether the implementation of UBI is accompanied by reductions in other social security benefits or whether it is merely complementary.
As touched on, UBI has seen support and derision from all across the political spectrum. Part of this is a function of the differences in individual plans, while part of it is a function of differences in understandings of what the side effects of UBI will be. Generally speaking, left-leaning and progressive UBI supporters favor UBI as complementary to already existing means-tested social safety net benefits, and can also favor larger payouts, derived from higher taxes. On the other hand, conservative and libertarian supporters tend to favor UBI as a total or near-total replacement of welfare benefits, removing federal bureaucracy and creating a general baseline. Left-leaning critics of UBI claim that the right-leaning model of UBI will perpetuate economic inequality by allowing the wealthy to continue accumulating wealth while the poor are stuck at the bottom. They also criticize both the conservative and liberal models for being overly expensive, since they lack means-testing and would be giving money to wealthy people whom they don’t think need the extra money. Right-leaning critics of UBI also complain about the plan being too expensive, and requiring the redistribution of wealth. They also claim that providing a basic income will dis-incentivize work, decreasing economic productivity and eventually ruining the economy.
II. What necessitates a policy like UBI?
In recent years, UBI has become a serious policy consideration among wonkier political thinkers, though it has not quite yet achieved mainstream popularity. There are a number of reasons for the growth in attention on UBI, including technological disruption, drastic changes to the U.S. economy, the changing nature of labor and productivity, and disillusionment with dominant models of economic organization. It’s certainly not the first time or place that has seen a spike in interest—in fact, forty years ago Milton Friedman, Richard Nixon, and George McGovern all publicly supported UBI plans (MacCarthy). Today, the epicenter of the UBI push is, interestingly enough, Silicon Valley. While this hi-tech oasis may be the driver of the economy now, tech wizards also have front row seats to what is sure to bring mass economic disruption in the years to come: automation. Technological development has already put millions of people out of jobs, from manufacturing to the service industry. Since 2000, manufacturing jobs have decreased by 5 million, and it’s estimated that between 2000 and 2010, 87% of manufacturing job loss was due to technological development, while only the remaining 13% stemmed from trade (Gillespie). So far, automation has been associated with middle-class and lower-middle-class occupations, particularly those that are routine. But this is only the tip of the iceberg. As technology improves, programmers and designers will be able to automate an increasing number of tasks, even those associated with white-collar and middle-to-upper class professions.
Silicon Valley, home to many of these technological changes, understands that, while it is coal workers and truck drivers on the chopping block now, next it could be them. Increasingly, the tasks carried out by computer programmers and other tech workers will be automatable. The same can be said of lawyers, doctors, and a whole host of other professions. The benefits in terms of economic productivity are obvious—humans are no match for machines that can work more effectively and at a lower cost than humans. Automation and technological development have always powered innovation and progress, and society has always re-adapted to changes in employment opportunities. But what happens when technology advances so rapidly, and diffuses so thoroughly throughout the economy, that the entire economic foundation is disrupted? Frey and Osborn (2013) claim that 47% of current U.S. jobs are at risk for automation. This would bring economic uncertainty to nearly half the working population, a development unprecedented in modern times. What happens to the families of these people who must drop out of the workforce? What would be the social effects of such massive labor displacement? How would our current welfare system provide the resources necessary to keep these people out of poverty?
If such predictions come true, and increased technological development does bring massive unemployment, we will need to re-think our model of economic organization in order to maintain a functional society. With the way capital and labor function in our mixed economy, such a scenario could lead to an accumulation of wealth in capital—as firms rack up the ever-increasing profits of automation—and the loss of any competitive advantage labor may have. Essentially, capital would triumph over labor, the result being a digital feudal society in which excessively wealthy elites own all means and ends of production while everyone else lives in poverty. Of course, this is a hypothetical, but it reveals the need to address an approaching trend before it has a chance of becoming reality.
Even without technological mass unemployment, the U.S. still has high levels of income and wealth inequality that have fostered a political backlash. According to Piketty et. al (2016), the top 1% income bracket earn an average of $1.3 million a year, which is more than three times the amount the 1% made in the 1980s. Meanwhile, the bottom 50% of earners have seen essentially no increase to their average pre-tax earnings. In fact, the higher up the income bracket you go, the more income has increased—121% for those in the top 10%, 205% for those in the top 1%, and 636% for the top .001%.
While the bottom 50% of incomes stagnated, average adult national income grew by 61%, signifying not just a stark contrast between the top earners and bottom earners, but an increasing divide between bottom earners and everyone else. But an increasing amount of income share is going to the very top earners: in 1980, the top 1% of earners made, on average, 27 times the amount of the bottom 50% of earners. By 2016, they earned 81 times more. This ratio between extreme wealth and poverty is equivalent to the same gap between the average income of the U.S. and the world’s poorest countries such as Democratic Republic of Congo and Burundi (Piketty et. al).
Even with government policies to redistribute income wealth through taxation, the bottom 50% has only seen a 21% increase in post-tax income, compared to the national average of 61%. There was also essentially no growth in inflation-adjusted incomes after taxes and transfers because most went to the elderly and middle-class. Additionally, these transfers were primarily in-kind services, meaning there was no additional disposable post-tax income, and the bottom 50% pays about the same amount in taxes that it gets back in cash transfers (Piketty et. al). This doesn’t even take into account growing wealth inequality, which refers to disparities not just in income but in overall assets. Edward N. Wolff found that during the 2000s, median wealth dropped by 36%, accompanied by a steep rise in wealth inequality. He also found an increase in the debt-to-income ratio, a transfer of overall wealth from younger to older households, and what he calls the “middle-class squeeze” (Wolff).
We’ve already seen the political ramifications of this kind of economic system. The Occupy Wall Street protests in 2011 highlighted popular frustration with financial institutions and government policies that were seen as “welfare for the super-rich.” More recently, the 2016 election re-surfaced these anxieties, exemplified on opposite sides of the political spectrum by democratic socialist Bernie Sanders and populist-protectionist Donald Trump. There is a growing disillusionment with traditional institutions of finance, politics, and media, and a sense that most people are not being included in the gains of economic development. Absent an appropriate policy mechanism, this is sure to only get worse with technological advancement and automation, as labor is increasingly excluded from value chains and profit tied up in firms and shareholders. What will be the political consequences if such inequality persists and worsens? Will we be able to maintain our financial and political institutions in the face of massive resistance from a marginalized and resentful public? More fundamentally, what level of inequality are we willing to accept in our society? Regardless of economic or political consequences, there is an argument to be made that a system that perpetuates large material wealth disparities is morally and ethically wrong. If a particular form of economic organization sustains the comfort and opportunity of a few on the backs of the many, wouldn’t our own morality compel us to change these circumstances?
III. UBI Plan Analysis
Much of the recent thrust towards UBI is motivated by an understanding of the coming disruption to the economy. We’ve already seen it play out in certain sectors of the economy, and a systemic change due to automation could have catastrophic effects if not mitigated. That’s why the policy has become so popular in Silicon Valley—they can foresee the approaching disruption because they are the ones developing the technology (not to mention UBI is compatible with the Valley’s generally libertarian leanings). So far, a number of experiments and pilots in UBI have been tried, both in the U.S. and abroad. Primarily, it has been tried on sub-national and local levels—state governments, city governments, and communities. In order to compare two different kinds of plans, I will examine the Alaska Permanent Fund Dividend (PFD) and Y Combinator’s UBI pilot in Oakland, California. The former represents UBI implemented on a state-wide level as a public service, while the latter represents a micro-focused experiment coordinated by a private entity.
A. Alaska Permanent Fund Dividend
In 1976, Governor Jay Hammond signed into law an amendment to the Alaska state Constitution stipulating the creation of the Alaska Permanent Fund. Managed by a state-owned corporation, the fund is a mechanism for distributing the money from oil revenues to the citizens of Alaska. After oil was discovered in Alaska during the 1970s and the Trans-Alaska pipeline was built, the state saw $900 million in revenue from the sale of drilling leases (Merchant). But the state knew this wouldn’t last forever, and decided to set up a fund in order to make the benefits more sustainable. The Alaska state Constitution states that “at least 25% of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments” (Alaska Constitution).
The first payment to citizens was in 1982, at an amount of $1,000. Over time, the fund grew due to an increase in oil production, but the corporation managing it diversified the holdings so it wasn’t reliant on oil. By 2014, the fund had a net income of $6.8 billion, and $1,884 was paid to all of Alaska’s 640,000 citizens (children included, incarcerated people excluded). The only aspect of the PFD that separates it from other UBI models is that the amount paid out changes from year to year, based on a five-year average of revenue from oil leases. Regardless, the amount hovers around roughly the same number each year. The PFD is also best characterized as a partial UBI, as it is not enough to provide a poverty-free lifestyle to those who receive it. Rather, it is meant to be complementary to other benefits and income streams. In this way, it is consistent with the left-leaning conception of UBI as an addition to benefits systems, though the amount is relatively low. And though it is sourced from extractive industries that may harm the environment, it positions the oil as a collectively-owned resource, rather than at the mercy of a large firm that may not be responsive to local concerns. It is also popular with conservatives because it isn’t really seen as a full UBI—rather, it is seen as a payout to the “owners” of a publicly-owned natural resource (Merchant).
While difficult to measure the exact effects the PFD has had, it is worth noting that Alaska is the only state in which the income of the bottom 20% of earners grew at a higher rate (25% growth) than did the income of the top 20% of earners (10% growth). This seems to buck the trend of much of the country, which is seeing increasing levels of income inequality. While income distribution in Alaska is already flat to begin with, it’s clear the PFD has prevented many Alaskans from descending into poverty. In large rural parts of the state, the PFD is especially important because much of the economy there is based on cash transfers from the government and subsistence activities. The PFD can mitigate the effects of inequality by creating a baseline income for all Alaskans. While salaries can range, as of 2015 Alaska had the highest per capita wage in the country, the second-lowest income inequality, and is one of the richest states per capita. The PFD also has the effect of attracting people to Alaska and keeping them in the state. It’s been found that the PFD increases the amount Alaskans spend on “durable” goods like appliances, which has helped retail in the state, but has not led to reckless spending—in fact, a decent portion of the money goes into savings (Merchant).
B. Y Combinator UBI Experiment
In May 2016, Y Combinator, the seed accelerator famous for funding startups like Dropbox, Airbnb, and Instacart, among others, announced that it was going to run a large-scale UBI experiment. The pilot for this program would be a micro-level project in which they gave 100 families in Oakland, California $1,000-$2,000 a month for six months to one year. The city was chosen for its economic and social diversity, as well as the fact that it holds vast wealth and high inequality. For this reason, it was seen as potentially representative of the nation at large. The people were chosen randomly from all different economic classes, including those with jobs and those without, to simulate real-world effects and prevent it from being akin to a means-tested benefit. There are no stipulations for how the money is to be spent—it can even be used to travel outside of Oakland, or outside the U.S. Because only randomly selected families receive the payments, it is not universal and thus not truly a UBI, though Y Combinator’s goal is to eventually roll it out to become one (Coren).
During the program, Y Combinator will test a number of logistical factors, including how payments are made, how data is collected, and how to randomly choose participants. They also seek to understand the effects of UBI, including how it effects people’s “happiness, well-being, [and] financial health, as well as how people spend their time” (Coren). The program began in January 2017, and so is currently being unrolled. The money is delivered to participants through direct deposit, and each month they fill out a survey about their overall feelings. Y Combinator’s president, Sam Altman, announced that the experiment was going to be expanded to cover 1,000 families in Oakland. But other than these few pieces of information, the study has been relatively opaque (Lee).
IV. Evaluation
For all the enthusiasm about UBI, it remains relatively untested on a large scale, particularly in the U.S. Various small-scale experiments and pilot programs have been implemented, but more testing needs to be done to properly evaluate whether UBI would prove to be an effective, sustainable response to our current economic crisis. It may also be important to test different kinds of models and plans, ranging the ideological spectrum and with varying features, in order to evaluate which works best. Contextual factors, such as specific economic conditions, local culture, other benefits and policies, and political preference regarding collective goods and services must be taken into consideration when determining whether or how to implement a UBI plan. The two plans discussed here, while heralded as examples of basic income, don’t truly fit the full definition of UBI. This is a testament to just how little we really know about how UBI would operate, pointing to the need for more pilot programs and evaluations.
In looking at the two aforementioned plans, it is much easier to evaluate Alaska’s PFD than the Y Combinator pilot, since it has been around for much longer while Y Combinator’s is still being tested. Even regarding the PFD, a number of factors make it difficult to judge its effects, because of interconnected variables that cannot be isolated. For example, because Alaska is a state within the U.S., and has free movement of people, goods, services, capital, and information with all other states—not to mention is beholden to federal laws—the state cannot completely control its own political and economic circumstances. One potential result of the PFD is that it becomes a “population magnet” that draws other people to the state. This includes both the over-65 population (who doesn’t work but can still collect the benefit) as well as lower-income people who are not necessarily tied to the labor market. This creates a higher demand for programs that provide needed services for those with lower incomes, making it more difficult to support these services publicly. Also, more obviously, a larger number of people living in the state means the dividend is smaller per person, meaning its positive economic effects would theoretically be lower. But it can also create what’s known as the “Hawaii Effect”: as more people are attracted to the state, including those that do have jobs, a new equilibrium is found where the population and labor supply are larger but the wage rate is lower (Goldsmith).
In general, it’s difficult to determine which of these potential effects we can observe, and especially difficult to know what came about specifically as a result of UBI. One way of thinking about the true economic effect of the PFD is to compare how the money from the dividend has been used to how it may have been used otherwise. Most probably, without the PFD the money from oil revenues would be used to increase the state government’s capital spending on projects like infrastructure and public works. This would have generated economic activity, but it would also have created less employment than the PFD did, and would have exacerbated income inequality (Goldsmith).
So how has the money from PFD been used? Again, it can be difficult to judge true spending habits, particularly when what people say in surveys does not align with real behavior. But it has been estimated that roughly one-third of money from the PFD has gone to savings and debt-reduction measures, with surveys saying that three-fourths of respondents planned to save at least half of the dividend. Additionally, many use the additional money to buy necessary durable products like appliances. It has been estimated that, overall, the PFD has created an additional 10,000 jobs, attracted 15,000-20,000 new residents, and added $1.5 billion in extra personal income. This brings stability to the economy as it adds additional revenue streams, and is especially helpful to those with high job insecurity and at the lower end of the income distribution. It also has a leveling effect, in which those at the lower end of the income distribution receive more money post-tax than those at the higher end (since the dividend is taxable income). It is believed that this has been one factor contributing to the decrease in poverty in Alaska, especially among rural Native American populations. While no rigorous studies have been done to determine what the long-term effects have been on indicators like health, education, happiness, or crime (Alaskans don’t see the PFD as serving this purpose, but merely as their rightful income), surveys do show that Alaskans don’t feel the dividend has given them less incentive to work (Goldsmith).
It’s interesting to note that to Alaskans, the PFD is not viewed as a handout or welfare. It’s seen as payout from a publicly-owned resource. Thus, ironically, they see the dividend as a private matter as opposed to something in which the government should be involved. It has also discouraged any kind of critical evaluation of the effects the program has had on Alaska. The question, then, is what happens to the PFD once Alaska’s oil begins to run out, or if demand for oil drops. The Alaska Permanent Fund was created with the knowledge that the resource wouldn’t last forever, and that a sustainable mechanism for enjoying its benefits needed to be developed. But over time it has become as assumed part of being an Alaskan, and eventually it will run out. In this way, it also differs from typical UBI in that it is contingent on a rapidly depleting resource. That is, of course, unless some new mechanism is developed to continue the payout system (though this is unlikely, since Alaska’s economy is dominated by petroleum extraction and government spending).
In terms of the Y Combinator pilot, such little is known about the progress of the program that it is difficult to determine how successful it has been. There have been concerns so far, from residents in the area, about what the ripple effects may be through the economy. Since only a select number of families will receive the UBI (closer to a true UBI amount than the PFD), there may be some hyper-local effects that could have unintended consequences for particular neighborhoods (Lee). On the other hand, it also might be nearly impossible to measure the effects, since the families will, theoretically, be dispersed throughout the city. Six months to one year also may not be long enough to really see the true consequences of UBI. Y Combinator has also been opaque about the study, leaving questions about its funding model, logistics, and research methods.
V. Looking Forward
Regardless of how the Y Combinator pilot program unfolds, more extensive experiments must be conducted in order to determine UBI’s potential effects, and to determine if it is a viable solution to our current economic crises. It is important that UBI be tested in a wide variety of ways: in urban, rural, and suburban areas; on state, local, regional, and national levels; from public and private entities; in varying amounts; with and without other social safety net programs; and with different funding streams. Only by testing UBI in different contexts and through different models will we be able to understand its true implications and consequences. The two models discussed here are not even full UBI, and there exists very little research on the effects. There’s little time to wait—if rapid technological development brings about the massive unemployment and economic disruption that has been predicted, we will need a mechanism through which to stabilize our economic, political, and social institutions. UBI may or may not be this solution we desperately need. We have only one way of knowing: experiment, experiment, experiment.
Works Cited
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