Chicago may hand $500 monthly for a year to 5,000 low-income families

Chicago may hand $500 monthly for a year to 5,000 low-income families

Chicago might spend $32 million on the nation’s largest test of universal basic income. What happens after that year is one question, as is whether handing out cash will truly fix anything.

Chicago Mayor Lori Lightfoot’s proposed 2022 Chicago budget includes a universal basic income pilot program that would give $500 a month to 5,000 low-income families for a year. The effort would cost roughly $32 million and be funded by temporary federal grants.

In her budget speech Sept. 20, Lightfoot said, “This program of cash benefits for our people, if approved, would be the largest in the history of the United States.” Major cities across the country have already adopted similar test programs, but on smaller scales.

Universal basic income is a proposal to send no-strings-attached direct financial assistance to every citizen or resident of an area. Because pilot programs tend to include only a small test group, they are not truly universal and are therefore an imperfect way to study the concept.

Universal basic income has been a popular idea among progressive and socialist members of the Chicago city council in recent years. Former Ald. Ameya Pawar introduced a resolution to create a task force to study the cash grants in 2018, which failed to pass. In June 2021, a group of aldermen and progressives, led by Ald. Daniel La Spata of the Democratic Socialists Caucus, created a spending proposal for Chicago’s $1.9 billion in American Rescue Plan aid which included $50 million for a universal basic income test program.

That proposal came after a non-binding resolution calling for the cash grants passed 30-18 in March. Judging by the outcome of that vote, the pilot program seems to have enough support to pass with the overall budget. But some opposition remains.

“If universal basic income is included, I most likely won’t be supporting [the mayor’s budget]. I’m torn. I don’t like to cherry pick. But it’s a socialist idea that doesn’t consider the mainstream,” Ald. Nick Sposato told Politico.

While currently embraced more by people on the political left, versions of basic income programs have received support from economists across the ideological spectrum – and from different schools of economic thought. In fact, both Friedrich A. Hayek and Milton Friedman,  arguably the two most prominent and influential free-market economists of the 20th century, are on the record in support of the concept.

Hayek endorsed the idea of a minimum income in the abstract, writing that the assurance of “a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself,” was a legitimate common protection for society and a way to promote individual economic freedom.

Friedman pursued the idea further, arguing in favor of a negative income tax that functions similarly to universal basic income in his 1966 report, “The Case for the Negative Income Tax: A View from the Right.” The main difference is the negative income tax would only pay individuals below a certain income threshold, proportional to how far below the threshold their earnings are, while individuals above that threshold would pay a proportional tax on their income. This makes a negative income tax less expensive than universal basic income, which would go even to the very wealthy. But Friedman’s basic principles and arguments nearly mirror those of universal basic income proponents.

Friedman argued a negative income tax would be cheaper and more efficient than the existing welfare state, which requires a large bureaucracy to administer benefits and ensure compliance with various restrictions on eligibility or the use of aid. Some welfare programs also create a “welfare cliff,” meaning earning money through work can cause recipients to lose money on net when their income rises enough that they are no longer eligible for certain benefits. The design of the negative income tax also avoids the welfare cliff by ensuring earning more dollars through work never causes a recipient to lose out on more benefits. For these reasons, Friedman proposed the negative income tax as a replacement for other programs, and was clear he would not support layering it on top of other welfare benefits.

Friedman’s idea ultimately led to the creation of the earned income tax credit, though it has significant differences from his proposal: most notably a work requirement. The earned income tax credit is now a pillar of the U.S. social safety net, providing 27 million Americans with $65 billion in benefits in 2017 while studies show it boosts overall employment.

Congress may have decided to pursue the earned income tax credit instead of the negative income tax because of results from four pilot programs conducted between 1968 and 1980. The negative tax tests were initially thought to show a significant decrease in work effort among recipients. Later research has called some of those findings into question, and newer pilot programs have sometimes found the opposite effect.

Concerns that no-strings-attached financial benefits will cause people to work less are one of the most common objections among universal basic income opponents. However, the effects of guaranteed income on labor supply are still not settled.

Results from a 2019-2020 pilot program in Stockton, Calif., funded by private donations showed full-time employment increased 12 percentage points among recipients and significantly more than a control group. Families that received the $500 monthly payments for a year also saw more stability in their income and improvements across a range of mental wellness measures.

Similarly, a pilot program in Finland found recipients increased work more than those on traditional unemployment benefits, though the researchers cautioned concurrent changes in unemployment law could have impacted the results.

Inconclusive results from the Finland test program as well as the older U.S. trial runs point to a fundamental problem with universal basic income tests: the results are very hard to disentangle from other economic and social factors. Because pilot programs must operate in a world where recipients could be receiving other welfare, and because the programs are small and temporary, results might not always be valid for an entire population.

For example, it could be that researchers don’t see a disincentive to work show up in short-term pilot programs because recipients know the benefits are temporary and plan for the long term. But if the program were permanent, beneficiaries might feel more comfortable scaling back their work hours.

Another concern with universal basic income is the cost. A program paying $1,000 a month to every American ages 18-64 would cost nearly as much as the entire existing safety net, according to a 2016 analysis by the center-left think tank Third Way. For this reason, many modern basic income proponents on the right still support Freidman’s concept of entirely replacing current welfare benefits.

If Chicago lawmakers end up deciding their pilot program is a success, they will struggle to figure out how to pay for it in the long run. They will struggle even more in trying to expand it to include additional families. Federal funds supporting the pilot program will run out in 2024.

Families across Chicagoland were hard hit by the pandemic. In theory, a universal basic income program can help these families get back on their feet, but Chicago cannot afford it without structural changes to its failing finances.

Chicago must first address out-of-control pension spending and skyrocketing property taxes. Lightfoot’s budget also comes with a $76.5 million property tax increase that will leave Chicago residents paying an extra $72 to $180 per year depending on where they live. That tax hike will hurt the economy and run counter to the programs Lightfoot hopes will boost the recovery.

Runaway pension costs are the driving force behind rising Chicago property taxes, as well as its declining municipal services.

Chicago recently ranked 141st out of 150 cities for municipal service quality. The primary reason for Chicago’s poor city services despite its high tax burdens is most of the money is eaten up by the pension crisis. From 2011 to 2021, spending on pensions has increased 239%, while spending for city services has only increased 18%.

Without structural changes to balance spending and revenue in the long run – starting with an amendment to the Illinois Constitution to allow pension reform – Chicago will continue asking its taxpayers to pay more to get less. Experiments with novel proposals such as universal basic income will either be impossible to sustain or come with an economically damaging price tag for already overburdened taxpayers.

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