No, your awesome policy idea will not pay for itself
James Kerr - 6th June 2023
Today I’d like to bring something slightly different to this august newsletter, by discussing crank economics - something that exists in abundance, but can be a little difficult to discuss in venues like this. For one thing, it falls outside the standard set of sceptical skills, and for another it is essentially impossible to discuss crank economic ideas without implicating political beliefs, and that’s a fraught exercise at the best of times.
Despite these issues, I would like to lend my expertise to discuss a claim I came across in a proposal for a Universal Basic Income (UBI) by Ian Middleton of Basic Income New Zealand (BINZ). For those of you who aren’t familiar with the concept, Universal Basic income is a concept for welfare where instead of the government providing a series of conditional, targeted benefits to people based on their assessed needs, everyone is given a flat sum of money that is (in principle) large enough to live on. The idea is that poor people will have more flexibility in how they live their lives, while having stronger incentives to find work if they can.
I don’t want to go into the potential benefits of a UBI in too much depth, because I don’t consider a UBI itself crank economics. UBI proposals have a major implementation problem, but the general concept is reasonably solid. Rather, the economics idea I want to discuss relates to its costs.
There is really only one downside to a UBI, but it’s a doozy - the financial cost. The numbers involved in government budgeting can be very large, so it’s important to look at hard numbers. Middleton’s Paper suggests setting a UBI at the rate of the Jobseeker’s Benefit (aka the unemployment benefit or “the dole”). A single person receives $337.74 per week on this benefit, after tax. Giving this money annually to every New Zealand Resident (estimated to be 5.2 million people as of December 2022) would cost just over $90 billion dollars per annum. By way of comparison, the total budgeted cost for all benefits in the year ending June 2024 is just under $36 billion. And while a lot of that budgeted cost could be applied against a UBI, not all of it can, because that budget includes superannuation, and superannuitants receive more than the UBI we’re proposing here.
Put another way, a UBI would cost most of the $166 billion in tax revenue the government is expecting to receive in the year ending June 2024. This means that the only way to pay for the UBI would be a large increase in taxes.
Or would it? Middleton’s paper makes a strong but all too common claim, that a UBI is such an excellent policy that it will pay for itself! You see, so Middleton’s logic goes, when people receive money they spend it, and the Government collects taxes on that spending. This means that over time, all the money the government spends will return in GST and income taxes, and the money passes from person to person, being taxed at each step. As Middleton says in his paper and its presentation.
Over time, the extra tax returned will increase to match the expenditure and a Basic Income scheme will become self-sustaining… In the long term we might expect the cost of a Basic Income scheme to be less than 0.4% of total annual payments.
This is the economics claim I want to debunk. Because while you may be able to see something off with this claim, understanding exactly why it’s wrong requires understanding what money really is, and what it isn’t.
In day-to-day life we think of money and wealth as being the same thing, but that’s not really true - as Adam Smith noted in The Wealth of Nations, back in 1776. True wealth is the ability to acquire goods and services that you value, and money is simply a mechanism we use to keep track of a person’s access to goods and services. In other words, money isn’t wealth, it’s just a symbolic representation of wealth - an image of the real thing.
OK, but why won’t it work? Well, if there is more money in the economy but the same amount of stuff to buy, then people will quickly bid up prices as they use their larger pool of money to buy the same quantity of goods. This manifests as inflation, a general increase in prices that would make it difficult for anyone on fixed incomes to make ends meet - precisely the opposite of what the UBI is trying to accomplish. Ultimately, you can’t make a country richer by printing money, any more than you can make a country more powerful by enlarging its flag.
But what about stimulus? Governments often print money to stimulate the economy, so why wouldn’t that work here? Stimulus is not an unlimited path to higher prosperity, but rather a solution to a particular problem that causes recessions. Explaining the whole of the New Keynesian Synthesis is a little beyond the scope of this article, but the short version is that recessions happen when monetary conditions make people worried enough about the future to start spending less, making the prophecy self-fulfilling. Stimulus kicks the economy out of the vicious cycle by filling people’s pockets, which lifts spending again. This doesn’t work for long (because once prices rise, people will realise they haven’t actually gotten richer), but it works for long enough to end the self-fulfilling prophecy.
What this means in practice is that stimulus only works under certain economic conditions, and doesn’t work for long even then. And if that sounds too theoretical for you, we know for a fact that persistent stimulus doesn’t generate sustainable increases in economic activity, because most of the world’s governments tried it for several decades after World War II, and the result was the inflation crisis of the 1970s.
It is always tempting to imagine that the policies we love are not just good, but so good that they are entirely without flaws. But, in practice, there are very few policy proposals that really are all upside, because such policies would be politically popular and therefore would be likely to have been implemented already. Whatever the merits of a UBI, it would be very expensive, and any serious proposal for implementing it needs to take that cost seriously. And the same is true of almost any other policy idea you can think of.