Over at the Zblog, the Zman was writing about the first Democrat debate and a comment string started about Universal Basic Income even though Andrew Yang wasn’t on stage. Quite a few people on the dissident right, especially among the youngsters, think this is a great idea. It isn’t.
Commenter Sunspot wrote this:
The upside is, it will be short lived. The currently proposed UBI will cover my mortgage. I currently run a business and provide a fairly important service– but if UBI covers my mortgage, there’s probably no need to deal with all the headaches of that service, with all its ups and downs and customer hand-holding to make sure revenues don’t fall. I won’t be the only one– every single kid who dreamed of not having to work at McDonald’s any more by doing something helpful can just sit back and enjoy the life he wanted without all that pesky doing something helpful stuff.
With UBI I can finally, as promised with Obamacare, chase my dreams of being an artist who produces nothing much.
One generation later, there’s nobody who can repair (or build) the theoretical automation that we’re implementing UBI to offset, and bam– back to 600 A.D.
Exactly. For younger dissident right types who reply with “that’s just boomerism”, a quick reminder that shouting “boomer” is the right-wing equivalent of shouting “racism”.
According to Andrew Yang’s website, and he is Mr. UBI, here is how it would work.
Every U.S. citizen over the age of 18 would receive $1,000 a month, regardless of income or employment status, free and clear. No jumping through hoops. Yes, this means you and everyone you know would receive a check for $1,000 a month every month starting in January 2021.
Where would the money come from? Ah, that is the trickier part. Andrew proposes a Value Added tax and also “consolidating some welfare programs”, so if you were getting food stamps, you wouldn’t get the UBI. Most people don’t know that.
My wife and I are of course both over 18 so under his plan we would just magically get $2000 per month. Like the commenter Sunspot that is way more than our mortgage payment and car payment. $2000 per month for doing nothing means the basic bills are paid whether we get out of bed or not. Sure I would like more money but the incentive to work hard suddenly diminishes when the bulk of my bills are already covered. Like Sunspot, I might choose to do something a lot less stressful because I don’t need to make as much. In fact I could work part-time instead of full-time and our standard of living wouldn’t change. Nice for me but having a lot of people drop out of the workforce entirely or pull back to easier or part-time jobs means a lot of work not getting done. So we need to flood the country with more migrants to replace the native American people who drop out of the workforce. Automation isn’t going to replace all of these jobs for some time to come.
The issue is not just that a lot of people will choose to stay home, smoke pot and play video games, although a lot of that will happen. The bigger issue is that it won’t work or at least it won’t do what it promises to do.
UBI is great for me, we live where we plan on living the rest of our lives so our mortgage amount won’t change. For younger people though, having an extra two grand per couple will radically change the prices they pay for pretty much everything, especially big ticket items like homes and cars. Prices are mostly the result of what the market will bear. All things being equal, you will sell your product for the maximum you can get for it. Why would I sell my house for $200,000 if someone will pay me $400,000? Cost today is a calculation based on monthly income rather than a reflection of intrinsic value. That is why car dealers always want to talk monthly payment instead of the total price of a vehicle. When people shop for houses, they are concerned with how much the mortgage payment will be. We base our economic activity on a month-by-month budget of income and expenses and make purchasing decisions based on that calculation.
For example, a young couple is looking to buy a house. Their combined net income per month is $2500. They figure they can afford a house payment of around $1000 per month, which is a debt to income (DTI) ratio of 40%. That means their ceiling for searching for homes is around $175,000 based on current rates and a 30 year mortgage. There is no reason to look at $250,000 houses because they can’t get approved for a mortgage. It has been a few years since I was a banker but that seems like a pretty standard scenario for young home buyers outside of the really expensive zip codes.
Now change that scenario by adding $2000 per month in UBI. Suddenly their price horizon shifts drastically. With a monthly income of $4500, they can swing a payment closer to $1800 per month and still be at 40% DTI. So now using the same assumptions, that means they can look at homes that are $100,000 more expensive, around $275,000, which would give them a mortgage payment of $1841. So that is great, we can all afford to buy a nicer house! Why wouldn’t we want that?
Day one of UBI that is true but here is what would happen over time quite rapidly. Prices would quickly start to inflate. If I was going to list my house at $175,000, now I can start to list it at a higher price because more buyers will be able to afford the higher mortgage. This is important: nothing has changed about my house, what has changed is the price the market can bear. In short order you will get a $175,000 house for $275,000. The market will stabilize the prices to reflect the new reality and the end result is that nothing will have changed. Prices will always fill the void because our economy is driven by consumption rather than savings and investment, a topic for a future post.
Fiat money is just a place-keeper with no intrinsic value. What you do to earn ten dollars and what you can buy with ten dollars is set by the marketplace. If you say that a job at McDonalds that pays $8.50 per hour is now paying $15 per hour, the job is still what it always was: a no-skill, no experience required bottom tier job. As the wage for burger flippers goes up, so will the wages for all other jobs because being a burger flipper has a purpose as the wage floor. Every other job has a wage based on how much higher it is than a burger flipper. Why does the CEO of McDonalds make so much more than the burger flipper? Because his job is a lot harder and not many people can do it, whereas anyone can flip burgers. A public school teacher makes a lot more than a burger flipper because it requires more education and we value teaching more than burger flipping but a doctor makes a lot more than a public school teacher because it is a more valuable profession that requires more education. Wages simply reflect the relative value society assigns to a position. If burger flippers make $15, then everyone else will need to make more to equalize the difference between an engineer or accountant and someone asking “You want fries with that?”.
The same is true with prices. Your house is a combination of the land it sits on, the building materials and the skilled labor to put it together. Everything above and beyond that is just value added by the marketplace. A house in Gary, Indiana will cost a lot less than the exact same house just a short distance away in a nice Chicago suburb. The value of the house expressed in terms of building materials and labor hasn’t changed but the marketplace has. It is a perceived value and one that is highly malleable.
It won’t take long for the market to adjust and fill in the void created by magically giving everyone $1000 per year, something that would require new spending of trillions of dollars annually. Reminder, we are already spending a trillion more than be bring in every year, a trillion a year stacked onto the existing $22 trillion in debt. Pretty quickly most people won’t be any better off than they were before the UBI because prices will adjust to reflect that extra money.
The American people are not going to take that extra $1000/month and put it into a savings account. They will spend every penny of it, on higher mortgage payments or higher car payments or on consumer products. That much cash flooding into the market will cause prices to rise drastically. The same thing happened to college tuition. When an 18 year old can borrow an essentially unlimited amount of money with no collateral and no credit history, they are less price conscious so colleges realized they could raise tuition double-digits year after year and not really harm the demand for attending that college. Again, you charge as much as you can and still sell your product. If people will pay $1000 per credit hour for college, why would you charge them $250? You wouldn’t and they don’t.
In short order, wages and prices will adjust and the people on the bottom economic rung won’t be any better off than they were before. People at the top of the economic ladder will still be at the top and everyone else will be where they were before. The only difference is that there will be a lot more money being printed and a lot more debt being heaped on the already unsustainable balance. If you support the UBI as an accelerationist move, I am down with that but if you think it will make your life better you are simply wrong.