Five Reasons Why Minimum Income Won’t Work

The Europeans are at it again. As if budget crises across the continent weren’t enough to temper their appetite for the welfare state, a proposal has emerged in Switzerland to write everyone in the country a check for $2,800 a month – simply for, as the New York Times put it, “being alive.”

Liberals are in love with the idea of trying a minimum income here at home, and some libertarians such as Charles Murray have sympathized with it – if only as a replacement for America’s bloated and inefficient entitlement programs. But while getting a check every month might sound like a good deal, it makes very little economic sense. Here are five reasons why “mincome” could never work in the U.S., or anywhere for that matter.

1. Cost

Let’s start with the obvious. Proponents of mincome have been remarkably mum on where all this money is going to come from. Bloomberg columnist Megan McArdle estimates that the equivalent of Switzerland’s proposal here in America would be a per-person check for $2000 a month. That amounts to an expense of $7.6 trillion a year, or half of GDP.

Raising taxes won’t work; increasing marginal rates to the levels you’d need to attain such a number would crush free enterprise. The only option would be running the money off the Fed’s printing presses – a recipe for hyperinflation. The U.S. would look less like Switzerland and more like Zimbabwe.

2. Work Disincentive

I will concede that mincome is different from  other welfare programs in that its disincentive to work isn’t double-edged. That is, it doesn’t phase out as private income goes up, since everyone in the nation would be guaranteed a check. However, the single edge of mincome’s sword is a deadly one – with a guaranteed income, fewer people will see a need to work for a living. Under such a program, not only would the productivity of our society plummet, but the tax base needed to finance mincome would shrink. Our nation of producers would become a nation of givers and takers.

Proponents of mincome charge that the work disincentives in mincome aren’t as strong as they appear. They cite the work of Evelyn Forget, who conducted the original “mincome” experiment back in the 1970s. She argues that the number of folks who dropped out of the labor force wasn’t as great as some feared. However, she fails to mention entry into the labor force. A middle-aged individual with a family to support and the wisdom that all experiments end might not give up his work, but a high school dropout who sees $2000 a month as all the money in the world? Try mincome in America, and the number of young people who enter the labor force at all would collapse.

3. Inflation

Every nation that has tried to finance a war or welfare program with printed money for any extended period of time has grappled with inflation. Remember the trillion-mark cup of coffee from the Weimar Republic? The logic is simple: print money to buy things, and producers will raise their prices. Mincome might even push prices so high that the people it’s intended to help slip back into poverty. Politicians then set the level of minimum income higher, and it goes on. I sense a vicious cycle coming.

Forget skirts around addressing commodity prices in her experiment, claiming they’re unobservable. Apparently she’s never heard of the Consumer Price Index. What proponents of mincome need to understand is that printing money or redistributing it is not the same as creating wealth – a concept that can only be fully realized in a free-market economy.

4. Improper Use of Income

As a libertarian, I’m not a huge fan of the government telling people what to do with their money – whether it’s to purchase Obamacare or pay taxes. However, when it’s not actually your money that you’re spending – as would be the case with mincome – I’m okay with a little more paternalism.

Inefficient though they may be, one of the reasons the government has programs like food stamps is to ensure that parents don’t recklessly spend taxpayer money that’s supposed to be feeding their children. Replace food stamps with mincome and such a guarantee goes away.

5. Implementation

Suppose we could do away with all of mincome’s other problems. Let’s even take Charles Murray’s much less ambitious mincome proposal of giving everyone over 21 an income of $10,000 – something that, cost-wise, might be feasible with massive cuts to other programs. How would such a proposal even make it out of committee?

To finance mincome, and to stay true to its presentation as “one welfare program to rule them all,” you would have to redirect funds from an array of other welfare and entitlement programs. Would the Social Security recipient really be willing to give up her $15,000 a year in benefits for a $10,000 mincome check? What about Medicare beneficiaries? Getting conservatives on board is one thing. Getting the rest of the people who benefit from our bloated entitlement system to say yes is another task entirely.

The real solution to poverty is to roll back taxes and regulations to unleash the free market to drive down unemployment and raise real wages. Just look at North Dakota, where an oil boom combined with a friendly regulatory climate has pushed salaries for oil field workers up to $100,000. The end of poverty lies in market-driven prosperity, not more government programs.

7 comments

  1. I’ll be honest. I’m not sure how I feel about a minimum income for a whole host of reasons, but this article features some shockingly bad economic analysis. For starters, Preston overestimates size of the program by roughly 50% because he calculates it including payments to children and the elderly. Now, the elderly already have social security and it seems reasonable to think that we wouldn’t be including children for all of the standard reasons (not wanting to encourage parents to have children simply to get the extra money) so the appropriate population size to use is 200 million — the size of the working age population.

    But more importantly, Preston asserts — without any evidence to back it up — that “increasing marginal tax rates to the level you’d need…would crush free enterprise.” This completely ignores a whole host of very interesting and compelling empirical work that has been done on optimal tax rates that suggests the economy could sustain a much higher top-marginal tax rate. See the link below. It also fails to grapple with the US historical experience. We had top marginal tax rates as high as 90% well into the sixties. As late as 1980, our top marginal tax rate was 70% (double what it is now). This era was a period of unprecedented economic growth and general prosperity. Now, it’s possible to argue the counterfactual and say we would have had more growth if these tax rates had been lower, but that’s a very hard case to make in light of the general weight of the empirical evidence on this question. The notion that the only way we could afford a minimum income would be to print money is simply false.

    http://www.epi.org/publication/raising-income-taxes/

    Preston’s analysis of the inflationary impact of such a program is equally atrocious. There is no model and no real thought process other than the reflex response “big government must lead to inflation.” If you want to claim that a certain government policy will lead to inflation, then you need to explain in some level of detail why the Federal Reserve wouldn’t be able to raise interest rates (by contracting the monetary base) to keep inflation in check. Preston simply hasn’t done that. Now, it’s true that if a minimum income program were financed primarily through seignorage (printing money) then we would probably get some inflation in the long term because the Federal Reserve is (by hypothesis) expanding the money supply so it can’t simultaneously contract it to raise interest rates. But the people proposing this aren’t suggesting that we do that. Every serious proposal for a minimum income consists of a balanced budget expansion whereby we increase taxes in order to pay for a minimum income. Making reference to the Weimar Republic is little more than a scare tactic — below the dignity of this publication.

    And honestly, I don’t even know where to begin with Preston’s arguments about implementation. Suddenly, for just this particular line of argument, we are no longer talking about a $24,000 minimum income but instead are examining a minimum income of $10,000. Of course social security recipients wouldn’t want to accept a cut from their current benefits. But in the proposal Preston started analyzing, they wouldn’t have to. It’s like saying, “of course labor unions would be happy to see the minimum wage increased to $15. But if instead we cut it to $5, they’d never accept it. The entire premise of a minimum wage is politically infeasible.” It’s mind-bogglingly absurd.

    Finally, the North Dakota analogy is just wrong. Comparing a resource boom in a small state whose population barely exceeds that of a small Los Angeles suburb to the economic situation of the entire United States is just silly. Why? Because most of the relevant statistics are normalized by population. So in a small state with a tiny population, a single supply shock can have a misleadingly large impact on the statistics we usually use to study economic health. For a more convincing analysis of why using this analogy is just bad economics, see the links below.

    http://krugman.blogs.nytimes.com/2012/03/10/the-stupid-it-freezes/
    http://krugman.blogs.nytimes.com/2012/03/11/when-scale-matters/?_r=0
    http://krugman.blogs.nytimes.com/2012/03/13/scale-and-energy-booms-continued/
    http://krugman.blogs.nytimes.com/2012/03/14/a-tale-of-two-resource-booms-continued/

    Now I haven’t even touched the points Preston has made about the Work Disincentive or the possibility for “misuse” of the funds — largely because I think that he makes some reasonable arguments (even though he fully admits that he abandons his libertarian philosophical commitments the second he starts talking about poor people). It seems to me like there is a serious discussion to be had about the possibility that a minimum income could have a negative impact on the workforce entry rate for young people. But Preston, why couldn’t you have just written that instead of attempting pseudo-analysis on a whole host of topics that you clearly haven’t studied at any length? I truly expected more from an economics major at Swarthmore…

    And to the editors of the Swarthmore Independent: why on earth did you let such shockingly bad economic analysis get published on your masthead?

    • Just thought I’d add my 2 cents about the author’s explanation about implementation. Considering a basic income of $24,000 would total up to $48 trillion for 200 million people, the system would be unsupportable. This is obvious when you look at the federal budget of $3 trillion for the 2014 fiscal year.
      The author decided to use a smaller number because it would be a lot easier to obtain at first. He somewhat mentioned this bit earlier in the article where he was talking about it costing half of GDP using the $10,000 figure.

  2. One thing that I also don’t see mentioned here is the fact that there is a lot of talk around minimum income due to technologies continued displacement of jobs. At some point something has to give. There aren’t going to be enough jobs for everyone since technology, AI, and automation are beginning to automate itself further with less human interaction.

    At some point you either have to regulate technology to the point of oblivion to get people back to work, which isn’t going to happen or you have to come up with another way of taking care of the people. Not everyone is a technological guru and some people really are geared towards manual work, which is good. But as technology displaces those people, you have to do something with them.

  3. There are so many incentives other than money why people (will) want to work. Just to name a few: making a contribution to society, developing ones skills, helping others, having an outlet for ones creative energy, being socially engaged with the people in your community, and in this particular case: supplementing your (m)income.
    The idea that money is the only incentive that makes people want to work is typical of the mindset of free market believers and it’s just not true.

    So, maybe a handful of individuals will choose not to work for a living. I don’t really see the problem with that. There will never be enough jobs for everyone anyway.

    And think about how many people will choose to do volunteer work when they are guaranteed a mincome. That might very well have a very positive effect on society as a whole.

  4. There are so many incentives other than money why people (will) want to work. Just to name a few: making a contribution to society, developing skills, helping others, being socially engaged with others, having an outlet for creative energy and in this particular case: supplementing your (m)income.

    So, maybe a handful of individuals will choose not to work for a living. I don’t really see the problem with that. There will never be enough jobs for everyone anyway.

    And think about how many people will choose to do volunteer work when they are guaranteed a mincome. That might very well have a very positive effect on society as a whole.

  5. Thanks for the article.

    The major Libertarian network actually designed the Alaska basic income and continues to advocate a voluntary form that may meet your objects.

    For info on actual people using voluntary Libertarian tools on similar and other issues worldwide, please see the non-partisan Libertarian International Organization @ http://www.Libertarian-International.org

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