Guaranteed Annual Income: Let’s talk numbers
I love simple solutions; magic bullets that make problems go away. I really do. Complex government programs make us poorer and less free. So I really want to believe in the Guaranteed Annual Income (GAI) idea, which has been mentioned by a lot of commenters (and Milton Friedman.) But I just don’t see how the numbers add up. (For similar reasons, I’d like a single tax, but think that given our level of government spending we need a progressive payroll, property, carbon and VAT tax system.)
Here’s what I don’t get. Imagine a single mom living in the South Bronx with two kids. A typical poor American family. How much do we give them? If we give every single person the same amount, there will be too much incentive to produce large families. Think about the amount an individual in the Bronx would need to rise above poverty, and them multiply times 5. It seems like a much better deal than for one person, especially if you assume the marginal cost of raising an extra kid is less than the cost of a single adult.
That can be fixed by giving less for kids than adults. But how much would the family need to not be considered poor by the standard of NYC progressives? Here I have to plead ignorance, I don’t really know. But let’s say it’s $27,000 a year, perhaps $15,000 for the mom and $6000 for each kid. (I assume the government still has free public education and Medicaid, all other welfare goes away.)
Here’s another problem—is this amount the same in every part of the country? I suppose it could be adjusted to make it proportional to the cost of living in each city. Let’s assume you were somehow able to get 60 votes in the Senate for a massive welfare scheme that favored blue areas with a high cost of living. What then?
Basically every single homeless person in America would be better off moving to a place with a mild climate year around and a high cost of living. After all, they are homeless, what do they care about real estate prices? Some portion of that population may be drug users. Is that a problem? It might be viewed that way by the city with a nice climate year around and a high cost of living. Did I mention that I hope to retire in West LA?
OK, so we’ll just go with the simple plan that most people are proposing, the same payment for every adult, regardless of where they live. But here’s another problem. The amount the family of three needs in the Bronx looks much better to a family of immigrants in South Texas. For instance, add a dad and assume 4 family members, making $42,000. With that guaranteed income would you want to work in the hot sun picking vegetables and cleaning hotel bathrooms in South Texas or Georgia? I wouldn’t.
I know what you are thinking: “No problem. We’ll have illegals do all the low paid jobs, and the American poor can relax with their GAI. The illegals don’t qualify for the benefits, so the tomatoes won’t rot in the fields.”
But wait, I thought the left wanted to legalize the illegals. And even if we don’t legalize them, is the following the “Great Society” the left has been clamoring for since the 1960s:
1. An underclass of illegals doing the hard stuff, and living in shantytowns.
2. Tens of millions of poor Americans watching TV, and giving zero incentive to their kids to study hard in school, because they’ve got the GAI awaiting them too.
3. The upper class, in their gated communities.
I’m not sure that’s what development economists mean when they talk about “getting to Denmark.” Denmark doesn’t have a GAI.
Again, I really want to believe the GAI can work. It’s the type of solution I like. Please convince me I am wrong. It’s easier to administer than my wage subsidy idea. But I just don’t see how the numbers add up. At best you could do a GAI that is so small that it does not eliminate poverty. Not enough to live on. That might help at the margin, but it would not end poverty.
The problem with simple solutions is that poor people are just like everyone else–they’re complicated. And they have complicated problems.
PS. I suppose there are some hidden stereotypes in this post. That’s not my intention. I grew up in the 1960s and 1970s and knew plenty of young white people who would love to live what was then called the “hippie” lifestyle if someone else would pay for it.
PPS. I also doubt our tax system could raise enough revenue. The figures I quoted would cost about $4 trillion in gross tax revenue. Yes, the net cost would be far less due to middle class people paying taxes to themselves, but it’s still a lot of money, and would probably mean significantly higher MTRs, perhaps reducing our work effort to European levels.
PPPS. Note to young pundits—there was a reason that Bill Clinton did welfare reform.
Tags:
27. September 2014 at 09:38
Hey Scott, better than a GAI is a negative income tax of the sort Friedman proposed. I crunched some numbers a couple of years ago. While I haven’t integrated it into a nice gen eq model, the numbers look good. Here’s the spreadsheet: http://contraryneal.blogspot.com/2013/02/datasourceurldocs.html
A couple of points.
1) It’s too complicated to adjust the payment by cost of living. Better to make it the same everywhere and enable people to move where it makes sense for them to live than to try to index real estate prices, food prices, etc., for every country (precinct? borough?) in the nation.
2) Huge, huge problem with a single lump-sum payment: It doesn’t eliminate the marginal incentive problems of the welfare state. Better to bake it into the tax code and make the pre tax-post tax income curve have a positive y-intercept and concave down than simply keep its current concave-up shape and just translate it up a little bit.
3) A negative income tax should be paired with eliminating the welfare state. I think this is potential grand-bargain material. Kill social security, all the welfare programs, everything, and in return, eliminate poverty.
4) Just a general comment (I don’t think you’re falling into this trap, but a lot of people do) — $15,000 a year looks VERY different when you aren’t working 40 hrs/wk than when you are working 40 hrs/wk.
5) This will be your favorite point. My version of the negative income tax indexes the tax curve to NGDP. The natural units are “percentages of NGDP/capita.” It dovetails perfectly with NGDP targeting. 🙂
27. September 2014 at 09:50
Scott,
If I’ve got you right, you’re saying that GIA inevitably ends up being about as complicated as the existing social security system. I agree.
27. September 2014 at 09:57
I think a theoretical advantage that you didn’t emphasize here is that free cash would reduce the amount of dislocations on the consumption end of things. Now, since poor households receive so much income in kind, goods and services aren’t exposed to the ongoing feedback that comes from spending discretion.
Society won’t stand for letting recipients spend redistributed income with their own discretion, so we would inevitably impose some of our demands on their spending. But just looking at housing, health, and education, I wouldn’t be surprised if 20% of gdp goes toward inefficient production and consumption that is a product of inefficiencies that have been enabled by sclerosis in the name of redistribution.
Food seems to operate largely as a classical market, and modern supermarkets are fine examples of abundance and choice. Maybe policies in food distribution could be better mimicked in other parts of the economy.
27. September 2014 at 10:00
Kevin Milligan calls it an impossible trifecta. You can pick no more than 2 of the folowing:
1) high benefit (or big enough to replace current aid)
2) balanced budget
3) low taxed.
On work incentives, see Evelyn Forget’s work on Mincome, a Manitoba experiment.
http://offsettingbehaviour.blogspot.co.nz/2014/01/guaranteed-minimum-income.html
The NZ Treasury had done some modelling on a GAI a could years ago; we would need tax rates north of 50% to fund it.
http://offsettingbehaviour.blogspot.co.nz/2011/10/impossible-trifecta.html
In the States, we usually are told it could be funded by cleaning up the tax code. And while that might be true, it isn’t a free lunch either, except where the GAI is the only thing that makes cleaning the tax code politically possible.
27. September 2014 at 10:32
$5,000 per person per year. No means testing. Full compensation starts at birth.
Incentivizes large families? You bet. And that’s a good thing.
Disincentivizes work? Well total compensation is lower than current system, so perhaps not necessarily:
-313M people * $5,000 = $1.5T
-Bump it up to $8,000 and it costs $2.5T
-Current non defense non interest spending: $5T
Special sauce: Only get to vote if you earn more than you receive (compensation going to dependents counts as “received”).
Tax cuts for everyone!
27. September 2014 at 10:40
Extra special sauce: Only get to vote if you *contribute via taxes* more than you receive.
27. September 2014 at 11:05
Marginal effective tax rates on the poor appear to frequently be 50-100% now. Sometimes > 100%. So I’m not sure we could decrease the incentive to work any more than we already have.
An income that didn’t adjust for cost of living might be a feature, not a bug, since it might cause migration out of high cost areas on the margin.
27. September 2014 at 11:52
Alexei Sadeski makes some interesting responses. The large families point is particularly relevant to many European countries, especially Germany and the Baltic states (and indeed Scotland) where demographics are presenting a choice between Japanese-style growth and destabilising levels of immigration.
Could the problem of differential costs of living/wages/climates be addressed by confederalising the scheme? I seem to recall that most US states have populations similar to average European countries. Those that don’t and have significantly varying climates, like California and Texas, could decentralise the benefit further, e.g. a North California/South California difference. One could presumably argue that this is more a problem with ANY national welfare scheme in the US.
Scott, if US government spending was low enough, which tax would be your preferred single tax? (Not changing adminstrative problems e.g. the problems of a Georgist tax or a tax on evil.)
27. September 2014 at 11:59
Did I mention that I hope to retire in West LA?
When I was young, I used to want to retire there or perhaps the Pacific Northwest. Now I’d prefer a place with four seasons. They build some really beautiful lakefront or golf course communities in the Midwest now, and thanks to ever-accumulating productivity increases it’s not like I’ll ever lift a shovel or a rake again anyway.
27. September 2014 at 12:05
Yeah Clinton was seeking campaign donations from wealthy donors who don’t like welfare. Also, triangulation.
http://www.dailykos.com/story/2014/09/25/1331955/-Cartoon-Unemployment-isn-t-a-bug-it-s-a-feature
27. September 2014 at 12:21
Oh, Peter K…..
I love the “The rich like high unemployment” meme. It’s so popular. And, it’s such a useful signal for the listener – kind of like when someone complains about the “gay agenda” or tells me that Obama is really a muslim.
We’re told that the rich don’t say it out loud, but they secretly really like it when unemployment is high. I have pointed out to some people that, empirically, everyone does better when unemployment is low, and one response I received is that, well, yes, of course everyone does better, but the rich are so bullheaded and consumed by relative status that they still prefer economic dislocations, even though it makes them worse off on an absolute basis.
So, the story, as I hear it, is that the rich secretly support outcomes that actually harm them, because they are so ignorant and greedy. It really must be helpful to have a point of view unencumbered by the expectation of rational behavior or empirical evidence.
27. September 2014 at 13:47
In Australia, many lower income earners also pay EMTRs 70-80%+, due to the tax-free threshold ending at $18,200 pa and the withdrawal of unemployment benefits, rent assistance, benefits for children, etc. Our dole is $13,000 pa, with higher rates of assistance for the parents and the disabled. Benefits for children (aka ‘family tax benefits’) start at about $15,600 pa for two children if only one parent is working and taper gradually until household income hits $112k. Full-time average earnings is nearly $80,000 pa. The MTR on incomes over $80k is 39% and 49% over $180k. So the only people facing EMTRs much below 40% are single people without children on moderate but not low incomes.
This suggests to me that replacing everything and imposing a single tax rate on all income from the first dollar of 40% would represent a net improvement in EMTRs, assuming it added up.
I think part of the payoff for a GAI in the Australian context must be that poorer individuals and families are made worse off on paper than they are now in exchange for the much lower EMTRs they would face and the avoidance of bureaucratic red-tape regarding obligations to look for work and participate in nonsense training programs, etc. If an unemployed single mother or ‘disabled’ person knew they could go down the street, get a low wage job and straightforwardly keep 60% of it without having to fill in forms or take the risk that they might lose support and not get it back if they lost the job, I’m convinced it would improve work incentives and incomes enormously. Of course, because a lower GAI than current benefits would ostensibly ‘hurt the poor’, it would never get up and the costs of making sure no one was worse off would make the costs of a GAI prohibitive.
27. September 2014 at 14:33
Is GAI affordable? GAI already exists. It’s called “welfare”. It’s just a rather messy and complicated GAI, with some very high MTRs at various points.
Collect data for each individual (or each family?) on: market income Y; net tax paid (taxes minus transfer payments) T. A good random sample will do.
Run a linear regression of T on Y. Check to see that the residuals sum to zero (I think they will, but my econometrics isn’t very good.) If they don’t sum to zero, ask a clever econometrician to re-estimate the linear regression subject to the constraint that the residuals sum to zero.
The estimated intercept of that regression tells you the GAI we can afford, for a linear tax rate equal to the slope of that regression, **if we assume that behaviour does not change**.
Behaviour will change, but it is reasonable to assume that smoothing out the wacky MTRs of the current system will cause changes in behaviour that increase net tax revenue.
27. September 2014 at 15:42
Why complicate this issue with taxes? Federal taxes are not revenue – they simply remove dollars from the monetary system. The federal government does not fund its spending with taxes, so the notion of a GAI is not revenue dependent.
27. September 2014 at 15:47
We do not need to speculate on the results of VAI. Just consider the Social Security and Veterans Administration “disability” systems with their exploding rolls.
From the F-35 fighter jet to welfare, federal spending seems to corrupt the people who receive the money.
27. September 2014 at 15:52
A Basic Income Stipend wouldn’t have to be designed to incentivize having children. Just make it something that all adult citizen and legal residents get as a flat payment indexed to inflation either monthly or annually, and there’d be no advantage to having more children while getting it – in fact, your incentives would be to have less.
The “tax expense” side of it is an issue, although not as big of one as you might think if you figure the BIS would eventually replace some of the income support programs. Assuming the ratio of adults to American population held from the Census in 2010 to now (along with the percentage of the population that’s here illegally), then you’ve got 231 million Americans eligible for a Basic Income Stipend. At the current US poverty threshold ($11,670 for household of one), plus the current 0.7% of administrative costs if administered like Social Security, then you’d have an annual expenditure of $2.71 trillion. That’s not too bad.
Yes, that would buy less in certain cities and states. But you could always let the cities and states offer a state amount on top of that if they wanted to, or just allow people to move to cheaper areas. A flat subsidy wouldn’t have too much of a negative incentive on people’s desire to work, since it’s not means-tested and everybody gets it. Most likely you’d get people working more flexible shifts for about 30-40 hours on top of the Basic Income amount.
@Kevin Erdmann
Tight unemployment forces up wages from the bottom, pulling away profits that could have been distributed to investors and other rich people. That’s why whenever unemployment does get low, you start seeing hand-wringing about how “rising wages” are going to cause dangerous inflation.
Technically speaking, the best situation for rich people is when unemployment is low enough that it keeps inflation low and keeps wage demands low as well.
27. September 2014 at 16:04
Keven Erdmann wrote:
“So, the story, as I hear it, is that the rich secretly support outcomes that actually harm them, because they are so ignorant and greedy. It really must be helpful to have a point of view unencumbered by the expectation of rational behavior or empirical evidence.”
“The rich” may not favor high unemployment per se, but there are certainly plenty of them who want tight money and have bitterly opposed measures that have helped to reduce unemployment. I suppose you could argue that this opposition to their own interests is out of stupidity rather than malice.
27. September 2014 at 16:22
I love it….
Two comments respond to my comment. One says, why yes, sustained low employment hurts the rich, and the other says, it doesn’t hurt the rich but they want unemployment anyway because they are stupid or malicious…
What we do know, for certain, is that evil rich people and corporations want everyone else to be screwed. Please, Peter, Michael, and Brett, work out exactly why and how, and then get back to us.
27. September 2014 at 17:20
So what your explanation for the constituency that opposes inflation at all costs, including unemployment? It’s all well and good to mock those who disagree with you, but why not offer your alternative?
27. September 2014 at 18:20
Well, Michael, I agree with you that low unemployment is good for everybody, so I guess I can’t say.
Brett, help us out. You say unemployment helps out rich people and corporations. So, are you stupid or malicious (toward the rich or toward workers). Michael says those are the only options.
For the record, Brett, I think these things are really complicated, and that you are just mistaken – maybe even pulled a little off track by a bigoted mindset, which, let’s face it, we all have to be diligent about. Our brains are built for it. Though it’s surely not the only cause for being imperfect, especially on something as complicated as macro-economic policies.
Of course, it could be that Michael & I are mistaken, and that when workers are all able to be productive, that’s really bad for rich people and corporations. But, while I can’t speak for Michael, since I am not malicious, and certainly am not stupid, that would be crazy.
27. September 2014 at 18:39
“when workers are all able to be productive, that’s really bad for rich people and corporations.”
It could be bad for *some* corporations and rich people.
27. September 2014 at 19:02
Neal, You said;
“Hey Scott, better than a GAI is a negative income tax of the sort Friedman proposed.”
The NIT is a GAI, isn’t it?
Ralph, No, that’s not my claim. I say it’s too expensive.
Kevin, I’m not comparing it to our current welfare system, but rather to a wage subsidy.
Alexei, You said;
“Incentivizes large families? You bet. And that’s a good thing.”
More specifically, it incentivizes large poor families.
Kevin, You said;
“So I’m not sure we could decrease the incentive to work any more than we already have.”
Keep in mind that we cut people off welfare after 2 years. This would be different. Single men would also qualify.
W. Peden, I’d prefer that the MTR on labor income be kept below 30% or 40% for most workers.
TallDave, I want to be in a large city when I retire, and I have no interest in golf courses or lakefront.
One season is enough for me. I’ve had enough winter for 10 lifetimes.
Peter, Have you forgotten about all the liberal intellectuals who supported welfare reform?
Nick, You said:
“Is GAI affordable? GAI already exists. It’s called “welfare”.”
Maybe in Canada, but not here. If I quit my job tomorrow all I get is food stamps. I guess that’s a sort of GAI, but not much.
But yes, the GAI is probably better than the current system, my question is whether it’s better than a wage subsidy. I don’t think it is.
JimG, Which planet did you say you were from?
Brett, You said;
“The “tax expense” side of it is an issue, although not as big of one as you might think if you figure the BIS would eventually replace some of the income support programs.”
Eventually replace . . . some?
The GAI is a non-starter unless it immediately replaces all income support programs.
Your comments on wages and unemployment are exactly backwards. Profits tend to be higher during booms than recessions, which is why the stock market loves recoveries.
Everyone, After hearing all the arguments for a GAI, here’s what I think:
1. A wage subsidy system is better.
2. If we can’t have a wage subsidy system, it would probably make sense to replace all welfare programs (except perhaps Medicare) with a GAI of equal cost. But there’s no way liberals would ever accept that trade. Zero chance. The annual income would be too small.
27. September 2014 at 19:44
Guaranteed incomes for people living where exactly?
27. September 2014 at 20:03
You do make good points here, Scott.
27. September 2014 at 20:49
Scott,
Yes, you could classify a NIT as a GAI. It is clearly a superior form of GAI, however, as it can be revenue-neutral and eliminate the substantial marginal disincentives of other types of GAI.
27. September 2014 at 21:33
@Kevin Erdmann
It’s not an either-or situation. You start seeing these calls to curb any efforts to further reduce unemployment to prevent inflation once it dips below 6-7% – low enough so that it’s not a huge dampener on business activity and profitability, but not so low that it creates a tight labor market that pushes up wages.
@Scott Sumner
It could replace the EITC and SNAP almost immediately, or rather as it was phased in. Social Security would just need a longer phase-in period, or something else – like deducting the amount you get in Basic Income assistance from your Social Security pay-out.
If I couldn’t get a Basic Income Stipend, I’d be okay with that. The easiest way would be just to create a broader, more generous, more carefully phased in EITC with a work requirement (or not). It’d be cheaper, although you’d still suffer from the de facto marginal income tax of a phase-out as well as the greater political vulnerability (the EITC gets targeted today by people complaining that the poor “don’t pay income taxes” and calling for raising taxes on the poor and middle-class to finance reductions in the top brackets).
@Major Freedom
Does it matter? If you set a flat national level stipend, then people could either move to cheaper areas to make it stretch further, or work hours on top of the stipend to pay their way (states might also pay out more on top).
27. September 2014 at 21:34
Before anyone says anything, yes, I know the EITC already has a work requirement. I just wanted to qualify that anyways.
28. September 2014 at 02:47
Brett – hard money types are those that live off fixed income streams, not corporations (whose profits, as Scott says, rise along with employment.) so, the hard money crowd and the nostalgia for gold, etc is better though of as old vs young.
28. September 2014 at 03:57
Ed Dolan has a good series on basic income:
http://www.economonitor.com/dolanecon/2014/01/03/the-economic-case-for-a-universal-basic-income/
http://www.economonitor.com/dolanecon/2014/01/13/could-we-afford-a-universal-basic-income/
http://www.economonitor.com/dolanecon/2014/01/27/a-universal-basic-income-conservative-progressive-and-libertarian-perspectives-part-3-of-a-series/
And on work incentives under a basic income:
http://www.economonitor.com/dolanecon/2014/08/18/a-universal-basic-income-and-work-incentives-part-1-theory/
http://www.economonitor.com/dolanecon/2014/08/25/a-universal-basic-income-and-work-incentives-part-2-evidence/
28. September 2014 at 05:08
Brett, I’d prefer a wage subsidy where people get a bigger subsidy the more hours they work at a given wage rate. Right now the EITC gives most people a smaller subsidy if they work overtime. The subsidy should be per hour, not per year.
The GAI would also have to replace other programs like food stamps, housing subsidies, etc, or else what’s the point?
28. September 2014 at 05:34
$200/week per adult citizen $0 per child. Some SS recipients live on this.
Free education for the poor but increasingly charge as income rises.
Some people in the Bronx would move lowering what owners can get for rent. There are economically depressed places with low rents right in NY state. This would push down rents in the Bronx.
Gov. provided Medical care with a deductible equal to you last years adjusted income.
Hippies work hard in their organic gardens and building their homes etc.
http://www.permies.com/
Eliminate min wage and it will be easier to get work to add to your income.
People will get by, what is median income in Russia?
https://www.google.com/webhp?sourceid=chrome-instant&rlz=1CAACAA_enUS524US526&ion=1&espv=2&ie=UTF-8#q=median%20income%20russia
Charity will help.
People can get house mates.
28. September 2014 at 05:40
http://earlyretirementextreme.com/how-i-live-on-7000-per-year.html
Disclaimer: This post has gotten wildly popular on the internet so in many cases this post is the first and only post many people will read. Regular readers will already know that I’m married and that we split expenses 50/50. Hence, our combined budget is $14,000/year. For first time readers, let me point out that I have, however, been living on $7,000/year or less for at least a decade and I’ve only been married for 5 of those years. Getting married meant saving money on things like rent, but it also meant having to compromise and spending money on things which I rarely use and otherwise wouldn’t have bought myself. Speaking in terms of budgets, it’s been a wash. I spend as much being single as being married.
28. September 2014 at 06:42
Oh for christ’s sake…
Scott why the hell wouldn’t you just say GICYB, and make your arguments for it? I mean, you realize, how much ass I’ve had to kick beating these people into the ground?
So amongst a group of people who get it, let me explain why GICYB is better than other past conservative proposals.
INFACT, I think you all do a dis-service to Friedman to not get that had he heard GICYB he’d have never mentioned NIT.
YOU SHOULD NEVER MENTION NIT AND EITC, because it misunderstands the opportunity we have at hand.
What we want is a WEEKLY feedback loop, with a payday every Friday. A system that from 14 years old onward (part time during year, full time during summer), pays out as long you show up and WORK.
There are other learned attitudinal things here gained from pricing labor at next to free: it’s an incredibly important signal to understand WHY one job pays more than the other. It helps you to start to think about the skills that pay that are MOST in your wheelhouse, and we simply don’t have that now.
In plain language, my argument here is that GICYB will cause the right kids to stop daydreaming about become entertainers, and quickly gain yeoman tradecraft skills. THE KIND OF SKILLS, that when you also have a familiarity with technology (because you are young), you are BEST positioned to create new forms of tradecraft production.
Inventors usually have specific knowledge of their invention space. New roofing systems are invented by kids who start roofing at 14, for $10 per hour (the max GICYB pays).
Beyond welfare, GICIYB is an EDUCATION SYSTEM, one driven by wants and demands of the market more than the one Scott teaches in.
Then, everyone read this:
http://www.nytimes.com/2014/09/27/upshot/total-package-start-ups-and-the-death-of-do-it-yourself-.html?rref=upshot&abt=0002&abg=0&smid=tw-upshotnyt
It should be more obvious to everyone now that that GICYB is basically a button that welfare recipients can PUSH to get other welfare recipients to come do work for them.
The better you get at thinking about this AS SOFTWARE, the better you’ll be at silencing the left about UBI.
GICYB is open source software (Scott that means it’s like WordPress or Linux), states (and cities) use when with a block grants for welfare.
When they pull a copy and install it, they set dials (and mine as I’d set them in Chicago)
1. How much? $280
2. Require work? Yes
3. Type of employers? Private sector minority SMB only.
4. Home to Job distance? under .5 mile
5. etc.
My point here is that, GICYB software can be UBI and it can be slave reparations. It can be lots of things. Hell, China could use it.
Think about Vermont which hypothetically goes #FULLUBI and requires no work.
NOW, the poor in Vermont SEE if GICYB in Texas means that TX poor get to consume 30% more because in poor TX neighborhoods the price level has fallen, so the GICYB buys more.
IMO, I think the 80% of the able bodied poor and 100% of the disabled poor in Vermont WILL SCREAM LOUDLY to throw out UBI and require work.
But we will find out, won’t we?
Now Chicago sees is favoring black entrepreneurs with cheap labor outright gives them a sustainable comparable advantage UNTIL there is no poverty disparity between white and black neighborhoods.
As an economist Scott, you should start to understand, what having EVERY GOVERNMENT ON EARTH all using the same software, setting their dials differently based on cultural political realities to start does.
OVER TIME, you economists all have the MOST COMPLETE ACTIONABLE set of provable economic tests that big data could ever construct, with new weekly data dumps.
OVER TIME, states, cities, and nations, will start to set their own dials, based on what they see working best elsewhere.
SO c’mon PLEASE stop dicking around with goofy stuff, and just say “let’s do GICYB.”
28. September 2014 at 07:19
30M GICYB participants (the able bodied unemployed) receiving an average of $10400 = $312B
Non-medical welfare spending currently in US tops $500B.
We don’t need to spend another dime.
There’s plenty left over for the disabled and bumping up GI payments based on kids.
BUT AGAIN, in poor areas the $12-20K each worker makes, the disability check, the Social Security check, it BUYS 30% MORE.
Labor input costs are the majority of service driven businesses, anywhere with 25%+ unemployment and minimum wage today OBVIOUSLY has an artificially high price level.
My math says we’re looking at $2-3 haircuts, mani pedis for $8, gourmet burgers for $4, yoga lessons for $20 month, day care for $50 per week.
Yes eventually, in theory, there will be equilibrium, but it will entail minority entrepreneurs capturing the market gain, and poor areas being pulled up. I suspect however, that with the shift to digital consumption, there’s actually a limit to the amount of atoms (things) and calories (yours and others) that individuals will consume.
The poor want to buy the same things we buy, by localizing labor advantages, they will have sudden access to things they cannot afford on welfare alone.
28. September 2014 at 07:22
Maybe we could start with a guaranteed annual education for the poor;
http://www.youtube.com/watch?v=AMbR-jATgWs
28. September 2014 at 07:25
Tight unemployment forces up wages from the bottom, pulling away profits that could have been distributed to investors and other rich people. That’s why whenever unemployment does get low, you start seeing hand-wringing about how “rising wages” are going to cause dangerous inflation. Technically speaking, the best situation for rich people is when unemployment is low enough that it keeps inflation low and keeps wage demands low as well.
That would be a reasonable model for pre-industrial times, but in the modern world profits are driven almost entirely by productivity increases and the rich work a lot more hours than the poor. In fact, one of the primary complaints of progressives today is that the rich are too well-positioned for high-paying work.
28. September 2014 at 07:25
Scott Sumner wrote:
“Brett, I’d prefer a wage subsidy where people get a bigger subsidy the more hours they work at a given wage rate. Right now the EITC gives most people a smaller subsidy if they work overtime. The subsidy should be per hour, not per year.”
This would get gamed, no?
28. September 2014 at 07:37
“Tens of millions of poor Americans watching TV, and giving zero incentive to their kids to study hard in school, because they’ve got the GAI awaiting them too.”
The important thing here is delta. How big would the change be? How hard are they studying now? How many of them are succeeding as things are?
28. September 2014 at 08:52
I agree that the only sensible GAI is one that’s fixed nationwide, and mostly set for low cost-of-living areas. Folks can move to such places, or higher-cost states/local govts can top up the GAI with other kinds of welfare, possibly a wage subsidy. It doesn’t matter all that much, IMHO.
Morgan’s GICYB is also a wage subsidy from an economic POV, although it’s ultimately set by auction, it has a short (weekly) feedback loop and it also makes casual hiring a lot easier. These seem to be good ideas, but the overall system might be a bit messy. The whole health insurance exchanges thing didn’t work very well, as I recall.
28. September 2014 at 09:08
Krugman racks up another Pot, Kettle, Black Award;
http://krugman.blogs.nytimes.com/2014/09/26/the-new-classical-clique/?_php=true&_type=blogs&_r=0
———quote——–
New classical macro was and still is many things – an ideological bludgeon against liberals, a showcase for fancy math, a haven for people who want some kind of intellectual purity in a messy world. But it’s also a self-promoting clique.
I don’t think this clique could have formed and grown powerful in the first place without the intellectual and ideological foundations. Economics as a discipline being what it is, attacks on Keynesian economics as being inconsistent with rational behavior were bound to get some traction, and the stagflation of the 1970s certainly helped that attack, even if it was less relevant than claimed. Animus against government activism also played a key role, both in motivating the new classical economists themselves and in guaranteeing them external support.
Once the thing had gotten going, however, I think you understand its dynamics much better if you stop assuming that the motives of the movement’s leaders were pure.
———-endquote——–
28. September 2014 at 10:22
“The important thing here is delta. How big would the change be? How hard are they studying now? How many of them are succeeding as things are?”
Glad to have you aboard Thiago! Yes work will be required, and GICYB it will dramatically improve status quo.
anon,
You are missing the idea of of GICYB open source software.
It’s no different than Open Stack or Linux, all code published into Github, and everyone who wants to globally can write branches, some favored UX interfaces emerge.
But know this, the thing is working fa industrial levels long before Congress hands TX the first block grant.
Psst… all laws will soon be like this.
28. September 2014 at 11:49
The primary misconception here is that you’re keeping Social Security. Basic income is–and can only ever be–implemented as a replacement for Social Security. It’s intended to replace the ENTIRE welfare state, not just tiny pieces of it.
To start, you grant it to citizens age 65 and up, incrementally reducing Social Security payments as you increase basic income. Initially I get $15k from SS, but now I’m getting $5k form basic income and $10 from SS. As the basic income level rises, seniors are getting more and more equalized in terms of their benefits.
In addition, you slowly lower the age cutoff, from 65 to 60, from 60 to 55, and so on until we get to age 25, at which point you stop. This is a multi-decade process. As you go, you slowly get rid of various other programs (food stamps) and dump the money into the same common pool.
It’s not the simplest transition, but result is very simple. Elimination of most work disincentives, and a dramatic increase in the gross savings rate, since people are getting more money earlier and less money later.
28. September 2014 at 12:07
Hint : markets are price discovery mechanims. GAI is a price.
Next, ask a market engineer
28. September 2014 at 12:11
Wage subsidy. To make it appealing to the left (it’ll instantly get framed as corporate welfare), call it a public minimum wage and lower the private minimum wage real low. Suppose the public minimum is 20/hr, then if the private is 1/hr the govt will match 19/hr. Basically Noah Smith’s idea. Throw in mandatory saving at 15% of private wages and 25% of govt matching wage. Then you have minimum of $0.85 private and $13.30 govt match yielding a public minimum after mandatory savings of $14.15. Employment for lower marginal workers soars and they get a shot at the middle class too. The beauty of the matching wage is that it fits real nice with mandatory savings. You can then make it modular and add Singapore style programs for college, retirement and health savings. You can even argue that a quarter of the govts wage match is investment. It’s just so damn good lol.
28. September 2014 at 12:17
To add a little example, my dad is a painter and used to work music gigs. They paid shit and sometimes you pay the bar to use a slot time to play. Well now the bar can just pay you $1/hr to play and you still come out with $14.15/hr, it lets you gone your craft instead of waiting tables (a big employer of musicians where I’m from). This would feed into creative sectors without worrying about paying fake artists a GAI to not make art. The way I see it, the service industry can become full of artists, writers, musicians, video game designers that make real good pay instead of waiters and cashiers.
28. September 2014 at 12:43
Writing from the UK I found most of this gruesome. Why focus on the poor as recipients of welfare? After all a great deal of tax distortion is at the other end of the spectrum. Perverse incentives are perverse for the ultra wealthy as much as the poor. Having a guarenteed wage would instantly improve (a) exploitative wage structures where the poor have multiple low wage jobs simply to survive, (b) it would improve the self- esteem of their children who could become fuller members of society- probably reducing crime and crime related activities. The impact of their *desire* to get employment cleverly elides the issue of the positive nature of work as a mechanism of belonging to the wider society. Welfare is not a oneway enterprise. Society benefits from placing a meaningful safety net beneath the poor.
28. September 2014 at 14:16
For the newbies here, this is GICYB, the plan Sumner endorses:
https://medium.com/@morganwarstler/guaranteed-income-choose-your-boss-1d068ac5a205
28. September 2014 at 14:18
No time to read through every comment stream but this is how it could work and solutions to your main issues.
Don’t give any money for/to children. Once you’re an adult you get it. If people want kids, they have to work to support them. Sure this unfortunately is not practical because of the religious but we’re talking about what ifs. We could also pair this with government paid for birth control.
Don’t give a cost of living adjustment. You want to incentivize freeloaders to move where they are least costly. This is a benefit of guaranteed income not a defect.
The guaranteed annual income should not be extremely high, you should not be able to live off of it comfortably as a middle class person. At best you could room together with family to live a decent working class life. The incentive to work will still be there even if it’s just part time.
You wouldn’t necessarily have to raise taxes. If you cut off all welfare spending, social security, medicare/medicaid and give the minimum income instead you get something like $8k+ per year per adult in the US. This is not a comfortable life by any means, but why should it be? We still need people to work. Pooling that with 2 or 3 or 4 people, it is livable in certain areas of the country. You could augment this income with a part time job or freelance work.
28. September 2014 at 17:32
Floccina, Some good points.
Morgan, You know I support wage subsidies, but if I use your acronym lots of people don’t know what I mean. If wage subsidies ever catch on everyone will go to you for an explanation of the best high tech version.
Michael, Yes, there would be corruption, as in our current system. With a GAI, I promise you that dead people would be collecting checks. Any system has flaws. See what Morgan says.
Thiago, Yes, but I still say the comparison should be an optimal wage subsidy, not the current system.
Patrick, Krugman gunna Krugman
Joel, I don’t see why the transition would take so long.
Daniel and Chris, Yes, I’ve been advocating wage subsidies for 35 years.
XVO, Good point about how it encourages people to move to cheaper areas.
28. September 2014 at 20:05
“Again, I really want to believe the GAI can work. It’s the type of solution I like. Please convince me I am wrong.” – Well, the poster Morgan Warstler hsa a detailed plan on GAI that he thinks will work, and they do use this in the Gulf States, where the oil-rich citizens are rich enough so each and every one hires a foreign maid. It’s just bad for productivity IMO, as it encourages gaming the system and laziness. Even Warsler has no real solution in his blog proposal on GAI cheats, except to “name and shame” them.
29. September 2014 at 00:28
I’m a pro-immigration lefty, so I think Morgan Warstler’s program seems terrific, as the lowr price of domestic labor under CIYGB wouldnt price domestic workers outta contention with immigrants, and would deepen and diversify the range of services available to unwealthy immigrants and unwealthy natives, alike. Many important third world innovations would sit comfortably in the first world, I think, were wage subsidies to replace the current statutory wages.
Warstler seems wise in recognizing that a more economical mobilization of unskilled labor will do more to benefit unwealthy people who might buy services from one another than to improve GDP. First on my wish list is housing liberalization in CA and NY, tho
29. September 2014 at 01:09
Scott, EVERYONE will know what you are talking about 🙂
Just write it down yourself.
I bet you can do it in 1K words.
And really, go read this:
http://www.nytimes.com/2014/09/27/upshot/total-package-start-ups-and-the-death-of-do-it-yourself-.html
29. September 2014 at 03:51
Are there no possible synergies between guaranteed income and wage subsidies? It seems to me that the regional effects would be muted if guaranteed income were simply not that generous. Can’t we dream up a wage subsidy with regional effects that at at least partially offset the pull from guaranteed income?
29. September 2014 at 04:02
Morgan,
I love it. When is ‘soon’?
29. September 2014 at 05:21
Ray, There is fraud in every system. Unlike Morgan, I might limit the subsidies to certain types of jobs, where fraud is less likely.
Nick, Yes, they could be combined.
29. September 2014 at 05:32
Nick, it’s what I do all day long 🙂 My company is called GovWhiz, but we’re still in stealth.
29. September 2014 at 05:36
@ Kevin Erdmann. It continues to surprises me that economists expect business people and politicians to be rational in real life. It’s a useful assumption for moedleing purposes, but really?
“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” I think you know where that comes from.
29. September 2014 at 07:12
Scott, I agree in theory with the idea of wage subsidies on a per hour basis, but I can’t think of a way that would work for the millions of people who are self-employed. Relying on people to self-report hours worked obviously would be an invitation to fraud. Any thoughts?
29. September 2014 at 10:04
Came her to ask why we’re even talking about GAI, which is so obviously inferior to GICYB. Morgan has the right approach here: anytime someone proposes a welfare scheme we should be redirecting them to GICYB. Politely staying on topic and discussing the merits of any inferior policy with the same goals is an awful tar pit trap.
This is how we ended up with the EITC instead of Friedman’s negative income tax. Sometimes you can’t be polite, you have to keep playing the Evangelist. If you don’t, some lobbyist is going to shank you and steal your political capital to make a bastardized program with more holes in it.
The same goes for NGDPLT with Futures. We should scream like hell whenever a lesser alternative is proposed. It runs contrary to pragmatist instincts, but if you show willingness to settle for less you’ve gutted your chances of full victory. Don’t move an inch if you’re right and enough people know it.
29. September 2014 at 10:30
Guaranteed Income will come. I’m pretty sure of it. As we richer we eliminate different levels of poverty. It may be 50 years or 100 years, but it will come.
My basic plan is nothing for kids. Everyone starts with the IRS owing them $10k and everyone pays about a 25% flat tax.
I’ve looked at it before and I think it roughly works if you eliminate almost every other welfare policy.
Harder game is politics than economics as the left would try to add back in other programs making the whole thing unaffordable.
A married couple with 3 kids working 40 hours/week at McDonald’s 50 weeks a year would earn at $7/hour about 28k. Under this plan they would have an after tax income of .75*28 + 20 = 41k. So a non skilled modestly hard working family would have a pretty significant income.
29. September 2014 at 11:43
BTW, Warstler’s plan is a major reason why I supported independence for Scotland — we need to re-open the laboratories of democracy and smaller states are far more likely to try these new ideas.
29. September 2014 at 14:21
A unconditional guaranteed income simply doesn’t work.
A guaranteed income small enough to keep taxes more or less the same isn’t viable.
“Nothing for kids” won’t fly because that will leave a decent proportion of the poorest families worse off and progressives will never go for it. Social conservatives might not like programs that lean against bearing/raising children as well.
Replacing in kind programs (food stamps, WIC, Medicaid) with straight up cash will be a tough sell to social conservatives. Keeping those in kind programs in addition to a guaranteed income will be very expensive.
Reducing benefits to the elderly (~$1.5 trillion adding up Social Security, Medicare and Medicaid or ~$30,000 per beneficiary on average) won’t fly for obvious political reasons.
What about people who are severely disabled or on unemployment? Those benefits are quite a bit higher than some of the numbers I’ve seen thrown around ($5,000/yr, $10,000/yr), do we take away from those people to give cash to employed people in the middle class, or people who have never worked a day in their lives?
What about Veteran’s benefits?
A guaranteed income large enough so that it doesn’t hurt any current stakeholders would be simply unaffordable, and it most cases it would be taxing working people to hand their own money back to them.
I don’t see what’s wrong with the safety net concept in theory if not in practice. If the people who need help are a 53 year old man who has been unemployed for a year and needs to keep paying his $1,200/mo mortgage and a single mom with four kids needs to keep food on the table, (expensively) giving everyone the same amount that is not needed by most but insufficient for the few who are struggling seems like a bad idea.
30. September 2014 at 07:47
Andrew, I would not use it for the self employed. Perhaps an EITC might work for them–I haven’t given it much thought.
cthorm, Good point.
Justin, Good points.
1. October 2014 at 05:55
I don’t see why this has to have such big tax rates. My math suggests you could fund it by slowly ramping up to a 25% VAT.
If you start with a partial BIG+VAT and grow it over time, it actually gives us time to tweak bits that don’t work so well. For instance, I’d argue against a regional cost of living adjustment. And it also lets you start by funding it with some Pigovian taxes. The current proposals for a carbon tax or a national sales tax to capture internet transactions would both suffice. Make these important Pigovian taxes palatable by giving them back to the people using classic Republican tax rhetoric. Just don’t give them back in the same distributional pattern as they were collected: take a 5% tax on all carbon emissions, and use the revenue to pay every American a small annual income. Call it a “rebate.” A partial BIG wouldn’t replace the current welfare state, but it could help ween us off means-testing, reduce the size of the poverty trap, and help us iron out the kinks in this plan while supplying lots more evidence for pundits, wonks, and social scientists to study.
Take your time, the poor will still be here: we can do 5% now, and another 5% in a decade.
As it grows, the BIG can replace the expensive or particularly paternalistic parts of the welfare state, things like Social Security (which isn’t actually egalitarian) and food stamps. The BIG is tailor-made for these kinds of gradual tradeoffs; it enlists the middle-class in poverty-alleviation. Just think of all the ways in which conservative economists and progressive activists can ally to accomplish economically efficient policy changes: a minimum wage becomes a clear obstacle to employment (with no distributional upside) if everyone has a BIG, and that means even greater workforce participation, as would decreased unemployment insurance, which current employers must factor in to the cost of hiring decisions.
My version of the transition probably has tons of public choice problems that I’m not fully considering, inflection points where the short-term cost-benefit looks bad to the median voter, but I’m don’t quite see the particular point you’re making here; could you expand it a bit? As I see it, a small BIG+VAT is unconditional, itself, but leaves the current “conditionality” considerations for traditional benefits in place.
If the starting VAT was 5% of consumer spending, then in 2008 it would have raised about $2500 per household, which is a little more than the Alaska Permanent Dividend. (The median household would pay exactly what it receives, and there would be no cap for luxury expenditures like there is for payroll taxes.) But part of what makes poverty is household size: the median US household is 2.6, but the lowest decile household is smaller, and has fewer wage earners.
A family of 2 living in the bottom decile would have $2500 more a year. You can’t do much with that, but it’s a start: it’s about what foodstamps are worth (for a family of 2 living on less than $19,128) and about twice what low-income heating/cooling assistance pays, or roughly equal to LIHEAP plus Medicaid. At 10% VAT+BIG, you can phase out foodstamps or (the incredibly restrictive) TANF completely. At 15% you can eliminate all of the above. At 25%, you’ve basically replaced the value of the federal means-tested benefits, which in the US right now is equal to about $12,000-$13,000. You’ve literally eliminated both poverty and the poverty trap at that rate.
I think that a truly just BIG would require about 30%-35% VAT+BIG, and in that case you could eliminate Social Security, as well. As you know, Social Security is not actually a redistributive form of social insurance: it’s based on your income so rich people receive more and poor less.
Of course, all along the way, you’ll be able to gradually reduce income taxes, minimum wage laws, and means-tested programs, but I can readily imagine some inflection points where these reductions and gains are not linear. There’s all sorts public choice hay to made of those moments, but I don’t think the work subsidy is better in this regard. I’d be interested to hear your arguments and objections, though!
6. October 2014 at 09:06
Minimum Income, NIT, BI, GAI, and other like terms have a particularly Labor Theory Value quality. It conjures up terms like welfare, redistribution and other touchy-feely social policies.
One can rather view minimum income as a constant wave of Main Street Liquidity to help keep everyday consumers and businesses afloat during the business cycle and allow failed businesses to be replaced by more efficient ones . Staving off reliance on Debt::GDP indexed central banking monetary policy that increases principal and interest on the national debt, as well as giving answer to the robotic automation question is a desirable outcome. A liquidity complement may be implemented as a GDP::Debt indexed fiscal policy funded through the payroll tax in a wholesale manner, piecemeal method or some combination thereof over time and congressional debate.
The nature of the minimum income or more economically speaking, liquidity complement, has been described by Hayek, Rhys-Williams, Friedman and most recently by Dolan and Murray, to name a few. Shiller’s Trill Idea combined with his other writings on indexing Social Security create food for thought.
A GDP::Debt Indexed Liquidity Complement is an incentive for popular political support of Congress to prudently increase GDP growth and thriftily reduce national debt because it is in the self-interest of every taxpaying voter whether they currently benefit from the scheme or not. It satisfies Hayek’s first-order minimum income for Smith’s necessaries without producing inflation by money expansion plus provides a carrot and stick to the proposition without unduly interfering with the free market. Surely, there may be times when monetary policy actions are required, but in this way they are not encouraged by the majority of taxpaying voters on their political representatives in Congress.
It is also in the self-interest of consumers, business, government, quasi-government monetary institutions and sustaining effective military defense over the long haul to ensure their own individual self-interests in a minimally intrusive manner. It is to everyone’s benefit to remove unnecessary parasitic influences and over-indulgences on the economic system that burden the productive majority of taxpaying citizens. Promoting free market operations and social mobility in this way, and in conjunction with technology advancements may be shown to create prosperity at all levels of society.
Comparing the opportunity costs, one may find favor with a GDP::Indexed Liquidity complement over our current situation of arrangements. Such a change may be found to lessen the desire for perpetuating broken window fallacies and find favor in both conservative and liberal circles in a win-win fashion. Acceptance and respect for temporary workers who are contributing to the system will be obtained from all taxpaying voters, as well as businesses and encourage a proper queuing and more streamlined immigration policy as the economy permits through increased growth.
The numbers are easy enough to estimate from these sources, as well as others. Tally the numbers for yourself and compare to the existing average of 30-35% of monies extracted from the average middle-income paycheck:
Economic Indicators by country (GDP, Workforce Participation, etc):
http://www.tradingeconomics.com
Total Personal Income for Taxation:
https://bber.unm.edu/econ/us-tpi.htm
US Government Expenses: by category and year are here: http://www.usgovernmentspending.com/budget_gs.php
US government Revenues:
http://www.usgovernmentrevenue.com/federal_revenue_chart
6. October 2014 at 18:41
Great topic and great discussion, Scott.
A relevant datum: various levels of government will extract more than $17,000 in taxes per US citizen this year.
7. October 2014 at 22:17
Much of the push for Basic Income is coming because of the trend for ever-increasing automation and productivity. Some people are predicting unemployment levels at 50% or more by 2050 and ultimately 90% or higher. And these levels aren’t going to be decreased by new kinds of jobs, because there will just be new kinds of software and new types of robots to do those new jobs.
If this happens (I hope it does not, but all the trend lines are going that way) then it’s CORPORATIONS and the One Percent that will be cheerleading Basic Income … who will buy their products if everyone is unemployed? And it will have to be a GENEROUS Basic Income because people who are just barely getting along don’t buy a lot of goods. A lot of corporations will bite the dust if there are no middle class and upper middle class incomes left to buy things.
The money is the easiest part. Productivity will not be going away, it will only increase under automation and robotics. Tax the automated productivity and give it to citizens to keep the economy going. Otherwise, everyone’s apple cart gets upset … not just the poor and the middle class.
25. January 2015 at 22:14
Charles Murray put the price of a GAI to be about 87% of current federal expenses. He has proposed redirecting current expenes of social security, medical expenses, welfare programs towards that-which together are about 2/3 of what is needed.
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