Tag: UBI

Development with Dignity

Human dignity is the central focus of a fascinating new book written by Tom Palmer and Matt Warner Development with Dignity–Self-determination, Localization, and the end to Poverty.  They spotlight the treatment of every person with the dignity due all people as a critical factor in unleashing the innovation and entrepreneurship that has dramatically raised the standard of living to virtually the whole world over the last three hundred years after thousands of years of no progress. The book is rich with interesting examples.

Palmer and Warner argue that the top-down approach of most development agencies and aid projects of “teaching them how we do it in our developed countries,” often fails as a result of overlooking and/or ignoring the knowledge and ways of social organization found in the local communities aid is meant to uplift.  Such knowledge is important to understand where the problems are and what is working well in a community. Any improvements must start from there and be embraced by the people we want to help. The IMF calls this “ownership.” It must start with treating every individual with dignity.

A wonderful example of the importance of understanding and building from local knowledge and practices is provided by Jennifer Brick Martazashvili and Ilia Martazashvili in their recent book on common law property rights in the villages of Afghanistan: “Land, the State, and War –Property Institutions and Political Order in Afghanistan.”  They argue very convincingly that the common law traditions of many Afghan villages can provide satisfactory property rights until there is a central government that can be trusted and has sufficient administrative capacity to administer the registration of legal land titles.

Both books reflect an attitude toward individuals and the importance of their agency for prosperous, liberal societies. I am struck by the similarity of attitudes in the above approaches to development aid and our approaches to social welfare in the United States. Our Federal, State, and local governments provide a wide range of programs to assist the poor or temporarily unemployed.  The food stamp program, for example, epitomizes the attitude that people “on the dole” can’t be trusted to make their own decisions about how to use such assistance. I don’t want to ignore the fact that there are people we shouldn’t trust to make their own decisions (drug addicts, the emotionally unstable, etc.). But the view that government can make better decisions about how food aid should be used than the hungry who receive it is at the heart of the Palmer – Warner discussion about the importance of dignity.

Those of us who support Universal Basic Incomes (UBI) are on the side of those who believe that most people know better than government bureaucrats or even well-meaning social workers what their needs are–i.e., how best to spend their money. UBI payments are made to every person with no strings attached. Unlike current unemployment assistance and other safety net programs UBI would not diminish the financial incentive to work, though the incentives to work include more than just money. With a UBI any additional income from work is kept. The UBI is not reduced by work. See my: “Our Social Safety Net”

Pilot tests of the impact on recipients and on their incentives to work are being carried out in a number of countries and cities with generally very promising results. A two year pilot that was recently concluded in the Washington DC area is typical:

“Placing money into people’s hands without restrictions empowered them to address their needs, program administrators said, and removed the typical layers of bureaucracy and eligibility requirements that can frustrate recipients and hamper the effectiveness of aid efforts. The study’s quantitative and qualitative data showed that “participants often struck a thoughtful balance between addressing immediate survival concerns like paying rent and longer-term concerns like accumulation of debt,” analysts concluded. Recipients surveyed for the study, which was released Thursday, reported lower rates of mental health stressors and food insecurity than people with comparable incomes in the District and nationally.” “Guaranteed basic income-dc-poverty thrive”

When Universal Basic Incomes are combined with the replacement of income taxes (both individual and corporate) by a flat consumption tax, the result is a nicely progressive tax rate relative to income. See rough estimates here:  “Replacing Social Security with a Universal Basic Income” It also simplifies the process of financing the government expenditures that we want.

Trusting the choices of individuals about their own lives doesn’t mean that we (government or private institutions) shouldn’t offer information to help inform and guide their choices. But it does mean that we do not make those choices for them. We give them the dignity with which free societies can and have flourished.

The New Covid-19 Support Bill

The New Covid-19 assistance bill could add an additional 1.9 trillion dollars to support the fight against Covid-19.  In discussing the 2 trillion dollar CARES Act last April I wrote that: “The idea is that as the government has requested/mandated non-essential workers to stay home, and non-essential companies (restaurants, theaters, bars, hotels, etc.) have chosen to close temporarily or have been forced to by risk averse customers or government mandates, the government has an obligation to compensate them for their lost income. Above and beyond the requirements of fairness, such financial assistance should help prevent permanent damage to the economy from something that is meant to be a temporary interruption in its operation.”  “Econ 202-CARES Act-who pays for it?”  While I referred to the shutdowns as the result of “risk averse customers or government mandates”, it seems that the “blame” lies with sensibly risk-averse customers who stayed home and/or out of public gathering places by their own choice before the government required it. “Lockdowns-job losses”  A key point was that this was not a stimulus bill as output/income fell because its supply fell, not for lack of demand to buy it by consumers.

As total and partial shutdowns will continue for a few more months (or permanently for some unlucky firms) such support (properly targeted) should be continued for a while longer. But at what level and for how long? As I stressed in my April blog, the CARES Act payments to unemployed workers did not create income but rather transferred it out of a diminished pie from those who still had incomes (and could buy the government bonds that raised the money being transferred).  As I noted then and as is increasingly important now, the increased fiscal and monetary support that accompanied these government expenditures will need to be unwound carefully as the economy recovers. Equally important, the further increases in debt and money created by the currently proposed support should not exceed what is “truly” needed. U.S. national debt is already almost 28 trillion dollars, over 130% of GDP.

While CARES Act type support was needed and helpful, it was not always appropriately targeted. It is not the kind of emergency spending that is easy to get fully right.  As time goes on more and more evidence will be collected of abusive uses of these funds. Rather than choosing specific firms and classes of individuals to receive support, implementation of a Guaranteed Basic Income for everyone irrespective of income and situation would provide a better safety net for all situations. “Our social safety net”

In December President Trump signed a $900 billion Covid relief bill providing “a temporary $300 per week supplemental jobless benefit and a $600 direct stimulus payment to most Americans, along with a new round of subsidies for hard-hit businesses, restaurants and theaters and money for schools, health care providers and renters facing eviction.”

President Biden has proposed a new additional $1.9 trillion dollar package. Added to the $900 billion approved in December, this would be 13% of GDP, a VERY large amount.  Ten Republicans have proposed a narrower package of $618 trillion. They would exclude measure not directly relevant to the impact of the pandemic such as raising the minimum wage to $15 per hour (a measure that would be damaging to inexperienced, new job entrance). The Congressional Budget Office has just “estimated that raising the minimum wage to $15 an hour would cost 1.4 million jobs by 2025 and increase the deficit by $54 billion over ten years.” “Minimum wage hike to $15 an hour by 2025 would result 14 million unemployed”

The Democrats’ package would provide $1,400 per person direct cash payments across the board in addition to the $600 provided by the December bill. The Republican proposal would lower the thresholds for receiving assistance to individuals making $50,000 or $100,000 for couples and would provide checks of $1,000 per person.  They were expecting to negotiate a compromise package, which now, unfortunately, seems unlikely, though as this is written discussions continue. There are many individual provisions in the proposed bill. I have not reviewed them. My focus here is on the overall financial size of the proposal.

In an interesting oped in the Washington Post, Larry Summers, former Secretary of the Treasury during the Clinton administration, gently warned that the democrats’ package was excessive and risked rekindling inflation.  He wrote that:

“A comparison of the 2009 stimulus and what is now being proposed is instructive. In 2009, the gap between actual and estimated potential output was about $80 billion a month and increasing. The 2009 stimulus measures provided an incremental $30 billion to $40 billion a month during 2009 — an amount equal to about half the output shortfall.

“In contrast, recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.

“In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall. Relative to the size of the gap being addressed, it is six times as large….  [Given] the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply.” “Larry Summers-Biden-covid stimulus”

The U.S. national debt was $22.7 trillion at the end of 2019 and skyrocketed to $26.9 trillion at the end of 2020. On February 7 it stood at $27.88 trillion or $84,198 per person and $222,191 per taxpayer. This is 130.8% of GDP. This is a very big number. Much of this debt has been purchased by the Federal Reserve resulting in an explosion of its balance sheet and the public’s holdings of money. At the end of 2019 the Federal Reserve assets (the counterpart of which is largely base money–currency held by the public and bank deposits with the Federal Reserve) $4.17 trillion and grew to $7.36 trillion by the end of 2020. In other words, the Federal Reserve bought $3.19 trillion of the $4.2 trillion increase in the national debt. This is a bit of an overstatement because the Fed also bought a modest amount of other debt.  Much of the rest was purchased by foreigners as “the U.S. trade deficit rose 17.7% to $678.7 billion and hit the highest level since 2008.” “The US trade deficit rose in 2020 to a 12 year high”

Because the Federal Reserve now pays banks interest to keep large amounts of their deposits with the Fed in excess of required amounts (excess reserves), the money supply measured as currency in circulation and demand deposits with banks (M1) grew somewhat less than the Fed’s purchases of US debt. In 2020 M1 grew $2.5 trillion, a year in which GDP ended a bit lower than it started.` In part, the public is not spending this money at the rates they normally would because the theaters and restaurants, etc. are closed. A seriously inflated stock market and cryptocurrency values seem to be temporary beneficiaries.

According to Wells Fargo: “We estimate consumers are sitting on $1.5 trillion in excess savings compared to the saving rate’s pre-COVID trend….  After a year of limiting trips, eating at home and putting off doctor appointments, we expect consumers will be eager to engage in many of the in-person services forgone during the pandemic, and spend on gas to get there and clothes to look good doing it. The ample means and eagerness to spend could potentially set off a bout of demand-driven inflation that has not been experienced in decades.”  “Wells Fargo–Poking the Inflation Bear”

As I noted last April, unwinding these monetary and fiscal injections, as is necessary to avoid a significant increase in inflation, will be challenging. And now we are even deeper into debt. As inflation increases nominal interest rates will increase as well and the cost of our huge debt financing with it. While managing the short run impact of the pandemic, the government’s eyes should be on the longer run picture as well.

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.

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.