Whenever the topic of Andrew Yang and the Freedom Dividend (1k/mo universal basic income — UBI) come up, there are few predictable, poorly thought out, and inaccurate critiques. The critiques are usually based at some level on the alleged economic problems of a UBI system.
As one of the handful of Yang supporters active here, I feel like I have a responsibility to correct some of these misunderstandings. Now, Wubh is the nice Yang supporter who engages in a friendly and good faith way with UBI and Yang critics. But bad economics makes me grumpy. So, here is the list of the most common bad economic (or “economic”) critiques of the Freedom Dividend and why they are wrong.
1. The Freedom Dividend is Funded by a VAT and a VAT is Regressive. It Hurts the People It Purports to Help
Yeah, I see this one a lot. There are a few keys to understanding this. The first is that there is nothing about any taxing and spending program that is inherently progressive or regressive. What matters is what the government does with the money it collects!
The Constitution specifically allows for the collection of a capitation tax. That is a tax simply for existing. Say $10,000 for every citizen. Is that regressive? Sure, because the poor couldn’t pay it. But what if along with passing the capitation tax, the government granted everyone an annual payment of $25,000? Is this still a regressive program? Of course not.
The key to understanding is to look at the net benefit received by various classes of people. Fortunately, someone has taken the time to do so.
People in the bottom half of the income distribution net out just shy of 1 trillion a year and that is every year in spendable cash. The next 40% of the income distribution nets out approximately 650 billion. Only among the top 10% of the income distribution do we see a net decline in spending power of 550 billion.
Even if the primary funding mechanism standing alone could be considered regressive, a VAT + UBI/Freedom Dividend is net positive for 90% (actually closer to 95%) of the income distribution. Only in bizarro world could a program with those net gains in financial resources be considered “regressive.”
2. UBI Will Just Cause Inflation That Will Eat Up All of the Gains
This one is probably the most annoying because there is a kernel of truth to it. But just a kernel. There are two things to understand about inflation: 1) that it is a monetary phenomenon — more money chasing a fixed amount of goods; 2) price increases can be, but are not necessarily, the result of inflation.
Let’s start with the second one and start with a example. Say a company, we’ll call it Apple, introduces a new kind of phone, let’s call it an iPhone, and they expect that they will sell 100,000 phones in the first week and 1,000,000 over the course of the first year. Naturally, they would talk to their suppliers and try to build inventory and a production schedule to satisfy that anticipated sales schedule. But it turns out that their new phone is a phenom and millions of people want one. That desire (coupled with buying power) is economic demand. They got the expected demand wrong and they need to ramp up supply. Until the supply matches the demand, the price of the iPhone will tend to rise until people who are willing to wait for supply to catch up step out of the picture. In economic lingo, the demand curve shifted to the right from what the company expected.
The price increase of the iPhone is not inflation. It is not because money is being printed. It is a simple matter of supply needing to catch up with demand. Over time the supply will catch up with demand and the price will decline to a new equilibrium level (that new equilibrium level could be either higher or lower than the initial price level).
At root, that story is similar to what could be expected with a Freedom Dividend. It will put more buying power into the hands of the heavily resource constrained and could drive up certain prices. But the Freedom Dividend is also removing buying power in a roughly equal amount from other sectors of the economy. There will not be “inflation,” but there could be a relatively short-term increase in certain prices, i.e. goods and services demanded by normal people, until production catches up and prices find a new equilibrium level.
An example that I like to use is that a Freedom Dividend may cause an increase in the price of remote forest land as groups of hippies start UBI-funded communes in northern California or Oregon. But it is also true that those same people will no longer be competing in the rental market in San Francisco. The Freedom Dividend will move supply and demand curves around, and the economy will take some (not even that much) time to adjust, but it will adjust and those temporary price increases are not inflation and will not eat up “all” or even that much of the increase in buying power that the Freedom Dividend will provide (and this is doubly true because the Freedom Dividend is permanent).
And, really, don’t we as Democrats want our economy to be oriented toward the production of goods and services desired by normal people rather than superyachts and spaceships fulfilling billionaire fantasies of colonizing Mars? I know I do.
3. People on Current Benefits Need to Give Them Up Making These People Worse Off
No. Economically, the important thing to understand is that absolute highest marginal tax rates are faced by people who move from our conditional benefits safety net programs into the work force. Now, I am not a Republican so I don’t want to overemphasize the work disincentive effects of marginal tax rates. But there are two huge problems here. First, people who move into the lower-skilled work force are often moving into jobs that are very unsteady and from which they can be fired at any time. Second, if these people lose their benefits by taking a job and then lose that job, it can take a new application process and months before they can get back the benefits that they lose. And those two things are a massive disincentive to move off of conditional benefits and into the labor force. I submit that the vast majority of people that defend our current patchwork of BS conditional benefits programs have never actually interacted with them.
The Freedom Dividend eliminates the benefits cliff and it is unconditional — meaning that if you want to spend the month of December working for UPS for some extra cash, you don’t lose your Freedom Dividend. That is not true for the vast majority of the conditional benefits programs that defenders express so much concern for. And that’s even leaving aside the complex application processes and the stigma that keep large percentages of people who might otherwise be eligible for these programs from even applying.
4. The Robots Aren’t Coming — We Don’t need A Freedom Dividend
This one is interesting mainly because it is half true. But it misses the point. The Freedom Dividend is not designed or intended to stop the robots. It is designed to ameliorate the effects. And what are those effects?
- A decline in labor force participation;
- A decline in working hours;
- Fewer opportunities for those without skills desired by the “new economy;”
- A decrease is opportunities in communities originally supported by “old economy” industries;
- Pervasive financial insecurity caused by the first four.
Well, ok then. All of these are currently happening in the economy. Despite a decade of economic growth, the labor-force participation rate is still in the low 60s. 78% of Americans live paycheck to paycheck. Deaths of despair are still increasing, particularly among high-school educated men in areas of the country devastated by mine and factory closures.
We already live in an economy that looks like what you expect if the robots were eating away at middle and working class jobs. Who cares, really, whether the robots are the cause or not? The solution is the same.
But here’s the thing, the automation story might not be wrong. Let’s take a look at the Fred database maintained by the St. Louis Fed. First, total retail sales between 2010 and the present:
Pretty consistent upward trend over the past decade.
Then total employment. Looks like a pretty consistent upward trend until 2017. Then employment and sales begin to diverge. Perhaps the same number of employees are just working more hours?
Nope.
Is it automation — self checkout, self service kiosks, robot-infested warehouses, etc. causing this? Don’t know, but it’s 100% consistent with the beginnings of an automation wave.
5. $12,000/year Isn’t Enough to Live on. UBI is an Inadequate Solution to an Imaginary Problem
Is $1,000/mo enough to live on? Well, yes, and we know this because tens of millions of Americans live on that amount or less every month. But more importantly, this is $1,000/mo for every adult. The Freedom Dividend can be combined in a two-person household. Multi-generational living arrangements become more possible. A group of friends can get together to achieve economies of scale.
But the real magic of the Freedom Dividend is that it is unconditional. If 12k isn’t enough, then you can pick up a part-time job to supplement your income without worrying about losing your dividend. That is profound and freeing for tens of millions currently trapped in our ridiculous patchwork of “safety net” systems.
But there’s another important fact here and that is that the Freedom Dividend will have big macroeconomic effects. At $1,000/month the Freedom Dividend is forecast to grow the economy by $2.5 trillion dollars. That represents a lot of new jobs for people to do. And the macroeconomic effects kick in no matter what level of UBI is provided. Even at $250 or $500/mo you would see significant macroeconomic effects.
Conclusion
UBI is a win, win, win, win. And the alleged downsides don’t exist, are overstated, or are based on a fundamental misunderstanding of the economics.