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Submitted by Rogier van den Brink on
Distribute cash to every citizen, unconditionally and untargeted, because they know best how to use it? There are very few countries which do this. As far as I know, today, only Alaska and Mongolia do it. Alaska has been doing this since 1982. Mongolia started recently, because of popular pressure to deliver on an escalation of political promises between the two main political parties made during the last elections. We do not know the impact of these monthly cash handouts on household behavior in Mongolia, since it has been too recent. We do think, however, that it is stoking inflation. And we know that even during the current mining boom it has already proven difficult to finance: the government just missed the last two payments. We also know that the two major parties have promised not to promise cash handouts ahead of the next elections, and to discontinue the program thereafter. They now both agree that it was a bad idea, or so they say. What do we know about Alaska? There, the wealth distribution takes the form of an annual payment to each resident, financed from the dividends of the Permanent Fund. We know that the popular support for it is huge. So much so, that it is a political taboo to even suggest tampering with it. So the first lesson from Alaska is that once such a scheme is in place, it will be very difficult to reverse. It gets worse: the constituency around paying out the dividends to the residents is so strong that the original objective of the Permanent Fund—-to sustain public services once the oil revenues disappear—-has now been completely subverted to providing permanent dividends to the residents. When the oil revenues run out, and they are declining as we speak, there will be no alternative source to fund public services, other than tax increases. And we know how Sarah feels about that... But what has been the economic and social impact? One study tried to link the cash distribution to improved health outcomes. Surely, higher incomes should lead to better health outcomes? Surprisingly, in the short run, Alaska’s cash handouts actually increase mortality! Why is this? Because lump sum payments like this produce the “full wallet” syndrome, causing people to suddenly increase consumption. And not just of alcohol and drugs-—that is actually the lesser of the problems. But consumption in general, which leads, for instance, to more heart attacks, strokes traffic accidents. So mortality is pro-cyclical. “During the week that direct deposits of Permanent Funds dividends are made, mortality among urban Alaskans increase by 13 percent” (Evans and Moore, 2010, p. 2). In other words, there is no case to be made for proposing cash distributions from a health perspective. In fact, the evidence supports a strong case against the cash handouts. They can kill you. There are other arguments against universal cash hand-outs. These include disincentives to work and increased migration from other states and countries leading to lower wages. Unfortunately, and maybe tellingly, the social and economic impacts of the Alaskan dividend distribution have not been studied. One explanation given is that Alaskans feel that the use of the dividends is a private matter, not to be researched. However, researchers do tend to believe that the payouts have helped to reduce poverty among Native Americans and improve the income distribution in general. But those outcomes could of course also have been achieved, and more efficiently, through targeted transfers, so they hardly make a case in favor of universal hand outs. What is the most compelling case against? That the Alaska pay outs have undermined the basis for collective action and citizens’ interest in the public good. Here is Scott Goldsmith, Professor of Economics at the University of Alaska, who has studied the scheme for a long time. He concludes: “After 29 years the dividend has become an integral part of the Alaska experience. Many, if not most, Alaskans view it as an entitlement—-a distribution from their share of the natural resource wealth of the state. An entire generation of Alaskans has been raised having received a dividend annually since birth without necessarily understanding the purpose for which it was created. This generation has also never experienced paying for the state services they have received because petroleum revenues have covered all costs. This has fostered a distorted sense that the role of the state is to provide public services at no cost and also to hand out cash to all citizens. Some would compare this generation of Alaskans to trust fund babies. Furthermore, because there are no personal taxes and receipt of the dividend carries no public responsibilities, the two together undermine the sense of community that comes from the need to collectively choose and fund public services. They also foster a disconnection between government and residents, leading to a deterioration of the quality of government.” (Goldsmith, 2010, p. 19) The first principle of our policy advice should be “do no harm”. Based on what we know about the Alaskan experience, let’s not include this idea in our menu of policy options, Marcelo and Shanta. references: William Evans (Department of Economics of the University of Notre Dame) and Timothy Moore (Department of Economics of the University of Maryland, 2010. "The Short-Term Mortality Consequences of Income Receipt". Scott Goldsmith, 2010. "The Alaska Permanent Fund Dividend: A Case Study in Implementation of a Basic Income Guarantee." Anchorage, Alaska: Institute of Social and Economic Research, University of Alaska.