Andrew Yang's UBI problem

For years, the universal basic income has danced around the perimeter of U.S. politics, a kind of utopian gadfly pestering the devoted centrist incrementalism of mainstream American policymakers. But at long last, the idea seems to have found its champion: Andrew Yang, one of the many contenders for the Democratic Party's 2020 presidential nomination, has made his proposal for a "Freedom Dividend" the centerpiece of his campaign.

In principal, a universal basic income (UBI) is an excellent idea. Unfortunately, Yang's version boasts some unnecessary errors that undermine the project.

As a refresher, a UBI is a check that would go out to all Americans on a regular basis: no strings, no income cutoffs, no eligibility requirements, nothing. Yang's version would be a $1,000-a-month check to every American over 18 years of age. Yang argues this would grow the economy, reduce crime, improve welfare, and leave Americans happier and healthier. And on the face of it, he's right: Previous experiments with UBI-style policies reliably deliver excellent social outcomes, with basically no evidence that recipients of the check will stop working, or frivolously blow the money on drugs or alcohol.

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The problems come with the details of how Yang would implement his specific proposal.

First, if you're already receiving some forms of government aid — such as food stamps or TANF — then under Yang's plan you would choose to keep your current benefits or take the $1,000-a-month UBI instead. In other words, rather than stacking atop the existing welfare state, Yang's Freedom Dividend would replace portions of it depending on recipients' voluntary decisions.

Granted, America's existing welfare programs are shot through with capricious requirements, random income cutoffs, and a whole mess of despiriting bureaucracy that lower-income Americans have to navigate. As Yang himself put it: "Our welfare programs are designed to be difficult." Replacing that maze with a simple, monthly, no-strings-attached check would arguably leave a lot of people better off, even if some of them would have to give up some of their existing benefits.

What's dicey is that, for many middle- and upper-class Americans who don't rely on the welfare state, Yang's Freedom Dividend would be pure net income. This would be offset by Yang's more progressive tax proposals, but at least some of those people would still be getting more out of the policy than their poorer neighbors, which is hardly ideal. The other issue is what happens when you combine that fact with how Yang wants to finance the program.

To his credit, Yang wants to impose a financial transactions tax on Wall Street, lift the income cap on payroll taxes, and other worthwhile measures that would cut the top of America's wealth hierarchy down to size a bit. But his main mechanism for financing his Freedom Dividend is a value added tax of 10 percent.

In brief, a value added tax (VAT) is a form of sales tax that's applied to every step in the supply chain. Exactly how business models pass along the costs of the tax is debatable, but economic studies are pretty unanimous that most of the burden gets handed off to the end consumer. Since lower-income households spend more of their budgets on basic consumption, that makes a VAT regressive: it takes a bigger percentage of poor Americans' income than of wealthier Americans' income.

Yang says his VAT won't apply to basic staples like groceries and clothing. But the research suggests these sorts of carve-outs don't really help with the overall regressive impact. He also argues no lower-income person could ever buy so much that their VAT burden cancels out their UBI. But the point is, for the poorer Americans who already rely on the safety net, Yang's UBI is partially offset by eliminating current welfare benefits. Therefore, any jump in their consumption costs due to a VAT will leave those individuals with even less of a net gain and in a few cases a net loss. It's not an enormous problem: An analysis from Max Ghenis of The UBI Center found most current welfare beneficiaries would see at least a 5 percent increase to the total cash in their pocket — including at least 85 percent of people making under $10,000. But this all highlights the strangeness of financing a UBI with a VAT.

Having people choose between the UBI check and their existing welfare benefits is meant to save the government money. But simply adding the annual cost of Yang's $1,000-a-month Freedom Dividend to all existing spending — state, local and federal — would still leave America with less government spending than France as a share of GDP. Granted, that's no small political task, but it's entirely doable from a budgeting and basic economic perspective. Meanwhile, Yang could get the additional financing he needs by increasing the progressive income tax the U.S. already has, starting from the top down. That would avoid the regressive hit to struggling Americans that comes with a VAT. If you're going to do something as wildly ambitious as call for a national UBI, you might as well call for a return to Franklin Roosevelt's income tax rates while you're at it.

Finally, it's worth dwelling on the larger narrative Yang tells for why he thinks the country needs his Freedom Dividend. Basically, he argues that automation and robotics are going to wipe out large segments of the workforce, and a UBI is needed to catch the people who fall through the cracks. This prediction has clearly fired up a lot of Yang's supporters, but it's far from obvious that future disruptions brought by automation will be any worse than what our economy's already endured for the last two centuries.

More to the point, Yang treats automation that increases joblessness and inequality as an inevitability that must simply be endured and ameliorated. And that means treating the nature of work itself — how many jobs there are, who gets them, how much people get paid, which workers do and don't get paid well, who has power, and so on — as somehow fixed by natural law. By all accounts, Yang's argument comes from a place of genuine concern and personal political reflection. But rather than approach work as a malleable social arrangement, whose terms and conditions can be altered by politics and policy, Yang essentially demurs to the idea of the market as a god-like institution. He leaves the evolution of that institution to the whims of the capitalist class, with his Freedom Dividend check as a kind of consolation prize for capitalism's losers.

Critics on both the left and right understandably lambast this vision of the UBI as politically poisonous, further reinforcing the (very wrong) assumption that pursuing a UBI puts you on a rival and mutually exclusive team from those pursuing full employment and a democratized economy.

Again, what's so frustrating is how unnecessary all this is. The combination of the two goals would deliver far more freedom and happiness to Americans than either could achieve on its own. From a practical perspective, a UBI itself could easily be part of a larger full employment program: If financed through a combination of deficit spending and progressive tax hikes, a UBI would increase aggregate demand and thus boost both jobs and wages.

One hardly needs tales of robot apocalypse to convincingly argue that a (properly designed) UBI would make U.S. society vastly more just and humane.

Editor's note: This piece previously suggested that many or all current welfare recipients would see no increase in net benefits under Yang's "Freedom Dividend" proposals. In fact, according to a UBI Center analysis, more than 80 percent of low-income households would see an increase in their disposable income. The piece has been revised throughout to reflect this fact.

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