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PM Modi’s economic advisory panel member bats for universal basic income

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Is it time to introduce universal basic income in India? Many economists would argue against it, but member of the Prime Minister’s Economic Advisory Council, economist Surjit S. Bhalla says it may be more relevant now given diminishing jobs.

In his latest book titled ‘The New Wealth of Nations’, Bhalla explains how a universal income for the poor is a welfare system whose time may have come across the world.

Excerpt: 

Poverty in most economies (outside of Sub-Saharan Africa) is in single digits, and declining. It is unlikely that any major institution in the world (e.g., World Bank, IMF) will be talking any more about the need to alleviate absolute poverty. Inequality discussions are also likely to become passé. What is very likely to become centre-stage, and with equal applicability in both developed and developing economies, is the new curse of progress—large-scale unemployment or minimal employment.

The old source of jobs—industrialization—has been continually declining in its potency. Several new-era services, for e.g., banking, require a lot fewer workers. The number of those educated, even college-educated, is rapidly increasing. But the demand for ‘traditional’ jobs is declining. It is going to be a brave new world, with brave new problems.

There is one possible solution, at least a partial one, to the emerging social tensions. It is the provision of a minimum income for all, the much talked about ‘universal basic income’ or UBI. The essence of UBI is that societies can now afford to provide a minimum income to all the citizens. Each individual can supplement her income by working, but if she is not able to work, no problem, she is assured of a minimum level of income.

Seems like a great idea, so what is wrong with UBI? That it was tried before and failed miserably. Each generation is entitled to its own mistakes, but each generation of thinkers or policymakers also believes they are Newtonesque. In a 1944 book, The Great Transformation, Karl Polanyi documents what happened in Speenhamland, England in 1795.

There is no social scientist who has not concluded that the market system does not yield the optimal or most socially desirable distribution of income. England had a free labour market prior to 1795. However, Polanyi writes that ‘the economic advantages of a free labour market could not make up for the social destruction wrought by it. Regulation of a new type had to be introduced under which labour was again protected, only this time from the working of the market mechanism itself.’

In other words, workers were not even paid a minimum ‘survival’ income. Hence:

The justices of Berkshire, meeting at the Pelikan Inn, in Speenhamland, near Newbury, on May 6, 1795, in a time of great distress, decided that subsidies in aid of wages should be granted in accordance with a scale dependent upon the price of bread, so that a minimum income should be assured to the poor irrespective of their earnings (author’s emphasis added in italics).

This guarantee of a minimum income proved the undoing of the system. Each person was guaranteed the same level of income; the only day-to-day change was in the amount to be given to each person. This amount varied with the price of bread, but not with the poverty of the recipient, i.e., each person ended up with the same level of income, whether they worked or not. So nobody worked, and the scheme failed.

Moral of the story: incentives work. In the mid-1950s, Milton Friedman came up with the idea of a negative income tax. Under his system, the payments will be on a graduated scale, and the recipient will have a higher take-home income the more she works.

Given the worldwide declining trend of job creation, societies will have to be creative in designing new welfare systems. Those that exist were for the old world order, a world with deep education and income inequalities. Education inequality has declined, and will continue to decline. However, social tensions are likely to rise, with jobs not available relative to aspirations and education investments. Negative income tax for those in the labour force can be one policy. In addition, technology now allows for the identification of the poor not in the labour force—targeting these individuals will now be easier. With these two policies, the Speenhamland mistake can easily be avoided.

This is an edited excerpt from ‘The New Wealth of Nations by Surjit S Bhalla.’ Excerpted with permission from Simon and Schuster India.

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