Otto Lehto is a PhD Candidate in the Department of Political Economy at King’s College London.
As a response to the COVID-19 shock, governments are contemplating various ad hoc crisis responses that are normally out of bounds for ordinary policymaking. Even Universal Basic Income (UBI) is back on the agenda. In his Easter address, Pope Francis proposed a “universal basic wage” as a response to the coronavirus. Many countries, including United States and Hong Kong, are turning to one-time unconditional cash transfers. Although no country has yet implemented a full-blown UBI scheme, at least fourteen countries are currently toying with approximating schemes.
Could UBI be a partial solution to the financial problems faced by individuals in the current crisis? As I have argued in “Basic Income Around the World”, the literature suggests that sending cash directly to people, no strings attached, might help individuals, households, and businesses who struggle with basic liquidity. However, UBI makes more sense as permanent reform of the welfare system than a temporary emergency measure with a sunset clause; and, if one can choose, it should be implemented in advance of a crisis rather than during one. Let me explain why.
The current crisis is a reminder of our perennial helplessness in the face of the unknown. The COVID-19 epidemic is a textbook example of a “butterfly effect” from chaos theory: a butterfly (or should I say a bat) flapping its wings in South China can lead to an economic meltdown in New York. Our globalized world is a highly complex and evolving system with lots of interdependencies which makes it chronically prone to systematic disruptions. We are in a state of permanent crisis. Disequilibrium shocks and disruptions are not exceptions; they are to be expected. We may not know what is coming or when – but we know that something is. Given how little we actually can know about the future – even in theory – is there any way for governments to expect the unexpected, predict the unpredictable, and prepare for the unpreparable?
Firstly, the COVID-19 crisis was not entirely unpredictable. Epidemiological experts have been saying that a global flu pandemic was inevitable for decades. The wet markets of South China have been known to be a ticking time bomb. The exponential rate of globalization, the intensification of global trade, and the increased density of urban populations have increased the infectiousness of epidemics. We should have known that an epidemic on the scale of COVID-19 was only a matter of time. We could and should have been better prepared, and not just epidemiologically but also politically and economically. An inexcusable lack of preparation has cost us lives, jobs, and money.
Secondly, building preparedness is a demanding but not impossible task. Individuals and societies cope with the problems of risk and uncertainty all the time. For sure, there is no way to fully eliminate the uncertainty that accompanies a complex world. However, it might be possible to develop robust institutional responses that mitigate the severity of crises. Governments can invest in various crisis buffers and comprehensive social insurance schemes. A social insurance scheme is a gamble in favour of the hypothesis that an early investment in crisis mitigation pays itself back by reducing the financial and nonfinancial costs of economic shocks generated by uncertainty.
The central lesson is that shocks are costly. But preparation pays. We need a palette of proactive social insurance policies we can rely on when a crisis hits regardless of how incompetent, slow, or insufficient the government response is. We have no excuse not to be prepared. Although cash transfers can be implemented during a crisis as a temporary measure, they should ideally be in place before a crisis hits as a buffer against permanent uncertainty. When a crisis is still developing, information is often dispersed and contradictory, and it takes time before the organs of the state become aware of the relevant facts and capable of acting on them. Only an automatic buffer can react fast enough to provide the first layer of protection to all the people. Having a universal basic income floor could be thought of as a first response strategy that delivers automatic first aid to critical patients.
Encouragingly, while many countries are implementing temporary programs, Spain is introducing a permanent, means-tested quasi-UBI scheme. Although not a full UBI, the development of a permanent program is a foresighted method of tackling uncertainty and crisis preparedness. To be sure, no UBI scheme could realistically replace the need for various potential ad hoc measures such as targeted help to business sectors that are hit hardest. Any successful scheme must combine proactive and reactive measures, automatic buffers and discretionary policy measures.
A plausible hybrid solution would be a UBI system that provides a permanent and automatic income floor in good and bad times alike but whose parameters can be discretionarily amplified and modified in crisis situations to provide an extra X% cash cushion to all individuals (a general boost to the level of everyone’s basic income) or select individuals (an extra boost to the level of basic income of targeted groups who need it the most). Crucially, however, no one would ever be deprived of their access to the basic income floor. Relying on an automatic income floor as the foundation of emergency relief on top of which extra discretionary measures can be stacked would provide automatic relief to individuals who usually fall through the cracks. Furthermore, it could provide a modicum of protection against predictable discretionary government failures such as delayed crisis response, political deadlock, policy short-termism, and bailout unfairness.
Times of crisis bring out both fatalism and optimism in human beings. Many people hope (against hope) that system shocks, disruptions, and financial insecurity are mere passing phenomena and mere exceptions to the norm. Nothing could be further from the truth. Our economy will continue to be upset by financial crises, epidemics, global warming, automation, globalization, Schumpeterian creative destruction, and other disruptive shocks. Although hardly a panacea, UBI can be an investment into a proactive, long-term social insurance scheme that enables individuals and societies to “prepare for the unpreparable” – and be ready for the next inevitable crisis.
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Learn about Otto’s work on his website.