Eliminating Poverty with a Guaranteed Annual Income:

Right Goal, Wrong Approach

Canada is a rich country by anyone’s definition. Yet, while the number of Canadians living in poverty has declined almost one in ten Canadians lives in a household struggling to make ends meet. According to the most commonly-used measure of poverty in Canada, Statistics Canada’s post-income tax Low Income Cut-offs (LICOs-IAT)[1] , there has been a significant reduction in the poverty rate in Canada over the past 15 years. Between 1996 and 2011 (the last year for which data are available) the poverty rate fell from 15.2% to 8.8%. Despite this progress, in 2011 almost three million Canadians were living in poor households and half of them had incomes at least 26% below their LICO-IAT low income thresholds.

Many Canadians, deeply concerned about social justice, including Senator Hugh Segal, advocate a Guaranteed Annual Income (GAI) as the best way to eliminate poverty in Canada.

An adequate GAI is not a new idea. Between 1969 and 1974 almost a dozen highly developed countries seriously considered implementing such a program. However, none of these schemes was ever adopted.

There is a reason for this widespread failure to adopt an adequate GAI as an instrument for eliminating poverty. No one has ever been able to design a program which simultaneously provides adequate incentives to earn, makes a major dent in the incidence and depth of poverty and is not ruinously expensive. That is to say, despite the attractiveness of a GAI as a concept, social policy designers in a range of countries have so far been unable to develop a specific GAI that would be both politically and fiscally feasible while still effectively eliminating or, at least markedly reducing, poverty. The devil has truly been in the details.

In 1994 I was assigned with two other officials of the then Department of Human Resources Development[2] to develop GAI options to address poverty in Canada. We came up with two distinct proposals. One was designed to be reasonably adequate. At the same time it provided the no disincentive to earn because the income guarantee was not taxed back as other income rose. The second was designed to require no additional government spending and to provide good incentives to earn by taxing back the guarantee at low rates as income from other sources rose.

The first design provided for an income guarantee of $20,000 for a family of four and $7000 for a single adult. For Census Metropolitan Areas (CMAs) with a population of 500,000 or more, this was still well below the 1994 LICOs-IAT thresholds of $26,092 for a family of four and $13,800 for a single adult. Part of the costs of this option were to be paid by eliminating personal income tax exemptions for the non-elderly and eliminating or sharply reducing all other income support programs for this age group such as welfare , child benefits and Employment Insurance. However, even at these less than adequate levels, this design would have cost governments an additional $93.1 billion annually based on 1993 data. Moreover, while it would have cut the total dollar amount by which the income of all poor households fell short of their low-income thresholds by 45%, it would have reduced the percentage of Canadians living in poverty by only 3.1 percentage points from 12.8% to 9.7%.

The second design provided for much smaller income guarantees: $15,000 for a family of four and $4,500 for a single adult. This option would have reduced the total dollar amount by which the income of all poor households fell short of their low-income thresholds by one-third, but would have reduced the percentage of Canadians in poverty by only 1.4 percentage points to 11 .4%.[3] Even more troubling, it would have left 51% of households worse off than under the existing income support system including 20% of households with incomes under $20,000.

For such small reductions in the poverty rate, the majority of Canadians would probably find unacceptable the cost of first option and the distributional outcomes of the second. We therefore reluctantly concluded at the time, and I continue to believe now that a comprehensive GAI for the non-elderly is not a viable approach to the significant reduction, much less the elimination, of poverty in Canada. It costs too much and just doesn’t fix the problem.

So how do we pull more Canadians out of poverty and improve the situation of those who remain poor? There is no single answer, but I will be discussing this question in future blogs.

[For readers interested in a more detailed technical explanation of the concept of a GAI and why I believe it is not a viable approach to significant poverty reduction in Canada, I have written a seven-page article on this theme which I will send on request. My e-mail address is: michaelfrederickhatfield@hotmail.com]

One of the readers of this blog has suggested that I tackle the question, “Why do smart people do stupid things?” as a topic.

It is certainly a question worth exploring.  First, however, some terms of the question need to be more precisely defined. To start with, who are smart people? We all know individuals who consider themselves smart and are even thought by many others to be smart, but whose superficial “smartness” does not equate with genuine intelligence. When such people do stupid things what needs to be explained is not the gap between their actions and their intelligence, but how they got the reputation of being smart in the first place. 

Second, what is a stupid thing? Some actions which are judged to be stupid in hindsight are taken after careful thought and with the best available knowledge of the relevant facts. These actions seem stupid, not because they were reckless or in disregard of something obvious, but because a factor which could not be reasonably foreseen occurred to make events turn out badly. Lack of success retrospectively turns decisions which were merely unfortunate into something stupid. That being said, however, there are many examples of people who have a long record of intelligent decisions doing something which the average person would identify as being obviously dangerous, excessively risky or just plain dumb. What were they thinking? How could they have done something so foolish?

Leaving aside instances  where such people were drunk, under the influence of other mind-altering drugs or suffering from a mental illness and were thus not in a position to make a rational decision,  why do truly smart people do truly stupid things?

Perhaps the most obvious answer is arrogance and an accompanying sense of entitlement. Conrad Black, Eliot Spitzer and Lance Armstrong had commendable achievements in business, politics and professional sports respectively, and are generally recognized as having above average intelligence. However, their intelligence seems to have led them to believe that they were entitled to act outside accepted moral codes and get away with theft of documents, adultery and use of performance-enhancing drugs respectively.

A variation of this is the situation where a person is genuinely smart in a given field, but is called on to make a crucial decision in another field where they lack the knowledge or experience to make the appropriate choice. Ashamed to admit they are out of their depth, they hastily choose a course of action without seeking counsel from persons wiser and/or more experienced in the field. This may be part of the explanation of the cheque written to Senator Mike Duffy by the Prime Minister’s then Chief of Staff, Nigel Wright.

Another explanation is hubris. People who have made intelligent decisions in the past in their area of expertise, whether it is political strategy, or making investments or identifying economic or social trends can easily become convinced that their knowledge is so complete and their thought processes so sound that they overlook or undervalue factors which contradict what they wish to be true. Unable to distinguish their emotional loves and hates from their rational conclusions, they do things that fly in the face of facts and logic which predictably turn out badly for themselves and those who depend on them.

In some cases, smart people are the victims of their own intelligence. One characteristic of smart people is that they have more imagination than people of more ordinary intelligence. They can conceive of and thus entertain ideas and strategies which would not have occurred to other people. Often, those ideas and strategies turn out brilliantly. On other occasions they lead people to take risks which appear to be and turn out to be reckless.

Some years ago the golfer Phil Mickelson was leading the United States Open golf championship when he came to the last hole. His tee shot went into the woods. Most ordinary golfers, upon finding the ball would have instantly concluded that it was in an unplayable position and would have taken a penalty stroke which would still have left Mickelson in a position to win. However, Mickelson saw an opening in the trees which he believed he could hit the ball through to the fairway, clinching the championship.   In the event he hit the ball off a tree; it ricocheted back deeper into the woods and he wound up making a score which cost him the championship. Afterwards, he berated himself saying “What an idiot I am.”  In one sense he was an idiot for taking an unnecessary risk. But the reason he took the risk was because he was smart enough to see a possibility which most other golfers would not even have noticed and talented enough to believe he had a reasonable chance of pulling it off.

Yet another explanation is that stupid things appear more stupid when they are done by smart people.  During the presidency of Dwight Eisenhower the Republican leader in the United States Senate was William Knowland of California. He was not known as a brilliant political strategist. Eisenhower said privately of him, “that in his case there seems to be no final answer to the question, ‘How stupid can you get?’ Even when Knowland made a stupid political decision few people pointed out its stupidity because no one expected anything different. His Senate colleague from California between 1948 and 1952 was Richard Nixon. Many people disliked Nixon, but most people considered him a smart politician. Therefore when he began his 1960 presidential campaign with a promise to campaign personally in all 50 states, many people raised the “How could a smart person be so stupid?” question about a promise that so drastically limited the flexibility of his campaign strategy and which no one had expected or asked him to make.

Nobody is perfect. Even the smartest people do stupid things from time to time, even and sometimes especially in the areas where they have the best expertise and insight. From that perspective the answer to the question “Why do smart people do stupid things?” seems obvious. However, smart people avoid having the stupidity of their bad decisions exposed often enough (through good luck, or because the decision involved was about something minor) that we become convinced of their infallibility. Thus, when a stupid decision leads to demonstrably bad results we are genuinely surprised and ask the question suggested by my reader.