Economic Model Fallacy and Risks for Basic Income Movement


This short essay is a collection of thoughts on economic models in general and their utility for the advocacy of basic income. The subject of the economic impact of a Universal Basic Income (UBI) is perhaps covered elsewhere in the literature, if so I would be most interested in learning about it. 

In 2020, UBI Works, a Canadian non-profit organization for which I am an advisor commissioned an economic modelling report on the effects of basic income on the Canadian economy. This agent based model was developed and simulated by the Canadian Centre for Economic Analysis. The report models three possibilities: continuation of the status quo, the Ontario basic income pilot and the UBI Works proposal. The UBI Works proposal is for a universal 500$ a month dividend and a $1500 a month minimum income guarantee for all Canadians 18 years and older. This essay is a collection of my thoughts on the use of this report for advocacy, lobbying and organizing.

Let me be forthright and clearly state that I am somewhat prejudiced against economic modelling or modelling of human behaviour in general. My underlying suspicion is you can get a “model” to say many different things. When political opponents argue over the economic impact of taxes we are effectively arguing over an economic model. The fact that models can be twisted to say different things undermines credibility of the model in the eyes of non-believers and on the flip side, it gives a false sense of confidence to the believers of whatever the model claims to show. In addition to the fact that the underlying assumptions of a model can potentially change there is also the significant element of the potentially vast number of items that were left out of the modelling. For example, did the model account for labour market changes, impacts of tax changes, disincentive to work due to behavioural change on specific groups within the labour market? The possibilities are endless and with a generalized model of the entire economy it is near impossible to accurately predict the impacts of major policy changes that would affect everyone. 

The main places where I have been exposed to complex models have been in Life Cycle Analysis of products and services, in climate change and in modelling the stock market. In all three cases (but especially the latter two) these are models of human behaviour on a vast scale with innumerable underlying variables and assumptions. The issues I have seen with these models is that you can change a small set of variables and have a huge impact on the outcome of the model. This large variance in consequences based on changed inputs referred to as the butterfly effect where the wing flaps of a butterfly on one side of the world leads to a hurricane on the other. The underlying science of the butterfly effect is Chaos Theory which remains both fascinating and scientifically sound. When you affect change on the scale of a full UBI it is probably impossible to predict the effects across all the facets of society.

On the one hand, basing our arguments on economic growth allows us to confront UBI challengers’ criticisms that a UBI would bankrupt the country. On the other hand, using a complex model opens up to new fronts of opposition and criticism. It will also change the discussion from one about rights and freedoms to one about GDP and government debt. Which argument do we want to have and which argument can we win in the eyes of the policy makers of Canada and the Canadian public?

Is Basic Income an economic, a social or a political challenge?

To be fair, most big issues are a combination of social (philosophical), political and economic rights. These three are more often than not intertwined in a myriad of ways. However, it is critical to determine which type of challenge we are facing and adjust our strategy and tactics in accordance. 

A social problem is one that primarily affects relationships between groups of people based on features specific to those people and who they are. One such example could be LGBTQ rights. This group was discriminated against based on their sexual orientation and it took a social movement to change this. Generally speaking they did not experience political marginalization or economic repression due to their sexual orientation. They were however prevented from fully expressing themselves and being accepted as complete members of society. This has recently changed thanks to decades of arduous work. 

An economic problem is one where the primary issue is access to capital and revenues for a group of people. It can also be a situation where certain people are subject to more difficult economic situations and require additional support to excel and fully participate in society and the economy. One such example could be single mothers who require additional financial support from their ex-partners or from the state to raise their children such that their children are healthy and can access the same services as their peers. Another example of economic challenges could be the right to strike or form unions. This has political elements, but a worker who cannot strike is a worker who is bound to a job and has his economic opportunities repressed due to a lack of capital.

A political situation is one that is primarily about power. The distribution of powers between the federal government and the provinces is a political challenge. The distribution of power between the state and the individual is ultimately about politics. Women’s right to vote was a political problem when it was finally resolved in the 20th century. The relationship between voting groups on key issues such as taxes and other items is a political problem. Unlike a social problem, in a political problem you cannot make everyone happy and compromises must be made between the different groups. This last point is why so many political changes happen incrementally and not at once. Big changes upset too many people (sometimes bigger changes are better though).

In my opinion, basic income is primarily a political reform program. While a basic income will have a massive impact on the economy, it is first and foremost a political challenge because it is ultimately about a transfer of power from the state to the individual and from the wealthy to the poor. If you tax the wealthy and distribute the money through a basic income or if the government takes on debt (prints money) you will be reducing the political and economic influence of capital holders (this is currently happening in 2021). Both approaches to changing the economic balance have their pros and cons which must be carefully evaluated. No country can easily impose massive new taxes or print substantial amounts of money without significant internal and external political consequences. 

In general, political reform is enacted by those in power due to pressures from an organized political movement or through decisions by leadership. It is therefore critical that UBI advocates either gain the strong support from those in power for basic income, place our own advocates in power, build a wide scale political movement or a combination of these three approaches. The current Liberal government of Canada is potentially the most pro-UBI government in Canadian history. With Prime Minister Trudeau and Chrystia Freeland at the helm, there is a strong desire to help the least fortunate and neither the prime minister or the finance minister are fiscally conservative. Additionally, Jean-Yves Duclos is the president of the Treasury Board and a long time advocate of UBI. Lastly, the balance of power is currently held by the left leaning NDP who are sympathetic to UBI. The need to transition the economy through the COVID pandemic is yet another excuse to enact UBI. The current COVID crisis has conclusively shown that the government can dramatically increase debt and can act quickly when required – two key ingredients for the implementation of UBI. That being said, there remain massive political, historical and psychological hurdles to the implementation of a true UBI in Canada.

The most successful political reform is incremental in nature and not revolutionary. Very rarely do systems in established and developed countries radically change in peacetime. Attempts at major overhauls of systems inevitably come up against vested interests and inertia. One recent example is the controversial overhaul of the American Healthcare system. After numerous attempts and decades of effort by very powerful people, Obama was finally able to squeak in a program that kept insurers, companies, and many citizens happy. It also upset a lot of people and is currently being attacked by the right. In the case of Obamacare the vested interests of the healthcare industry are very powerful. These same forces are trying to overturn Obamacare and they may very well succeed. A true basic income, like the one UBI Works is proposing, is a reform of an even greater magnitude than Obamacare. Like that battle, we are facing very strong vested interests in the current non-basic income world. We would be fools to underestimate or dismiss the vested interests aligned against UBI.

Too many UBI advocates assume the locaI is clear and the evidence is overwhelming. When I ask UBI advocates why no country in the world has a true UBI, I get a variety of responses that could be summarized as “governments have just not seen the light”. Like many progressive initiatives, advocates make the fatal error of presuming that others will agree with them if only they had access to the same information. This presumption has sunk more progressive political movements than any other reason. The reason we do not have UBI anywhere in the world is not simply a question of inertia, ignorance or laziness. 

Politicians and power brokers have strong vested interests that will not be simply overcome with logical arguments and evidence. If it were that simple, we would be tackling climate change, offering free university tuition, higher minimum wages, free medical assistance and low cost housing. In Canada we are failing to do most of these things despite clear and compelling economic evidence that we should. To affect political change we need to do many things, but one critical element is to present our program in a new light that casts it as a different solution than traditional welfare solutions. We also need to demonstrate how UBI is an evolution of the current system and not a radical departure. These two seemingly opposites – novelty and continuity – are critical to obtaining establishment support and mobilizing new people.

The UBI model that allows us to achieve this balance of new and old is a basic income in the form of a dividend. A universal and unconditional return on our common assets is a new and innovative way of viewing government and citizenship without upsetting the elite. It also reflects our common understanding of the concept of shareholders in a corporation who receive dividends from the profits of an operating business. In my opinion the dividend model is the most politically viable option as it breaks the traditional welfare state program model without seeming too crazy. It is no longer about tax and spend, wealth transfers, government debt, or bureaucracy – it is about becoming a shareholder in our common future. A dividend form of UBI offers a new narrative and a new way of proposing basic income. UBI Works proposes such a model, but it does not specify that it has to be funded through common assets. This is a risky approach as the most powerful vector of attack on a UBI is its funding model. Due to the massive scale of a UBI program, you simply cannot separate the proposal from the funding model. Without a defined funding model we will be rightfully attacked as just another welfare program. Offering a “pick your own adventure” list of potential funding sources, as UBI Works has done, is appealing because it gives the impression that UBI can be supported by a wide base of people. However this path of vagueness will inevitably lead to internal conflict and battles as we approach our goal of a UBI. Instead of fighting over UBI, we will fight over funding models and that may very well sink the entire endeavour.

Nearly all debates are won or lost on the underlying assumptions that are snuck into a debate (see this excellent Youtube video). The way you frame an issue determines how people will think about it. When abortion is framed as “killing babies” you elicit a very different emotion than when it is framed as a health or women’s rights issue. If we frame UBI as an economic issue, people will rightfully question if UBI is the best way to improve the economy. 

Returning to the specific economic model commissioned by UBI works and conducted by CANCEA, we need to carefully analyze the frame that it sets up for our advocacy. Once the debate over UBI is framed in the minds of citizens and politicians, it will be very difficult to change. Once that is done and we are faced with options within that frame, it is near impossible to break free.The challenge I see with this economic model, beyond the challenges inherent in any large scale economic model, is that it is proposing a tax and spend model for basic income. The model seems to favour little to no government debt despite record low interest and the emergence of modern monetary theory (MMT). I am curious why the model comes to the conclusion that government debt is the bad way to go. Regardless of the reason, if we propose this economic model as the best economic policy option for UBI – this proposed model is in fact proposing the largest tax increase since 1940.

The model does show that the basic income program will create many new jobs and good GDP growth. While this seems like a good outcome, I would argue that there are lots of ways to spend 230 B additional dollars per year that will generate jobs and GDP growth. We could invest 230 Billion more in research and development, universities, startups, on export oriented activities, or myriad of other programs in place to distribute this type of investment. Yes, UBI will solve poverty and create economic growth. However I like to remind people that the government’s priority is not to eliminate poverty. If it were, we would have done it. Government priority will always be to create security and to increase economic productivity. Poverty is viewed as a nuisance or a cost of doing business. We do not need an economic model to show that UBI is better than nothing – we know that. We need a model to show that UBI is better than the alternatives with the same resources allocated to them. 

If an economic model is not that helpful for the UBI case due to the underlying variability in the model, the tax and spend approach or the lack of a comparison with a similar sized investment – we should carefully think if this advocacy tool will harm or help us. Can the economic model hurt our efforts for UBI? The model is likely to help convince a few people and most likely to be appreciated by people who are already firm believers in UBI. My biggest concern is that the model becomes a red herring that will distract us from the core mission of moving the voting population on the issue. 

At a broader level I do not think voters ever vote based on economic programs. Beyond taglines such as cutting government tape or improving medicare, how many people are mobilized by economic reform and GDP growth? We may think that policy makers and the government are mobilized by economic reports and to a certain extent they are. However, it is ultimately politics and votes that determine if a policy will be adopted by the government. Does UBI get the government votes or risk losing parts of the population? A government is supposed to guide the country towards prosperity. However the government must do so within the constraints and established interests of the donors and the electors and the mood of the day. They also typically do not have the time for massive overhauls of programs – if they did, we would have resolved many known problems with our welfare state by now. No one operates in a vacuum – least of all government.

When US civil rights leaders famously met with Franklin Delano Roosevelt and asked for political reform, FDR replied, “Make me.” Ultimately this is the task of the UBI movement – we must make the government put UBI in place. We should have no illusion – there are powerful forces aligned against UBI. To put it frankly, there is no way an increase in government spending of the magnitude required to fund a full UBI will appeal to fiscally conservative or wealthy people. Wealthy people (in which I include the top 10%), have one overriding interest – protect their assets. As cynical as this may seem it bears out time and time again. With the exception of inheritors, the majority of the wealthy class earned their money by being a professional. Their perception is very much that they deserve what they have. The wealthy are interested in policy changes, but only if it means little to no change to their status or way of life. If we propose UBI as a radical redistribution of wealth it will go nowhere. If we propose to take away RRSP and TFSA and other tax advantages there will be massive political push back and I doubt any serious politician would dare to propose that. If we print money at the rate we are doing now the lions of austerity will eventually rear their heads and roar with all their might. In short, it is extremely hard to take things away from people – especially powerful people.

My purpose is not to undermine the hard work and investment the basic income movement is making in this economic model. Hopefully some of the points above illustrate the risks of promoting the study that links 230 billion in new spending to theoretical jobs, growth and massive tax increases. Ultimately we need a clear strategy to advocate for UBI and the strategy cannot be “try to make everyone happy” because we all know that is not possible. The famous definition of strategy by Michael Porter is, “deliberately choosing a different set of activities to deliver a unique mix of value.”. How does this economic model define our strategy and establish the frame of the public debate? Will this economic model convert the unconvinced, bring in new allies or block attacks from opponents? We must carefully analyze the consequences of an economic argument for UBI – there are many – but the way we frame it will set the stage for the grand debate to come.

Tiny Reference

(NY Times)

Published on April 24, 2021