America

The Siren of Universal Basic Income


- March 26th, 2019
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Word on the street is that Andrew Yang—a Democratic presidential hopeful—has a fat bag of cash that he’s willing to give out to all American citizens if he becomes president.

Although I have yet to see the bag, I trust Andrew Yang without reservation. The bag is secure and stuffed with paper. We can all look forward to getting a universal basic income (UBI) of $1,000 per month if he wins.

Scratch that—when he wins. Who doesn’t want $1,000 a month? I do, and I know that you do, too.

The question is: do we need UBI? Andrew Yang certainly thinks so, as do many economists.

Yang’s case for UBI is simple: robots have taken millions of jobs from Americans, and they will take tens of millions more. Estimates suggest that the introduction of autonomous vehicles could eliminate up to 5 million driving jobs virtually overnight. Furthermore, no job is safe. Artificial intelligence is now threatening the employment of highly-educated professions like doctors and lawyers. Yeesh.

Journalists keep telling ordinary Americans to “learn to code”—but what happens when computers can do the coding themselves? Do we deserve to starve to death while men like Jeff Bezos (and his robot-owning pals) literally lock their “lucky” few remaining workers in cages?

Given these bizarre—borderline dystopian—circumstances, UBI might be crazy enough to work. But just because it could work doesn’t mean that it should.

While I admit that most of the standard “conservative” critiques of UBI are bogus, UBI remains a bad idea.

Mainstream Critiques of UBI are Bogus
The first question worth asking is whether America can afford UBI?

Yes. Despite the incessant hand-ringing from economically illiterate charlatans like Ben Shapiro, America could afford to implement a UBI. Easily.

First of all, how much would Andrew Yang’s UBI of $1,000 per month cost? Let’s start with some basic math: $1,000 per month, multiplied by 234 million American citizens over the age of 18, equals $2.8 trillion per year. This is a lot of money—no question—but the real cost is much lower because Yang’s proposal would not allow the UBI to “stack” on top of benefits people already receive from the federal government.

For example, if a citizen received $300 worth of food stamps per month, her UBI check would be $700. Furthermore, if a citizen received $1,100 in food stamps per month, then they would not receive a UBI check (although they would keep their more valuable benefits).

Because the federal government already spends $1.5 trillion on various welfare programs and social security, this brings the cost of UBI down by a commensurate amount. Thus, Yang’s UBI would actually cost an extra $1.3 trillion.

On top of this, there is good evidence to suggest that providing people of marginal means with additional income would reduce healthcare and penal costs. Yang estimates these savings to be in the neighborhood of $100 billion to $200 billion per year. This seems reasonable, and would bring down the annual cost of UBI to $1.2 trillion.

Now let’s put this in context. America’s federal budget was just over $4 trillion in 2018. Meanwhile, President Trump’s proposed 2019 budget is a record-setting $4.75 trillion—an increase of $750 billion. And guess where that money went? Who knows? But it didn’t go into your pocket, that’s for damn sure.

If the federal budget grows by $450 billion next year (and it likely will), then Yang could redirect the pointless budget increases from 2019 and 2020 into the UBI and call it a day. Frankly, I’d rather this happen than to see us throwing that $1 trillion into the deep state’s frothing maw.

“Won’t Universal Basic Income Cause Inflation?”
First of all, that ship has sailed.

The U.S. dollar has lost 97 percent of its value since the Federal Reserve Act of 1913 created the Federal Reserve system and instituted fiat currency. Further, I note that the vast majority of Republicans running around like Chicken Little while clucking about inflation are wholly in favor of protecting the Federal Reserve’s monopoly on money-creation. They don’t care about inflation. They are frauds.

Unless you are willing to break the bank like the all-American hero President Andrew Jackson, then you don’t get to cry about inflation. Period.

Second, UBI would not cause inflation any more than federal spending on food stamps or fighter jets causes general inflation. This is because Yang’s proposed UBI is redistributive in nature: it does not create new money, it simply shuffles it around. This criticism is a logical dead-end, and I don’t know why “conservatives” harp on it incessantly. It’s embarrassing.

Finally, let’s assume that Yang decides to pay for UBI by straight-up printing money. Would this cause inflation? At this point, I’m not so sure. Consider that between 2009 and 2014 the Federal Reserve purchased some $3.5 trillion in U.S. Treasury bonds and other government-backed mortgage securities from private banks. These “stimulus” purchases freed up the banks’ capital so that they could settle their debts and lend the remaining funds.

Now, because we have a fractional reserve banking system (wherein banks must keep $1 in reserve for every $9 they lend out), these purchases actually created an enormous amount of money downstream—up to $35 trillion. Did America experience dramatic inflation between 2009 and 2014? No. So why should we assume that a much smaller injection of money into the economy via UBI would cause abnormal inflation—much less hyperinflation?

The money is already funny, so we might as well spend it on jokes like UBI.

“Surely UBI Would Reduce the Incentive to Work!”
Maybe, but probably not. The fact is that four-in-five Americans are living paycheck to paycheck—vanishingly few people are going to retire on an extra $12,000 per year. It is far more likely that they will put the extra money to good use (perhaps fix their car, pay some credit card bills, etc.). The bulk of academic studies suggest this would be the case.

Paradoxically, UBI might actually create an incentive for welfare bums to work. How so? Many welfare benefits are currently cut off when you reach certain income thresholds. This actually creates an economic incentive to stay poor. Because Yang’s proposed UBI would not stack with current welfare programs, people near the cut-off point would have no reason not to make a little extra. After all, cash is clearly better than food stamps.

I know what you’re thinking: why not just cut taxes by the equivalent of $1,000 per month? The main reason is that most of the people who would truly benefit from a UBI don’t pay federal income taxes—there’s nothing to cut.

Regardless, there’s a strong psychological benefit to having a guaranteed income that is not tied to your employment: it would give regular Joes the “f— you” money they need (and deserve) to look for a better job, get a better education, or take an entrepreneurial risk. America was built on risk, and risk is built on “f— you” money.

F— you. Give me my $1,000. It really is that simple.

Reality: America Does Not Need UBI
The above critiques represent the best that mainstream “conservative” pundits have to offer. All of them fail. Does this mean that America needs a universal basic income?

No. UBI is like putting a Band-Aid around America’s ruptured aorta—it might help, but it won’t stop our economy from flat-lining.

Here’s why:

Robots aren’t taking our jobs. Andrew Yang thinks automation will result in mass unemployment, and therefore we need a UBI to soften the blow. Both the economic logic and evidence suggests otherwise.

Begin with this logic: Employment is determined by the ratio between productivity and output. All other things being equal, higher productivity (getting more done each hour) means fewer jobs, while higher output (making more stuff) means more jobs. If both productivity and output increase at the same rate, then employment does not change. This remains true no matter how fast productivity increases—no matter how many robots we build.

Consider that between 1950 and 1979 America’s manufacturing productivity increased by over 3 percent per year, and yet employment increased. Why? Because output grew even faster.

By the 1990s, things had changed. Between 1989 and 2000 American manufacturing output grew by 3.7 percent on average, while productivity grew by 4.1 percent. Guess what? Employment declined. Since 2000, output growth nosedived: output grew only 0.4 percent per year, on average, while productivity increased at a rate of 3.7 percent.

As a result, America lost more than 4 million manufacturing jobs.

What did the media blame for America’s job loss? Automation. Yet the historical data refutes this claim unambiguously: automation does not cause job loss unless output growth lags behind. So the real question is: what is causing output growth to decline?

Answer: the trade deficit.

The fact is that much of America’s new output growth is occurring abroad, as opposed to domestically. Rather than build a new factory in Michigan, we build it in Mexico. Rather than open a call center in Philadelphia, we set it up in the Philippines. We consume more and more goods and services, but do not make them ourselves. As a result, output stops growing, but productivity does not. This gives the false illusion that, by increasing productivity, automation is causing job loss—but this is only the proximate cause.

The real culprit is, and has always been, offshoring. Thanks for that, David Ricardo.

UBI and mass immigration are incompatible. You can have immigration or welfare—never both. This is the Democrats’ dilemma.

Fact is, immigrants receive more in benefits than they pay in taxes. UBI would compound this problem to a comical (and terminal) degree.

Consider that a relatively recent, and comprehensive, study from the National Academies of Sciences, Engineering, and Medicine found that although immigration is (theoretically) revenue-neutral in America, not all immigrants are created equal. Half of all immigrants actually receive more in government assistance than they pay in taxes, but thankfully they are balanced out by the other half. Specifically, immigrants who came to America for family reasons, or arrived as refugees, cost a net present value of $170,000.

Net present value is how much money the government would need to invest today, at a yield of inflation plus 3 percent, to pay for that immigrant’s tax deficit over the course of his expected lifetime. Of course, the government does not do this—it spends only as it receives. Therefore, looking at net present value creates artificially low expectations.

According to the Heritage Foundation, each non-economic immigrant more realistically costs a net of $476,000 in welfare payouts. And this does not account for any increases in government programs. Applying the more realistic figure to the original study means that immigrants consume far more in government services than they pay for. In fact, if immigration levels remain unchanged, those arriving over the next decade would cost American taxpayers a net of $1.9 trillion over their lifetimes.

Remember, this figure is just at our current level of welfare—now imagine adding UBI into the mix. It would be economic Armageddon.

Even if you don’t care about the viability of America’s welfare state, you should care that UBI would turn America into a magnet for welfare-seeking illegal immigrants. If you think it’s bad now, just wait until people from the developing world hear that they can make five-times their annual salary just by existing in America.

You ain’t seen nothin’ yet.

Universal Basic Income Will Not Solve America’s Economic Problems
The French poet and aviator Antoine de Saint-Exupery once said, “Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away.”

A lovely sentiment, but the English poet Robert Browning beat him at his own game with the phrase, “less is more.” This aphorism exposes the core problem with UBI: a universal basic income is additive rather than subtractive—it’s more, not less.

America has big economic problems. UBI would solve some of them. However, UBI would also introduce something new into the system that could have unforeseen (and unforeseeable) consequences—consequences which could be disastrous. Why?

The economy is a complex system, and is therefore subject to the causal opacity resulting from nonlinear, and often autocatalytic, interactions between second-order effects. This means complex systems can only be understood post hoc and never a priori without previous empirical sampling.

Wow. That was a mouthful of jargon. What does it mean?

Andrew Yang, and the economists who support UBI, suffer from physics envy that results in them confusing simple for complex systems.

Simple systems are governed by something called first order causality: cause and effect are related in a linear, Newtonian way. Imagine a billiards table. Every time a ball is struck it responds perfectly predictably. No surprises. Austrian School economists and (literal) Communists both believe that the economy works like a giant pool table, in that we can understand the consequences of our economic policies a priori. If only we had perfect knowledge then we could “solve” the economy.

But that’s not how the economy works. The economy is a complex system governed by second order causality—cause and effect are related in an opaque, nonlinear way.

Imagine a butterfly. It flaps around your garden, disturbing the air ever so slightly. Although this disturbance alters our immediate atmospheric conditions imperceptibly, its effect may magnify because of exponential interactions and positive feedback loops. Perhaps this disturbance gives a breeze just enough impetus to blow. This catalyzes another breeze, and another. Now a gust of wind. A month later a storm rumbles overhead—it was born of the butterfly’s wings.

It is not immediately obvious how cause and effect are related in complex systems, and this is why tampering with them is so dangerous. Will we get a butterfly-kiss or a tornado? A breeze or a blizzard?

The Yang Gang believes that UBI will solve particular economic problems. Maybe it will. But there is no possible way of knowing what new problems UBI may cause. Perhaps they will be worse than the ones UBI “solved.” In fact, they’ll probably be worse—such is the nature of political iatrogenics.

If we want to heal America’s economy then treating the symptoms with UBI isn’t good enough: we need to purge the disease.

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