Judy Shelton’s monetary policy

I share Judy Shelton’s support for monetary policy with a hard anchor. Following currency board rules, the public should determine the money supply they want to hold at its fixed price. Historically, gold was the most common hard anchor. It worked well for centuries. However, it had two problems.

The first is that central banks actually bought and stored gold, which distorted its market supply and thus price. Widespread adoption of a gold anchor combined with central banks buying up much of it would be an even more serious problem today. But gold can anchor the price of a currency without the central bank actually hoarding gold. It would instead issue its currency against other safe assets, such as government debt securities, as fixed gold price. It would fully back its currency with such assets so that it could redeem it all if the public chose to return it. This would ensure that the gold price in the market in the central banks currency was always very close to its official (anchor) price.

This system of indirect redeemability, as Leland Yeager called it, would ensure a more stable market price for gold relative to other goods and services and thus a more stable purchasing power of a currency fixed to it. However, choosing a single commodity as the anchor (its second problem) would result in a less stable value of the currency than would choosing a small basket of widely traded commodities. https://www.adamsmith.org/blog/returning-to-currencies-with-hard-anchors

Given the discretion to manage their currency supplies, central banks have historically tended to undermine its value as the result of over issuing it (inflation). Judy is right to want to limit that discretion. The Federal Reserve Act mandates that the Federal Reserve should aim for price stability (and full employment). This is an important constraint on the Fed’s behavior, but we can do better.

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Unions vs the Gig Economy

Americans largely support and benefit from a political/legal environment conducive to individual freedom and active entrepreneurship.  However, within that broad consensus, views vary over how large and prescriptive the role of government and mandatory bodies should be.  Should only doctors, lawyers, plumbers and hairdressers licensed by the state be allowed to provide their services?  Few things capture this difference more clearly and dramatically than whether cab drivers must be employees of the cab company or can work as little or as much as they chose as independent contractors– company employees or gig workers (uber drivers).

Licensed professionals, like union members, can help promote and certify a minimum standard of training and confidence. But historically they have also sheltered their members from competition. Unions provide a number of services to their members, but their overriding purpose is to confront employers with a united front from workers on wages and working conditions. They understandably exist to serve the interests of their members.  While the commercial success of the companies’ union workers work for is also in the interest of these workers in the long run (if companies are not profitable they cannot provide jobs and/or good wages) it is more remote from workers’ immediate interests.

Gig workers are independent contractors who individually agree with an employer (such as Uber or Lyft) on wages, hours, and working conditions. In fact, Uber and Lyft drivers decide on their own, hour by hour whether and when to work. Their financial reward rests more directly on satisfying their customers.  The brand name Uber or Lyft must also insure a minimum standard of service to their riders (quality and cleanliness of the car and honesty and politeness of the driver, etc.). https://wcoats.blog/2014/12/18/free-markets-uber-alles/

The incentives confronting union workers and gig workers thus differ. Union works, in the first instance, by confronting their employers seeking better working conditions and pay (wages and benefits) while gig workers are competing with other drivers to please their customers. The results can be mixed but the difference between a ride with a yellow cab driver and a Lyft driver can be rather dramatic. I never had a yellow cab driver leap out of the spotlessly clean car to open my door saying: “I hope that you enjoyed your ride.” But while Uber and Lyft provide us with better and cheaper rides, they also provide drivers with more and better options of when and where they work.  Some want to work only a few extra hours after a regular job. Some choose to put in long hours when in need of extra money. Like most transactions in a free market both drivers and riders benefit–its win, win.

My experiences with unions have not been good. My father was a Shell Oil union member.  His union went on strike long ago when my mother was pregnant with my younger brother. After a few months on strike it was growing obvious (according to my father) that it would end soon in failure from the union perspective. The union bosses feared that my father and others would return to work before the union had formally given up. They came to our house and told my pregnant mother that it would be quite unhealthy for her if my father returned to work.

While a student at the U of C Berkeley I had taken jobs for three summers with Shell Oil, one of the perks they give their workers’ children. Two summers were roustabouting in the oil fields of Kern County, California with regular Shell employees who never spoke of labor relations with the company. Instead they talked about their families and non-work activities.  The middle of the three summers with Shell, I was assigned to the supply yard behind Shell’s Kern County headquarters. I assisted the one employee there who loaded pipes and other oil field equipment onto trucks that then delivered the equipment to the fields I had worked in the summer before. Much of the time the two of us just hung out there waiting for the next truck, very unlike digging ditches to repair leaking pipes as I had done the previous summer in 112-degree summer heat. We drove around in the small portable crane used for loading the trucks. The entire time my “companion,” an avid union member, complained about how Shell Oil was exploiting us. After a few weeks I dreaded having to be around him.

After my brother and sister and I were out of the house my mother went back to school, first to finish high school and then to college and a teaching degree. She became a highly successful grammar schoolteacher who specialized in taking on (and taming) problem students. She complained frequently at the attitude and self-protective behavior of the teachers’ union members that was far more interested in protecting mediocre teachers than in teaching students.  Michelle Rhee only turned around the education system in Washington DC when she was able to break the strangle hold of the teacher’s union.

More recently we have seen yet again the destructive role of police unions in protecting bad cops in connection with the death of George Floyd in Minneapolis. “Police-unions-minneapolis-kroll” Much has been written about how deals with police unions has thwarted needed reforms in policing. There seemed to be broad nonpartisan support for such reforms before the “defund the police” nonsense killed it.

But there is a surprising bit of good news from the election earlier this month beyond replacing Trump.  In California, for example, the state was attempting to apply a law regulating employment (AB-5) to contract Uber and Lyft drivers, demanding that they be treated as employees rather than contractors. This would have destroyed Uber and Lyft’s business models and was strongly opposed by them and their drivers. “California’s Public Utilities Commission said in an order Tuesday [June 9, 2020] that Uber and Lyft drivers are “presumed to be employees” under AB-5, the state’s new gig work law.” “Uber-Lyft-drivers-declared-employees-by-California-regulators”  California voters rejected this union effort to kill the market for gig drivers.

As The Wall Street Journal put it: “Democrats and unions in California are shell-shocked. Voters last Tuesday rejected a referendum that would have allowed racial preferences in state hiring and college admissions, defeated a massive business property tax hike, and rescued tens of thousands of gig economy jobs.” https://www.wsj.com/articles/californias-progressive-thumping-11605136309?st=ra1kvgf2okxr35j&reflink=article_email_share

The following description of Proposition 22 appeared on California ballets:

PROP 22

EXEMPTS APP-BASED TRANSPORTATION AND DELIVERY COMPANIES FROM PROVIDING EMPLOYEE BENEFITS TO CERTAIN DRIVERS. INITIATIVE STATUTE.

SUMMARY

Put on the Ballot by Petition Signatures

Classifies app-based drivers as “independent contractors,” instead of “employees,” and provides independent-contractor drivers other compensation, unless certain criteria are met. Fiscal Impact: Minor increase in state income taxes paid by rideshare and delivery company drivers and investors.

WHAT YOUR VOTE MEANS

YES A YES vote on this measure means: App-based rideshare and delivery companies could hire drivers as independent contractors. Drivers could decide when, where, and how much to work but would not get standard benefits and protections that businesses must provide employees. 

NO A NO vote on this measure means: App-based rideshare and delivery companies would have to hire drivers as employees if the courts say that a recent state law makes drivers employees. Drivers would have less choice about when, where, and how much to work but would get standard benefits and protections that businesses must provide employees.

Proposition 22 passed with a 58.6% majority in a state that rejected Donald Trump by a wide margin (64% for Biden and 34% for Trump). This result is consistent with what I hope is true, namely that a majority of voters voted against Trump rather than embracing the more government dominated management of our lives promoted by the “socialist” wing of the Democratic party. With the more skillful and predictable management of a Biden administration and a Republican controlled Senate to block any excessive expansions of government, we might be lucky enough to keep the good measures taken over the past four years (tax reform, reduction of excessive regulations, strengthening the courts, and no new wars) and get rid of the anti-market, protectionist, executive overreach, and internationally disruptive measures of an ineffective and dishonest bully.

Posted in Economics, regulation | Tagged , , , , , , | 6 Comments

Saving our free society

The vast majority of every new generation want to make society a better place. They support policies that they believe will contribute to making society fairer and “nicer.” As they age their altruism may tilt toward self-enrichment and self-protection at the expense of fairness (cronyism), but initially their motives are pure. The key issue is what policies they believe will help make society a better place. “The-search-of-purpose-nature-and-nurture-genes-and-culture”

We can be thankful that American voters in throwing out a dishonest, divisive, egomaniac didn’t endorse the socialist wing of the Democratic Party.  We seem to have moved back to the broad center.  “Dan Mitchell–a victory for Biden-a defeat for the left”  It is hard to know where to look for and find the truth today, and our society will suffer because of that.  But as we review and debate the policy proposals of a Biden administration, we must remember that we are all looking for the truth about what will make our society better (fairer, freer, and more virtuous).  We must listen to each other’s concerns and carefully evaluate each other’s proposals. But we have a duty to ourselves and our neighbors to study history for what has worked and what hasn’t and to do our best to understand why limited government and maximum reliance on our own decisions and the decisions of our neighbors is the best framework in which to help make society better.

The growing number of today’s youth who look favorably at socialism (whatever they understand that to be) is worrying because it reflects an incorrect assessment of what socialism has always delivered. To today’s youth: If you really care about making society better, take the time to study the history of socialism and learn why it failed and is bound to fail and why societies that are freer and law abiding are both more virtuous and more prosperous. “Socialism-as-seen-by-millennials”

Posted in Economics, Foreign policy, Government | Tagged , , , , , | 3 Comments

Saving the American Dream

The American Dream is under attack.

“The American Dream is the belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society where upward mobility is possible for everyone. The American Dream is achieved through sacrifice, risk-taking, and hard work….” “The American Dream is to succeed by work, rather than by birth”. The Dream has attracted the world’s best and brightest to our shores making America the world’s leading economic powerhouse and enabling us to live freely as we each determine what we are willing to work for, for ourselves and our families.

Historically, individuals have been limited in what they could achieve by where they were born in society, by their parent’s position in life, and by who they knew. Companies of individuals were limited by the restrictions placed on them by their governments, often by the protections from competition government granted their friends (crony capitalism). Such traditional societies limited the freedom and ambitions of its citizens and limited the productivity of its human and physical resources. In short, traditional societies were keep poorer than they would have been if their citizens had been freer to innovate and compete.

The American Dream is now under attack by Donald Trump’s trade protectionism, crony capitalist government favoritism, immigration walls, and weakening of the international rule of law that has extended the benefits of specialization and trade globally. It is also being attacked by Alexandria Ocasio-Cortez’s (LOC’s) vision of state leadership and control of production and a new generation of idealistic, but uninformed, voters who mean well but have missed the lessons of socialism’s failures. If we are to save the conditions in the United States in which the American Dream still lives, we must better understand what has led so many Americans to vote against it.

I am sure that the answers to that question are many and complex, but broadly speaking two stand out in my mind, both of which point to the measures needed to restore support for the dream.

The first is to better educate the public, especially its younger members, about the conditions that allow and encourage a productive, innovative economy. This includes understanding the proper role of government in protecting private property, enforcing contracts, maintaining public safety (the rule of law) and in providing the public infrastructure that facilitates private activities and commerce (the commons of public goods). It includes the lessons of why all socialist economies have failed as a result of the corrupting incentives of state direction of economic activity rather than the competitive search by profit seeking private enterprises for better ways to serve the public.

The second answer concerns the adequacy and efficiency of our social safety net. The American Dream concerns individuals who take responsibility for their own well-being. While on average this has opened the way for most to prosper to the extent of their talents and energy, some will, often through no fault of their own, fail and fall off the tightrope. Society has an interest (even beyond the obvious humanitarian one) in softening the fall. It has an interest in an effective social safety net. 

Some–those who have not understood the lessons of socialism’s failures–have looked to trade and immigration restriction to prevent them from losing their jobs. They object to the economic benefits of free trade when it means that they must look for a new job (however, most manufacturing job losses in the U.S. have resulted from technical progress and the resulting increase in productivity rather than from cross border trade). “Econ-101-trade-in-very-simple-terms”  “Trade-protection-and-corruption” Those with such views have supported Trump’s anti free market policies. They have been attracted by Trump’s “I win you lose, us vs them” rhetoric.

AOC and her friends point to the widening income inequality–the dramatic increase in the incomes of the wealthiest and the stagnation of the incomes of the middle class in recent years–and demand income redistribution. But she fails to understand that it has been the growth of government’s role in the economy and the incentives in big government toward corruption and crony capitalism (protectionism for the wealthy) that have reduced competition and protected the position and markets of the biggest companies with friends in government. Socialism would make those incentives even stronger.

America’s dynamism and success reflects the creative destruction of risk-taking entrepreneurs and their hard-working employees.  https://economics.mit.edu/files/1785  However, the workers whose jobs are displaced by new products and new technologies may need help in finding and retraining for new jobs. They may need financial assistance in between (unemployment insurance). If nothing else, this may be the cost of their support for such a dynamic system.  Our social safety net sometimes provides poor incentives and sometimes has holes. It is time to seriously consider replacing it with a less intrusive and more comprehensive Universal Basic Income.  “Our-social-safety-net”  “Replacing-Social-Security-with-a-Universal-Basic-Income”

The American Dream–the foundation of our freedom and affluence–is under attack from the left and the right. We should fight to preserve (or restore) it.

Posted in Economics, Government, immigration, News and politics, trade | Tagged , , , , , , , , | 3 Comments

My Travels to Baghdad

Iraq: An American Tragedy, My Travels to Baghdad

Warren Coats (2020)

Kindle and paperback versions available at: Iraq-American-Tragedy-My-Travels-Baghdad

From the corkscrew landing at Saddam International Airport (now the Baghdad International Airport) to adventures in the Green Zone and beyond, this recounting of my experiences helping the Central Bank of Iraq develop modern market tools of monetary policy exposes the disfunction of the U.S. lead Coalition Provisional Authority (CPA) in its attempt to govern and rebuild post Saddam Iraq, following one of America’s more foolish and damaging military adventures. The existence of weapons of mass destruction was a lie. American skill at imperial rule–from disbanding the Iraqi Army to De-Ba’athification of the Iraqi bureaucracy– was a myth. 

Regime changes usually don’t involve changes in the monetary system. However, the toppling of Saddam Hussein’s government and the occupation of Iraq and the takeover of its government by the United States and a few allies in the name of the Coalition Provisional Authority (CPA) was accompanied by the replacement of the so-called Saddam dinar and modernization of Iraq’s monetary and financial system. The Iraq war was launched with “shock and awe” on March 20, 2003 and President George W Bush declared “mission accomplished” on May 1 a month and a half later. But when I retired from the International Monetary Fund and took up residence in Baghdad to advise the Central Bank of Iraq on developing Iraq’s financial markets and managing its new currency, the fighting was not over on many fronts. I lived in Baghdad the last two months of the CPA (May-June 2004) and made four two-week visits between then and December 2005

In this book, much of it written in diary form at the time, I share the challenges of advising the staff and management of the Central Bank of Iraq from my office in the central bank and of navigating the U.S. interagency rivalry from my office in Saddam’s Republican Palace in Baghdad’s Green Zone.  Security was always a challenge, producing many adventures. But the wisest advice I received was from a colleague in the CPA, who told me to “be careful who you talk to here (CPA headquarters in the Republican Palace), your worst enemies are in this building.” Over my 26 years in the International Monetary Fund and the technical assistance missions I lead to some 20 countries, many of them post conflict countries, I have never encountered the disfunction and resulting ineptitude of the U.S. led Coalition Provisional Authority in Iraq.

Previous Books

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina

by Warren Coats (2007)    Hard cover: One Currency for Bosnia

FSU: Building Market Economy Monetary Systems–My Travels in the Former Soviet Union

By Warren L Coats (2020)  Kindle and paperback versions available at: FSU-Building-Economy-Monetary-Systems

Afghanistan: Rebuilding the Central Bank after 9/11 — My Travels to Kabul

By Warren Coats (2020)  Kindle Edition:  “Afghanistan-Rebuilding the Central Bank after 9/11”

Zimbabwe: Challenges and Policy Options after Hyperinflation

by Warren L. Coats (Author), Geneviève Verdier (Author)  Format: Kindle Edition

Zimbabwe-Challenges and Policy Options after Hyperinflation-ebook

Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence

by Warren L. Coats (Author, Editor), Deena R. Khatkhate (Author, Editor)  Format: Kindle Edition

Money and Monetary Policy in LDCs-ebook

Posted in Iraq, Travel, War | Tagged , , , , , , , | Leave a comment

My Travels in the Former Soviet Union

FSU: Building Market Economy Monetary Systems–My Travels in the Former Soviet Union

By Warren L Coats (2020)  Kindle and paperback versions available at: https://www.amazon.com/FSU-Building-Economy-Monetary-Systems-ebook/dp/B08K3WNQK2/ref=sr_1_2?dchild=1&keywords=warren+Coats&qid=1601491694&s=books&sr=1-2

By the end of 1991 the pressures for the Union of Soviet Socialist Republics (USSR) to break up into 15 separate countries climaxed. On December 25, Mikhail Gorbachev resigned as the President of the USSR and the next day the Supreme Soviet voted to end its existence. The demise of the Soviet Union was precipitated by the failure of its system of central planning to deliver an acceptable standard of living for its unfortunate citizens. Thus, Russian and the other now Formerly Soviet Republics wanted to transition into market economies as quickly as possible. They wanted to become what they called “normal” countries and to join the rest of the world.

Of direct relevance to me, my employer, the International Monetary Fund (IMF), suddenly faced the prospect of fifteen new members, each of which wished to convert its branch of Gosbank, the central bank for the USSR, into its own independent central bank overseeing the monetary and financial systems of market economies.

Four months after the USSR was formally dissolved, I was on a charter flight from Geneva, Switzerland, to Alma Ata, Kazakhstan, with eleven other economists to provide technical assistance to the National Bank of Kazakhstan. We knew almost nothing about the people we were to meet, the living conditions we would find, the social customs that we might be expected to understand, and the condition of the former branch of the Gosbank of the USSR that we were to help become a normal central bank. It was a challenging but very exciting undertaking.

In this book, I attempt to share some of the more interesting social, primarily non-economic, encounters of my work in Kazakhstan, Kyrgyzstan and Moldova from 1992 to 1995.

Previous Books

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina by Warren Coats (2007)   Hard cover: One Currency for Bosnia

Afghanistan: Rebuilding the Central Bank after 9/11 — My Travels to Kabul By Warren Coats (2020)  Kindle and paperback versions available at:  “Afghanistan-Rebuilding the Central Bank after 9/11”

Zimbabwe: Challenges and Policy Options after Hyperinflation by Warren L. Coats (Author), Geneviève Verdier (Author)  Format: Kindle Edition Zimbabwe-Challenges and Policy Options after Hyperinflation-ebook

Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence by Warren L. Coats (Author, Editor), Deena R. Khatkhate (Author, Editor)  Format: Kindle Edition Money and Monetary Policy in LDCs-ebook

Posted in Economics, Kazakhstan, Money, Travel | Tagged , , , , , , | Leave a comment

My travels to Afghanistan

Afghanistan: Rebuilding the Central Bank after 9/11 — My Travels to Kabul

By Warren Coats

Kindle and paperback versions available at:  “Afghanistan-Rebuilding the Central Bank after 9/11”

Watching the collapse of the twin Trade Towers in New York on September 11, 2001 on the TV in my hotel room in Bratislava, I never imagined that I would be in Kabul several months later and spend 212 days there spread over 19 trips from January 2002 to December 2013 to help modernize Afghanistan’s central bank–Da Afghanistan Bank (DAB). I learned more than I taught and share the highlights in this book. I became friends with many wonderful Afghan people, and bonded with my IMF team members. DAB was almost completely rebuilt. Watching its eager young staff mature into effective managers was a joy. Whether it will last in Afghanistan’s uncertain political and cultural environment is an open question.

I learned as much as I could about Islam and its internal struggle to denounce Islamism (radical Islamic fundamentalism). I share details of the collapse of Kabulbank, Afghanistan’s largest bank, and the corruption surrounding it and its resolution. The IMF’s presence and work in Afghanistan was not without tragedy. The IMF’s resident representative, in whose guest facilities we stayed, was killed in a terrorist attack. And I learned much about walls.

Previous Books

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina

by Warren Coats (2007)   Hard cover: One Currency for Bosnia

Zimbabwe: Challenges and Policy Options after Hyperinflation

by Warren L. Coats (Author), Geneviève Verdier (Author)  Format: Kindle Edition

Zimbabwe-Challenges and Policy Options after Hyperinflation-ebook

Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence

by Warren L. Coats (Author, Editor), Deena R. Khatkhate (Author, Editor)  Format: Kindle Edition

Money and Monetary Policy in LDCs-ebook

Posted in Afghanistan, Economics, Money | Tagged , , , , | Leave a comment

Buy American

Buy American is un-American. Much if not most of what we already buy is American, meaning made in America. Though it would be rather challenging to identify products (leaving aside services) that are 100 percent made in American, i.e. that do not have at least some components produced abroad, 85% of U.S. GDP is domestically produced. So why is the slogan “buy American” un-American?

Buy American has several understandings. There are laws, such as the Buy American Act of 1933, that require the U.S. government to give preference to American goods and services over others in its purchases. To the extent such laws have any effect, they require the purchase of goods and services that would not otherwise be chosen–that would not otherwise meet the test of the best value for the taxpayers’ dollars. This law aims to protect American jobs. This, of course, is a misunderstanding of the reality. Buy American, when it changes behavior at all, protects some undeserving jobs at the expense of other jobs that are worth keeping.  It protects jobs producing goods and services that would not otherwise be profitable. In short, it keeps American workers employed in activities that are less productive than would otherwise be the case. In the long run, it does not increase employment but rather reallocates workers to less productive tasks. In short, buy American lowers our standard of living. Thus, we can be thankful that it only requires 51% domestic content to qualify as “American.”

So why does our current government adopt such policies? For the same reason we have slapped a tariff on Canadian steel. It is not to make the American economy more productive or to keep it fully employed (which it already was when President Trump imposed such a tariff for “national security” reasons (I kid you not).  Rather, like other “protectionist” measures, it is to protect the jobs of particular, favored industries or workers, or what you might call political corruption.  Such favored industries are not competitive without such protection or why bother.

Beyond the legal requirement for government to Buy American, the plea to the general public is voluntary.  But why should we purchase products that we otherwise would not have (because they were more expensive or inferior)?  As with government buying American, the effect is to draw workers into activities at which they are less productive than they would have been otherwise. So “Buy American” is un-American because, if taken seriously, it would lower our standard of living and is contrary to the free market and entrepreneurial spirit that has made America the prosperous society that it is.

Posted in Economics, Government | Tagged , | 5 Comments

Replacing Social Security with a Universal Basic Income

The idea of a Universal Basic Income (UBI) in place of existing entitlement programs (Social Security, Medicare, Medicaid, food stamps, unemployment insurance, etc.) that is financed by a flat rate income or consumption tax calls for a deeper discussion of its financing. “Our-social-safety-net”

For purposes of illustration, lets assume a UBI of 18,000 dollars per year for adults and half that for children (under 20 years old). This is somewhat above the current average Social Security benefit for someone retiring at age 65.  The current American population of 330 million consists of about 82 million children and 248 million adults. Thus, the total cost of such a UBI would be about 5.2 trillion dollars. This would exceed total expenditures in 2019 of 4.4 trillion dollars, of which 2.7 was for the social safety net (entitlements–social security and welfare). Total Federal tax revenue in 2019 was 3.5 trillion dollars of which 36% or 1.26 trillion dollars was from payroll taxes (social security and Medicaid and Medicare). This left a staggering deficit in 2019 of almost one trillion dollars that had to be borrowed from China and others when our economy was at full employment and should have been in surplus. And now look at our shocking deficit in this pandemic year! But that is another story.

The goal of this note is to illustrate the significant progressivity that would exist with a flat rate consumption tax in place of the corporate and personal income taxes and the payroll tax when replacing existing safety net expenditures with a UBI.

The original rational for the regressive payroll tax to pay for social security pensions was that social security was a traditional retirement program funded from the savings of each pensioner. The assumption was that the pension it paid reflected the money that each worker paid into the so called but misnamed social security trust fund. In short it was characterized as what we call a defined contribution system (you get what you saved) when it was in fact structured as a defined benefit system (you get a defined amount no matter what you actually paid in). In fact, as Americans lived longer and longer, thus enjoying more and more retirement years, the system collapsed into a basically pay as you go system (today’s workers were paying for today’s retirees’ pensions). The trust fund has very little savings in it. So instead of the payroll tax funding the worker’s future pension it became a regressive tax funding current retiree pensions. The payroll tax should be abolished. “Saving Social Security”  

A flat tax (whether on income or consumption) has many economic virtues, with simplicity at the top of the list.  But a flat rate rubs some people the wrong way who think that the wealthier should pay more tax than implied by a flat rate. My sense of fairness calls for someone with twice the income (if we are focusing on an income tax) to pay twice the tax. That is exactly what a flat rate tax (the same tax rate for everyone whatever their income level is) provides.  Whether we go for an income tax or a consumption tax we should forget about the corporate income tax. It is more trouble than it is worth in a world in which many if not most companies operate globally (i.e. in many different tax jurisdictions). It only contributed 7% of total Federal tax revenue in 2019 and unfairly taxes the company incomes of company owners twice. “Principles of Tax Reform

A flat personal consumption tax that would raise the same revenue as raised by all Federal taxes in the U.S. in 2019 (3.5 trillion dollars) would require a 24% rate. But that revenue did not cover all of the government’s expenditure as noted above. In addition, replacing existing safety net expenditures of 2.7 trillion dollars with a UBI of 18,000 dollars per adult and 9,000 dollars per child (5.2 trillion dollars) would result in total Federal government expenditures in 2019 of 6.9 trillion dollars or 2.5 trillion dollars higher (5.2 – 2.7). A flat consumption tax rate of 47% would be needed to raise 6.9 trillion dollars. This seems very high for two important reasons. First it assumes a balanced budget for the actual level of defense and other non-entitlement expenditures in 2019, i.e. it raises almost one trillion dollars more than the government actually collect in 2019.  Secondly it is financing the additional 2.5 trillion dollars for the UBI from which the higher tax would be paid, i.e. the net tax would be lower.

Though the marginal tax rate would be flat (the same for everyone), the resulting tax burden would actually be quite progressive. To provide a rough idea of the net progressivity of the UBI with a 47% consumption tax, assume that all income is consumed (this would overstate consumption some for higher income families). The poorest families, those who have no income other than the UBI, and assuming a family of two adults and two children, would pay no net tax and receive a net income subsidy of $28,620 or $2,385 per month. For the median family in 2019 (50% income level) the average income was $63,030. But including their UBI their total tax payments would be $55,004 or an excess of $1,004 over their UBI for a tax rate on their (pre UBI) income of 1.6%. For the family at the 80% income level, the average income was $130,000 and their total tax payments would be $86,480 or an excess over their UBI of $32,480 for a tax rate on their earned income of 25%.  This is a significantly progressive outcome while preserving the flat marginal rate.

Individual states may well choose to provide assistance for individual specific purposes, as they do now, for example, for education at various levels. But at the Federal level every effort should be made to prevent such add-ons to our social safety net. If as we become richer as a whole, we choose to be more generous, the amount of the UBI can be raised (or lowered) but only for everyone equally. This would prevent individual interest groups from tacking on special assistance for themselves. The ability of such special interests to gain special favor is a major reason for the slippery slope of the creeping welfare state we now enjoy.

It is important that policies, whatever their good intentions might be, also provide good incentives for outcomes that are desirable for society as a whole. A danger with progressive marginal tax rates, is that the majority of taxpayers have an incentive to raise the rate on those with incomes greater than their own. Or at best there is no incentive for them to resist such a temptation. Soaking the rich is not only an unfair treatment of those who have prospered inventing and delivery goods and services we liked enough to buy, but it will drive them away to tax jurisdictions that better respect their property rights. One of the many virtues of a UBI financed with a flat rate consumption (or income) tax is that the only way to increase the average tax rate on the wealthy is to increase the UBI for everyone.

A UBI would fulfill our desire to help those in real need but would return the responsibility of individual decisions of how that assistance is to be used to the individuals involved. It would simplify and depoliticize the determination of who gets help and how much and would remove the burden of determining our proper tax obligation for most of us. It would thus greatly simplify the administration of such a combined program. It would better align the political incentives for the level of assistance with the preferences of society as a whole. While most people work for more than the income it generates–the self-esteem of being a useful member of society is also important–a UBI would remove the economic disincentive of many current welfare programs of working resulting from the loss of benefits when income reaches a modest level.

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Our Social Safety Net

Virtually every country provides assistance to their poorest citizens–to those who fall for one reason or another from normal employment. Approaches to fulfill this objective differ widely. The Federal safety net spending in in the United States in 2019 was 2,600 billion dollars. Total government (Federal, State, and local) entitlement spending was 2,900 billion dollars. Of this, about one third was for Social Security and one third for Medicare and Medicaid.

“The federal government funds 126 separate programs targeted towards low‐​income people, 72 of which provide either cash or in‐​kind benefits to individuals. (The rest fund community‐​wide programs for low‐​income neighborhoods, with no direct benefits to individuals.) State and local governments operate more welfare programs.”[1] This year, in response to the Covid-19 pandemic, the Federal Government has added about $3 trillion dollars ($3,000,000,000,000) for temporary one-time assistance for the impact of the forced interruption of production, and is likely to add more.

The goal of these programs is, or should be, to adequately support those needing it without creating disincentives to work and with minimal abuse (corruption). The CARES Act and other pandemic assistance programs were quickly created in an emergency. It is thus understandable that mistakes were made. As time goes on charges of corruption (politically motivated expenditures) are multiplying. The administrative challenges of suddenly making millions of individual payments quickly and correctly were and are huge.

There is a dramatically better way to do this. We might characterize our existing approach of government directed assistance (e.g. food stamps) as the Socialist Model. It is top down and dictates how the assistance is to be used. Replacing all of these programs with a Universal Basic Income (UBI) leaves the decisions on how its recipients use it with each individual. This might be characterized as the Individualist Model. It has many advantages over our existing approach.

A UBI would eliminate all government discretion over who receives assistance and how much they receive.  Every adult citizen would receive that same amount monthly (and every legal child would receive the same smaller amount). The government could not favor one group over another on any bases other than age. This removes political considerations from defining and administering the payments. Every birth and death in the country is recorded in a county hall of records and every legal immigration is recorded with the United States Citizenship and Immigration Service (USCIS). Thus, the records upon which payments would be based already exist. Using them would remove my need every year to submit a certified document to my pension plan stating that I am still alive. No special measures or supplements would have been needed to address the personal income shocks of covid-19.

One carveout would be required for medical insurance. Every person or family should be required to use part of its monthly UBI to buy a health insurance policy that at a minimum includes catastrophic care coverage. At the launch of UBI and this insurance mandate, insurers would not be allowed to refuse coverage to people with preexisting conditions and the government would cover the actuarial estimate of the extra cost of such conditions.

As the UBI would replace Social Security pensions, another modification would be for the unlikely case that the UBI would be less than ones current Social Security pension (which in 2017 was $13,824 for someone who retired at age 65). So, for such a person who has already retired or is, say, within five years of retirement, their UBI should not be less than their existing Social Security pension. But a UBI of $1,500 per month ($18,000 per annum) for everyone seems reasonable, which would make this case mute.

Those with a welfare state mentality argue that people can’t be trusted to spend such income wisely (from their perspective). I reject such thinking. There are among us, of course, those individuals with addictions and mental illnesses who are indeed not capable of making their own decisions and thus caring for themselves. Our laws and practices already provide for such special cases and would continue to supersede the rights of such individuals to make their own decisions about the uses of their UBIs.

But can we afford it? Today’s American population is about 330 million, of which about 80 million are under the age of 20. To get a rough sense of what is possible, if we replaced today’s safety net expenditures of 2.9 trillion with a UBI to the 33% poorest (110 million people, of whom 25% or 26 million are under 20 years old) in the U.S. in 2019 each person could received about $26,000 per year or about $2,200 per month. If children (those under 20) are paid half what is paid to adults, existing safety net expenditures could finance about $15,000 per child per year and $30,000 per adult if a UBI is given to the lowest third of the population in terms of income. For a family of four this would be an annual income of $90,000, which is above the median household income of about $64,000 in 2019, and is clearly excessive.

But a UBI must be universal. It must be paid to everyone for several simple reasons. Most importantly, it would eliminate the disincentive to work in the existing programs, which end if a person’s income rises above a specified level. With a UBI, every additional dollar of income joins an irreducible UBI. Every additional dollar earned make the recipient that much better off (the UBI amount plus the earned income). This is a very important feature. In addition, it would remove any political question over the level of income at which it should be withdrawn. It would be paid to everyone regardless of their income.

But paying the UBI to everyone, not just the lowest one third, would triple its cost. Can we afford it? Clearly those who pay taxes will have to pay more to cover this additional cost. But as the additional cost is to cover payments to these taxpayers, they would not pay more on net (depending on the nature and structure of our tax systems).  For reasons of equity and tax efficiency I have long advocated a flat tax, meaning the same marginal tax rate for everyone paying taxes. “My-political-platform-for-the-nation-2017” I would go even further and replace income taxation (both corporate and personal) with a flat rate, comprehensive consumption tax.  When a flat rate tax, whether income or consumption, is combined with a UBI, the net result is mildly progressive. Low income people pay no tax on net and in fact receive net income via the UBI (what Milton Friedman called a negative income tax). Middle income families might break even (receive a UBI sufficient to pay for their extra taxes) and for higher income families their extra taxes would be greater than their UBI, hence a progressive average tax rate system even with flat marginal rates.

A UBI with a flat rate consumption tax would enormously simplify our tax and welfare system while improving the financial incentives to work and returning more control over our lives to individuals from the state. Covid-19 dramatically demonstrates that the time has come to replace existing welfare systems with a Universal Basic Income (UBI).


[1] Michael Tanner, “When Welfare Pays Better than Work” CATO Institute, August 19, 2013.

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