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Is Universal Basic Income a free lunch?

If there’s something that I held as a deep belief growing up is that there is not such a thing as a free lunch.

I also developed an instinct to spot trends.

Mostly to find opportunities, but also for fun.

So when I stumbled upon Andrew Yang. I listened to a couple of his interviews and realised his ideas are powerful and bipartisan.

The way he talks makes him likable both on the left and on the right.

But what makes him stand out is the proposal he wants to bring to the table: “Universal Basic Income” for US citizens.

This is in stark contrast and incompatible with a core belief of mine. So I decided to dig deeper and try to argue both sides.

The case for UBI (as promoted by Andrew Yang)

The Proposal

Everyone over 18 gets with a US citizenship 1.000$ a month.

How much does it cost?

Americans are 310 million of those around 23% are under 18 so 238.7m Americans would be recipients of UBI.

As the cost of UBI is 12.000 dollars a year per citizen, the program would cost around 2.9 trillion dollars a year.

Who pays for this?

The proposal is to pay for Universal Basic Income with money coming from:

  1. Current spending. The US currently spends between $500 and $600 billion a year on welfare programs, food stamps, disability and the like. This reduces the cost of Universal Basic Income because people already receiving benefits would have a choice but would be ineligible to receive the full $1,000 in addition to current benefits.

  2. VAT. The US GDP is $19 trillion. Adding a VAT at half the European level would generate $800 billion in new revenue. A VAT will become more and more important as technology improves because you cannot collect income tax from robots or software.

  3. New revenue. Putting money into the hands of American consumers would make the economy grow. The Roosevelt Institute projected that the economy would grow by approximately $2.5 trillion and create 4.6 million new jobs. This would generate approximately $500–600 billion in new revenue from economic growth and activity.

  4. The US currently spends over one trillion dollars on health care, incarceration, homelessness services and the like. $100 – 200 billion would be saved as people would take better care of themselves and avoid the emergency room, jail, and the street and would generally be more functional. Universal Basic Income would pay for itself by helping people avoid institutions, which is when our costs shoot up. Some studies have shown that $1 to a poor parent will result in as much as $7 in cost-savings and economic growth.

The counter case for UBI

The practical argument

A VAT contrary to popular belief is a tax paid by the people.

If I buy something from an American site from Italy 22% VAT will be added as a last step to the transaction.

Would something change if the US had VAT too?

Amazon, Facebook, Google, and all the other tech companies would increase by 10% all prices. Adding VAT to your shopping cart, just like a negative discount coupon. Leaving their profit margins unhinged.

So a 10% VAT will result in a 10% (or more) increase in price on everything you buy.

To make this even scarier with a practical example, Italy introduced VAT in 1972 at 12%.

The year after it increased to 14% then it increased to 20%. Today it’s 22% and it’s already approved by law to become 25% in 2021.

Essentially VAT brought to Italy is what we call “in nero” (aka black market) transactions. Many Italians receive their salary on the black market, with tax-free payments. It’s normalised.

Over here it’s quite ordinary for a plumber to tell you when the job is done “It’s 2100€ with VAT or 2000€ cash”.

This means it invalidates minimum wage and job security policies and creates a big tax evasion problem.

On a side note, in 2021 if the American market will have VAT, online services might accelerate Bitcoin adoption in order to be tax-free.

The theoretical argument

Getting “something for nothing” is an old promise. It was peddled so many times over centuries that no one with basic common sense would even consider it in normal conditions.

Andrew says this proposal aims to make people think about the nature of life and work, it is a way to liberate them from the jobs they don’t like but need. As the unhappiness of most workers is compared to the indignity of slavery.

More importantly, UBI will allegedly help society survive the imminent unemployment apocalypse. With the help of automation and artificial intelligence, most of all existing jobs will be taken over within the coming decade.

This might sound rational, but there’s a much deeper discussion to have.

We’re taking for granted that as humans we see ourselves downgraded and equated to machines, like just another cog that can be replaced at any time, in a system where man is literally defined as a human resource.

Isn’t the human brain an intrinsically valuable economic resource?

The truth is that it is a cultural debate, far more than it is an economic one.

The outcome of the Yang campaign will show if the US actually prefers collectivism over individualism. Such a signal could serve as a trigger for a further escalation of government empowerment: After all, a collapsing centralized system will desperately “double down”. Accelerating and maximizing its centralization efforts.

Also, automation of all unskilled jobs has been 10 years away for over 200 years.

UBI Incentivises Entrepreneurship and the Arts

One of the big arguments people use in support of UBI is that it would benefit struggling artists and entrepreneurs, that will create jobs.

Does it?

After all struggling entrepreneurs and artists are struggling for a reason. For whatever reason, the market doesn’t deem the goods they produce sufficiently valuable.

What happens today is that people rapidly abandon these unprofitable markets to pursue more productive endeavors.

The UBI instead enables these people to continue their unproductive work using the hard earned money of those that actually produced something.

More generally people that don’t produce wealth are able to continue to consume scarce goods.

Libertarians and economists in the 60s supported UBI

The UBI here proposed is a tool to solve the problem of unproductive people.

Andrew Yang argues that Milton Friedman was in support of such a policy, but was he really?

The Milton Friedman proposal was of a Negative Income Tax up to a certain threshold.

He explained it pretty clearly in 1968 during an interview:

…Under a family of 4, I’d be entitled to a tax exemption of up to 3000$ dollars. That is if I had an income of 3000$ a month I would pay no taxes. If I had an income of 4000 dollars I would have a positive taxable income of 1000 dollars and I’d be required to pay a tax on it. Suppose I have an income of 2000 then I have a negative taxable income of -1000. The idea of the negative income tax is to apply a tax rate to that -1000 and give it as a subsidy in proportion. For example, the highest rate that would be feasible to use would be 50% and it makes it simple for arithmetic. So If I had an income of 2000 I would be entitled to receive 500 and end up with 2500. If I had an income of 0 I’d have a taxable income of -3000 so I’d be entitled to receive 1500. And in this way, no family in the country would receive less than 1500.

And he continues to say:

..It’s important to stress that while there’s a minimum guaranteed income, that income isn’t equal to the break-even point. This difference is essential.

Professor Friedman freely concedes that his proposal, “like any other measure to relieve poverty … reduces the incentives of those helped to help themselves.” But he argues that “it does not eliminate that incentive entirely, as a system of supplementing incomes up to some fixed minimum would. An extra dollar earned always means more money available for expenditure.”

So UBI with a Friedman twist would look like 30% NIT on an income bracket of $36.000/y. People not working and earning zero income would get 1000$ a month. But someone making 24.000$ a year would get an extra 300$ dollars a month.

This still isn’t what most libertarians are about.

Most libertarians are about having the freedom to be left alone by strangers, not the freedom to be coercively supported by strangers.

And remember:

A government big enough to give you all you need is also big enough to take away all you have.

Is UBI better than current Welfare Laws?

Universal Basic Income is worse than the status quo. All the fundamental criticisms of the welfare state apply with even greater force:

  1. Some forced charity is more unjust than other forced charity. Forcing people to help those who can’t help themselves is defensible (like kids from poor families or the severely disabled). Forcing people to help everyone is not. The status quo makes some effort to target people who can’t help themselves. Universal Basic Income, instead gives money to everyone whether they need it or not. Of course, the UBI formula reduces the payments due as income rises. But if an able-bodied person chooses never to work and play Fortnite all day long, the UBI still rolls in.

  2. The UBI is a wasteful form of forced charity. Helping the small minority of people who can’t help themselves doesn’t cost much. Giving an unconditional grant to every citizen wastes an enormous amount of money. If you were running a private charity, you would never “help everyone,” because it’s a frivolous use of scarce resources. Instead, you’d target spending to do the most good. And unlike the UBI, the status quo makes some effort to target its resources.

  3. The UBI gives even worse incentives than the status quo. Defenders of the UBI point out that it might improve incentives for people who are already on welfare. Now earning another $1 of legal income can reduce your welfare by a $1, implying a marginal tax rate of 100%. But under the status quo, vast populations are ineligible for most programs. Such as? You! Able-bodied adult, aged 18-64, who don’t have custody of any minor children, don’t get anything from the current system. Switching to a UBI would expand the familiar perverse effects of the welfare state to the entire population - including you. And if taxes rise to pay for the UBI, the population-wide disincentives are even worse.

The good

Something I appreciate from Andre Yang’s approach to UBI is that he doesn’t want to touch the supply of money, which I find disturbing and unjust.

As it enables governments to wage useless wars without having to ask their voters and take money from their pockets. It is instead financed by diluting the money supply.

The federal government recently printed $4 trillion for the bank bailouts in its quantitative easing program with no inflation. Our plan for a Universal Basic Income uses mostly money already in the economy. In monetary economics, leading theory states that inflation is based on changes in the supply of money. Our UBI plan has minimal changes in the supply of money because it is funded by a Value-added Tax.

Conclusion

The UBI policy is not a libertarian policy and it’s not better than the welfare state from a libertarian point of view.

In practice, it’s unclear what will happen when such a policy is enacted as there has never been a large scale experiment like the American one.

So the effect of this on the economy isn’t known yet and it could be disastrous as it could be positive.

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