Andrew Yang, UBI, and the VAT
A friend of mine pointed this article out to me: http://www.yomyomf.com/entrepreneur-andrew-yang-is-running-for-potus-2020/
If you read the article, you find out about a man named Andrew Yang, who is running as a Democratic candidate for POTUS in 2020. He has proposed that all American citizens between the ages of 18-64 should receive a government check of $1000 every month. This is called a Universal Basic Income payment (UBI). The premise behind the idea, in Yang’s mind, is this: the US has a lot of resources, but those resources are not distributed to the people effectively.
Why $1000 a month?
-recommended by former Service Employees International Union president Andy Stern
-$12,000 a year brings an individual close to the US poverty line, which is $12,752 per person per year for those under the age of 65, according to the US Census Bureau.
-$1000 a month UBI has been studied and modeled by The Roosevelt Institute (It could grow the US economy by 12.56 percent after 8 years if paid for by increasing the debt).
-$1000 is low enough to help assuage a common criticism of UBI: that it will discourage people from working (It would make a huge difference for families, but not enough to lead one not to work.)
Yang believes UBI will encourage entrepreneurship, as it will improve mental well being.
Under Yang’s plan, the UBI payment would be funded by a value-added tax (VAT) of 10 percent on goods and services a company produces, particularly those produced by companies benefiting the most from automation.
Yang states that VATs will become more important in the future as we cannot collect income tax from robots or software. He believes that this plan would generate between 700 to 800 billion dollars in revenue. He bases this estimate on a study done in 2010 by Eric Toder and Joseph Rosenberg of the Tax Policy Center.
Under Yang’s plan, current welfare and social program beneficiaries in the United States would be able to keep their existing benefits if they prefer.
A Review of Economic Principles
Basically Yang states that a UBI is necessary because technological advancements are putting more and more people out of work. There are so many robots doing jobs that people used to do that millions of people will be unable to work. Unskilled labor workers will have no other choice but to depend on wealth redistribution in order to survive.
However this scenario does not seem to be likely in the near future any time soon.
The very field of economics exists because of the existence of scarcity. This world of ours simply does not possess enough resources, goods, and services for everyone to have limitless amounts.
Thomas Sowell said, “The Garden of Eden was a system for the production of goods and services, but it was not an economy, because everything was available in unlimited abundance. Without scarcity, there is no need to economize – and therefore no economics” (Basic Economics)
In other words, in a post-Eden world where scarcity exists, economics must exist unless we find a way to recapture the unlimited abundance of a pre-Fall world.
Even if robots do take over an increasingly higher number of jobs traditionally filled by humans, the reality of scarcity in the economy will not change. It still takes resources and labor to build and program these robots, and the robots themselves must use resources to produce goods and services. More resources still will be required to service and repair these robots when they break down. Therefore a more technologically driven economy will not change the fact that there are costs to produce goods and services and entrepreneurs will only continue to produce the goods and services so long as there are sufficient profits to leave them better off.
If the world of Disney’s Wall-E is ever realized, where robots will do literally everything including build and repair other robots and so humans will be able to simply relax all the time, then I suppose a UBI would be necessary, but I would not count on this scenario happening any time soon.
Therefore even assuming the robot takeover happens as all these doomsday technologists claim, the laws of supply and demand will still apply to the economy, even with a universal basic income.
Next, history has already given us many examples of jobs that became obsolete due to innovation. For example, when was the last time you were walking down the street and saw a business that produced and sold saddles and horseshoes? There are still some around, but there were far more before the invention of the automobile. Nonetheless did a massive amount of unemployment result for ranchers and merchants who sold horse related equipment? Maybe for a short time, but the reality is that people simply found other lines of work that resulted from the technological shift itself. The creation of automobiles improved long distance travel and high-capacity shipment giving rise to a boost in the road construction and transportation industry.
As another example, despite whatever jobs may have disappeared as a result of the world wide web, I do not think anyone prior to 1995 could have predicted how many people would be earning 100% of their income solely by using the Internet. The bottom line is even if the advent of technology predicts a shrink in a given industry, history has shown that it will inevitably lead to a boost in another new industry. If and when robots can literally do everything there is to do, we will have a different discussion but I just do not see that happening.
With these two things in mind, the continued existence of the laws of supply and demand and the eventual shift of people from one industry to another, let us continue.
Application of Scarcity and History
If there is a robot or machine that give you everything you want or need as UBI proponents predict, then we will have achieved the world of Wall-E. We will have achieved the unlimited abundance of Eden instead of continuing to live in the scarcity of a post-Eden world. There will be no entrepreneurs because robots will be doing literally everything. However because of the reality of scarcity, there will never be a robot that can give you literally everything you want or need. Until a robot can create resources out of thin air this statement will remain accurate.
It has been said that Internet sales replace retail workers, diagnostic apps replace health care workers, and self-driving cars will replace drivers. According to a study by Carl Benedikt Frey and Michael Osborne, almost half of all US jobs are at risk of being automated in the next 2 decades.
However, we need to consider the job figures that will be created as a result of these technological advances. There still have to be people to build, service, and repair these self-driving vehicles. There will be competition amongst app developers and internet sales platforms. Even if we can predict that some jobs will disappear wholesale, history has already shown that we cannot possibly predict what new jobs will result.
The UBI experiments
UBI proponents like to point to studies (Oxford, The World Bank, MIT, Science Magazine) that have shown that people who receive free money do not stop working initially at least. However, the biggest failure in economics is the failure to see the long-term consequences of a policy.
Hilmar Schneider noted, “Experiments are made that are supposed to demonstrate empirically that people would not or would only insignificantly reduce their working hours after the introduction of a UBI. These experiments are financed “externally,” and as such, the incentives for earning more than the UBI remain attractive because there is no necessity for internal financing. Furthermore, these experiments always cover temporary periods. People might therefore not quit their jobs just because they receive greater income temporarily, since they would risk longer unemployment after the experiment ends.”
So these studies have either been done on a small scale or are privately funded with money coming from voluntary donors outside of the small-scale economic decisions of the participants. Therefore there is a problem with extrapolating from the results of these studies to support a larger scale, permanent version.
If the money is coming voluntarily from private donors, the results of that study will not tell us anything about whether or not a UBI would be effective coming through the force of taxes in a large country like the United States.
As a thought experiment: If someone just offered you an extra $1000 would you turn it down? Of course not. It is not surprising then that if people rich and poor alike are temporarily given some extra money for a few months, they will use it to enrich their lives with a new computer, help pay their school bills, or to make a new investment. This is the same principle behind what private employees do when they’re given a one-time bonus or a temporary pay increase.
However consider what happens when a UBI is permanently implemented on a large scale for a large country like the United States. If you simply provide everyone with a modest amount of cash but not enough to live on, all that will result is a form of inflation since everyone has a little more money to spend, when they all go out to spend more, prices will rise to compensate for the increased demand. The initial spenders will get lucky but once the price raises take effect, everyone will be no better off than before there was a UBI.
When money is redistributed from the wealthy to the poor, the poor will come out and start buying things that they were not buying before. Since there is now an increased demand for the things that the poorer demographic wanted but previously couldn’t have, the prices of these goods and services will rise to compensate for the increased demand. Just because it is not overall inflation caused by an increased currency supply (from printing more money, for example) does not mean this redistribution will not cause inflation in the very markets that affect the demographic that the UBI is supposed to help.
The Cost of a UBI
What if we give a UBI that can be lived off of without working?
David Freedman states: “Economists are quick to point out that whatever savings might result from cutting out the existing safety net bureaucracy, they are likely to be far outweighed by the cost of handing an annual check for, say, $10,000 to every adult in America. (Proposed amounts vary, of course, and are likely to be adjusted for those supporting children. It’s generally assumed that existing health-care financing programs would remain in place, as would Social Security.) A rough calculation suggests that a $10,000 basic income, enough to lift the vast majority of Americans above the poverty line, would be at least twice as expensive as current antipoverty benefits and overhead, adding between one and two trillion dollars to the federal budget. Halving the size of the check would go a long way toward solving that problem, but that would leave millions below the poverty line with fewer other programs to help.”
Ted Cruz pointed out in a debate with Bernie Sanders that even if the US confiscated 100% of the earnings of all Americans who make more than 1 million dollars a year, it only produces about a trillion dollars in tax revenue. What does this mean? It means that in order to provide a UBI of $10,000, it will mean massive tax increases on both the rich and the middle class. Financing a UBI of just $10,000 a year would cost far more than could be paid for only by those who make a million dollars or more a year.
So coming back to Yang’s idea. To support his annual UBI of $12,000, we would need at least one or two trillion dollars, and his VAT plan would only provide between 700 to 800 billion dollars in revenue. To make up for the remainder, we would need to increase taxes on both the rich and the middle class.
The Problems with Increasing Taxes on the Rich and the Middle Class
Whether it is through the VAT or other taxes, profit earners will have to finance the UBI. Once the UBI becomes sufficiently expensive, those profit earners will no longer earn profits high enough to motivate them to keep working. Once this happens the whole system will collapse.
As Margaret Thatcher once said, “The problem with socialism is that you eventually run out of other people’s money.”
Does a basic income create a floor from which people can lift themselves up? No, once you reach a certain threshold your basic income will simply be your own money being given back to you since the money is obtained through taxes. The tax rates that will finance the UBI alongside all other forms of government spending to include universal health care and other programs that most UBI proponents also support will mean that even middle-class families will likely pay up to 50% income tax or more.
It is extremely doubtful that government spending will ever go down or that people will stay happy with a UBI of $12,000 a year. It is practically human nature as this verse from Proverbs 27:20 astutely points out: “Sheol and Abaddon are never satisfied, and never satisfied are the eyes of man.” Over time there will be pressure to raise the UBI and in doing so increase tax rates even further. This will discourage people at the top from working hard and innovating.
UBI might appear to be successful in the short term but eventually it will bankrupt the country especially once the people at the top stop working as they see their success stolen from them.
The Problem with Socialism in General
People should be allowed to keep the money that they worked for. Socialism, through its use of governmental coercion, takes other people’s money and gives it to people that did not earn it for nothing in return. This is theft, plain and simple.
There is a significant moral difference between donations and taxes done through socialism.
-Donations: voluntary; “I am giving money because I want to give money.”
-Socialistic taxes: militarily coerced; “I am giving money because people with guns will come for me if I do not”
As Friedrich Hayek said, “There is a difference in the world between treating all people equally and attempting to make them all equal.”
The more you steal from Peter to pay Paul, the less incentive Peter has to work hard and try to earn more the next year, which means this will only accelerate the spiral of failure that results from penalizing good behavior like smart work decisions with higher taxes and rewarding bad behavior like perpetual unemployment with free money. Eventually you run out of other people’s money.
What would a nationwide UBI look like?
Quite possibly, in the first year that a UBI is implemented, thousands of people will rejoice if not millions. Although the higher income earners will groan as they see even more of their hard-earned profits stolen from them, there will still be enough low income earners who see it as free money. The media will run tons of stories showing poor women going to the store to buy enough groceries for the first time or proudly driving down the street in her new car. Everyone will praise the US for its progress.
There will be a significant amount of people who decide to simply leave the workforce and try to live off their UBI. What will be the result be? With fewer people willing to perform basic labor, prices of all goods and services will rise.
Schneider said, “Price reactions are likely if nobody can be found who is willing to perform low-wage labor. Wages for such work would have to be higher than under the status quo. Although UBI proponents see this development in a positive light, it would actually lead to a worsening of the real income situation of households, since the accompanying wage increases would be reflected in rising consumer prices.
Conversely, if for some reason the wages for these types of jobs did not rise, the UBI would dissuade workers from performing them. Consequently, households would be forced to spend their own time on tasks they would otherwise pay other people to do, such as housework or food preparation. In both cases, these households would be worse off than before, because they would either have to spend additional money or additional time to get what they used to have.
Due to the increased tax burden, the UBI would increase incentives for illegal employment and create even more financing needs. Furthermore, a UBI would destroy incentives for investing in one’s education. Not only would it lead to increased unemployment among unskilled workers, but it would also enlarge the group of workers with low qualifications.
Finally, a UBI would serve as a tremendous pull factor for immigration, which would consequently increase financing needs even further.”
Those who choose to live off the UBI will not be satisfied with a $10,000 per year income. Legitimate question: When is the last time you heard a welfare recipient say “I have enough, please don’t give me any more welfare?” Before long people are going to be complaining about how the UBI is not high enough and how the rich need to pay their fair share, even though by this time the highest earners will likely be paying more than 90% income tax.
Only the politicians who promise to raise the UBI will be able to get elected and as more and more of the rich stop working when they see their earnings stolen from them, the system will collapse into bankruptcy.
As I have repeated before, I will say again: The problem with socialism is eventually you run out of other people’s money.
How Socialism Undermines Motivation
Under any form of socialism to include the implementation of a UBI, the more successful you are at your job, the more you will be penalized by having the fruits of your labor stolen from you. Where will the motivation to do difficult jobs come from? Who is going to bother going to medical school when they see that being a doctor will not leave them any better off than a garbage man or someone who simply does not work and lives off his UBI. The personal satisfaction of work is not strong enough to motivate a high enough number of people to do these types of work.
The problem that a UBI is meant to address: the lack of jobs that automation will bring, does not truly exist.
-we have not yet made a robot or machine that can create resources out of thin air and thus gets rid of scarcity, which is the very foundation of economics.
-when jobs are lost, people simply move from one industry to another industry; it may take time and be inconvenient at first, but people do eventually adjust.
A UBI could work well if it is done on a small scale, voluntary, and temporary basis. But to replicate the results on a larger, permanent scale will be problematic.
The cost of a national, permanent UBI would require higher tax rates on the rich and middle class than what they already are. This places a heavy financial burden on the rich and middle class, and if they chose to stop working, the whole system collapses. The pressure to stop working will almost certainly come when the government and poor individuals ask for more money. Also mandatory taxes are fundamentally different than voluntary donations.
The prices of all goods and services will increase because of inflation due to increased demand, and when a significant amount of people decide to simply leave the workforce and try to live off their UBI.
A national, permanent UBI may possibly work if the following conditions are met:
-the rich and the middle class are willing to shoulder the financial burden of financing the poor individuals of society
-government spending goes down and people stay happy with a UBI of $12,000 a year
-people continue to seek and stay in the workforce instead of living off their UBI.
However these conditions are unlikely to be met for very long due to human nature.
Ideally, we could replicate the results of the UBI through voluntary donations, not through socialistic taxes. As already alluded to in the UBI experiments, people have voluntarily invested their resources to participants on a small scale and temporary basis, and the results have been great.
I am personally fine with financing through voluntary donations a UBI done on a targeted, small scale, and temporary basis, which is a far cry from the mandatory, military coerced taxes that a national UBI would require.