Andrew Yang is one of the runners in the field to gain the Democratic presidential nomination. Sure, he’s at the back of the field, currently on some 3% support, but it looks like he’ll gain significant attention along the way. Perhaps I should say I hope he will, for he’s got at least the germ of a sensible idea here. A universal basic income is indeed a good idea.
It’s not a new idea of course. We can horrify progressives by pointing out that one source is Charles Murray (he of “The Bell Curve”) some years back. Yang’s proposal seems remarkably similar in many ways. Actually, updated for inflation and growth, add a little rounding, and the $1,000 a month is the same proposal, as is largely paying for it by curbing other welfare benefits. But, you know, don’t tell them it’s a good idea from a right-winger they’re proposing.
As to why it’s a good idea, remember the central lesson of economics, incentives matter. The problem with any welfare system is that as incomes rise you’re going to pay less in any form of welfare. That, allied with the taxes we’ll be charging people too, can mean tax and benefit withdrawal rates that are far too high. The Laffer Curve really does exist and the peak is around the 50% of income level. Take more than half of what people gain by going to work and they’ll reduce the amount of work they go do.
That’s for rich people of course, but there’s no reason why this isn’t also true of poor people. So, yes, we have a problem, a generous welfare system is going to lead to, as incomes rise, high marginal income withdrawal rates. That reduces the incentive to rise up out of poverty through work, just what we don’t want to happen. The solution is just to have this universal basic income, an unconditional, nontaxed, basic amount just given to you each month, given to everyone. That’s how we make sure the poor can live and destroy the fewest incentives at the same time.
The problem of course is how to pay for this. Yang is partially correct. Even Rep. Alexandria Ocasio-Cortez, D-N.Y., couldn’t squeeze that much money out of the rich, they’ve not got it. The grand truth of anything like Scandinavian democratic socialism (what I’d call social democracy) being that you can’t do it by taxing just a few people. You’ve got to tax everyone, and you’ve got to tax them a lot. There’s not much room (that Laffer Curve again) to tax incomes much more. So, it’ll have to be a value-added tax which does it.
Which is where Yang starts to go wrong. His math is correct, good enough for politics at least. But his understanding of a VAT is hopeless. He thinks it’s a tax paid by business. He says, “It is a fair tax and it makes it much harder for large corporations, who are experts at hiding profits and income, to avoid paying their fair share.“
Nope, sorry, that’s not how it works. A VAT is a consumption tax, just like a sales tax. It’s paid by consumers in the end.
Recall that great truth about social democracy: We can’t afford it by taxing them over there, not the rich, not “business.” It has to be us, all of us, to raise the sums required. That does make the choice rather starker. Yang is offering us a 10% tax on everything we buy. In return we get to send $1,000 a month to every adult. Do we have a deal?
I think a universal basic income is a great idea. But I’d pay for it by eliminating most of the rest of the stuff the federal government does. Perhaps that’s not a policy choice that will appeal to the progressives Yang is chasing.
Sadly, there’s also a more basic economic error here. Yang is saying that we need a universal basic income because of job-killing automation. Some massive percentage of us will lose our jobs as the robots take them and so we’re just going to have to make sure everyone has some sort of income.
Sorry, this just isn’t how it works. It never has done in any previous episode of automation, and it’s not going to start now. It has the process of job creation entirely the wrong way around.
It assumes that there’s some limited number of jobs, and when the robots take one then that’s a human out on the streets. But reality is that there’s an unlimited number of human wants and desires. So, if we have spare labor because we’ve automated this or that, then we can apply that labor to assuaging or sating some other desire. This is as it always has happened.
Some 10% of so of the workforce is in healthcare. We couldn’t do that when 100% of the people had to be guiding a mule across 40 acres of farmland. It’s the automation of farming that allowed us to have a healthcare system by freeing up the labor to staff it. The robots killing off current jobs doesn’t mean no jobs in the future, it just means we get to work on solving as-yet-unmet wants.
This process only stops when every desire of every human being is being met by the robots. And at that point, who the heck needs to go to work anyway?
So, yes, Yang can, as he advertises, do the math. And I too think a universal basic income is a great idea. It’s his knowledge of economics which seems to be a bit lacking, both in who really pays a VAT and in what the robots are going to do to employment. But then he’s hardly alone among Democrats in not quite grasping the basics of economics, is he?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
