Is Andrew Yang smarter than a 5th Grader? A UBI primer
“Let the free market provide them with cake!” - Andrew Yang, probably.
If 5th Graders were asked how to structure a social grant program, Universal Basic Income would likely be suggested and summarily shot down. “Give everyone money” is an appealing idea, but tends to wither in the face of more sophisticated and virtuous schemes like “give money to disabled people” or “give money to people who actually need it.”
UBI is remarkably easy to dismiss, on both sides of the political aisle. At first glance it bears a close resemblance to socialism, which history has shown to be less than spectacularly successful as an economic doctrine and which is anathema to the Economic Right. UBI also flies in the face of the guiding principles of the Left (economic and social); it transfers powers of resource allocation from the state to the individual, and it does not preferentially support the disadvantaged.
It would be deceptively easy to stop here and summarize UBI as a transparently stupid idea that no-one likes, but the fact is that there are world-leading economists, politicians and business-people who just won’t let the idea go.
These are people who are strongly opposed to socialism, on economic grounds. Their willingness to throw themselves behind UBI despite it being vaguely socialism-shaped is a good indication that it can’t be handily written off as a Marx-in-a-Mask economic doctrine. This is because UBI simply does not share the major fundamental flaws of socialism.
The first of those is that under socialism, the absence of personal ownership reduces the incentives for productivity at an individual level. It is commonly asserted that receiving handouts via UBI will similarly decrease productivity. This is a weak assumption, and particularly strange coming from die-hard capitalists. To make this argument one has presuppose that money has diminishing marginal utility to an individual, which is antithetical to the fundamental principles of capitalism, particularly belief in the value of capital accumulation. When arguing against UBI on that basis, capitalists inadvertently make a utilitarian argument in favour of wealth redistribution — if money has diminishing marginal utility, then overall utility is maximized by equitable distribution of wealth.
The second weakness of socialism is that the state is inefficient at both allocating and utilizing resources. The inefficiency in allocation arises because a state does not have any intrinsic mechanism for accurately evaluating how much value its citizens ascribe to any particular service or resource. The inefficiency in utilization arises because there is no incentive for efficiency in the absence of competition, nor is there is an ongoing selection process rewarding efficiency and punishing inefficiency. In short; a socialist state uses the country’s money to buy stuff you don’t want, and they overpay for all of it. UBI just gives everyone their share of that money and lets them use it as they see fit, relying on free market efficiency rather than state control.
UBI is also criticized as just being another form of social welfare, while the other side of the aisle derides it as inferior to social welfare as a means of addressing poverty. In the first instance, the criticism holds no water; the incentives of UBI are fundamentally distinct from means-tested social welfare, which introduces a swathe of negative incentives that are absent from UBI. An unemployment grant, for instance, acts as an opportunity cost to securing formal employment, and is a discouragement commensurate to the size of the grant. It also decreases the efficiency of any formal wage transaction. If an employer is able to pay someone $1 000, but that person must forego $300 in order to be eligible to receive it, that $1 000 is now only buying an effective $700 worth of labour, decreasing the value of that transaction for both participants. Social grants therefore have predictable negative effects on overall productivity. In short; paying people to be unemployed does not decrease unemployment.
At this point we have eliminated the knee-jerk criticisms of UBI, so it remains to discuss its potential effects before going into its actual weaknesses and its potential place in the South African context.
It goes beyond stating the obvious that most people would be happy to receive a regular stimulus check, and research has shown that it enhances mental health and cognitive function, and actually increases productivity measured in terms of hours worked, which is a decidedly incomplete measure of long-term value creation. By reducing the constraints on people’s decision-making exerted by short-term needs, a guaranteed income would allow people to make better long-term decisions, potentially increasing the long-term value of their labour.
This is particularly true in people’s youth, when the long-term value of education and training is constantly weighed against the need to start work to meet immediate needs. The single biggest predictor of a child’s future income is their parents’ income, even when individual traits are controlled for. This fact reveals that access to sufficient resources is critical in a child’s chances of future success, and that generational effects greatly amplify inequalities over time, unless some correcting factors are introduced. The negative incentives of social welfare have made it a poor correcting mechanism and so, historically, generationally-escalating inequality has seldom been eliminated except by the guillotine. UBI, if it turns out to work as projected, has the potential to somewhat equalize the playing field and, at the very least, eliminate the kind of poverty traps that thoroughly entrench wealth discrepancies.
All well and good, but we now arrive at the real crux of the matter; how could we pay for UBI? I will use my home country, South Africa, as an example. We’re broke. Our Treasury could not sustain the expense of a wide-scale UBI scheme; nor could those of most nations. UBI can’t be paid for by simply ratcheting up taxation. Hauser’s Law (not an actual law) and the principle of the Laffer Curve (is an actual curve) constrain taxation, as a percentage of GDP, within a set of bounds which really should not be exceeded. Most countries tend to operate at or close to their maximum long-term feasible tax revenue; South Africa has quite likely exceeded it already, potentially driving an economic decline that will eventually diminish the capacity to collect tax. In short, we don’t have money for the stuff we’re already doing, we are likely to have even less money going forward, and adding more taxes will reduce revenue collection in the long term.
UBI would, therefore, have to be funded by replacing existing government expenditure. This idea should be exciting to free-market fundamentalists; it would take resources away from the state’s inefficient decision-making machinery and instead place them in the hands of the free market. The core concept here is that services currently supplied by the government could instead be obtained directly by people, with their UBI money covering the costs. This would allow people to decide which services they value and to what extent, maximizing the utility achieved by that spending, and competition between service providers would result in greater efficiency than is typical under the state.
There are limitations to this, of course. You could send me stimulus checks until they come out my nose but I would never use them to build roads. UBI replacing government spend has to be constrained solely to services that can reasonably be delivered by a free market economy. Privately-owned monopolies are also to be avoided; they are prone to exploitation and seldom efficient in the long term. There is also an issue of speed. A free market can take quite a while to equilibrate; people only spend money on stuff that they need when they need it, and a critical service could easily collapse in that time-frame. This places another constraint; any service for which demand is time-dependent must have a solid bridging plan for the transitional period.
This leads us to a fairly simple summary of the constraints on UBI; it would have to replace state expenditures, rather than being added to them. Careful consideration must be given to which government expenditures can be phased out, and transitional plans must be in place for critical services.
South Africa specifically presents an intriguing use case for UBI. Our state is not just inefficient at utilizing resources, it brazenly steals them. Diverting actual state expenditure with UBI has advantages and disadvantages; replacing outright looting with UBI is all upside. Converting a corrupt state into a functional one is a long and arduous process, but it could be shortcutted by simply carving out the most corrupt parts and replacing them with a UBI scheme.
