The prevailing economic policy philosophy of the past 20 years has been one which focuses nearly exclusively on supply-side stimulus and deregulation in order to manage the economy for maximal social benefit. Needless to say, such a philosophy is one-sided, and when faced with crises which arise from the demand-side of the economic equation, it finds itself helpless to successfully manage a transition through those crises. Much as we faced during the Great Depression, the problems we face today find themselves on the demand-side of the equation. After all, it is not as if we face a shortage of any good. Even energy, whose prices are rising, is not in such short supply that it is unavailable for some uses. Moreover, technologies and practices exist which can mitigate our energy demand, thereby alleviating somewhat any possible supply shortages.
Bear with me, as we try to fill out the demand-side of a more complete economic policy philosophy, find the economic justification for a Guaranteed Minimum Income, and finally raise and deal with some objections to such a program.
The prevailing economic policy philosophy of the past 20 years has been one which focuses nearly exclusively on supply-side stimulus and deregulation in order to manage the economy for maximal social benefit. Needless to say, such a philosophy is one-sided, and when faced with crises which arise from the demand-side of the economic equation, it finds itself helpless to successfully manage a transition through those crises. Much as we faced during the Great Depression, the problems we face today find themselves on the demand-side of the equation. After all, it is not as if we face a shortage of any good. Even energy, whose prices are rising, is not in such short supply that it is unavailable for some uses. Moreover, technologies and practices exist which can mitigate our energy demand, thereby alleviating somewhat any possible supply shortages. Bear with me, as we try to fill out the demand-side of a more complete economic policy philosophy, find the economic justification for a Guaranteed Minimum Income, and finally raise and deal with some objections to such a program.
Supply-side economic theory, in a perverse sort of way, makes sense as a philosophy of setting economic policy. Make it easier to invest, and presumably more money is made available to start businesses and compete. Free up money for profit-taking, and higher wages also become possible. Deregulate and privatize, because it is often harder for smaller businesses to meet higher standards, and competition in the market place spurs innovation at least, and potentially price cuts as well. Nevertheless, it is one-sided, because it neglects the effects of demand, and the means through which the supply-side stimulus is effected.
In other words, those economic players which already have a great deal of capital to invest are the ones who rake in the stimulus disproportionately. Their ability to make a demand on that supply is much greater than those with less wealth, and so they suck up all the subsidy in the supply-side stimulus. The rich get richer. But because we're already relaxing the rules on production, including labor rules, the poor get poorer, because the business owner has no reason to increase wages when the labor supply has not contracted or their demand for labor has not increased.
This is not to say that supply-side stimulus is all evil. Where supply-side stimulus succeeds is where there is a real supply shortage, or a real unmet demand. Deregulating the telecom industry had the effect of multiplying the types of telephone products available, from voicemail to caller-id to cell-phone and internet technology. Emphasis on supply-side stimulus makes sense in an environment ruled by scarcity.
But our current environment is not one ruled by scarcity. Globally, we produce enough to more than meet the world's needs. Nor is our problem one of supply-distribution. The relative plenty of energy resources and advancements in transportation technology make it very cheap to move goods around the world to where they are needed. Within the US, this is even more true, despite the fact that we are experiencing an enormous trade deficit. The capacity to produce and distribute all the goods needed for ourselves still exists, though I am not advocating we adopt such a model. The trade deficit is largely a result of currency valuations designed to export "paper" wealth to developing economies.
In an environment of plenty, when the economy still requires stimulus or adjustment for maximal social performance, the problem does not lie on the supply-side. Rather, the problem lies in the distribution of demand. When one looks at the economy through the supply-side, wealth is seen as the possibility to produce. And since production typically benefits from an economy of scale, there is no particular problem with the concentration and accumulation of wealth. One's ability to produce increases exponentially as one's wealth increases, so great heights of wealth are encouraged.
But if one looks at the economy through the demand-side, wealth is not the possibility to produce, but the possibility to consume. One needs money to buy things like food, clothing, and shelter. The accumulation of wealth then presents a large problem insofar as one can use great wealth to outbid others for consumption. Furthermore, there is a problem with how we distribute the possibility to consume. Without subsidy, and some of these subsidies do exist, one is reliant on income from investments or more likely, wages to acquire any possibility to consume. And so the possibility of consumption comes to rely on the activities of the agents of production, demand becomes parasitic on supply.
Furthermore, as the inexorable logic of capitalism progresses, innovation spurs productivity. Fewer man-hours are needed to meet demand today than were needed yesterday, and fewer still will be needed tomorrow. The overall demand for labor drops over time, only to be spurred by the opening up of a new market with unrefined techniques. Over time, that market's demand for labor will also drop. Demand for labor can only be kept high by regularly discovering and opening up such markets. This means that over time, in a capitalist system, the real wages of those who work will drop, more so if the population of labor is growing. So, over time, the ability of productive enterprise to deliver the possibility to consume to labor (and those who rely on labor) drops.
Finally, we cannot rely on innovation and the opening of new markets and new demand to keep the overall demand for labor high enough to carry the load of consumption needed to keep the economy going. First of all, such innovation and the discovery of new markets is highly unpredictable. Nobody knows when the next new thing will happen or what it will be. Secondly, supply-side stimulus meant to spur innovation will be sucked up by wealthy players, where it will be doled out to those it was intended for in the form of business loans or grants. Such big players tend to be institutional and conservative, hardly the place one expects to see the next big innovation.
Therefore, we need a sustained demand-side stimulus that is not tied to labor to get through the crisis of our economy. I (and many others) advocate a Guaranteed Minimum Income program. Such a program would guarantee every tax-filing household poverty-level income, regardless of whether any member of that household worked or earned any money through investments. For every dollar earned in that household, $0.50 of the subsidy should be reduced. So, for example, if the poverty level for your family is $20,000 per year, and you earned $15,000 in wages or investments, your original $20,000 subsidy will be reduced by $7500, giving you a total yearly earning of $27500. When you earn $20,000, you end up with $30,000, a $10,000 subsidy, and when you earn $30,000, you get $35,000, only $5000 from the government. And when you earn $40,000, you're off the subsidy.
In 2006, the poverty level for the average 4 person family was $20,614. 45.75% of all income earners fell below $40,000, or twice the poverty level. That means that there would need to be in excess of 51 million subsidy checks to send out. These subsidy checks would range from between nearly nothing to $20,000, so if we assume they would average out to around $10,000, we would need a mere 1/2 a trillion dollars to fund this. Rolling back the Bush tax cuts would pay for it, as would increasing the tax rates on the highest brackets and including their capital gains in that higher rate. These tax hikes are already necessary to dampen the boom/bust enthusiasm in commodities markets that results from the excess liquidity injected as a supply-side stimulus to a demand-side problem.
Now that I've told you what it would cost to fund this program, here are a few more reasons you should support it:
Flexibility
Because we're simply dumping cash in the hands of the very poor, we're increasing their ability to consume, and thus demand, not only more goods, but a greater variety of goods. Part of the reason we haven't seen a greater movement toward more energy efficient appliances, homes and cars among the poor is that they lacked the economic freedom to make those choices. Retail subsidies can only go so far to make these products affordable by the poor. By guaranteeing every household a minimum income, we make it much easier for them to qualify for the loans it would take for them to afford that new hybrid or bio-diesel car, it makes them more likely to "splurge" on those new florescent light bulbs rather than buying the cheap ones to afford dinner. It gives them the ability to make product choices for food, so they have the ability to move away from the cheaper, but heavily processed and preservative-laden junk and can afford more healthy and sustainably grown foods. Finally, it gives them the ability to educate themselves, by being able to afford to go to technical schools or college, without having to balance working to make ends meet with time studying.
Cost-effectiveness
Some might object that we should at least require those who can work to do some job in order to earn that money we're proposing to give to them. They would prefer job subsidy programs, by throwing money at businesses to hire more people, or by using the government as the employer of last resort. The problem is that neither of these solutions is cost-effective, and both presume that there exists a real need for that labor. Hiring subsidies are unreliable, for if a business owner does not need a new employee, they aren't going to hire a new one just for the subsidy. Rather, they will replace old employees with new ones under the subsidy, resulting in no net increase in employment and a government-subsidized industry. And building the government into the employer of last resort would necessitate a huge bureaucracy in order to process hours worked with labor class or position to wage rate and taxes. Furthermore, it is simply not feasible for the government to give a job to everyone who wants one. And depending on the salary, may result in a mass exodus of the private sector, resulting in de facto top-down socialism. In comparison, the bureaucracy necessary to distribute the GMI checks can be integrated into our current income tax-collection, unemployment compensation and Social Security Insurance systems. Say what else you will about these bureaucracies, they are among the most effective government agencies that exist. Administrative overhead costs should be comparable with those same Social Security or Medicare costs.
Labor Supply
Contrary to some who advocate for a Guaranteed Minimum Income, I believe there will be an effect on the labor participation rate. Many households which rely on two income-earners may be able to get by with just one on the subsidy, and may choose to do so if it means spending more time with their children, or improving and maintaining their own households. There will be less incentive to enter the labor market because a perfectly acceptable alternative exists in the GMI. But unlike others, I do not consider such an incentive to be a bad thing. For one thing, it decreases the labor supply, thereby increasing wages and compensation, and thus the ability of the wage-earner to carry the consumption of those who depend on him or her.
Resource Allocation
When the only route to gaining the power to consume is through participation in the labor market, certain forms of labor become neglected. I am speaking here of the work of raising a child or keeping a home. A single mother doesn't have the choice of devoting her time to raising her child, she must spend her days running the register at the local Wal-Mart or seating and serving people at the local Olive Garden, despite the fact that it would be much better for everyone if she could stay home and devote herself to those much more important things. Better that the local high-school or college student do that for extra money, so long, of course, that it does not interfere with his or her studies. Requiring people to work to make money means that we approve of all the work that's being done in our society, and that we need much more of it. But of course, if this were true, these people would already be hired.
Now, one might object here that we already consume too much as a society. Giving such a subsidy would do nothing more than increase our already bloated and consumptive lifestyle, and that would be a massive misallocation of resources. And I agree that such an increase is quite likely in the short term. But as those who bemoan such over-consumption like to quip, "How much cheap crap from China does a person need, anyway?" By increasing the buying power of the poor, they may gorge themselves on cheap crap for a time, but as they become acquainted with other choices, more economical or environmentally friendly choices, this sort of consumption should shift. This shift can be helped along by retail-subsidies of highly efficient appliances and vehicles.
Moreover, such an objection ignores the fact that American overconsumption by the poor is not by choice, but by their lack of choice. They have limited financial means to purchases the most efficient and long-lasting products, so in the end, they have to waste money. Guaranteeing them a minimum income gives them the ability to save, and shift consumption patterns, just as much as it gives them the ability to increase consumption.
Why Work?
If we guaranteed everyone an income, why would anyone work? Well, after all, $20,000 for a family of four ain't a lot of money. I'm not entirely sure how one could live comfortably on that in any major metropolitan area of the country. So a strong incentive to work still exists. And since the subsidy is reduced by only $0.50 for every dollar you earn, the more you work, the more you keep. So an incentive to work more and earn more still exists. And there's even an incentive to get entirely off the subsidy. By the time you've reached twice the poverty rate in income, the point when the subsidy is dropped, you get to keep every new dollar you earn. Before, when you're still on the subsidy, you only get to keep $0.50 of every new dollar you earn.
Some Tweaks
In order to keep inflation under control in the result of such a massive wealth and income redistribution and to account for differences in the regional standard of living, the poverty level should be calculated and indexed to inflation measures, and vary according to region. The Guaranteed Minimum Income subsidy should be considered gross, or pre-tax income, and should be taxed at the same rate as wage income, and the same deductions should apply. Consider the Guaranteed Minimum Income to be an add-on to the current tax system, to be accompanied with other reforms for progressiveness and the like, but not a replacement for taxation, as Milton Friedman wanted it.