Thursday, April 27, 2017

Guaranteed Minimum Income?

One of the wackier ideas of the early 21st century was the idea of "guaranteed minimum income".

When financial crises occur, people come up with all sorts of ideas to "solve" our problems, even if our problems seem, well, fairly trivial, particularly today.   While folks literally had to deal with malnutrition back in the 1930's, during the recession of 2009, the worst most folks had to deal with was losing an over-mortgaged mini-mansion they had no business buying in the first place.

But just as the Great Depression brought the wackjobs out of the woodwork, today we are seeing similarly bizarre ideas being floated around.  One of these is "Guaranteed Minimum Income" - sometimes called "Guaranteed Basic Income" or some other nonsense.

The scheme - and it is a scheme - works like this, in theory.   (I say in theory as no one has tried this yet, and the half-assed "experiments" in guaranteed minimum income are little more than a windfall for a select few people - akin to lottery winnings.   Anyway, like communism, it is never purely applied, so the proponents can perpetually claim it was never given a fair chance.)

So, how it works:

The government gives every citizen a flat amount of money every year.  It could be enough to live on or enough to barely live on, or an amount that is really less than what you need to live.   The numbers bandied about have been in the range of $8000 to $16,000 or so, per person.   Everyone gets this check (or monthly checks) regardless of whether they are rich or poor, working or unemployed, drug addicts or homeless, or whatever.   There are no restrictions on what people can do with the money.  They can spend it going to college or on methamphetamine.

Proponents say that if you do this, amazing things will happen.  People will turns their lives around!  Homeless people will get jobs and houses!   Drug addicts will kick the habit!  Moms will go back to work as they can now afford day care!   Of course, the "data" for these assertions are based on anecdotal data based on very limited implementations of the idea.

The problem, of course is, who pays for it? and how does this affect the overall economy?  Say we decide to give everyone in the USA $10,000.   There are about 315 million people in the US, that amounts to 3.15 trillion dollars, or coincidentally, $10,000 per person (sarcasm light is ON).  The annual budget of the USA is 3.8 Trillion dollars, which amounts to about $12,000 per citizen.

So right off the bat, you see the big problem.   The annual budget for the USA would nearly double.  Or would it?  Proponents argue that this "guaranteed minimum income" idea would replace all forms of government handouts, including food stamps, TANF (welfare), subsidized housing, social security, and so forth.   No word whether this would include medical care, but in the countries it is being seriously considered, medical care is also provided by the government.

As I noted in an early posting, most of what the government spends money on, other than defense, is YOU - social programs that pay you directly, such as medicare, medicaid, social security, and various welfare programs.  This amounts to about 36% of the annual budget, or about a trillion dollars.  So the cost of "guaranteed income" would increase the annual budget by "only" about $2 trillion, or a 66% increase in spending - at a time when we are borrowing more than ever before.

Of course, this means raising taxes - or borrowing even more heavily.    For the very poor, this would mean a windfall of $10,000 as they basically pay little or no taxes.  Somewhere in the lower-middle-class it would likely be a break-even proposition, as people would pay $10,000 more in taxes, and then get a check back from the government for the same amount.   The wealthier would thus have to pay far more in taxes to pay for the subsidies to the very poor - as well as their own $10,000 kickback.

You see where this is going - redistributing the wealth.   Sure, they give it a fancy name and tell you it will do great things.  But the bottom line is, it is a scheme (in every sense of the word) to take money away from one group of people and then give it to others.  The idea that "everyone" gets the same amount doesn't not make it a wealth transfer scheme.

Would the idea work?  Of course not - any more than communism, which sounds swell on paper, never works in the real world, due to this sticky thing called "human nature."   People are not naturally altruistic, particularly people who claim to be altruistic.  Greed rears its ugly head, and of course, as you might guess, the people pushing this idea of "guaranteed minimum income" (or what we should really call it, "give me free money") are usually poor or lower-class folks, or politicians pandering to this group hoping for votes.   They are literally buying votes by promising bread and circuses - and we know how that works out for civilization in general.

Proponents claim that getting rid of all the layers of bureaucracy will mean huge cost savings.  You have a social security number?  You get a check.   But social security already works that way, and we have an army of people managing that program, trying to keep fraud and abuse at a minimum.  Hey, if you can get $10,000 just for breathing, if you can come up with a fake ID, you can get $20,000.  Or $30,000 if you can get two.   Or just keep someone chained up in your basement and cash their checks.  This sort of thing already goes on.   So no, there is no "savings" in cutting back on government oversight.  In fact, you'd have to expand government employment considerably to police such a system.

The big problem, of course, is that it would lead to inflation.   Like the arguments about doubling the minimum wage, the fly in the soup is that if you flood the economy with 3.15 trillion extra dollars, people will have more money to spend.   This does not mean people will go out and buy more stuff, only that since money is now less scarce, it will be worth less, meaning prices will climb.   Hey, if they are giving away money, it can't be worth much, can it?

So this "free money" advantage would be watered down - pretty much completely - by a corresponding decrease in spending power.

And human nature being what it is, most people won't suddenly "turn their lives around" or do great and noble things with this free money.   The guy living under the bridge asking for spare change won't suddenly become a heart surgeon, or even work at the drive-through at Micky-D's.  He'll simply spend the money on more cheap beer and drugs - as he already does with his panhandling money.   The problems of the poor and homeless are not lack of money.   Lack of money is the symptom.   Throw money at a poor person, they will remain poor, as that money will go through their hands like water.

In some smaller countries with smaller budgets and huge tax burdens, maybe such a scheme could be implemented, but I doubt it would work in the long haul.   Here in the USA, where a huge portion of our budget (16%) goes to defense (to defend a lot of European countries that have tiny defense budgets as a result), the staggering cost would be just too much, even if we lowered this "guaranteed income" to a mere $5,000 which would not really accomplish much for an individual.

Now, some countries have tried experimental pilot programs of this idea.   But the nature of the idea is, as I noted above, structured that you cannot "experiment" with partial guaranteed minimum income.  You either give it to everyone or no one.   Giving it to some is just stupid.

For example, some countries in Europe are talking about trying this in one city or one region.   This merely acts as a bug-light to attract people to that city or region.   Also, how much do you think rents and housing costs in that area will go up?   I strongly suggest it will be about the same as the guaranteed minimum amount.   People pay as much as they can afford for housing.  If they can afford more, they will pay more, driving prices up.   It is like all the subsidies and funny-money loans we offer for college - they drove the cost of college up, not down.

During the recession of 2009, gasoline prices went to all-time lows.   Why was this?  Did the price of oil suddenly drop?   Was the cost of refining or exploration lowered?  No, the reason was, demand dropped as people drove less.  The law of supply and demand is a beast that must be fed, and you see this every summer during the "driving season" when gas prices go up as demand goes up and goes down as demand goes down.   When people are willing to spend, prices go up.  When people stop spending, prices go down - to induce people to buy. 

The same is true with "free money".   In tight real estate markets like DC or New York, or San Francisco, housing prices are high because there is a limited supply and a lot of people with high incomes.   You are bidding against some guy who makes $250,000 a year and is willing to spend $100,000 a year on mortgage payments.  You lose.    If you raise everyone's income by ten grand, housing prices (and other prices) will go up, as people become more willing to spend.   It may, however, depress prices of more expensive homes, as the very wealthy, now taxed to pay for this scheme, may will find themselves with less cash to spend.  Again, this is a redistribution of wealth scheme, period, paragraph, end-of-story.

As I noted before, Ontario has a particularly unusual "experiment" in that 4,000 randomly chosen poor people are being sent checks for $16,000 each, or $25,000 for married couples.   Here's a hint to our friends up North:  Get a divorce!   Like many other social welfare programs, you collect more if you split up.   Here in the US, if your husband "left you" you can collect more in welfare (or could, in the past).  This lead people to make the logical decision to split up, so their family could live a better lifestyle.   Unintended consequences are the biggest problem with giveaway programs.

But randomly giving money away to some people, or limiting the giveaway to certain provinces or cities or regions really won't test how such a system works.   You may be able to see how it works on the recipient side - and I am sure there will be anecdotal stories about how this money "turned my life around" - but since the effect of dumping so much money into the economy won't be felt, these experiments won't really tell the whole story.   And when $10,000 is the baseline income, then $10,000 means nothing - which negates the entire effect.   Few, if any, lives will be "turned around" when inflation wipes out the gift.

And of course, such limited and selective test programs won't measure how the economy will be affected by the dramatic increase in taxation needed to pay for such programs.   High taxes have been shown to dampen the economy, discourage investment, and encourage non-productive tax-avoidance strategies.   When you tax people enough, they either work underground or give up on working entirely.   I suspect under such a "guaranteed minimum income" scheme, a lot of folks would just collect the free money and then work off the books so they don't have to be part of the class of people who are actually paying for this scheme.   And of course, the very rich will Exile on Main Street, and move overseas or use other tax-avoidance strategies.   The middle-class and upper-middle-class will get socked.

Now, I know all you millennials hate your parents (after all, they are always nagging you about leaving dishes in the sink) but is this really the best way to get even with them?  Just because they won't raise your allowance is no reason to pass a law forcing them to give you $10,000.

All sarcasm aside, though, that's all this cockamamie scheme really is - a redistribution of wealth scheme.   And if you believe that "income inequality" or "wealth inequality" (which are two different things!) is the biggest problem in this country, and that money should be taken - as a matter of course - from wealthy people and just given to poorer people, well, this scheme is for you.

But hey, at least be honest about it, and call it what it really is - a redistribution of wealth.   Because "guaranteed minimum income" is really a deceptive label.  According to Investopedia, Income is money that an individual or business receives in exchange for providing a good or service or through investing capital.  It is not just money handed out willy-nilly for no reason at all.

What is sad to me, in this day and age, is that we still have people believing things like, "Hey, let's all vote ourselves a raise!" - which have been shown time and time again not to work.   Because if you think about it, if you take this irrational idea to its rational conclusion, you might as well give everyone $100,000 a year.  Or make everyone a millionaire, while you are at it.  Every man a king - why not?

The "why not" is that someone else has to pay for it, and that someone else will get mighty tired of paying for it, in short order.

And what "problem" this scheme is solving is increasingly unclear.  Will this lower our staggering rate of inflation?  Reduce our horrendous unemployment rate?  Bring down our sky-high interest rates?  Bring back the era of cheap gas?  Oh wait, we already have low inflation, low interest rates, low unemployment, and low gas prices.

"Guaranteed Minimum Income", I fear, would just screw up a perfectly good thing.