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Ed Dolan, “The Economic Case for a Universal Basic Income”

Edwin G. Dolan is an economist and educator with a Ph.D. from Yale University.

[Craig Axford]

In this blog post economist Ed Dolan evaluates the effectiveness of a universal basic income using four common criteria: effectiveness at lifting everyone above the poverty line; the degree to which the program targets those who need it most; availability of work incentives; and, administrative efficiency.

Ed Dolan, “The Economic Case for a Universal Basic Income”, EconoMonitor, January 3, 2014.

Discussion

7 Responses to “Ed Dolan, “The Economic Case for a Universal Basic Income””

  1. Hi Ed – thank you so much for this series – I believe UBI is an idea whose time has come, albeit 80 years after CH Douglas first thought of the concept.

    I think you might be missing the most important factor here though – when it comes to affordability we need to think outside the box (I know, I hate that term too).

    Basic incomes should be funded by debt-free money created by the government rather than with money that is created as an interest-bearing debt by private banks. Most of the money supply at present is created by private banks when they make loans. In the US, the only debt-free money is in the form of coin and this represents a fraction of 1% of the total money supply. This odd fact of life means there is always more debt (principle plus interest) than there is money in the economy. This madness has to go and a UBI funded by debt-free government created money would seem the easy way to do it.

    If you have to raise taxes to finance UBI then no-one in their right mind would vote for it – it would defeat the object. The idea of UBI, after raising the level of dignity of all in society, is to create spending power – it’s this that drives economic growth. Contrary to popular belief, its not entrepreneurs who create jobs – it’s us – the spending public. If a company CEO could create the goods and services to meet increasing demand without hiring additional workers then he would. When demand for goods and services increase, the wise thing to do is to hire more people to meet that demand. So UBI will increase aggregate demand and hence employment opportunities.

    When it comes to funding UBI, it would pay for itself – the increase in goods and services would offset any inflationary pressures caused by government creating money and spending it into existence.

    When it comes to the size of UBI, the idea should be not to complicate matters as we have in current welfare state models – the amount paid should be very simple to calculate and be flexible according to economic conditions. If UBI is based on the levels of private borrowing, then a neat feedback loop is created – if private borrowing increases, then there’s not enough money in circulation so the UBI is raised. When levels of private borrowing begin to fall that’s a sure sign of too much money in the economy so the size of UBI can be reduced.

    Posted by Mike Raddie | January 22, 2014, 11:32 am
    • Thanks for your comment. I have two responses–

      1. I am not sure I agree that your distinction between debt-free money and bank money is important here. Why is Treasury money any different than Federal Reserve currency? Both are nonredeemable, non-interest liabilities of the government? But I think these monetary distinctions are a side issue.

      2. I agree that if the government sent out UBI checks without raising taxes, that would stimulate the economy. Under current conditions of labor market slack, I agree, that would promote job formation and (at least in part) it would mean that the UBI would pay for itself through increased tax revenue. By the same token, if the economy overheated, you could cut the UBI to reduce aggregate demand. However, I think using the UBI in this way would be a bad idea. I think the whole point of the UBI is that it is guaranteed–something people can fall back on year-in, year-out, no matter what. I would prefer to use more conventional tools of monetary of fiscal policy for countercyclical purposes.

      Posted by Ed Dolan | January 27, 2014, 8:59 pm
  2. Ed Dolan begins his case for UBI by specifying 4 objectives to be achieved by a basic income program. Two of these objectives are sound: (1) to raise everyone above the poverty level, and (4) to minimize the bureaucracy (i.e., administrative cost) required to do this. The other two objectives which Dolan specifies are problematic: (2) targeting income support to specific groups or classes of people, and (3) maintaining work-incentives for all recipients.

    Dolan’s objectives also fall short by omitting to mention the most important reasons to implement UBI, and these potential benefits of basic income guarantees will become clear by analyzing the flaws in the erroneous goals (2) and (3).

    Why should income support programs be targeted? The answers given are either ethical or economic (which includes, as always with economics, the political).

    Ethical answers: “It’s the Christian thing to do.” “It’s wrong to let people suffer, or starve in the streets.” “We have a moral duty to protect the children, the infirm, the unfortunate.”

    Economic answers: “It costs less to assist destitute people financially than to process them with other public services like law enforcement and prisons, health services, burial services, etc.” “Welfare programs create lots of jobs (and careers) for the bureaucrats who run them.” “The collateral effects of extreme poverty, like rising crime, make income support a ‘good bargain’ for society.” “The poor spend their transfer money on essential goods & services, thus stimulating the economy.”

    But none of the economic reasons listed requires targeting, if it can be shown that a non-targeted approach is most cost-effective. And none of the ethical reasons requires targeting at all, if poverty can be eliminated without targeting. Consequently, targeting is really about Dolan’s 3rd objective for income support programs: work-incentives.

    What are incentives? The word is really a kind of smoke-screen, used to hide what is really being said. The word conjures up images of enticement, of inclination, of penchant and wont, of what is desirable and sought-after and alluring. But in fact the economic use of the term is closer to our everyday use of the word persuasion, or even compulsion. The pretense is that we are talking about how to make work alluring and desirable to people, but the reality is that measures are being sought that will compel people to work.

    As an aside, it is fascinating how orthodox economic was able to justify blatant domination as merely an issue of psychological tendency, by pretending to look at the matter from the inside of people’s brains, instead of depicting the objective facts of compulsion. There is a great scene in a movie called “Cool Hand Luke” that demonstrates this linguistic strategy most clearly. Faced with recalcitrant prisoners on a chain-gang, Paul Newman frames the situation as “a failure to communicate” when the enslaved prisoners show the slightest sign of resistance, and of course the whip gets the message across. So in economics, we talk of incentives instead of punishment and reward, i.e., the stick and the carrot.

    In fact, the best “work-incentive” is chains and a whip, so why are we talking about marginal tax-rates? Such questions bring us face to face with issues that, it seems, it was the very purpose of orthodox economics to keep out of sight. These are the questions of the role of government, of who has the power and who gets what. Economics pretends to be a science unconcerned with such messy topics, and instead focuses on the “objective” aspects of human behavior in social interactions. And how can our “scientific” economists perceive these objective aspects? Obviously, by looking inside people’s heads, with psychology. How about a marginal propensity to consume? Or pick any other utilitarian concept. Instead of approaching economics as a physical science, and studying economics as the flow of money and work as “energy” in a social system, as Frederick Soddy did, our modern economists give us, well, what else can we call it: bunk.

    Nonetheless, the spell still holds, so we must give an answer. The real aim of “income support programs” must be to provide sufficient physical relief to satisfy certain minimal moral aspirations, while at the same time turning a profit from your slaves’ labor. So in most ways, our problem appears to be no different from that of the slave-owners of the ancient world: you have to treat the slaves well-enough that they don’t die or become disspirited (or even threatening), but not so high that it seriously damages your bottom-line.

    Now, with due apologies, let us put back on the mask of the “objective” economist, and consider the incentive to work, for clearly if the only way to acquire the income needed to purchase the necessities of life — as well as the luxuries — is through employment, and if the government can reduce that income at will through taxation, or supplement it through transfers (or tax-deductions), then we can dispense with the whips and chains and “communicate” in a wholly civilized fashion.

    But the problem is, we are talking the language of dinosaurs. In the 21st century, the work-incentive, which the ancient world required for all wealth not derived from plunder, is in fact completely unrelated to the real wealth of the world. Buckminster Fuller spent a lifetime proving this point, and demonstrating that in 1970 humanity reached a milestone, when it had accumulated sufficient scientific and technological know-how to take are of all humans at such a high level that, as he put it, “we can have a planet of 4 billion billionaires”. That was 44 years ago, before the personal computer revolution, the advent of cell-phones, the internet, smartphones, nanotechnology, etc. etc. So why, exactly, are we talking about austerity?

    The answer, of course, is the work-incentive. Science, in its half a millennium development, gave to humanity its enormous bounty of exponentially increased wealth — most of it in the invisible realms unknown to the ancient world, but unfortunately, it was all channeled through the economics system that grew out of the ancient world of slavery and corruption. As far as I know, only one man, Frederick Soddy, revealed how the corruption of the economic system evolved and how it can be easily corrected, in his book, _Wealth, Virtual Wealth & Debt_, written in 1926. Of course, his solution was dissed and suppressed by the orthodox economic establishment, and has yet to be recognized by today’s duly anointed economists. But today, more than ever, we desperately need to hear the message of this 1921 Nobel laureate who discovered isotopes, and who sacrificed his preeminent position among the fathers of nuclear physics, in order to solve the puzzle: “What prevents humanity from using the benefits of science for the benefit of humanity?”

    The scientific economics of Frederick Soddy, I will argue, brings us to the concept of a universal, unconditional Basic Income Guarantee (uuBIG). While it is true that Soddy did not directly advocate this concept in 1926 (and in fact he criticized the reasoning of C.H. Douglas whose Social Credit was one of the precursors of the idea), Soddy laid the groundwork for understanding how a free-market economy can operate with stability and without the corruption now built into it because of debt based on the “perpetual motion machine” of compound interest. Soddy realized that providing purchasing power to all citizens was the crucial element, but his real focus was on freeing the economy from the corruption (and instability) of the money supply resulting from governments allowing private banks (such as the US Federal Reserve) to manipulate the money supply through its issue of fractional-reserve backed credit.

    Now, it may appear that all of this is an irrelevant digression. Unfortunately, without looking at the work-incentive in the context of a properly functioning economy — as fixed by Frederick Soddy — it is difficult to understand the true role of an unconditional basic income today. The role of work, or labor, or human diligence within the economy is a function of the money system. If the money system is corrupt, no amount of work-incentive can prevent the collapse we are experiencing today. But once a few simple corrections are made to the money system, then the solution to the problem of work-incentive becomes clear.

    Work is a function of the market place, in a properly functioning economy. Once the government has insured economic security to every adult citizen, at a median level, it has no further role to play with regards to work. This is the beauty of the free-market: people choose for themselves how they wish to participate in that marketplace. If employers need skilled human labor, they must provide the incentives to attract that human labor, and if they cannot afford to pay what people demand, then they must either automate or go out of business. This is the path of the 21st century.

    With this simple model of a properly functioning market economy in mind, we discover the crucial aim of a universal Basic Income: to insure that the government treat all citizens equally and the same, whenever possible. In Ed Dolan’s article, we are immersed in the details of how possible ways for the government to discriminate between people, based on their earned incomes. How much should this group of people get from the government, and how much should that group pay?

    But the whole undertaking is based on false premises. It is as if we are lost in the intricate calculations of planetary cycles and epicycles, all supposing the planets circle the earth, while in fact it is the sun at the center of the solar system. No amount of calculation will get it right until we recognize this fact.

    The flaw, then, is plain. The mandate which the free citizens of our democratic state must give to our government “of, by and for the people”, which governs “with the consent of the people”, is to treat all citizens equally, as far as this is possible. It is intolerable that the government should act for the benefit of this faction or that interest group, unless there is no alternative. And what we have failed to take into account today, is that, in the 21st century, there are now alternatives that did not exist in 1776, and most especially they have to do with wealth and the economy (as in the reference to Bucky Fuller above).

    So, what if we reconsider the aim of establishing a UBI, and seek to end the corruption now rife in our government by requiring the government to treat everyone the same, as far as possible. Could a universal basic income be established on this basis? At first it would seem impossible, especially if we retain the two problematic aims which Dolan has postulated. But if we discard the targeting and work-incentive, we find it can easily be done, simply by replacing the existing tax system with one in line with our goal of having the government treat everyone the same.

    Proposal for the 28th amendment to the US Constitution:

    -1- The existing tax-code is declared null and void, with a Congressional committee established to handle a 3 to 5 year transition to the new tax-code.

    -2- The new tax-code sets up a single-bracket tax system, in which every citizen must pay exactly the same tax-rate on their gross income, with no possibility of any deductions of any sort. Citizens will no longer be required to report any of their expenditures to the government, only their gross income (including uuBIG), on which they pay the same flat tax-rate as every other citizen, hence an end to all tax-forms except Gross Income. (Corporations and businesses must still provide full accounting of their operations, and pay a separately determined flat tax-rate, again without possibility of deductions or “tax-breaks.)

    -3- The new tax-code also sets up a universal unconditional Basic Income Guarantee (uuBIG), which is transferred to every adult citizen equally, and which is scientifically set by the US Treasury at a near-median level (in 2014, perhaps $2500/month). (Note that children under the age of 18 do not receive payment, as the level is set high enough for parents to cover the costs of their children).

    -4- All current government “welfare” programs are terminated as quickly as possible, again with Congressional oversight on transition to the new tax-code. This includes Social Security, Unemployment Insurance, Disability Benefits, etc.

    -5- All non-essential government employment is phased out over a 3 to 5 year period. Former government employees will have the uuBIG for economic security as they make the transition to employment within the marketplace (as jobs are a function of the market). Thus, as well as the former employees of the welfare agencies, the Post Office will transition to private enterprise. (Note: this is also where discussion must take place on how to handle Education, but to maintain the principle of having the government treat all citizens the same, it seems clear that Education should transfer to private enterprise, although with sufficient government regulation). Finally, note that some essential government employment must remain, such as the Treasury, Justice, Environmental Regulation, Military, etc.

    -6- The US Treasury takes back from the private consortium of banks (the Fed) the prerogative of issuing all money and controlling the money supply by setting the levels of the flat tax-rate and the universal basic income, so as to maintain stable prices from the beginning of the century to the end. This will be easy to do, since there will be no mandate to maintain full-employment, as economic security has been guaranteed to every citizen. All citizens will have the option of voluntary participation in the free-market economy, whether for employment or for purchasing (and all citizens will have some level of purchasing power, assured by the uuBIG). Note that for the Treasury to regain control of the economy, banks and financial institutions will be required to maintain 100% reserves on all loans, and the Fed will no longer be allowed to manipulate interest rates, which will adjust to their market levels (see Michael Kumhof “Chicago Plan Revisted”, also billstill.com).

    The 28th amendment will have to be adopted through the alternate method which the Founders gave to the people for the very situation in which we find ourselves today, with Congress owned by special (monied) interests and incapacitated by political deadlock. With a grass-roots movement, we can get 2/3 of the State legislatures to demand that Congress hold a Constitutional Convention, and with 3/4 of the States voting to approve the 28th Amendment we can regain our democracy.

    Posted by Francis L. Goodwins | January 23, 2014, 10:02 am
    • Thank you for your lengthy comment. As it is based on the first part of a three-part series, I was unable to say everything in the first part, so I think we are closer to agreement than you thought when reading part 1. The other two parts are now posted; you can find the links by going back to part 1 and scrolling to the end.

      Here are a couple of specific replies:

      (1) I do not personally support targeting. It is one of a list of criteria that I said are commonly set for income transfers, but as I try to explain, the four are mutually incompatible. By the time you finish the whole series, you will see that I, like you, end up saying we should forget about the targeting part.

      (2) I think you misconstrue my position on incentives. You write, “What are incentives? . . . The word conjures up images of enticement . . .But in fact the economic use of the term is closer to our everyday use of the word persuasion, or even compulsion. The pretense is that we are talking about how to make work alluring and desirable to people, but the reality is that measures are being sought that will compel people to work.”

      I have in mind neither compulsion nor enticement. What I want to do is get rid of the powerful *disincentives* in current means-tested systems that penalize people who want to work. What I like about a UBI is that it is neutral with regard to work incentives. People can work if they want and not if they don’t. As I explain in Part 3, I think on balance more people would work under a UBI than under means-testing, but I am happy for those who would take the UBI and choose to work less or not at all.

      Finally, I like your 28th amendment. The only part I disagree with is article 6, about banking and money. I know there are many disagreements about what is the best banking and monetary system, but I think that is a separate issue and should not be mixed with the UBI part.

      Posted by Ed Dolan | January 27, 2014, 8:55 pm
  3. To be truly effective a UBI must be truly universal.

    I like the idea of creating an international currency specifically for funding sovereign debt, to be distributed to each adult person as a trust, in conjunction with an actual social contract.

    Something like this:

    Social Contract between and among People and Governments

    Definitions:

    People: Adult human beings.

    Government: Social structure holding assumed right to control social order.

    Common Resources: Those resources accepted as International, earth, air, fire, water, wood, and those resources claimed by governments for its people, monetized as shares for deposit in local banks.

    Rights and Responsibilities:

    Peoples Rights:
    • As described by Universal Declaration of Human Rights
    • An equal share of the Common Resources
    • As provided for by local government

    Peoples Responsibilities:
    • Deposit Common Resources share in local bank
    • Comply with law

    Government Rights:
    • To govern as directed or suffered by its citizens

    Government Responsibilities:
    • To act based on objective reality in the public interest
    • To safeguard and secure the people, their property, and the Common Resources
    • As required and/or demanded by its citizens

    Posted by Stephen Stillwell | February 13, 2014, 3:30 am
    • No, really.

      Any basic income limited to one developed country can not begin to address the basic human problem on this planet.

      I had a lengthy argument with a person about the notion on the straight dope argument place, and the only thing they would address was the obvious inevitability of hyperinflation, which makes little sense.

      If the people presented the governments with a line of credit equal to a million dollars per adult human, demanding a return of 1.25%, could all the greatest minds on this planet not figure a way for that to work?

      And if it was just done, and all the governments just started transferring monthly payments to each adult citizen, how would it fail to just work.

      I have this faith in the market, in greed, and in compassion, apathy, and all the parts of this world economy, if only the organ that delivers sustenance, material and social, to each person existed.

      Posted by Stephen Stillwell | February 24, 2014, 3:47 am
      • Seriously, if one was to cost out the infrastructure requirements for a comfortable and sustainable world, I’m certain there will be a workable provision that approximates five or six quadrillion dollars, so plan for it, and this can be the funding.

        What would be the tax base for a world economy with this structure?

        How would a single international currency backing all sovereign debt, and a universal basic income guarantee effect worldwide economic stability? …planning of any kind? …a person’s willingness to defect civilization and make war? …production and delivery efficiency? …the markets ability to respond effectively to human needs?

        How could we not find a thousand dollars a month for everyone?

        Posted by Stephen Stillwell | February 26, 2014, 2:18 am

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