Universal Basic Income (“UBI”). The signature policy proposal of everyone’s favorite nerdy goofball, Andrew Yang. He made a splash in this year’s Democratic primary race, touting free money for everyone and existential robot fears. His quirky charisma and loyal following kept him in the race longer than expected — most attributed that strictly to his fundraising — but with the advent of COVID, it’s worth taking another look at the strength of UBI, his flagship policy. Free money for everyone, it must be just another big government, liberal tax-and-spend debt-monster, right? After all, just one payment of $1,200 early in the pandemic already blew up the deficit and proved that UBI could never work, right?
With a closer look and proper administration, it may be the best idea going. To take it one step further, I say that it is the small government, libertarian solution we all need. Just ask Milton Friedman, famed libertarian and UBI (or negative income tax as he called it) proponent. Properly enacted, it would reduce the burdens of government, achieve greater prosperity, and increase freedom in a wide variety of ways. At the end of the day, more freedom is always the goal.
So what exactly is UBI? Its brilliance is its simplicity. Each month, every adult gets a set amount of money from the federal government. Automatically. No questions asked, no strings attached. Yup, free money. For Yang, that means $1,000 per month, but that number can be anything we make it.
So how, you ask, does spending this kind of money reduce government? Big spending, most of the time, does mean big government — but not always. The libertarian notion that more spending means more government and more government means less liberty is an enticing law of politics. Most of the time it’s true, and it makes for a good rule of thumb, but in this instance, big spending can lead to less government. Less government leads to more freedom, and yet the smaller government is still facilitating that freedom. It all depends on the problem you’re trying to address and the solution that will work.
The main problem here is poverty. Since the 1960’s the United States has been in a war on poverty, declared mainly by Lyndon Johnson. It saw the establishment of Medicare, Medicaid, and a host of other public welfare systems. It also hugely expanded the size of government, both in terms of bureaucracy and spending.
The elimination of poverty is a laudable goal. Poverty is itself a costly problem and creates or exacerbates all varieties of other social ills. There is significant benefit to society, as well as a moral imperative towards eliminating poverty — good people should not stand by and watch their fellow humans suffer. While there are any number of reasons for poverty, the only relevant one is lack of money. It’s not that hard.
Libertarians traditionally argue that private charity is sufficient to alleviate poverty, so government intervention is unnecessary. In a country of 350 million people, that’s simply not a credible position, nor is it sustainable in times of extra economic hardship or labor contraction. The government (and perhaps it’s better for the state governments to do this) needs to play a role.
Under the current system, the federal government pays — depending on how you classify it and who you ask — between $500 Billion and $1 Trillion per year on social welfare programs. Let’s take a look at the big 4: Medicaid, TANF (welfare), SSI (means-tested disability), and SNAP (food stamps). Altogether, using 2018 stats, those four account for around $760 Billion per year, with about 38 million people in poverty. That works out to $20,000 per person per year. Let’s assume they’re all adults (they’re not).
So the government is spending $20k per per person on those 4 programs. That includes overhead, employees, administrative costs, and more that is not going to the recipient (i.e. government bloat). If you use that same money and just send it out to people, the administrative costs all but disappear and people get substantially more money, in cash they can use. No paternalism telling them what they have to do with it or what they have to do to keep it.
This is the same rule as any foodbank you go to — sure, they’re happy to take your old cans of beans, but if you donate money instead, they can use it more effectively and make it go further based on their own needs. Trusting people to know what’s best for them is cheaper, more effective, and lessens the burdens of government. Even if we assume that administrative costs are 25% (a means-tested-only benefit would need some administration) — for a job that could literally be done by a computer and a check-printing machine — that comes out to $1250 per month per person. Deficit neutrally. It’s not a lot to live on, but that’s a solid foundation for every person in this country that needs it to survive. People who aren’t struggling to survive are much more productive members of society. They’re healthier mentally and physically, they’re better equipped to work, better equipped to earn even more, and able to break out of poverty and thrive.
So now we’ve shrunk the size of government considerably and given an income floor below which nobody can fall. We’ve fixed poverty without breaking a sweat.
But UBI only really works if everybody gets it, otherwise it’s a disincentive to work and break out of poverty. It works best as a floor for everyone that never goes away, and when everyone gets it, government administrative costs can disappear almost entirely.
Here’s where it gets tricky (and, admittedly, a little less libertarian). You need to raise enough money to pay for everyone. Part of that is done through inevitable economic participation with all the newfound cash people have. More jobs, more income, more tax revenue. Inflation won’t go up because the amount of money in the economy is the same; we’re not printing more money to give away.
However, the primary mechanism for raising revenue is using a Value Added Tax (“VAT”). This is a consumption tax on each stage of a production process where value is added (thus the name). Prices on goods would go up (though essentials like groceries and clothing would be exempt under most plans), but not nearly enough to offset the monthly payment unless you’re shopping a LOT and are already better off. It’s paid by businesses. Producers. The main advantage of this type of tax — which 160 other countries in the world use, at much higher rates than, for example, Yang’s plan of 10%— is that it cannot be evaded in the same way that corporate income taxes are dodged by huge corporations. It’s a way of making them pay the fair share they’re not paying now without the complication and hucksterism of the income tax corporate deduction model. Additionally, as the labor participation rate continues to fall from automation, revenues can stay steady or grow, as opposed to an individual income tax. The Trumps and Amazons of the world would finally pay their way towards creating a more functional society.
The biggest draw of a UBI system is that is confers greater liberty and freedom on its citizens. It creates a more equal and fair playing field for everyone. Consider Joe Schmoe. Joe lives with his wife Flo and their newborn child Bo. They receive $246 per month (national household average) in food stamps and $486 (national household median) in TANF cash assistance and receive Medicaid.
As a requirement of receiving those benefits, Joe must do work activities for 35 hours per week. The reason he’s getting welfare is because he’s out of work, so the state sets him up with community service cleaning up parks and highways. This is not employment. It does not come with wages, benefits, or upward mobility. He’s not paying into a pension system and he’s not accruing work credits for Social Security. It’s time spent working so he can get the welfare benefits. After 35 hours of physical labor every week, he’s exhausted. He can’t miss his work to go interview for better jobs and Flo is at home taking care of Bo. If Joe can get a full-time job now, probably at minimum wage, he’ll be kicked off his benefits and the end result will be less financial security. He’ll fall back into the trap. Indentured servitude in America which can last for generations.
UBI gets implemented. Joe gets $1,000 per month and so does Flo. Flo is getting paid for the essential labor she does at home taking care of the baby. Joe can take stock of his situation. He‘s got the basics covered. He starts looking for a job in earnest and finds one at minimum wage. He works there a few years and works his way up to junior manager with a small salary, health insurance, and some benefits for his family. The family is getting by and he’s on a better track. While he’s working at this job which, let’s be honest, isn’t the best job on earth, he gets laid off. Turns out a robot can do his job twice as well as any human. This gives Joe a great idea about how to automate things even better with a certain type of robot he was learning to use before they replaced him.
Laid off, Joe is a little bummed, but fine. He goes home and finds time to develop his robot idea. Joe and Flo have to tighten their belts a bit, but they get by on the $2,000 per month they never stopped receiving. Joe works feverishly on his new business plan and before long is able to pitch it to investors with a small nest egg he saved while working. The investors love it and Joe creates the next great American business. He employs hundreds of people across the country, pays more money into the UBI system with each robot he makes, and lifts his employees out of poverty too.
UBI breaks Joe and his family out of the poverty trap, rather than simply keeping them alive. It gives them mobility and freedom. They have an income floor. Even with a not-great job, they’re able to get ahead because they have rudimentary financial security. That security allows Joe to take a risk and be entrepreneurial. Even if he fails, he can go find another job…in time. His basic needs are met and he’s not bogged down having to meet with his case worker. He doesn’t have the mental stress of not knowing how to feed his family. He never has to recertify his benefits or be subject to a continuing review. He can live the life he wants, free to fail, free to try again, and doesn’t have to worry about breaking the rules or becoming ineligible or working too hard to keep his safety net. His wife’s labor finally has economic value (so maybe that wage gap will finally get up to speed).
He is free.
While it is right to be skeptical of government making you less free, there are times when government can facilitate more freedom. There are times when the government needs to be the glue that holds society together a little bit better. UBI, despite the (more fair) extra taxation, can grow the economy, reduce the size and scope of government (in a way that doesn’t give it leverage over you), and create an essential safety net that is entirely consistent with a much healthier form of capitalism. It lets capitalism work by removing the drags on the system and on the human condition.
So when this idea gets brought up by President Biden or maybe a President Yang a few years down the road — let’s give it a good look. There is still a lot of uncertainty in funding it and we should all be wary of too many new taxes, but it just may be the glue we need for a country that shows more and more cracks by the day.