We are seeing growing discussion of a Universal Basic Income (UBI) in light of the automation revolution (i.e. “robots will take all of our jobs”), and at least one US presidential candidate is running on this platform. His name is Andrew Yang.
“The UBI he is proposing for the United States is a set of guaranteed payments of $1,000 per month, or $12,000 per year, to all U.S. citizens over the age of 18. Yes, that means you and everyone you know would get another $1,000/month every month from the U.S. government, no questions asked.”yang2020.com
Of course Yang has a FAQ on the linked page outlining counter-arguments to this entire post, so I would encourage you to read them and draw your own conclusions. We’ll use his proposal as a scenario with actual numbers we can explore.
And this certainly does sound appealing to Americans that are struggling to get by. However, because this is a nearly $4 Trillion in spending ($12,000/y * 308,000,000 Americans = $3,696,000,000) the taxes required to fund it are astronomical; so, any realistic implementation of this plan likely involves printing money to pay the bill anyway.
While Yang claims he can up with the money through taxation (among other measures), and his Value Added Tax proposal may be a good one regardless of whether or not we implement a UBI, $3.7 Trillion is no small price tag. That’s nearly 4 times the current budget deficit, nearly as large as our entire budget, and larger than our existing tax revenue all by itself; so we will explore both scenarios of “taxing the rich” or “printing money” to pay for our UBI, because it remains to be seen if we could raise the capital for such an inordinate annual expense in the first place.
Of course, we could not print money under a bitcoin-only economic system because it has a fixed supply schedule. There will only ever be at an absolute maximum of 21 million bitcoins. Printing money would never be possible in this extreme hypothetical if we are being honest with ourselves. We are nowhere near a hyper-bitcoinized economy, but if bitcoin really is a revolution of money, we should consider the full implications.
If Yang’s proposal is what we need to survive, and tax isn’t enough, then bitcoin could spell doom.
Giving everyone the same amount of money seems awesome in the short run, does absolutely nothing in the medium run, and is potentially destructive in the long run.
Let’s take a look at the potential effects of a UBI under each scenario:
1. INCREASE MONEY SUPPLY (print money)
In modern times we are constantly increasing the money supply, in various ways with different effects on the market. Most money supply expansion actually happens at individual corporate banks and at a governmental level with central banks through “credit expansion” or “fractional reserve banking,” where banks issue loans against reserves. The effects of increasing the money supply is that prices rise, and we measure and target the amount of price rise as “inflation”.
Bank credit expansion money is not evenly distributed like our UBI would be, the “new money” that is created at banks disproportionately goes exactly where you would assume, to those that take out the most credit. A great deal of this credit goes to real estate and other assets like stocks. The effect is seen in the rising prices of the real estate market and the stock market, and it is magnified by artificially low interest rates (like near-zero percent Fed funds rate we have experienced for the last decade).
This is why large amounts of money supply injection “saved” us from the 2008 financial crises as stock prices were falling, new money and liquidity entered the market supporting those prices.
But let’s consider now evenly distributing “new money” for our UBI.
In the short run, everyone takes their new $1,000 check and goes out to buy things/services. With a new supply of money flooding the market, prices rise by an equivalent amount due to increased demand for goods. Because we give everyone an equal amount of money, no one really benefits from this, except maybe for the first few people that go out and spend on the very first month of the program before the commensurate rise in prices takes hold as the market absorbs the increased demand for goods/services from the increased supply of money.
Now, this of course does not happen unilaterally across the market. Yang’s proposal specifies $1,000 for every American, every month. Giving a wealthy person an extra grand wouldn’t have much effect on their spending, as it comprises a much smaller percentage of their regular spending, a “drop in the bucket”. But $1,000 for someone living around the poverty line would account for a significant portion of their monthly spending.
Importantly, “poor people” don’t buy the same types of things as “rich people”. So what happens is the goods/services used most by lower income spenders see a relatively larger rise in prices, while again, the wealthier spenders see little effect.
There’s no real way around this, it’s basic supply and demand.
Let’s look at the other option that might be viable even if the ability to print money is removed altogether.
2. PROGRESSIVE TAXATION (tax the rich)
Remember, this would take multiple trillions of dollars, so it would not be very popular among “the rich”. Assuming that we could pass the legislation at all, or prevent a ‘diaspora’ of capital flight from heavy tax burden, is a tall order.
Essentially, the argument is that wealth disparity is far too great, the 1% (and the .1%) control such an inordinate amount of the wealth, that coupled with the coming robo-revolution, a select few control the means of production and no longer need human capital to produce goods/services. Jobs are “disappearing” and they may continue to do so at alarming rates over the coming years.
Now, I would argue it’s inflationary policies that are to blame for the predicament we’ve found ourselves in (the inordinate disparity extant today contributing to a quasi-feudalism with the “landowners” wielding too much power), but that’s a whole ‘nother thing so we will come back to that later.
Thus, our premise is that we essentially steal back some wealth from those that will be just fine. We take from the wealthiest among us for the greater good. They’ll be forced into a smaller mansion and have to sell one of their 4 yachts. Something like that. Keynesian economics teaches us that in some cases we use the “tax the rich” card, and I understand the sentiment here.
So we consider taking a great deal of money away from the rich, we give it to the poor, a modern day robin hood saves the day.
But, we fail to consider a number of things.
Firstly, our premise from the first section still largely applies, though we haven’t increased the money supply in aggregate, giving everyone at the poverty line a relatively large budget will likely increase their spending proportionately. But spending by the rich will decrease by a proportional amount. The effects of this are more complicated to understand, but for brevity let’s say that wealthy tend to invest more, and the poorer among us tend to buy basic necessities.
If we take this extremely narrow premise as a thought experiment what we see is that “basic necessities” increase in price, and “investment” decreases by a directly proportional amount. The effect again is that not much changes (poor see rising prices, rich see lower prices). However, the loss of investment is never seen, because it never comes to pass, though we may notice that assets prices (like stocks and high-end real estate for example) fall proportionally. But the businesses that might have expanded in an alternate future, new endeavors that could have been undertaken, are hidden from view. All we see is the new jobs created, and we miss what could have been.
There are so many factors to consider here, we should maybe take a step back and observe what is really happening. We are distorting the free market. We are trying to manipulate it to our will, and it’s doing everything it can to fight back.
The free market’s purpose is to identify efficiencies of production and trade, and to facilitate accurate price discovery. Sometimes we convince ourselves that we know better than the market, or that some “greater good” requires this manipulation, despite it’s costs (costs that are often hidden). But I’m not here to make those judgments. I’m simply here to attempt to identify the causes and effects of our actions, and to identify the limits of our knowledge of what those effects look like into the future.
Another factor proponents of a UBI pose is that it would create jobs by injecting money into the markets. But this is where costs are hidden or obscured behind half-truths. If we create a few million new jobs, we are doing this by diverting capital from current endeavors, no matter how we slice it. And prices will rise exacerbating the moving target of inflation and the problems they carry, which I argue is what got us here in the first place, requiring ever more wages to buy the same things. So we would need to keep increasing this from $1,000 over time to have the same effect, which would only further perpetuate the cycle. This is the same downward spiral of constantly raising the minimum wage, only we are now giving to everyone regardless of employment status.
These are rather complex macro and micro economic forces, and by no means am I claiming to be smarter than any economist or politician, these are after all simply my observations. Take them with a heavy grain of salt.
And, we haven’t addressed what to do about the disappearing jobs at all. Yang even admits during his appearance on the Joe Rogan Experience that the UBI by itself doesn’t treat the problem, only the symptoms of a larger problem he describes as: “fundamentally one of reconstituting means of structure, purpose, and fulfillment in people’s lives.” He goes on to say that using GDP growth as a “measure” of progress is misleading ourselves that we are, on average, enjoying commensurate increased prosperity. Personally, I agree with his assessment that using GDP is a poor measure of economic success, but his plan doesn’t address the problem, and is at the same time causing price distortions and influencing the allocation of capital.
Here’s another perspective.
We have seen many technological revolutions before. We have seen many people lose their jobs due to these revolutions, and I would never for a second imply that people should lose their jobs. Investment of time into an obsolete skill being wiped out by a new technology is a tragedy for those that have invested a lifetime on a now-obsolete skill.
Instead, I would point out that every one of these revolutions have left society as a whole much better off.
The industrial revolution saw immense increases of the standards of living, even for many that live near the poverty line. And many lost their now-obsolete jobs. But many years later we don’t question that we failed to “save the X industry.” We don’t shed a tear for the telephone operators put out of work by digital phone networks. Nobody pines for the poor horse buggy whip manufacturers that went out of business.
Of course the argument is that it is going to happen “too fast” for us to adapt. “This time it’s different”
That’s what the buggy-whip manufacturers said.
I might contest that increasing the standards of living “too fast” is a good thing. What’s difficult for us is the unknown, we fear it. What will the world look like when many of the menial jobs humans do today are obsolete? It would look like a world with less menial jobs in them. Where and how we create new jobs is certainly a very important.
That all being said there is a huge problem with wealth disparity in modern times, and it’s not that disparity simply exists, it’s that the system is so fundamentally flawed that it is concentrating power at the top at the expense of everyone else, instead of a rising tide lifting all boats. My position is that our inflationary practice is the real culprit for the increasing wealth disparity, propping up the big players while keeping down the “little guy” so we’ll explore bold claim next.