Thinking Out Loud About UBI: Economic Strategies
That the individual is an important part of a society and at the same time an important part of a government is something I will revisit, (I touched on this in The Game, another article in this informal series), but I think it is essential to avoid the hand-waving that I see time and time again whenever an argument is presented either For or Against any notion like a Universal Basic Income, or many other Social Programs that exist today in the United States, or which are the subject of debate by politicians or the public at large.
In order to consider how UBI might fit into the way the United States functions as a funded concern, I believe some kind of strategy must be adopted and taken to completion for the sake of the debates on this, so that we are not merely saying “we give everybody a thousand dollars a month and then… profit!” Merely falling back on pro-Socialism and anti-Socialism arguments quickly become anecdotal comparisons with other countries and other times, while we are almost certainly looking at a new path that people on the planet, or at least within the US, may be forced to walk [whether they know the path or not].
The questions that need to be answered or more granular than merely whether the US goes Socialist or remains Capitalist. Worth noting, the means of production become a bit of a question in our robotic future, so making the loss of jobs and the need to have some kind of funds source to live is a great basis for the UBI discussion, but does it account for what happens in the long term? Ideally some model could be constructed and tested over decades of various UBI-like strategies to make some better guesses than what I would call the sky-is-falling short-term arguments about the dire need to make changes that might not make sense.
To begin, here are a few Wikipedia articles to use as starting points for familiarity with popular economic theory found in the United States (again, a starting point, as any visit to Wikipedia probably should be):
It’s the Economy
As I write this we have our Trump Economy with its various interpretations. End of the day, though, it’s a fairly straight-forward trickle-down tax cut approach that moves wealth toward the wealthy with the supposition that the wealthy will then increase investment in the economy (through consumption, business development and thus job creation and growth, general investment, and so on). Previously, the Obama Economy features successes and failures, the Obama Care controversy, bank bailouts, automotive manufacturing company bailouts, and other large applications of force to The Economy. The history of the United States is rife with economic swings on short- and long-term debt cycles, adjustments to attempt to control it, and gaping holes where those attempts failed.
There have been some experiments to test how a UBI economy might function. It is my view that these experiments are interesting but not at all conclusive, and to be honest, they are not completely honest. There are opinions about the intent of experiments and how they are implemented and measured (The “failed” experiment in Finland is perhaps the largest and most recent subject to be illuminated by opinions from both sides… here’s one of many, I suggest flipping through some of these on either side: https://www.nytimes.com/2018/05/02/opinion/universal-basic-income-finland.html). It has been my position on these experiments, that they seem to be planned as an epidemiological study might be, and if the are conducted within a “normal” economic region, so that some small test population is functioning within a population NOT receiving the UBI experimental funding, which means the economic forces are not realistic, the local marketplace (jobs, housing, cost of living, etc) is not materially altered by the tiny UBI injection of capital, and so on. The Finland experiment is interesting because it took place on a far larger scale (and actual analysis from the government is not due until 2019 so opinions are opinions for now), but still it took place within an EU country, which thus has access to a larger economic zone where forces may not have felt any impact from this experiment.
Judging the strength of the US economy on the stock market or on technology salaries in Silicon Valley or coal miner salaries or local cost of living or… well, there are any number of things one could look at and each individual in the US will find that some of these metrics mean more to their own daily lives than do other. This is often said of stock market indices, but everyone could determine which factors are personal indicators with the investment of time, research, and inclination, which many don’t have. Since this notion always plays a substantial role in any political campaign on any and all sides of any ballot anywhere, it seems that some sort of characterization of the individual economic situation, parameterized by values we can easily obtain externally and from our own checkbooks and spreadsheets, should be available for anyone to look at and judge for themselves. Yes, of course, such models do exist, but are they useful for any arbitrary individual to reflect what they themselves are experiencing based on economic forces as they are feeling them at that moment and as they might after the next election, after the next debt cycle, and so on. With so many mobile devices in so many pockets, checking my place in the economy should be as informative as checking the weather forecast where I am standing.
The take-home question at this point is whether focus on macroeconomic theories (as I’ve linked to above) and the lack of commitment to one over a long term (subject to election outcomes, the US economy has different drivers, though the distribution of wealth according to a Pareto distribution or similar appears consistent regardless of party power ) is useful for consideration by individuals. I propose that the individual needs a useful way to measure economic forces on themselves that will make sense, reflect their reality, and which will provide useful ways to assess campaign promises and congressional debates on tax cuts, social program cuts, welfare and other subsidies, rebates, interest rates, and all manner of other components of money flow. While micro models do exist, if the proposal is to fundamentally alter the nature of income for a large fraction of the population on a national scale, we need to do better at modeling what that actually means not only to the recipients, but to non-recipients of these capital infusions, as well as how they will impact the macro economies locally and nationally.
Investing in The Individual
Thomas Paine, a political and economic thinker with influence easily seen in what would become the Government of the United States, authored a pamphlet entitled Agrarian Justice, wherein he mentions a periodic payment to adult citizens that amounted at the time he wrote it this pamphlet, to about 65% of the typical annual salary. This is arguably a more generous proposal than today’s UBI proponents offer (typically in the $1,000 per month range, which is at or below most poverty lines around the United States, and below 65% of the typical $30,000 annual salary taken by about 50% of the population in the US today). Not only is the an interesting seed planted so long ago for a UBI approach to enabling the population, but it is recognition early on of the value of the individuals in the population, that living, and funds to do so, should be a concern of the government. I agree with this position in general because as I’ve mentioned previously in this series, if the population goes to zero, so goes the society and by association, the government.
While a Keynesian macro economic model is probably more conducive to any form of UBI, the big two (the other being “Trickle Down” or Supply Side economics) are macro economic theories, so it is possible that the macro model might need some adjustment to account for what would be the creation of a financial floor of sorts, with doubtless upward pressure on cost of goods (if we assume that UBI-like programs are similar to full-employment scenarios, it would be inflationary), and a change in the way employment itself is made a factor of an economy not only as a metric (as Unemployment) to bandy about, but as a factor in demand modeling and money flow in general. I would guess early on that in a Keynesian macro economy, the creation of this financial floor as a universal employment equivalent eventually, and possibly quickly, makes the UBI amount the new Zero or at least poverty bar, raised or not.
Merely setting a universal wage and paying it out is essentially a short-term cash infusion strategy executed occasionally by the federal government in the form of tax rebates or similar, and as is predictably the case the parts of the population at the lower end of the wage spectrum will spend this money, keeping it in circulation. These are typically one-time payments and are often earmarked at the household level for items that fall outside of the budget window, but there is absolutely no guarantee that this infusion of cash will be used productively or even strategically. The important effect of this infusion is that the money will return to the economy after purchases made with it, which in our capitalist economy means the infusion will gravitate toward the more wealthy end of the wage spectrum. Curiously, where welfare and other entitlement programs often come with various kinds of judgement about their beneficiaries, these one-time injections given to all tend to be approved by all, with the likely understanding at the top that a lot of that money will benefit them in the near term anyway. However, welfare and other monies will tend to move in the same direction, so why are these entitlement monies viewed differently, and how would a UBI program fit into this environment?
It would seem that a Supply Side view of the economy is not compatible with the creation of UBI programs, unless there is a slight change of viewpoint. Welfare and other entitlement programs function when there is a supply side drive to the economy, the question is whether there needs to be a direct connection between the macro economic model driving economic decisions, and the availability of capital at all levels of the wage spectrum. If we take a Supply Side position, then UBI would be providing for some predictable demand floor where money will flow to the upper end of that spectrum, and so some simple math about tax rates, tax revenues, and inflation would likely enter the political conversation around election times. If UBI offsets unemployment (whether as a result of robots and automation and whatnot, or as a result of periods of economic slow-down, or whatever might be happening) and provides a smoother or at least more predictable demand for goods and services, then UBI could be a functioning component of a Supply Side economic model. The point is, a position on UBI or similar initiatives isn’t easily derived from a tendency to support or “believe in” a particular flavor of macro economic model. [Obviously a lot more could be written on either gross economic model approach, on a serious comparison in the UBI context, and more, but this is thinking out loud for now]
My inclusion of Modern Monetary Theory right up at the top is a non-trivial component of my view on UBI thinking. I’ve been consuming a lot of talks by Mark Blyth ( https://en.wikipedia.org/wiki/Mark_Blyth )about how the US economy works with no small part of the picture colored by our fiat currency and the “full faith and credit of the US government” to para a phrase there. We hear constantly now about the Supply Side tax cuts enacted during the Trump Administration (well, Congress, since that is how government works around here sometimes) are placing the government more squarely in debt (with huge budget deficits and of course the National Debt). The question, which has been asked before, is how our country with the currency of record, that everyone wants to hold around the world (with few exceptions), can be used to rescue the criminal chaos of our banking system, but not the human chaos of our society. Cash infusions have predictable results (see above or read just about anything on the subject), but what happens if farm subsidies, tax credits, entitlement programs, and rescue programs could be turned around into investment in the population? If we look at banks and car manufacturers and compare them against the populous, which is too big too fail?
My proposal, then, is to view anything like a Universal Basic Income as one views Investment, which is a component of any variation of macro economic theory. Typically the investment is a part of money flow that is outside of demand (that is, after I have met my demand needs of food, shelter, security, etc, I can save money with low risk or invest money with higher risk, grossly speaking) but is viewed as part of the demand side with a Keynesian model, or as the trickle-down monies with a Supply model. What if rather than a Universal Basic Income, there was a program of Universal Basic Credit extended to every citizen (upon reaching the age of adulthood?) to enable every citizen to become an increasingly relevant part of our society, economy, and life.
Guaranteed Loans vs Guaranteed Wages
Injecting guaranteed wages to raise the economic floor is an open loop approach to addressing marketplace shortfalls, because the results of the injection are predictable at the wealthy end of the spectrum where cash accumulates naturally, but do we know that the cash is spent productively? Well mostly, no. The hoops and hurdles that come with entitlement and other assistance programs (even unemployment insurance payouts) are intended to capture some feedback along the way, with success levels that could form an entire series on its own. Government regulation of micro economic adjustments is a challenge that many might say it, on the whole, is not meeting. If many or all American Citizens were to begin receiving a periodic (monthly?) wage, stipend, cash infusion, or whatever it might be called, would there be a way to ensure that it is used effectively, appropriately, or even legally? As a big fan of individual freedom, I would ask how much of that freedom an individual (or our population) would be willing to give up for their financial security… if Benjamin Franklin is to be believed, anyone willing deserves neither. Draconian government oversight in the spending or use of the monies from this program goes against much of what the country is based on, and any form of monitoring seems to be a bad idea in general (barriers to welfare payments in the form of drug testing is one popular example of this form of oversight that is mixed in popularity but seemingly ineffective at making any sort of measurable difference in the lives of welfare recipients or the oversight of the welfare programs in general).
As a recipient of a Guaranteed Student Loan many years ago to help fund my higher education goals, I have that personal experience to propel this view, that connection of use of the capital infusion to repayment seems like a better way to go. Seems. Said plainly, replace the notion of a periodic wage supplement or replacement with a guaranteed line of credit, at an interest rate that varies to make the investment reasonable on the part of the creditor and stimulative on the part of the debtor, and make repayment mandatory (of course, with defaults absolutely unacceptable (with substantial impact on credit scores and thus any possibility of borrowing more money in the same or similar programs). It goes without saying that the US economy is driven by Credit (regardless of the macro model), so here we create an opportunity for anyone to start a business, pursue higher education, purchase a home, write a book, teach abroad, research an idea, or any number of things that might be just beyond the reach of most of the population but for the “leg up” that might make all of the difference in the world. Guaranteed Citizen Loan? Universal Basic Credit?
There would still be interest on the debt. The terms of the loan could vary with an interest rate set based on the prime rate at the time, the interest could be deferred until some milestone (eg graduation, home completion, book publication, etc), and built into the terms could be a fail-safe repayment scheme of sorts. There was a running gag for as long as I can remember that forgetting one’s wallet while eating at a restaurant could be “fixed” by washing some dishes, and so similarly not repaying the guaranteed loan within some boundaries of deferment and tardiness arrangements might have with that delinquency a way to “work if off,” by doing just that.
While this is a new idea and not flushed out, there are a few bullet items to consider right off the bat:
- Similar to a student loan, this form of credit would be paid directly to some recipient in some cases. Using monies for college tuition and a line of credit cash draw are two very different things and would be two different types of loans with two different term sheets.
- Interest rates are kept low enough to allow these loans to stimulate the economy in the long term while stimulating society in the short and long terms. The rates would reasonably vary with a prime rate or similar, and could vary as well based on risk, which itself could be based on a credit rating as is the case today.
- An individual credit rating would be given some initial value to enable this loan scheme regardless of past history. That is to say, on reaching the age of legal adulthood (18 years for a US Citizen at the federal level), an individual credit score that enables this guaranteed credit line is presumed to be an initial condition.
- The Federal Government is the guarantor of each loan. Whether the federal government is to be the lender of first resort in this scenario, or if private loans are guaranteed but otherwise administered by smaller lending institutions (with risk and benefit spread to the marketplace), the entire program would require regulation to ensure that the interest rates, repayment plans, uses, and so on are consistent and not the source of sub-prime loan crises or similar. In other words, this entire notion would require regulation and oversight, which is almost certainly a negative when contrasted against a basic Income program.
- The credit limit would ideally be equal for all comers, with variability in actual credit offerings based on usage. That is, any person might be able to borrow $100,000, but if college tuition exceeds that amount, it would be possible to build a loan that covers the tuition cost of $120,000 while still allowing for some remaining credit for other uses. This is not a new idea by any means, and there already exist actuarial tables everywhere to score the risk and how it might impact a particular credit limit.
- Not unlike health insurance and the health maintenance industry in the US, there is a possibility that making this money easily available would drive continued inflation of medical costs, tuition, housing costs, etc etc. As would be the case with UBI, that everyone has access to some minimal level of funding would tend to drive up the minimal costs for these kinds of things. Since we are not limiting an individual to a fixed low income (as is the case with many UBI proposals I have seen) but rather enabling easy access to credit to fund these pursuits, does increasing the demand floor enable more competition to supply that demand? Does this broad access to investment-level credit rather than subsistence-level wage alter the supplier competition landscape to offset inflationary tendency? That is my concern with this approach, that it would suffer as I believe a UBI approach would.
- The Federal Government is still as able as ever to print money. Injection of capital into the economy to bail out a bank is one of many ways to use that flexible balance sheet, the idea here is to inject that capital on the demand side as a way to build a substantially stronger base, not unlike the one the country and its government were founded upon. The extension of a substantial credit limit to any citizen is an investment in infrastructure just as spending money on a highway system or water or air transportation safety or space travel are, with long term upside that far outweighs the short term risk. Quantifying this would be essential to show the success of a Universal Credit program, obviously. The ability to inject funding into a slow economy is “easy” with our fiat currency, and injection of capital into a slow economy has been shown over time to be one of the fundamental responsibilities of a sustainable government, with no difference here other than the possibility of injecting more useful capital with opportunities to capitalize on interest and repayment above and beyond the tangible and intangible benefits of an enabled populous.
- The line of credit would be available for life and would be treated as an asset for purposes of probate, divorce, general access to credit, etc. The line of credit could be viewed as an augmentation of funds available for medical emergencies, natural disasters, or other instances where today the typical individual would be put deeply into untenable debt and possibly bankruptcy. The line of credit guaranteed by the Fed is not untenable by design and while it is not intended to replace insurance (with an actuary cost basis), it is meant to be a bridge where necessary, just like a line of credit might be used today.
Doing The Math
Any time I hear a pro-UBI argument, and any time I hear someone complaining that their hard-earned money is “given” to people in the form of welfare or other assistance programs, I find myself asking (rhetorically or not) where the math is to support the assertions. Of course I need to hold myself to that same standard, whether with this idea or any other that I ponder, since there are so many dials to turn and switches to switch, with a variety of gauges to monitor throughout. Without knowing what to look for, or by skewing the way we look at some piece of the bigger picture, we might end up with another Trickle Down story, which I deem Undesirable.
The next steps, then, are to find existing individual and micro economic models that might be useful for this exploration which can be adjusted for credit availability, and which can be adjusted for an individual given easily-available information. This individual-centric model should be applicable to investigations of a UBI program just as well as it should be usable for this Universal Credit idea. The ability to compare the two approaches would be very obviously valuable, and perhaps my take on this would lose out, or perhaps any notion of a Universal anything would lose if we want to stick with Capitalism, or maybe some other surprises are in store.
The next steps are fairly obvious, I think:
- Investigate models of Guaranteed Student Loans if any (impact on typical economic indicators, etc).
- Identify existing individual economic models (any person-based micro models to start with).
- Investigate how easy access to credit might impact the Big Two approaches to modeling our macro economy today (at least with simple changes to demand, though obviously testing variable interest and credit access parameters based on different factors would be essential).
- Make an experiment that can be tweaked to account for personal parameters as well as day-to-day economic parameters. The end goal of this step may well be a mobile application and/or website where anyone could go and adjust some sliders to see how they themselves might be impacted by different kinds of economic decisions.
To argue in favor of a UBI or free college for all or universal health care or rugged individualism at this point seems to be an exercise in political ad hominem with Progressive Liberals and the GOP appearing to be taking up the far ends on either side. A lot of posturing and hand waving without a vision beyond the next election or two. I believe that the lack of an over-arching economic strategy that survives presidential regime changes and the blowing of the congressional winds is unhealthy for all but the very wealthy (including those in government, come to think of it), and so Thinking Out Loud should eventually land on some sort of mathematically sound Experiment…
