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Can Guaranteed Income Truly Reduce Debt and Spending? A Critical Analysis

Writer's picture: Citizens Coalition AdminCitizens Coalition Admin

The Compton Pledge was introduced by Compton Mayor Aja Brown on October 16, 2020. This initiative, in partnership with the Fund for Guaranteed Income and the Jain Family Institute, aimed to distribute recurring cash relief to approximately 800 low-income residents over a two-year period.


In short, the Compton Pledge did not produced the "hoped for success." It demonstrated that guaranteed income programs may provide some financial stability, help reduce debt for some participants, and lower reliance on high-interest credit. However, the results varied, with some outcomes—like debt reduction—not reaching statistical significance. Additionally, its scalability and broader economic impacts remain untested. So while it showed some promise, but it wasn't an unequivocal success.

The recently published study by Phys.org article examines the effects of the Compton Pledge, a guaranteed income program that provided approximately $500 monthly to 698 randomly selected low-income households over two years. The findings indicate that recipients reduced their spending by an average of $302 per month compared to a control group, and their non-housing debt decreased by nearly $2,200 over 18 months, though this reduction was not statistically significant. These outcomes suggest that participants may have utilized the additional income to pay down existing debts.




While the study offers valuable insights, it's important to consider the broader context of guaranteed income research. For instance, the Stockton Economic Empowerment Demonstration (SEED) in Stockton, California, provided $500 monthly to recipients and observed different outcomes. In contrast to the Compton study, SEED participants increased their spending, primarily on basic needs, and experienced improvements in employment rates and mental health. These differing results highlight that the impact of guaranteed income programs can vary based on factors such as local economic conditions, participant demographics, and the timing of the intervention.


Additionally, the Compton study found that the frequency of payments influenced outcomes; households receiving twice-monthly transfers experienced a more significant decrease in credit card debt compared to those receiving quarterly payments. This finding aligns with other research suggesting that more frequent payments can help recipients manage finances more effectively.


While the Compton Pledge study indicates that guaranteed income can lead to reduced spending and potential debt reduction, these outcomes are not universal across all such programs. The variations observed in different studies underscore the importance of considering local contexts and program designs when evaluating the effectiveness of guaranteed income initiatives.


The claim that "guaranteed income lowers debt and spending" is partially true, but it depends on several factors, including the design of the program, the recipients' financial situations, and the local economic context.

Here's our take:


Supporting Evidence


  1. Debt Reduction:

    • The Compton Pledge study found that non-housing debt decreased, though the reduction wasn't statistically significant. This suggests a trend where recipients use the guaranteed income to pay down debt.

    • Recipients in other studies, such as the Stockton SEED project, also reported financial stability improvements, though not always in the form of reduced debt.

  2. Lower Spending:

    • The study observed that recipients reduced their monthly spending compared to the control group, potentially because the guaranteed income reduced the need for high-interest credit-based consumption.

  3. Behavioral Economics:

    • Frequent, predictable payments (as shown in the Compton study) may encourage better financial planning and debt repayment over sporadic or lump-sum payments.


Potential Caveats


  1. Generalizability:

    • The findings are context-specific. In areas with lower living costs or different economic pressures, guaranteed income could have a different effect (e.g., increased spending on essentials rather than debt repayment).

  2. Limited Sample Size and Scope:

    • The Compton Pledge involved 698 households, which is a relatively small sample. Larger-scale studies or nationwide programs might show different results.

  3. Participant Behavior:

    • Not all participants may prioritize debt repayment. Some might focus on immediate needs, saving, or discretionary spending, depending on their unique circumstances.

  4. Other Guaranteed Income Studies:

    • As noted with the Stockton SEED project, guaranteed income can sometimes lead to increased spending, particularly on essentials, rather than debt reduction. This contrasts with the Compton results, suggesting that outcomes vary.


Conclusion


The statement is plausible but context-dependent. It holds true in the Compton Pledge case, where a predictable income stream appears to have supported better financial behavior among participants. However, it shouldn't be generalized as an absolute truth across all guaranteed income initiatives without considering specific program designs, economic conditions, and participant demographics. More robust, large-scale, and longitudinal studies is necessary to justify this claim universally.

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