Ioana Marinescu on Universal Basic Income

Studies show that Americans find their identity in work more so than other countries, is no strings attached money transfers compatible with the American ethos?

Ioana Marinescu is a professor of economics at the University of Pennsylvania and is a research fellow at the National Bureau of Economic Research. Ioana joins the Macro Musings podcast to discuss her work on labor markets and universal basic income.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

Beckworth: Ioana, welcome to the show.

Ioana Marinescu: I'm very happy to be here.

Beckworth: We're happy to have you on. We've been following your work. You've been receiving a lot of attention lately for your UBI work in particular, and some, also, recognition for the labor market concentration paper you have. We'll be discussing both of those today. Let's begin by getting started with your story about how you got into economics.

Marinescu: Right. So when I was a kid, I had a subscription to this science for kids magazine, and I was completely fascinated by science. And I thought, "That's it. When I grow up, I want to be a researcher in some scientific field." And wasn't quite clear what at that point. And then eventually I also developed an interest in society and social problems, and so that's how I came up with, "Oh, look, a lot of social problems have to do with money, or lack of money. Hmm. What branch of science studies that?" So that's a little bit how I came to economics. But I also studied philosophy and considered doing my Ph.D. in philosophy. I have a master's in philosophy from the Sorbonne, I studied back in France. But I went for economics because I thought that there was a lot more progress to be made, thanks to, in particular, lots of new data and new policies that are happening every day. So that we have something new to say. And that philosophy's very important but hard. Trying to improve on John Rawls? Not easy.

What is UBI?

Beckworth: Yep. Well we're glad you made the decision to come into economics. And you've made some great contributions. And one of the areas where you've done a lot of work is with Universal Basic Income, or what we'll call UBI. And you have several papers, and we'll get to those papers. But why don't you tell our listeners, what is UBI? What is it trying to accomplish?

Marinescu: Right. So a universal basic income is something pretty basic. It's giving cash to every person in a certain jurisdiction, like a state or country, with no conditions. So it's cash with no strings attached. So that's really basically what it is about, and usually also on a regular basis. So you get your regular cash, whether it's once a year, once a month, that comes from the government without any conditions. So that's really the basic idea of a universal basic income, and then of course there's variance along a number of dimensions, importantly one of them being the amount, exactly how much cash. And that's something we can discuss more.

Beckworth: Okay, so, and an ideal one would be one that had a sufficient amount of cash to cover basic living expenses. Is that right?

Marinescu: Well, that's something that's up for debate.

Beckworth: Okay.

Marinescu: Because this policy doesn't come into a vacuum.

Beckworth: Right.

Marinescu: We already have a number of other welfare policies and income replacement policies more generally, so that's why this is something that needs to be considered given the landscape of existing transfers and policies that are already there. So I don't think it is obvious that certainly in the short run, we need to go for an amount that, by itself, would be enough to live on.

Beckworth: Okay. This idea, though, has become incredibly popular as of late, both from the political right and the left, which is surprising. So give us the reasons why people are now more interested in UBI.

Marinescu: Right. So I think the idea has a long history, and there was actually interest, and we'll get back to that, in the '70s. And Nixon was really interested in it. So there's a long history. But it was dormant during the '80s and '90s, probably because some of the studies showed some decrease in labor supply, and together with the change in policy priorities, this just wasn't a priority any more. So I guess it's not just that some negative effects were shown, but more importantly, it wasn't a priority. So anything remotely negative was enough to kill the policy, and I think it has become a priority again, or at least something that people are willing to talk about, partly because of the changes in technology that we have seen and the concern that many people might be out of a job and therefore we need to increase economic security. And I think more broadly, it is not just about technology but other threats to economic security, like globalization, for example. And so just having something that you can always count on, no matter what, I think has become much more appealing with this growing threat on, in particular, the ability to make a livelihood through work.

Beckworth: Yeah. So one of the big motivations, maybe from the right, more, is this idea of massive structural unemployment, right? So robots take over, smart machines are here, and many of us will be without work during this transition period. In the long run, that's great. Productivity's a good thing. But we could have some high levels of structural unemployment, robots taking over most of our jobs, and this would be one solution. On the left, so is it more, on the left, just a general improvement and a social safety net argument?

Marinescu: Right, exactly.

Beckworth: Okay.

Marinescu: I think the idea, yeah, is to make sure that everyone has something to fall back on, and I think the left is also worried about potentially the massive unemployment and therefore the idea of social safety net which is always popular in the left, if you want, its force is greater when we are facing the potential of really high unemployment. I do want to say that this is not something that is a given, and many economists will argue about the fact that, and rightfully so, that it's pretty uncertain how big the unemployment might be, at what horizon. It's unclear. But it's certainly something that is worth worrying about and studying. We just don't know, because predicting the future is very hard and past industrial revolutions have shown that the economy is, in the aggregate, able to recover. But that doesn't mean there aren't a lot of costs in the process. And I think that's part of what UBI is supposed to address, is to provide security no matter what economic upheaval people are facing.

Beckworth: Yeah, that's a good point. So globalization's been more destructive than many had imagined.

Marinescu: Right.

Beckworth: So the famous paper, the China Shock, the David Autor paper, shows that China, of course that's just a one-time shock, we think. But nonetheless, it was a big shock, very disruptive. There's been a decline in labor mobility in the US, a number of other issues that make this argument, at least on the surface, more appealing. And then it's been interesting to me, though, to see people on the right, people from Silicon Valley, very eager to embrace this. The Peter Thiels of the world.

Marinescu: Right.

Beckworth: Let's go after this, because man, those robots will be here soon. At the same time, you mentioned an interesting point that we really don't see it really now, right?

Marinescu: Exactly.

Beckworth: So Larry Summers had this great observation. He says, we've been looking really hard in the data for these massive productivity gains. The robots are taking our jobs, but we just don't see it in the data. So on one hand, there's all this talk about robots taking our jobs. On the other time, we're having a hard time actually seeing it in the data. And there's been a lot of work trying to see, is it a mis-measurement problem? Nope. Is it something else. But your point is, we need to be thinking about this because it could be very disruptive moving forward.

Marinescu: That's exactly right. And there's other trends like globalization, for example, that are disruptive.

Beckworth: Very disruptive.

Marinescu: And therefore we have to think about how we provide economic security in front of these kinds of threats. And let me tell you that part of the reason why some market oriented people like this is because it is not distortionary by itself, in the sense that because it has no conditions, that means that there is no discouragement of work. Even if you work, you keep it. Whereas most welfare style programs mean that as your income increases, your benefit gets cut. And so therefore you don't exercise your freedom of choice. And that's something that is precious to many, actually liberals and conservatives alike, the idea of freedom. And one important element of a universal basic income is freedom. That is, you can do whatever you want, whatever you see best for yourself as an individual, with your own money. And that's something that is very appealing with this universal basic income proposal.

Beckworth: Yeah. It's not only freedom to consume but freedom to produce.

Marinescu: Exactly. You could become an entrepreneur.

Beckworth: Right.

Marinescu: You could support yourself when your startup is making no money.

Beckworth: Right. So there's many potential entrepreneurs out there who are just very timid, afraid to take that first step because they have to pay the bills, their kids have health insurance issues, and so this would give them that cushion, that added ability to take the risk and move forward.

Marinescu: Exactly. So this could be used in many possible ways, and actually in developing countries, there is research, experimental research, looking at this and showing that indeed many people there are using it for productive purposes. Buying themselves materials for agriculture and so on and so forth. So everyone can use it in whatever way. This is economics. You think that every individual is in the best position to know what is optimal for them, in terms of their use of money. And in that sense, it can be seen that it's a government overreach if the government tells you, "Well, you ought to use this money for housing and this money for food, and so on." And the idea of UBI says, "No, people can do what they want with their money. They are in the best position to know what they want," and this certainly, with that particular sum of money, which, and I mentioned before, it is a debate and a worthwhile debate, to what extend this universal basic income might replace some other forms of welfare or not. And so that's a discussion that's worth having.

Traditional Welfare Discourages Work, UBI Does Not

Beckworth: Yeah. And those are all very, to me, very intuitive, very clear arguments. But I want to be fair and bring in maybe the other side, all right, just briefly talk about that. And then we'll get into your paper. So some of the arguments against UBI is, it's a solution looking for a problem. We've already touched on that. But the other one probably you hear the most is that people find meaning in their work, work brings structure to life, you find identity in your job. How do we respond to that?

Marinescu: Right. So first of all, I want to come back to what I was saying earlier, which is that part of the problem with traditional welfare is that because it has been taken away from you when you work, it discourages work. Whereas this transfer allows you to work and do whatever you want with your money. But beyond that, this idea about the value of work, I think that's a point that goes beyond economics into psychology and philosophy. And the idea of values and what we really care about. And the values, of course, are culturally determined. For example, there is some research about the psychological cost of unemployment, and these tend to be higher in the US than in many other countries, because Americans in particular define themselves through work. And so as such, this is not something that occurs in a vacuum, but it occurs in a sort of cultural context that is relative to a particular time and place.

Beckworth: Interesting.

Marinescu: So I think that's something that's important to keep in mind, and it is not something that economics can decide by itself. But it is a matter for society at large to think about what values we want to prioritize.

Beckworth: That's a great point. So the US is very different, maybe, than some places in Europe. We really do find identity in work, and maybe in some places they don't. They find identity in how they spend their leisure, maybe creative pursuits, and so we have to be careful in how we apply that critique.

Marinescu: And it's a matter of degree, right?

Beckworth: Right. Yeah.

Marinescu: It's not that other people don't care about their identity as workers. It's just, how important is that compared to other aspects of life?

Beckworth: Right.

Marinescu: Americans also work way more than most other developed countries.

Beckworth: Yep.

Marinescu: And, that's something that will be relevant perhaps later on as we talk about the politics of all this. In comparison to Europeans, and there's a new study at Harvard and co-authors looking at that. The Europeans are much more likely to say that poor people are poor, the majority of Europeans think that poor people are poor because they are out of luck, whereas the majority of Americans think that poor people are poor because they don't work hard enough.

Beckworth: Interesting.

Marinescu: So again, it tells you something about the cultural beliefs that we are steeped in and that we need to be conscious of when having those discussions.

Beckworth: Okay. Well let's move into your first paper. Well, the first one we'll discuss. And this paper is titled No Strings Attached: The Behavioral Effects of US Unconditional Cash Transfer Programs. And we'll provide a link to that on the SoundCloud webpage where we host the podcast. But in this paper you provide a nice survey, you go through a number of different examples that help us maybe get a feel, a sense, for what can happen with a universal basic income. So go ahead and list first the different cases that you draw upon to help shed light on this issue.

Examples of Cash Transfers Already in Use

Marinescu: Right. So there are several broad categories of cases we draw upon. One is the negative income tax experiments, which happened in the '70s in the US and Canada. Then we have the other cases of actual ... So these programs, the negative income tax programs, were experimental. They were not actual programs. But there are, in the US, some policies that are similar to universal basic income, which is the Alaska Permanent Fund in Alaska, and in the Eastern Band of Cherokees, casino dividend, which is in a Native American tribe. So those are actual policies that look like a universal basic income, and then we can also look at evidence from lottery winners. This could sound a little bit strange, but the point is, once you win the lottery, it's often given to you in installments. So it's very much like this cash that you get every year. And importantly, it doesn't have any conditions. Once you win the lottery, you won it, you get your cash. And of course a lottery is random.

Beckworth: Yes.

Marinescu: So we can compare winners and losers who are selected randomly. Yoo-hoo, best design ever for research!

Beckworth: A nice lucky natural experiment.

Marinescu: Exactly.

Beckworth: So, just to be clear, these have different features. In a minute, maybe we should talk about income effects versus substitution effects.

Marinescu: Right.

Beckworth: But just to help our listeners kind of put this in perspective, the negative income tax experiments in the 1970s in the US, and there's one in Canada as well, but they ranged up to almost $26000 a year, is that right? That you could get, in current dollar terms.

Marinescu: Right. Exactly. So these were large sums of money that you would get if you weren't working at all. So that's really the basic income is what you'd get if you weren't working at all.

Beckworth: Okay.

Marinescu: And this is supposed to be roughly at the level of the poverty line.

Beckworth: Okay.

Marinescu: And then the important thing with this negative income tax program, as you were working, the benefit was taken away from you. Not 100%, but at a high rate between 50% and 80% of the benefit was taken away. So that was the implicit tax rate. So if you were making $1, then between 50 and 80 cents of the benefit would be taken away from you. And so what that means is that there is a substitution effect, meaning that because of this tax on work, that means that work is less attractive than leisure, relatively speaking, because it's been taxed at this 50% to 80% rate, and so that means that this program can discourage work because of the substitution effect. That's the substitution effect.

Beckworth: Okay.

Marinescu: In general, and let's talk back to the most obvious thing, which is the income effect. That simply means that when you have more income that's coming from a non-work source, any source that you don't have to, yourself, make any effort for, that's called the income effect. It's just coming from somewhere else, someone gives you income. Then, economic theory predicts that you'll be working less. And we call that the income effect. And the reason isn't that, again, I think it's quite interesting to remember that basic economic theory assumes that work is bad. So leisure is good, work is bad. So if you have more income, you can buy yourself out of work and into leisure. Because according to basic economic theory, basically, oversupply, the reason why people work is in order to get income to consume. So if you get income without working, your willingness to work decreases. That's the income effect.

Beckworth: Yeah. Very interesting. So the negative income tax is neat, in my mind at least, because there's such large quantities of money or funding that were available. Now, as you note in the paper though, and you just mention two issues. One, they effectively have high marginal tax, very high marginal tax rates. So there's these huge incentive problems as they get closer to, when they start working, it really can change their behavior. But you also mention in the paper though, in the case of the negative income tax, you can't really tease out the difference between the substitution effect and the income effect. Is that right?

Marinescu: Exactly. They just weren't set up in terms of the way that the study was designed to do that properly. And so you can try to infer it, but it's not possible to do it with a great degree of confidence. And so in my review, I talk about what they inferred based on the findings, but it wasn't really set up to do that properly. And so you can talk about the overall effect, but the overall effect of having this program is mixing the income and the substitution effect. So now to be fair, if you had a UBI, probably you'd still have that money being taxed. But the fundamental difference is that in the case of a UBI, for example you could say, well, it's going to be taxed at the normal income tax rate. Well, that's very different from the negative income tax experiment. Why? Because in the negative income tax experiment, remember those implicit tax rates of up to 80%? This is essentially saying that you're taxing the poor for making almost nothing, at 80%. That's far less than anyone else is paying. So if you were taxing this basic income at the normal income tax rate, poor people would pay nothing. Because basically you're exempt from taxes if you make less than a certain amount. And then it goes up from there.

Beckworth: Right.

Marinescu: So it would be very different in terms of the tax rates that people are facing on their basic income, if this basic income were taxed at the regular income tax rate. And, by the way, that could still be called a negative income tax. The issue is, as a policy matter, how do you choose to tax the poor versus the non poor versus the rich, and therefore basically who ends up bearing the burden, the tax burden, of the whole scheme? So that's very important. Part of the reason why they had this very high implicit tax rate in the negative income tax was because they didn't want to, they were thinking about how much this would cost if they were going to extend it to the whole population. And so the higher you make this implicit tax on the poor, the less you need to raise taxes on everyone else in order to pay for the program. And so that's a fundamental trade-off, and it's not inherent in the negative income tax scheme. It's just, you have to choose your tax rate. Your tax rate could be whatever you want it to be, but of course that comes with economic consequences in terms of who's bearing the tax burden in order to pay for these transfers.

Beckworth: Okay. Now, just to clarify again, the reason we care about teasing out the substitution effect and the income effect is really concerned about, or worried about, the potential adverse consequences of the income effect, right?

Marinescu: Exactly.

Beckworth: So when we do these experiments, we look at these experiments, we don't want to get caught up in the noise created by a substitution effect. But what we really want to know is, okay, if we add, if we give these folks unconditional funds, are they going to drop out of the labor force, are they going to work less? So I think that the key point is, we want to do the best we can to see whether this UBI, this income and the income effect it creates, is detrimental on balance or it's actually a net positive. Now, let me move on just quick, briefly here, I want to talk about a few details about this program. So I found it fascinating that this program actually was brought in by, well, under President Nixon.

Marinescu: Right.

Beckworth: And initially it was a much broader vision, right? Tell us about the history. It would have been bigger, but Donald Rumsfeld, his chief of staff, decided to downsize it.

Marinescu: Right. So the idea was to reform welfare as we know it and a key reason for that was exactly the sort of substitution effect, because existing welfare programs, so I was telling that in the experiment, the implicit tax rate on the poor were 50% to 80%. But the implicit tax rate of a regular welfare program is 100%. Meaning that most welfare programs say, if your income is below $10,000, you can qualify. You earn $1 above, we're going to cut everything.

Beckworth: Yeah. Very high tax rate.

Marinescu: So it's much worse. Very, very high tax rate, than the negative income tax. So the whole point was, this is not an economically effective way of doing this. Let's do something more rational. And this negative income tax was advocated by Freedman, Milton Friedman, and he has great arguments for that. And one important one is this, is we don't want to disincentivize work in this really stark way, the way it happens with a regular welfare program. And so Nixon was very interested in that, and receptive to this argument, and so he was really into potentially doing the negative income tax instead of welfare for everyone. That this was just a pilot, this was the idea. But then eventually it went nowhere, as I mentioned earlier, because of a change of political wits.

Beckworth: Yeah. Well, that's unfortunate, but at least we got a little bit of experimental data to look at.

Marinescu: Exactly.

Beckworth: As you mention in the paper, there were, this experiment was not for everyone, it was just a few case places. So New Jersey, Pennsylvania, Iowa, North Carolina, Gary, Indiana, Seattle, Denver, and then also there was a city in Manitoba, which is interesting. The entire, there was ten thousand residents there, Mincome in Manitoba.

Marinescu: Right.

Beckworth: All ten thousand were eligible for it. But let's move on and talk about the lessons learned from this particular case. What insights can we learn about UBI from the negative income tax experiment?

Marinescu: Right. So first of all, let's talk about work. So many of the studies, so if you take it side by side, many of the studies found no significant effect on work. The bigger ones did, but the rough size of the effect was that a 10% increase in this income would reduce work by about 1%. So relatively small effect, but it was there. Now, there were some issues with these estimates in that there was some selective attrition, meaning that the people who didn't get benefits tended to not take the survey, and that effect would result in overestimating the negative impact on labor supply. And there was also misreporting. So people were reporting less income than they were actually making in order to qualify for more benefits. And this, too, would exaggerate the negative impacts on labor supply.

Marinescu: So basically, some evidence for negative impact on labor supply, but that was probably exaggerated by these issues that I just mentioned. Now, they also looked at other outcomes. Importantly, health and education. And for both of those they found positive effects with improvements in health, especially in Canada for that site that you mentioned. For education, there's many more sites that have been studied, and it's very consistent, the effects on education are always positive in terms of increased school attendance, better grades, and so on. And this positive effects are concentrated among the poorest children. So overall, the program had small to no negative impacts on work, and improved education and health, especially among the poorest children.

Beckworth: Well, that's very good results, right? That's what people were looking for, correct?

Marinescu: Right. Except that as I said, the just finding some negative impact on work was enough for the people who were opposing the policy.

Beckworth: Oh, okay.

Marinescu: To discredit it. Also, at the time, they found some effect on increasing divorce, but this effect eventually didn't hold up. So the combination that there was some negative impact on work and an increase in divorce. But again, that result was not verified later, meant that it made it easier for political opponents to kill the proposal.

Beckworth: So again, the takeaway is that it had a very small, if any, effect on labor supply.

Marinescu: Right.

Beckworth: And to the extent that there was something in the data, it was a measurement problem, a reporting problem. So the net effect was positive, very positive. And that's what we care about as economists. Did Milton Friedman respond to these experiments? What did he say?

Marinescu: Not that I know.

Beckworth: Okay.

Marinescu: That's a good question, I don't know.

Beckworth: Yeah. Well, that's unfortunate that it stopped there. Because I mean, Milton Friedman's absolutely right. Much better incentive structure set up with the negative income tax. Let's move on to, now, the Eastern Band of Cherokee Indians. Tell us about their experiment.

Marinescu: So this is very interesting. The idea there is to give Indian reservations a source of income and so therefore casinos were authorized on a number of Indian reservations. And in this particular one, why do we study this one, because we have good data on people living there. And so what happened there is a casino opened, and then the proceeds, the revenue, basically, from the casino, was given back to every tribal member with no conditions. So all you had to do is to be a tribe member, and then you would get this $4000, roughly, a year, just for being a member of the tribe. And so what the study did is they compared tribal members with non tribal members, so people who are not from this tribe, living in the same area. And they compared before this casino came on, and after. So it's a difference in difference design.

Beckworth: Okay.

Marinescu: So then we can examine how this unconditional yearly income that the Native Americans were getting, how did that effect behavior?

Beckworth: And the amounts, if I read your paper correctly, were $4000 to $6000 per person, is that right?

Marinescu: Exactly. And that included children. But in this case, the children's money was put into a form of trust that they can then access when they're 18.

Beckworth: Okay.

Marinescu: So, but still, it's really ...

Beckworth: That's a significant amount of, I mean, so two adults, two parents would get up to $12000, and then additional for their children. Is that right?

Marinescu: Right. Right.

Beckworth: And now, what was the timeline? Is it still going on?

Marinescu: It is still going on.

Beckworth: Okay.

Marinescu: And it's not the only Indian reservation that has that, it's just that this is the one for which we have data. So it's like the famous joke, you go look under the lamppost.

Beckworth: Right.

Marinescu: Because that's where there's data. And so they looked at the impact on employment, and there was zero employment, in fact, despite a pretty sizable transfer, and they looked at mothers and fathers, nothing. And then they looked at other outcomes and saw that there was an increase in educational attainment, which is consistent with the positive effects of the negative income tax on education. So that's really consistent. And then they also looked at mental health, and they show an improvement in mental health and a decrease in substance abuse, especially among youth. And so this result is very important, about substance abuse, because one of the worries of people who are being told about this universal basic income is that people are going to spend it on alcohol and drugs. And actually, when it comes to the Native Americans, it's the opposite that happened. Youth had fewer troubles with alcohol and drugs and were in better mental health, thanks to the transfer. So I think this is a very important result.

Beckworth: Very interesting. Now let's move on to your other paper and the other experiment, which is covered in your first paper, No Strings Attached, but the paper you do with Damon Jones, and that deals with Alaska's Permanent Fund Dividend. And tell us about the fund, but also tell us why this is different than the previous one. Why is it so important?

Marinescu: Right. So this is a study that I did with my colleague Damon Jones at the University of Chicago. And we chose the setting of Alaska, we think it's very important because for two reasons. One is that it's literally for everyone in Alaska, whereas the prior studies were not universal. So the casino dividend is universal for members of the tribe, but that's not necessarily everyone who lives in that area. So whereas in Alaska it's literally for everyone. And I'll tell you more in a moment about who qualifies. And second, this has been going on in Alaska for more than 30 years. So we really get to see what happens in the long run, whereas negative income tax experiments were only running for three years, so therefore this was a temporary kind of money injection. And that can affect behavior in different ways, as compared to a permanent program.

Beckworth: Yeah. So you use this as a great way to study what a universal basic income might look at. And you use a technique which is very fascinating. You used a synthetic Alaska. So many of our listeners may know what a synthetic Alaska is, but for those of us who don't, tell us, what is a synthetic Alaska?

Marinescu: Right. So because everyone in Alaska gets the transfer, we don't have a control group to control the Alaskans to within Alaska. By definition everyone gets it. So we have to compare Alaska to some other state. And in order to do that, what we do is we use a data driven method. So we look for states that are most similar to Alaska in terms of employment, industry composition, education, and so on, a number of characteristics, before this Alaska permanent fund dividend was introduced. So we look again for the most similar states before, and then we compare Alaska to this so called synthetic Alaska, which is basically the average, the weighted average, of these most similar states where a bigger weight is given to states that are even similar to Alaska. So basically what you have to think about is this synthetic Alaska is the group of states that are most similar to Alaska before the program was introduced. And they're going to serve as a yardstick for a control group for us to compare Alaska to after the program was introduced. So that's really what the synthetic Alaska is all about. And it's really funny, let me tell you, because we matched on a number of economic characteristics and most of the states that were picked up were all mountainous states.

Beckworth: Interesting.

Marinescu: Which I think is very funny, like Nevada and Utah.

Beckworth: Yeah.

Marinescu: And Wyoming. But we didn't aim for mountains, we just were matching on industry, education, and so on. So presumably those states just have a similar economy going on as seen from the point of view of the labor force.

Beckworth: I really find this synthetic control approach really fascinating. I mean, there's other ones. I'm a macro-economist, so I look over at my micro-economic friends like you and I see, you guys do really interesting uses of data. So synthetic control, there's regression discontinuities, you mentioned a few minutes ago difference in differences.

Marinescu: Right.

Beckworth: There's internal variables. All kinds of ways that you guys really are careful about teasing out causality. I would like to know, is synthetic control kind of the hot new thing? Is it being more widely used? Or is it just one of many in a tool box?

Marinescu: Well, I mean, it's one of many in the tool box, but it is a bit new and hot. And it's interesting because in a way, you could see that it's something that's similar to a difference in difference. But it is being refined, because in the difference in difference, you kind of make the argument that you're picking this control group, but it's a little bit informal oftentimes why you picked this control group. Whereas in the synthetic control, you literally try to find the most similar control group based on data, based on observable saying earlier it's a data driven method. Because we're looking for the most similar control or comparison group not based on our imagination of why they might be similar, but based on actual data.

Beckworth: Okay. Well let's move to your results. So what did you find for Alaska, in terms of employment?

Marinescu: So in terms of employment, so we look as an outcome at the overall employment population ratio in Alaska. So basically just, what's the share of Alaskans who are actually working? And we find literally zero effect of the permanent fund on employment. Meaning that employment in Alaska after this universal basic income style transfer happened was exactly the same as in synthetic Alaska. So if you follow year by year the employment in Alaska versus synthetic Alaska, you see that it tracks each other pretty much perfectly. So therefore there is no effect on the employment population ratio.

Beckworth: Very interesting. So a lot of the concerns ... Well, were there concerns about setting this up initially? Were people concerned about labor supply issues in Alaska?

Marinescu: No. This was not on the table. This is really not the reason. Because it was not at all seen as a welfare program. Negative income tax was supposed to replace programs. So immediately all the things you might think about with welfare would come to mind. But in Alaska, that wasn't really the framing.

Beckworth: Interesting.

Marinescu: It was about giving the money to the people that they deserve, because of the oil richness of the state of Alaska. So this, I can't say for sure that they weren't discussing this, but it wasn't at the forefront.

Beckworth: A big deal.

Marinescu: Of the debate in thinking about this. And so here we found no employment effect, and then we can ask, why not? Because you might think income impact, as we said earlier, would mean that people wouldn't want to work.

Beckworth: Sure.

Marinescu: And we show evidence consistent with the following story. That remember, in Alaska, everyone gets a transfer. So people have cash in their hand, and they spend this cash in local businesses. And so we think that this spending leads to local businesses hiring more. So basically what you have is that on the one hand, some people might want to work less. But on the other hand, local businesses are desperate to hire, and so this increase in labor demand compensates for the potential decrease in labor supply, so that the two more or less cancel each other out. And we find some suggestive evidence of that, because the effect of the program in the tradable sector, meaning sectors of the economy that don't sell locally but sell to other states, were more negative. Whereas the effect in the non-tradable sector, meaning the one that mostly sells to Alaskans, were quite positive. And so we think that it's a macro-effect that giving this cash to everyone, it's a bit like a Keynesian demand stimulus. People spend, so employment is being created, and that served to counterbalance any negative income effect.

Feedback from the Paper

Beckworth: Very interesting results. And you've gotten a lot of attention on this. So what has been the feedback you've gotten from this paper?

Marinescu: So, we did get a lot of attention. And I think a lot of the questions I get asked is, how applicable is this to the rest of the US? And I think, obviously Alaska is somewhat special. But I still think that it's quite applicable. First of all because we could find a very good control group for Alaska, so the states that we take in synthetic Alaska are really quite similar to Alaska, and there are several US states that are similar. So Alaska actually isn't that weird, certainly compared to a number of other US states. And the other thing is, people tell me, "Well, $2000 a year is not a lot." Yes, granted, but two things.

Marinescu: First of all, the earned income tax credit is typically less money for families than this program. And yet, the research shows that it has had strong impacts on labor force participation and employment. So a small transfer, even smaller than this, can have an impact. It's been shown to have an impact. So the fact that we don't find any impact is not just because it's small. As I said, we think it's because of this macro feedback loop. And then in terms of it being small, we also think about political practicalities that probably, in the short run, if any program like this is going to start, it's going to be rather small. So we think that practically speaking this finding is very important because it tells you about what's likely to happen with a universal basic income that is relatively modest in terms of its amount, and probably that's the most realistic thing in the short to medium run.

Beckworth: Yes. And also to maybe recognize that that's $2000 per person, so if you had a family of four, that'd be $8000.

Marinescu: Exactly.

Beckworth: I have five in my family, three children. That'd be $10000. That would make a meaningful difference. And since we're a family, that $10000 would go a long ways. So it's not-

Marinescu: I hear you, I have three children too.

Beckworth: This is not a trivial amount here, if anyone wants to argue otherwise. The other thing, kind of, I think, that's another lesson you [inaudible 00:42:14] having this discussion is the framing of this. So they didn't have all this controversy the negative impact tax did, as you said, because it was framed differently. And I think maybe that's another lesson to take away from this as well.

Marinescu: Exactly. So it really matters, politically speaking, how people see it. Is this a right for everyone? A dividend from the state riches? Or is this a handout? Welfare, something you should be ashamed of? You know. And so I think that can really affect political support. And that's why I'm interested, and I'm pursuing work on this topic of the political economy of this policy, and particularly interested in financing a small transfer with a carbon tax, which is something that has a lot of bipartisan support. And so basically you tax carbon, you take the revenue, and you give it back to the people on a per capita basis, cash, no strings attached. I think that's something that could realistically be implemented in several US states to start with. And so this is something I am actively working on in terms of understanding the politics of how this can work.

Beckworth: Very interesting, all right. Let's talk about lottery winners. So you looked at a number of lottery winners in a specific state. Tell us about that.

Marinescu: Right. So there are two studies of lottery winners, some in the US and some in Sweden. And they show very consistent results, showing that contrary to stereotypes, most lottery winners don't stop working. And the effect on earnings is actually kind of similar to the effect that negative income tax found, which is that roughly a 10% increase in lottery wins decreases your earnings by about 1%. And so the effect, again, is relatively small, and then they were looking in the Swedish case at hours worked versus whether people were working at all. And they found that most of the effect was that people were working less. Very few people actually stopped working. So winning $100000, roughly 2 out of 100 people might stop working when they win $100000. And so this effect is relatively small. Again, most people were cutting down their hours, taking more vacations, and staying at their same employer. So these are relatively small labor supply effects, and probably relatively important increases in wellbeing for people who are receiving these transfers.

Beckworth: So once again we're seeing only small effects, at best, in the labor supply response to these transfers.

Marinescu: Exactly.

Beckworth: So, one question I had, because they looked at, in the case of Massachusetts, they looked at 496 lottery winners in the '80s, and you mentioned the other ones. One question I had, and maybe this is a stereotype in my mind I needed to spill, but I have this stereotype in my mind that lottery winners are often very unhappy people after they win the lottery. So I saw this documentary, and this is probably pure selection bias. All the people that got in the show were probably the really miserable ones who couldn't handle the money. But almost every one of them said, "I wish I hadn't bought that ticket."

Marinescu: Right.

Beckworth: Because once they won the lottery, people come out of the woodwork, relatives they didn't know exist, friends they didn't know they had come knocking on their door.

Marinescu: Right.

Beckworth: And they're just miserable. This is a completely different discussion.

Marinescu: Right. I think this is mostly a selection bias.

Beckworth: Okay.

Marinescu: Because the shows will focus on the biggest winners and probably also those who have the most trouble. So I'm not saying that this can't happen, but it's probably a very kind of small share of the population for whom this would be happening.

Beckworth: Okay.

Marinescu: Interestingly in Sweden they had a pretty large sample size of lottery winners because in Sweden, there are subsidized saving instruments that come with lottery tickets. So that's why it wasn't as weird of a sample. In Sweden, basically everyone who saves, or many of the people who save, play the lottery. Because it's one way that the Swedish state uses to encourage people to save.

Beckworth: Interesting.

Marinescu: And so that allowed the authors to look at a much more representative sample of the population than you might find in people who actually buy lottery tickets. And so they were able to show that the effect on work was small, and also was proportional to the amount won. So it's not like there's an amount that if you win more than this in the lottery, you're going to stop working. Instead, the effect is roughly proportional. The more you get, and the less likely you are to work, but again the effect is small. But I think it's important because many people tell me about the study in Alaska, "Oh, $2000 per person is not a lot, but if you gave people enough to live on, they wouldn't be working." And I said, "No, I mean, some may not, but we know from the Swedish study that it's just proportional." Yeah, I mean, the bigger you make it, and the lower the incentives to work, but there's no bang bang effect so that, okay, if I give you $20000, that's it.

Beckworth: Yeah.

Marinescu: Everyone's out. Not working. That's not how it works.

Beckworth: Well that's great. Those studies are dispelling my stereotypes, and that needed to be done, I guess. TV does a good job of using selection bias, for sure.

Marinescu: Yeah. Well, I mean, obviously they want the most interesting story, which is often the outlier.

Beckworth: Right, right. So I'm getting the person as I watch that show. So let's summarize the lessons, the big lessons from your paper No Strings Attached. What can we conclude about UBI?

Marinescu: Right. So based on the existing studies, we know that giving people cash with no strings attached has small to no effects on work, and that it can improve educational and health outcomes, especially among the most disadvantaged.

Beckworth: Okay. So that's very promising for advocates of the UBI. It's definitely evidence they can use to make their case for promoting a UBI.

Marinescu: Right. But we have to keep in mind that it is not a trivial matter to know how you would finance that. And that's where we need to better understand the trade-offs involved in different financing options.

Beckworth: Okay. So the concern is, if this were to go national, how would you pay for it? Would there be general equilibrium effects if they had to be financed in maybe some distortionary way?

Marinescu: Exactly. Exactly.

Beckworth: Okay.

Marinescu: Hence my idea of financing it for the carbon tax, which instead of distorting, corrects a distortion.

Beckworth: Okay.

Marinescu: Namely a negative externality.

Beckworth: Right. Very nice. Let me throw another possible experiment that would maybe help shed light on UBI. There's a gentleman named Sam Hammond from the Scanlon Institute, and he's written some pieces where he argues there's been a recent change in the Canadian child tax credit that now, I think it's just been for a few years, but now children under five, if you have a child under five, you get $6400. And then from age five to ten, it's $5500. So, pretty significant amount of money. Would that be considered something you could look at to be a proxy for a UBI?

Marinescu: Exactly. So I think that's another promising solution, is to have a child allowance. A child allowance. And importantly, or a refundable child credit. Because the problem is, in the US, we do have a child credit, but it's not refundable. Meaning that only people who have tax liabilities can benefit from it. And so basically that excludes the poor from this benefit, which is really unfortunate, because a great benefit of having a universal child allowance is that it would really help to diminish, substantially, child poverty. Because we know that in the US, most households who are poor have children. And that's really bad in the sense that if we don't invest in our future, that's going to be a problem, right? So if we let a lot of households with poor kids and no money or not enough to make ends meet, that's definitely an issue. And that's why this, too, can have bipartisan support.

Marinescu: And so I think that's another promising way of going about it. Of course it's not universal. So when it comes to what we were talking about earlier in terms of economic security for all, especially in the face of disturbances in the labor market, well, having the child allowance is not necessarily going to certainly help everyone. If you don't have young kids, then too bad for you, sorry. So it's great, it has its advantages of focusing on kids. And honestly I think we're not investing enough in kids today. But, on the other hand, the downside is that it doesn't cover everyone in terms of giving economic security in the labor market no matter whether you have young kids or not.

Beckworth: That's a fair point. And politically it becomes a tougher sell, then, too, right? Since people who don't have kids might wonder, "Why am I paying for someone else's child?"

Marinescu: Right. Exactly.

Beckworth: So it's harder to market and sell that.

Marinescu: Well, but in another way it's easier, because then you can say, "Well, it's for the kids."

Beckworth: That's true.

Marinescu: Not for lazy bum adults.

Beckworth: Do you have a heart? That's true. Fair point. And then also, people who would get this have high to consume. They're actually going to use this money. You could argue, like you said, it's not going to some person living in their parents' basement playing video games and it's not going to some really wealthy person who doesn't need it.

Marinescu: Right.

Beckworth: It's actually going to someone who's actually going to use those dollars and invest in the future of labor supply of a country. And in a place, even in the US, recent evidence suggests that labor fertility is going down, this might be an important program.

Marinescu: Encouragement.

Beckworth: Yeah.

Marinescu: Right. Right.

Beckworth: Incentive to-

Marinescu: Although, to be fair, most of these schemes have been started before don't have big effects on fertility, so.

Beckworth: Oh really, okay.

Marinescu: I wouldn't put my eggs on that.

Beckworth: Okay.

Marinescu: From that perspective.

Beckworth: All right, fair enough.

Marinescu: But still, it's good to perhaps combine with other policies. This certainly makes it easier for parents to make ends meet.

Beckworth: Okay. Our guest today has been Ioana Marinescu. Ioana, thank you for coming on the show.

Marinescu: Thank you.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.