Lorna Collier wrote a post on the Universal Basic Income that appeared yesterday. She interviewed me for it, but didn’t use anything I said. That’s alright because she took the arguments I made, fashioned them into a short op/ed by me, and gave me veto power. So the op/ed by me in the piece faithfully reflects my views. She did quote other people saying the same things I said: the huge expense of a UBI; the huge tax increases required pay for it and still leave us with a deficit of “only” $1 trillion; the effect of those tax increases on incentives; the fact that if it replaced all means-tested programs, it would leave many poor people worse off.
That’s all in there.
If you want to look at it, note that it will be gated in a few days, so look now.
But she did get one thing wrong. Collier quotes a Federal Reserve study as follows:
A 2019 survey by the Federal Reserve found that 27 percent of participants said if faced with a $400 unexpected expense, they would have to borrow money or sell something to pay for it, and 12 percent said they could not pay it at all.
Although the Federal Reserve study is often quoted the way she did, that’s not what it said. I posted on this in May and cited Alan Reynolds’s excellent post on the issue. During our conversation, the issue came up and I told her that many people were getting it wrong. I offered to send my post on it. She said yes and I sent it. I don’t know if she read it.
Some highlights of the Collier piece follow.
First, Robert Greenstein, who is usually on the opposite side of issues from me:
A Yang-type UBI would cost “something like 50 percent to 100 percent of the entire federal budget,” says Robert Greenstein, founder and president of the Center on Budget and Policy Priorities, a liberal think tank that analyzes budgetary issues affecting low- and moderate-income Americans.
Good for Hillary Clinton:
Hillary Clinton wrote in her recent memoir, What Happened, that she tried to devise a UBI policy to recommend in her 2016 Democratic presidential run. But she abandoned the idea because “unfortunately, we couldn’t make the numbers work,” Clinton wrote. “To provide a meaningful dividend each year to every citizen, you’d have to raise enormous sums of money, and that would either mean a lot of new taxes or cannibalizing other important programs.
My EconLog colleague Bryan Caplan:
Similarly, Bryan Caplan, an economist at George Mason University in Virginia, argued that it is “common sense” that there would be “a large fall in work effort. People may not immediately quit their jobs, but this provides a great relief from the need to find a job when you don’t have one.
And my favorite quote, and I was pleased to see that it was from Oren Cass, whose views on other economic issues I’ve been less impressed with:
Oren Cass, a senior fellow at the Manhattan Institute, a conservative think tank in New York City, wrote that a guaranteed income would “make work optional and render self-reliance moot. An underclass dependent on government handouts would no longer be one of society’s greatest challenges but instead would be recast as one of its proudest achievements.”
READER COMMENTS
Ed Zimmer
Mar 7 2020 at 3:14pm
I’m not in favor of a UBI but how can you continue this “how you gonna pay for it” nonsense. You may not believe MMT, but I hope you can see that Trump has gone a long way to validating it (at least showing the value of massive government spending accounted in a government debt that will never need to be repaid). Nor do I buy Caplan’s “common sense” argument that a UBI would cause a “large fall in work effort” – perhaps in his concept of what “work” should be, but seriously undervaluing the human need to “stay busy, a la Oren Cass”.
David Henderson
Mar 7 2020 at 4:31pm
You wrote:
It’s not nonsense.
You wrote:
You’re right that I don’t believe MMT. I had Liberty Fund commission an article on it by Jeff Hummel a year ago. It’s here.
Re Trump, I don’t think he’s validated it. Why do you think he has?
You wrote:
I can’t speak for Bryan, but what I find persuasive is that it will reduce the kind of work effort that leads to being paid.
One thing missing from the piece was a point I made on the phone with Lorna Collier: either the government gives it to everyone, in which case the tax rates are as I said, or the government phases it out past some level at a 20 or 25% phaseout rate, in which case even middle income people’s implicit marginal tax rate, including the phaseout “tax” rate, the federal income tax rate, the state income tax rate, and the FICA and HI, could well be above 50%. And this would be for a large swath of the population, probably at least 40% of the population.
Ed Zimmer
Mar 7 2020 at 5:37pm
As long as you remain blinded by deification of past economists there’s little anyone can do to help you see current realities. I had read Hummel’s article a year ago & it suffers that same syndrome. This is my summary of MMT:
GDP is the measure of our PRODUCTIVE economy. GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending, because all spending is someone else’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries to household bank accounts). All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends ONLY on currency-users perception), there are no limits other than that perception.
This shows (with logical consistency) that all that’s important to our economy is the FLOW of currency. If you believe it is not logically consistent, show the inconsistency – logically. That the accumulated flow of fiat currency has any meaning or relevance to anyone outside the inbred economics community (or the gamblers in the non-productive economy) is where I see the nonsense.
David Henderson
Mar 7 2020 at 6:37pm
I’m willing to engage in discussion but ONLY if you answer the question I asked you.
Ed Zimmer
Mar 8 2020 at 12:03pm
“Re Trump, I don’t think he’s validated it. Why do you think he has?”
Massive increase in government deficit (private surplus) with no inflation (or tendency thereto). Now, logical devalidation of my 115-word model?
Jon Murphy
Mar 8 2020 at 12:39pm
Logic isn’t the issue here. MMT is, for the most part, logically coherent. The question is whether it is empirically valid. Logical does not equal correct.
David Henderson
Mar 8 2020 at 12:57pm
Thanks, Ed. I’ll respond to the Trump point here. I’ll respond to your 115-word argument in a separate comment.
Nothing I said suggests that a higher deficit will lead to higher inflation. The U.S. government is funding the deficit by selling bonds to the public, which includes other countries. So far, buyers here and in other countries see bonds as relatively safe ways of holding wealth. So that’s the first part of the “how you gonna pay for it” answer.
The second part is that if the debt is paid for, it will be done in one, or a combination of, three ways: (1) raising taxes in the future, (2) keeping taxes on their current path but reducing government spending in the future, (3) printing money.
There is some level of debt as a % of GDP that could be stable. It’s higher for the U.S. economy than I would have said 10 years ago, but I don’t know, and no one knows, what that % is. Is it as high as 500%? Almost certainly not. Is it as low as 50%? Certainly not; we’re well past that. Whatever that level is, if the government just had deficits as a % of GDP equal to the growth rate of nominal GDP, we could stay there potentially forever. So consider the $1 trillion deficit we expect this year. That’s about 4.6% of this year’s GDP. If the government cut spending so that the deficit was 4% of GDP, and if nominal GDP is expected to grow by about 4%, then the debt/GDP ratio would stabilize. 4% of GDP equals $860 billion. So that still means a substantial deficit. And, by the way, it’s not hard to find $140 billion in spending cuts: over half of them could come from the Department of Offense. The political will is another issue, though.
I said above that the 3 ways are ways of paying the debt if it’s paid for. Why the “if?” Because there’s another way of handling it: partial or total default on the debt. Jeff Hummel singly, and he and I together, have written on this. If you’re interested, I’ll provide the links, but I want to go on my Sunday walk and so I’ll wait to see if you’re interested.
Now go to my other comment, which I’ll write shortly, on your 115-word argument.
Jon Murphy
Mar 7 2020 at 10:04pm
Mr. Zimmer:
Beware of falling afoul of Goodhart’s Law which states “once a measure becomes a target, it ceases to become a good measure.” GDP is measured in currency and is a proxy for the productive economy, but the underlying assumptions of a market economy (ie market prices matching the subjective values of people) are crucial. Simply printing more fiat money and shoving it into the economy may make GDP look like it is growing, but if real resources aren’t growing, then the GDP figure is no longer a good proxy for the productive economy; it’s just a useless metric. Indeed, that’s why GDP ended up being a totally useless measure of the wealth (or lack thereof) of the USSR.
You are indeed correct the fiat currency depends on user’s perceptions, and one of the reasons I oppose MMT (and other what I like to call “get rich quick” schemes of economic planning) is that it undermines people’s perceptions of the usefulness of the currency.
Ed Zimmer
Mar 8 2020 at 12:50pm
John M: NGDP IS a target. Virtually everyone wishes it to rise. Yet it does it’s ups & downs – because it’s measured via double-entry accounting, providing rational measurement of measurement validity. And, as mentioned in my last post, GDP is not & cannot be a measure of “wealth”, wealth being nothing more than an accumulation of fiat coupons. (Observing how easily Trump creates cult-like behavior by simply manipulating perceptions, should cause one to question just how real that coupon wealth is.)
NGDP (a measurement of flow) appears to be the only measurement we have to manage our economy. But that should be adequate, as it’s what every productive business uses to manage their finances. (Productive businesses concern themselves with “wealth” ONLY to the assess their financial safety margin & growth potential.)
Jon Murphy
Mar 8 2020 at 1:08pm
That’s not what wealth is, though. Wealth is the things people value. “Fiat coupons” are only valuable insofar they can be exchanged for real goods and services. They are a means of facilitating the transfer of wealth, not wealth itself.
Don’t believe me? Then I’ll make a deal with you: you give me all your material possessions (and claims on all future material possessions) and I’ll give you all my money. According to your description, you’ll be very wealthy and I’ll be incredibly poor. So it’ll be a great deal for you.
Ed Zimmer
Mar 8 2020 at 3:53pm
Jon M: Responding to your 03/08 12:39pm post, NGDP is an empirical measurement of the productive economy – so my short-form description of the economy is both empirically valid & logically consistent. See my responses to David H for further understanding. I’m still looking for flaws in that description (seriously) – & still not finding them.
Responding to your 03/08 1:08pm post, you’re playing word games (as I’ve found economists are prone to do). Money is an empirical measurement of wealth that applies to your property as well as cash (as you’ll discover if, god-forbid, our politicians ever try to enact a wealth tax).
Jon Murphy
Mar 8 2020 at 8:51pm
Yes, money is a measurement of wealth. It is not wealth itself. Money is a unit of account; if there was no money, your property is still valuable. Just like NGDP is a measurement of the economy, not the economy itself.
Jon Murphy
Mar 9 2020 at 10:48am
Addendum and expansion:
To highlight the point about the difference between measurement and the object measured:
Height is measured in feet and inches, but feet and inches are not necessarily height. Currently, there are 12 inches in a foot. But, let’s say that the definition of a foot changes such that 1 foot = 1 inch. A person who, under the old measurement, stood at 6 ft (72 inches) now stands at 72 feet. But did the person’s height grow? Of course not. Treating height as merely “the accumulation of inches” and changing the definition of inches does not make him taller any more than measuring wealth in some given currency and changing the definition of that currency makes someone wealthier.
Mark Z
Mar 10 2020 at 4:19am
I feel like this is hearkening back to an old debate in the comments over the relevance of NGDP vs. RGDP.
There is indeed no limit to how high the government can drive NGDP. NGDP obviously isn’t relevant to well-being though; real GDP is what matters. MMTers don’t dispute this and don’t insist that we should fixate on NGDP, to my knowledge. Rather they believe that the economy ‘naturally’ tends to have a great deal of slack in it, not just during recessions, but even at the peak of the business cycle, and therefore the government can boost real GDP simply by boosting demand via increasing spending.
What’s odd is that you claim that we can spend without borrowing or taxing or causing inflation, then refer to the Trump admin. borrowing money and spending it as evidence of this. Also, it’s incorrect to say that the failure of budget deficits to produce high inflation vindicates MMT. Increases in aggregate spending, not government spending, are regarded as causing inflation. Inflation rates don’t tell us whether deficits are too high, nor even necessarily whether there’s still slack in the economy. I’ll refer to a post of Scott Sumner’s not too long ago: https://stageeconlib.wpengine.com/excessive-debt-doesnt-cause-inflation/
Fred Foldvary
Mar 7 2020 at 7:33pm
For optimal UBI, see https://schalkenbach.org/universal-basic-income/
David Henderson
Mar 8 2020 at 11:46am
Fred,
Thanks for the link. I read your piece. You advocate funding a UBI with a huge tax on land, Henry George style. But the numbers you come up with would fund the UBI and not much else.
In previous discussions on this site, you have argued for a tax on land rents to fund the federal government. Are you backing off from that advocacy? If so, why?
robc
Mar 9 2020 at 12:49pm
Your revenue from the land tax seems high.
I see approximations of about $23T in unimproved land value in the US. Estimates of economic rent on land range in the 3-4% range, lets assume 4%.
That is total revenue of $9.2B, lets call it an even trillion. We are talking about about $3000 per person.
To go to David’s point, I favor a single land tax myself, but the key word is SINGLE. So we would have to use that $1T to replace all other tax revenue (federal, state, and local). Total government spending it about $8T, so we need to cut 87.5%. I don’t see any room left over for a UBI.
David Henderson
Mar 8 2020 at 1:03pm
Response to Ed Zimmer on MMT.
The problem with your argument is that you have totally left out the supply side of the economy. The supply side is a constraint on what can be consumed or invested.
With a 3.5% unemployment rate, there’s very little slack left in the economy. Even with a 10% unemployment rate, when the government increases spending on, say, infrastructure, most of the people hired (we saw this in the last recession) are hired from the ranks of the employed rather than from the ranks of the unemployed.
So if government spends a huge amount on UBI, that doesn’t increase the productive potential of the economy. On the contrary, the higher taxes required to pay for it reduce the incentive to produce and, thus, reduce production.
Now I think you’ll say that the last sentence above is begging the question. And you would be right. You’re arguing that higher taxes are not required. For my response to that, see my comment to you on the previous thread above.
Ed Zimmer
Mar 8 2020 at 3:28pm
David H: That my 115-word economy-description has omitted the supply-side (aka, income-side) of the economy is simply incorrect. I chose to phrase it in terms of the expense side for the same reason BEA emphasizes that side (because it’s more easily visualized & measured). But the supply-side is wholly represented by my inclusion of “all spending is someone else’s income”. If you’re arguing that your “supply-side” is not equal to NGDP’s income-side, I’d like your definition of supply-side.
And I’ll respond to your 03/08 12:57pm response to my Trump point here. My argument is that there is no need to “pay for” the Federal debt by either borrowing or taxes – that both are unneeded conceptual holdovers from commodity-money days, ie, I find your “(3) printing money” perfectly acceptable. There are no taxes (other than the taxes directly related to the production of finished goods/services) or borrowings included in NGDP income-side, so they (eg, personnel income taxes) CANNOT be required to “fund” the NGDP expense-side.
I’m not arguing that there are no limits on that “printing money” spending. There are both supply- & demand-side constraints requiring management, but I will argue that they can (& should) be managed just as a corporate comptroller would manage them, ie, when deviation from expectations occur, dig down into the subsidiary NGDP accounts to determine why the deviations are occurring & assess the options for correcting them.
I would like the offered links to your & Hummel’s writings on Federal debt defaults. I’ve likely already read them but am certainly willing to re-read them.
Jon Murphy
Mar 9 2020 at 10:43am
That’s not what “supply-side” refers to; supply side is not the “income side”. The supply-side refers to the aggregate supply curve as a whole and shifts thereof, not definitions of GDP. “Supply-side” refers to activities and policies that increase/decrease aggregate supply. So, when all you do is talk about government spending and taxation and not talk about the effects they have on the supply side (and no, “all spending is someone else’s income” is not talking about the supply side), you are omitting the supply side.
And no, I am not playing word games. I am using the literal textbook definitions of these things, the same definitions the BEA uses.
Ed Zimmer
Mar 9 2020 at 12:09pm
Jon M: Sorry, it IS word games you’re playing. You only think you have definitions for the variables your words are trying to convey. But go to the BEA Methodology Handbook & look at the detailed definitions of the variables they use (& even their definitions leave something to be desired).
I’ve found that economists have a broad definition of the words, phrases, concepts they use, but the nuances in their understanding (ie, in the details of their definitions) they differ widely. In fact that’s the source of most arguments among economists. If you’ll look objectively at those arguments it’s clear that their disagreement stem from differences in understandings of these unexpressed nuances.
What you are trying to describe in broad general terms, BEA (actually NIPA) describes in precisely defined variables & attempts to MEASURE those variables. That’s the fundamental difference between the scientific (NIPA) approach to understanding the economy & the philosophical approach taken by most economists. (I’m not knocking the philosophical approach. It can yield useful insights so long as those insights are accepted with the uncertainty they deserve. It’s when they become accepted as “truths” they become problematic.)
Jon Murphy
Mar 9 2020 at 12:27pm
Again, I am using those definitions. I posit, however, that you do not quite understand them. Doctor Henderson and myself, who are experts on this matter, are trying to explain to you the errors in your 115-word model, the logical and empirical flows. However, if you simply dismiss these definitional and foundational errors as “word games” and “deification of past economists” then there is nothing I can do or say to convince you otherwise.
You are indeed correct that there are many differences of opinion among economists that stem from various nuances of economic concepts. But this disagreement between us is not one of them.
Ed Zimmer
Mar 9 2020 at 3:19pm
Jon M: You’re comparing yourself with Henderson!? Your & Henderson’s arguments are at totally different levels. I gave a clear counter-argument to Henderson’s last response to which he has not responded. I choose to believe he accepts that argument until he tells me otherwise (which, if he does not accept, I believe he would say so & state his reasons).
Jon Murphy
Mar 9 2020 at 5:01pm
I am comparing myself with Henderson only insofar we are both economists, experts on this matter. We both teach economics and study this field. Henderson has far more experience than I and his friendship and mentorship to me has been invaluable.
But all this is besides the point. My point that you do not quite understand the subtleties and foundations of the terms you’re using remains. That is where the logical errors of your 115-model lie.
Jon Murphy
Mar 10 2020 at 9:16am
I choose to believe my Honda is a Maserati, but that doesn’t make it true.
BC
Mar 10 2020 at 6:39am
“the huge expense of a UBI; the huge tax increases required pay for it and still leave us with a deficit of “only” $1 trillion; the effect of those tax increases on incentives; the fact that if it replaced all means-tested programs, it would leave many poor people worse off.”
How would you respond to Mankiw’s example that a UBI with a flat tax can be equivalent to a means-tested transfer with a progressive income tax [https://taxfoundation.org/universal-basic-income-ubi-means-tested-transfers/]? Presumably, because the two are identical, they would have the same incentive effects and would not leave poor people worse off. Even in Mankiw’s example, however, the UBI leads to higher gross taxes and spending; only the net taxes/transfers are equivalent. What problems are created by high gross taxes and spending, even when incentives and net transfers are kept fixed?
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