Universal Basic Income is Probably Not the Future of Welfare

If for no other reason, universal basic income — that is, the idea to replace the current means-tested welfare system with regular, unconditional cash payments to every citizen — is remarkable for the eclectic support it receives. The coalition for universal basic income (UBI) includes libertarians, progressives, a growing chorus of Luddites, and others still who believe a scarcity-free world is just around the corner. Based on its popularity and the growing concerns of coming economic upheaval and inequality, it’s tempting to believe the centuries-old idea is a policy whose time has finally come.

Personally, I’m not sold. There are several obstacles to establishing a meaningful universal basic income that would, in my mind, be nearly impossible to overcome as things stand now.

For one, the numbers are pretty tough to reconcile.

According to 2017 federal guidelines, the poverty level for a single-person household is about $12,000 per year. Let’s assume we’re intent on paying each American $1,000 per month in order to bring them to that level of income.

Distributing that much money to all 320 million Americans would cost $3.84 trillion, approximately the entire 2015 federal budget and far greater than the $3.18 trillion of tax revenue the federal government collected in the same year. Even if we immediately eliminated all other entitlement payments, as libertarians tend to imagine, such a program would still require the federal government to increase its income by $1.3 trillion to resist increasing the debt any further.

Speaking of eliminating those entitlement programs, hopes of doing so are probably far-fetched without a massive increase in taxation. A $1,000 monthly payment to every American — which again, would consume the entire federal budget — would require a lot of people currently benefiting from government transfers to take a painful cut. For example, the average monthly social security check is a little over $1,300. Are we really going to create a program that cuts benefits for the poor and spends a lot of money on the middle class and affluent?

In spite of the overwhelming total cost of such a program, its per capita impact would be pretty small, since all the cash would be disbursed over a much greater population than current entitlements. For this reason, its merit as an anti-poverty program would be questionable at best.

Yes, you can fiddle with the disbursement amounts and exclude segments of the population — dropping minors from the dole would reduce the cost to around $2.96 trillion — to make the numbers work a little better, but the more you do that the less universal and basic it becomes, and the more it starts to look like a modest supplement to our existing welfare programs.

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Universal basic income’s problems go beyond the budget. If a UBI was somehow passed (which would likely require our notoriously tax-averse nation to OK trillions of additional dollars of government spending), it would set us up for a slew of contentious policy battles in the future.

Entitlement reform, already a major preoccupation for many, would become a more pressing concern in the event that a UBI of any significant size were implemented. Mandatory spending would increase as more people draw benefits for more years and continue to live longer. Like the entitlements it may or may not replace, universal basic income would probably be extremely difficult to reform in the future.

Then there’s the matter of immigration. If you think reaching consensus on immigration policy is difficult in the age of President Trump, imagine how it would look once we began offering each American a guaranteed income large enough to offer them an alternative to paid work. Bloomberg columnist Megan McArdle estimates that establishing a such a program would require the United States to “shut down immigration, or at least immigration from lower-skilled countries,” thereby leading to an increase in global poverty.

There’s also the social aspect to consider. I don’t want to get into it too much because everybody’s view of what makes people tick is different. But it seems to me that collecting money from the government doesn’t make people especially happy or fulfilled.

The point is, part of what makes universal basic income appear realistic is the political coalition backing it. But libertarians, progressives, and the rest of the groups superficially united behind this idea have very different opinions about how it would operate and very different motivations for its implementation. When you press the issue and really think through the consequences, the united front for universal basic income begins to crack.

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Don’t get me wrong; there’s plenty about universal basic income that appeals to this author’s libertarian sensibilities. I think there’s a strong argument for reforming the welfare system in a way that renders it more similar to a basic income scheme, namely replacing in-kind payments and some subsidies with direct cash transfers. Doing so would, as advocates of UBI claim, promote the utility of the money transferred and reduce government paternalism, both goals which I find laudable.

I should also note that not all UBI programs are created equal. Universal basic income has become something of a catch-all term used to describe policies that are quite different from each other. The negative income tax plan Sam Bowman describes on the Adam Smith Institute’s website is much more realistic and well-thought-out than a system that gives a flat amount to each citizen. That it is neither unconditional nor given equally are its two greatest strengths.

However, the issues of cost and dispersion, both consequences of UBI’s defining characteristics, seem to me insurmountable. Unless the United States becomes dramatically wealthier, I don’t see us being able to afford to pay any significant amount of money to all or most people. We would need to replace a huge amount of human labor with automation before this plan can start to look even a little realistic. Even if that does happen, and I’m not sure that it will anytime soon, I think there are better things we could do with the money.

This article originally appeared on Merion West.

Money to Burn?

First of all, Happy belated New Year to all 16 people who read this blog. Sorry for the lapse in posts; I’ve been busy basking in the relative success of my last article, looking for a new job, and freezing my ass off in the midst of this cruel phenomenon called New England winter.

Whilst taking shelter from the subfreezing temperatures–emerging only to go on job interviews and buy scotch–I’ve done my best to keep up with the world beyond the attic in which I reside. I know, for example, that the Federal Reserve raised rates for the first time in 2016, signalling that inflation may be returning and the US economy might finally be moving towards normalcy.

Inflation

How you feel about inflation depends on where and when you live. In the developed world, hyperinflation, once a real problem, has largely been tamed by central banks, which use monetary policy to constrain the money supply when inflation starts to get out of hand. In fact, since the financial crisis inflation has been so weak that some central banks have pursued negative interest rates with the hope of staving off deflation.

In other parts of the world, hyperinflation persists. Venezuela is slated to experience 1,600% inflation in 2017, per the IMF.

The combination of cold weather and thoughts of inflation brought to mind some famous pictures of residents of the Weimar Republic using increasingly useless money for purposes other than exchange.

 

Anyway, that got me wondering: what kind of inflation would we need to see to make dollar bills an efficient heating source? To find out, I compared dollar bills to other sources of heat on a cost/megajoule basis. While the nominal cost of other heat sources would increase with inflation, it would remain constant with dollar bills because their heating value is independent from their monetary value.

Difficulties, Assumptions, and Deficiencies

In order to turn this into an answerable question I had to build some assumptions and omissions into my calculations.

First of all, all prices listed reflect only supply costs associated with different fuel types. Energy costs are typically broken down into charges for supply (rate times quantity) and delivery, which, depending on the energy source in question is either a fixed cost, a function of supply, or a function of “user profile.” For example, delivery charges for electricity are often higher during hours of “peak demand.”

Second, all calculations are based on prices from my area. I also didn’t go crazy trying to find the best deals on things like pine firewood, but instead relied on the most available source (in the case of pine wood, the Stop and Shop down the street). Different prices would obviously mean different equilibrium points.

The third assumption, assuming the price of these energy sources would not be influenced by anything other than inflation, is highly unrealistic. You can bet that if the price of natural gas doubles for 10 years in a row, people will start coming up with new heating sources or moving south for the winter. But again, for simplicity’s sake we’ll assume nothing will change in response to increasing prices.

One last assumption: that no one would be foolish enough to burn dollar bills in any denomination other than $1.

Data

screen-shot-2017-01-27-at-11-54-36-am

Far and away the most challenging part of this was doing the data conversions; as you can imagine, kerosene isn’t commonly purchased by the kilogram. I haven’t taken a math or science class in about 4 years. Add to that my stubborn insistence that I do my own calculations by hand and you’ve got a recipe for a very humbled author.

Nevertheless, I persisted. The second column in the table above shows lower heating values–the net amount of energy released by burning–for various fuel sources, measured in megajoules per kilogram (A friend explained this concept to me–thank you, Zane). The third lists the cost per kilogram, and the fourth displays the cost per megajoule of energy.

With the exception of dollar bills, finding heating values for these different substances was easy. I found a couple reliable websites (like this one and this one) that listed heating values. Wikipedia also lists heating values for common fuels. There were a few discrepancies when I looked to confirm values, but nothing too major.

Dollars are made of a blend of cotton and linen fibers (about 75% and 25%, respectively), so I wanted to take a weighted average of the two heating values. Unfortunately, even that information proved too difficult to find. I thought it would be easy to find similar pieces online, but I turned out to be wrong about that. I only found one article that was trying to get at the same thing and in the end, I just decided to go with the value they suggested: 4 btu per bill or 4.22 mj/kg.

If you want to cut to the moral of the story, here it is: Don’t burn dollars for heat. It’s a terrible, terrible idea.

How Terrible?

Barring some kind of extreme and sustained change to US monetary policy, it will probably never make sense to burn dollar bills for heat. Here’s a chart showing how long it would take for dollars to become an efficient fuel source over years at 100% annual inflation (prices doubling every year):

years-100

The price of natural gas would have to double every year for 16 years before you could produce more heat by burning singles than buying natural gas. However, as Venezuelans know, prices can increase faster than that. Here’s the same graph with the Venezuelan inflation rate of 1600%:

1600
“That escalated quickly.”–Ron Burgendy

So maybe we’ll see some Venezuelans burning currency in the near future, but hopefully not–a lot of human misery comes along with that kind of inflation. A regime change and some monetary restraint would be a much better outcome.

If anyone out there has some other heating source they’d like to see added to the graphs, leave a comment below and I’ll gladly include it.