Guaranteed Basic Income Revisited

Wonkblog is getting on the bandwagon and discussing a guaranteed basic income.  The comments suggest that many detractors and even some of the proponents think that a GBI will accompany a cessation of normal market capitalism.  That is the only way to explain the slippery slopes and straw men that pop up everywhere.

As a sidenote, someone misinterpreted a land value tax as taxing a rural homeowner more than Lloyd Blankfein (head of Goldman Sachs) seemingly thinking the tax would be independent of location.  It is of course based on the value of the land, as the name implies, so land in Manhattan would be taxed at much higher amounts.

Lets tackle a few of these misconceptions and then maybe imagine the shape of the economy after a GBI.  I think this page provides a good defense of a GBI except for the allowance that inflation might run amok after it is implemented.  The example they give is landlords raising rent in response to the fact that everyone has a GBI.  Now the prices of everything will change after a GBI is implemented, there is no denying that.  However, the article makes no attempt at explaining why market forces are suspended under a GBI.  A landlord could cut prices to increase his occupancy and make more money.  This would in turn induce other landlords to lower their prices, so on and so forth.  You need an explanation for why the market is so badly imperfect.  You could talk about inelastic supply, but that is a problem with housing/zoning policy, not a GBI.

Now the author compares this to a child care credit in the UK that did indeed cause price inflation.  This problem is specific to in-kind welfare benefits.  The UK was basically saying here is money you can only use on child care, i.e. they are subsidizing and as we should know subsidies cause us to consume more of that product.  This obviously increases the demand for child care immediately increasing the price.  In-kind benefits have a number of such drawbacks.  Walmart gets a huge amount of our food stamp money as that is where a lot of poor people shop.  On the employment end, stuff like food stamps allows them to pay a lower wage to their employees who can count on the government to make up the difference so to speak.  So means-tested benefits are a subsidy to low wage jobs.  The GBI has no market distorting effects as it subsidizes no particular industry or occupation.

Finally, lets tackle the lazy moocher problem and potential impact on prices in one go.  The GBI to a zero order approximation would immediately cut all salaries by the amount of the GBI.  This has little effect on people making considerably more than the GBI and I would say the same even for most of the middle class.  After all, theoretically they could work less and earn less if they valued leisure.  Instead they either enjoy their jobs or the extra consumption enough to continue to work full time.

No, the important cohort are people that who once made about the same amount as the GBI now provides.  The amount of money they get from their marginal hour of work is virtually nothing and thus it makes sense that they would consume leisure as an economist would put it.  Who then would man our local Walmarts?  Quite simply the market jumps in to the rescue.  Wages will rise until the wage for an hour of work is greater than the utility of a marginal hour of leisure.  At this point you have induced people back into the workforce.

Oh noes you say, wont everything cost a bunch more?  Actually on the face of it everything should be cheaper since wages are almost assuredly lower than they were before the GBI.  The only way this is not the case would be if the utility of leisure was higher than the wage before the GBI was implemented.  However, this is unlikely as we are talking about people on the border of poverty, not people deciding whether to work to buy a fourth jetski.  The real culprit for any real price increases (as opposed to inflation) will come from how you pay for the GBI.  This, however, is a topic for a later post.

Lets say a country implements a GBI.  It is either too high or too low.  If it is too low you basically have the current situation where it ameliorates suffering but must be supplemented by some amount of work.  It’s probably still better than our current welfare system.  If it is too high you will immediately see a general price inflation in all lower class goods as the demand curve is pushed outward and the supply curve contracts as people leave the workforce to retire on their overgenerous benefits. However, wages will go up as well and the price inflation will help settle the economy into an equilibrium where the GBI is not too high.

Thus, I think that fears about making it too generous are mostly overblown.  The worst possible scenario is that the price inflation is large enough to trivialize the GBI.  However, I am having difficulty imagining the dynamics that would lead to such a situation.  Our current welfare system triggered no such price spiral and remains relatively generous for low income workers.  Instead I believe the economy will self-correct to neutralize the objections to a GBI.

Up next is how to pay for a GBI.

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