Why I support a UBI

First, I want to apologize for my recent light posting–a combination of being busy and not feeling well meant that something had to give.  Still the last few weeks have been the busiest this blog has ever seen (more attention than I really want, honestly… I’d prefer just to influence the thinking of the more important bloggers) and I don’t think ignoring all that traffic shows respect for my readership.   So I’m going to try to up my game and post more regularly this week.

This post, just like my last several (here and here) is again a response to Steve Waldman (indirectly) and his series on social welfare economics.   This time I mostly agree with what Waldman wrote… I have some nitpicks with the fifth post in the series, but that’s all.

I’m actually responding to a commenter who suggested in my last post that Waldman is trying to justify a universal basic income.  But I also support a UBI!   Probably for different reasons than Steve, too.  That’s what I want to talk about… I’ll present my thinking here in list form.

1.  Efficiency of Unconditional Institutions

Let’s think in terms of two basic institutional structures which might make up the welfare state, two packages of benefits as it were.  I’ll call them “conditional” benefits and “unconditional”.   These labels are pretty self-explanatory, but let me pedantically spell them out.

There is a state of the world s and a set of all states S.  Conditional benefits means that for some s and s’ in S, there are associated benefit levels, b_s and b_s’, which are not the same.  Unconditional benefits means that the benefit level, b, is the same in all states of the world S.   Simple.  Here’s the thing, though: who decides if the state of the world is s or s’?

If the government decides, than conditional benefits mean larger bureaucracies and more fraud.   If beneficiaries decide than you have to worry about creating “truth telling mechanisms“… that is you need to think about the cost of encouraging people not to game the system, to reveal their true type as an economist might put it.  The problem with this second approach is that any type revelation mechanism requires what we call information rents.  Which in non-economese means that the benefits packages have to be less targeted or less generous than would be idea.

2  Interlocking Macroeconomic Institutions

This is a point I haven’t heard elsewhere, but I think is the single greatest benefit to a UBI… It plays really well with another macroeconomic institution I support: nominal GDP targeting monetary policy.

Consider this.  Fund a UBI through a simple flat tax on all income (for simplicity).  So, you earn UBI benefits of w, then the after-tax benefit is (1-t)w and the tax collected is (t x NGDP… I’ll write NGDP as PY from now on).  If the population is N, then Nw = tPY.   So, if the growth target for nominal income is adjusted for population growth, then the funding stream for UBI is stable when the UBI grows at the same rate as NGDP.   Another way to say the same thing is that wage pressure in the economy always grows at the rate of nominal income growth.

Yet a UBI would be a powerful counter-cyclical automatic stabilizer: rising in importance whenever NGDP falls below target.  That reduces how hard the central bank has to work

That’s not all, though.  Suppose NGDP is on target, but there is a supply shock, what happens?  Well, inflation rises as a share of nominal growth.   The purchasing of the UBI erodes relative to trend growth.  Marginal workers reenter the labor force.  So potential GDP growth rises again.  Also note that when the UBI is set “too high”, that’s just a kind of adverse supply shock.

So, a UBI is an automatic stabilizer for Potential GDP as well as Nominal GDP when coupled with NGDP level targeting.  This is a point that Nick Rowe ought to appreciate.

3  Work Paternalism is bad

Unlike Adam Ozimek, I don’t think it’s OK for libertarians to denounce all forms of paternalism… except when it comes to telling people that they necessarily have to work.   Un.  Cool.

Why do most people drop out of the labor force?   1) Personal reasons like becoming mothers (or, increasingly, fathers)… that’s something you ought to support if that’s the choice people want to make; 2) Professional reasons like retiring or career changes–these shouldn’t be tied to strict cutoffs like a retirement age but based on personal choices and normally libertarians are the first to point this out; 3) education–a UBI makes it easier to be a student and that’s a good thing for the economy.  These are all people who are making better choices because of UBI.

That leaves only two theoretical groups, those who are demoralized by lengthy spells of unemployment (“discouraged workers”) and (theoretically, at least) there are the  “parasites”.

In terms of the demoralized, I think people have the sign wrong: a UBI would help keep morale up, because low morale is one of the consequences of living without an income.   More than that an income can help fund hobbies and hobbies can help prevent skill degradation by giving them an outlet to use some of those skills even without a job.

As for the parasites… to a good approximation, I don’t think they exist.  Adam and other libertarians, on the other hand, seem to think that everyone who chooses not to work in a UBI regime must be a parasite.  That’s ridiculous.  A UBI, at least at the level people talk about, would be barely enough, or perhaps not even enough, to live on.   People who would use their benefits to buy pot and video games would find no money left for rent and groceries, while who use their benefits for rent and groceries would find no money left to enjoy their free time.   These are just not choices that actual human beings would make.

At any rate, that’s my thinking on a UBI.  There is one more reason for me supporting a UBI, but that’s an issue which I think will come up when I’m ready to discuss my thesis online.