Universal Basic Income

I had assigned five potential readings for extra credit: Atlas Shrugged, Economics in One Lesson, Capitalism and Freedom, The Anticapitalistic Mentality, and "The Use of Knowledge in Society." One of my students sent me a video of an interview about the idea of universal basic income. Many of the points the interviewee makes are fallacies discussed in the readings, especially Economics in One Lesson and Capitalism and Freedom.  I hence sent the following email to my three online classes:

One of your classmates showed me a video about universal basic income. This is one of the ideas invented by Milton Friedman in Capitalism and Freedom. However, the proposal made today involves a sharp expansion of welfare benefits, which Friedman would have opposed were he alive today.  The issues in the video are among the current issues that overlap with several of the extra credit readings I have made available, so I thought I'd send my response to you. If you're not interested, skip this email as this material is not relevant to the exam.

The student wrote this:

Hi Professor,

I saw this a few weeks ago. What do you think about UBI?

https://youtu.be/cTsEzmFamZ8

My response is as follows:

Andrew Yang's fallacious claim that technology destroys jobs is hundreds of years old. It goes back to 17th century England.  Some of the Luddites in the 19th century destroyed textile machinery as a form of protest.  Eleanor Roosevelt made similar claims in the 1940s. The claim that technology destroys jobs has always been false. This is something discussed in Economics in One Lesson, which I recommend to you to understand why Yang misunderstands the implications of technology.  Market-based technology increases wealth. Hence, there is demand for new kinds of jobs as increased wealth finds new markets and new outlets.

However, this isn't working well today because today's technology and investments are not market based; they are created by government fiat and monetary expansion.  That is, the Fed and the banking system expand the money supply; the expanded money supply reduces interest rates to nearly zero; then, the banking system makes the artificially created money available to powerful borrowers at low or zero rates.  The low rates create bad investment or malinvestment in projects that would not exist under free market conditions. The bad investment initially stimulates employment, but over time it  substitutes capital for labor. The reason is that low interest rates reduce the cost of capital to a greater degree than they reduce the cost of labor.

The manufacturing jobs that have left the country have disappeared neither purely because of technology nor purely because of low overseas wages.  When capital leaves a country, its currency falls, and further overseas investment is curtailed because the currency becomes weak.  For the past 40 years, plant relocations have been subsidized by low or zero interest rates that the Federal Reserve bank creates artificially coupled with the reserve currency status of the dollar. Because countries around the world hold dollars, the dollar does not decline, so firms borrow at artificially low interest rates to relocate plants, but the dollar does not fall because it is held by firms and central banks around the world.

If capital costs are minimal or zero, then there is minimal or  zero cost to substitute capital for labor. Hence, capital investment in plant relocation has cost firms little, and plant relocation has exceeded the market level. The same is true of investment in technology. Because interest rates are low, it is cheaper for firms to borrow to invest in technology and replace labor with technology.   Today, technology is nearly costless because interest rates are nearly zero.  As a result, the economy has become distorted in favor of capital investment. To correct all this will be hard, but to distort it further by creating more money and inducing men to stop working so that they have free time to create militias is insane.  The end result will escalate the decline of the economy because of misallocation of resources --the subject of the novel Atlas Shrugged.

That said, Milton Friedman in Capitalism and Freedom, which I also recommend (along with Economics in One Lesson and Atlas Shrugged), is the one who created the idea of the  negative income tax, which is what Yang is talking about. Friedman's idea was to simplify the myriad welfare programs by replacing welfare, Social Security, and all other programs and treating welfare as an extension of the income tax in one simple program. That would reduce bureaucracy costs.  That is one of the chapters in Capitalism and Freedom. That is probably a good idea. However, an expansion of welfare is not a good idea because it will encourage people who would otherwise attempt to cope with the economy by finding jobs that may not be as good as would exist in a market setting to instead go on welfare.  The result will be more disenfranchised Americans who live lives of hopeless welfare dependency--and more monetary expansion at a time when government is heavily in debt.  Antfa will go on steroids.

The current federal debt level is 106% of gross domestic product, but that doesn't include unfunded Social Security liabilities, unpaid student loans, unfunded future Medicare and Medicaid liabilities, and unfunded future public sector pension costs . The actual indebtedness may be closer to 200% of GDP.  Japan has sustained indebtedness at this level, but an expansion of welfare will push US indebtedness higher still.  You will notice that recent graduates in Japan have suffered since the 1990s, and the same will happen to you.

According to a  research paper by Kenneth Rogoff, when indebtedness exceeds 90% of the GDP it slows growth.  An opposing,  recent theory called the Modern Monetary Theory claims that government can expand the money supply indefinitely without consequences.  The answer to this is that there is no evidence in history of this working, just as there is no evidence in history of socialism working. Because the dollar is a reserve currency, an aggressive monetary expansion to  cover infinite indebtedness will potentially cause withdrawal of foreign central banks from the dollar.  This may result in a dollar collapse, and the reverse of what Yang and other advocates hope for.

The economic fallacy that Andrew Yang is making in the video is that it is easy to see the jobs disrupted by technology , but it is difficult to see how demand will evolve because of additional wealth due to the technology. In 1875, if you had asked someone what the effects of the automobile's disruption of the horse-and-carriage market, the person would have said the same thing that Yang is saying. The problem with much of the technology now, such as social media, is that it is interest rate rather than market driven.  The result is that many tech jobs are not value producing and should not exist. (The same can be said of professors' jobs, which would not exist without student loans, many of which will not be paid off.)

Hence, to help address Yang's fallacies, I suggest reading both Economics in One Lesson and Capitalism and Freedom as extra credit assignments. Atlas Shrugged paints a dramatic, dystopian picture of the direction in which economic fallacies, including this one, are taking us. 

Tariffs Make Us Poorer in the Long Run

I was drinking last night in Snyder's tavern in West Shokan, and two friends were defending Trump's tariff program. After four Canadian Clubs, I wasn't about to go into the apples-and-oranges example that illustrates comparative advantage; then, one of the friends emailed this Breitbart column defending the tariffs because products made with the protected metals have been in strong demand. 

Comparative advantage is a simple insight: If someone can do something that you can do, even if not as well as you (i.e., so that they are poorer and less productive than you in all respects), it makes sense to have them do the thing or things at which they are most productive or at which you are least productive if it enables you to spend more time on the things on which you are most productive. The total output goes up (their production plus your greater production), and the surplus can be divided.

Studies of comparative advantage have confirmed that it works in the real world. When you shop at Wal-Mart or Target, you benefit from free trade.

When tariffs are first imposed, it is normal for output in the protected industries to go up in the short-term because the effects of making yourself poorer aren’t yet felt. In addition, today’s economy is accelerating due to the monetary expansion of the Obama years. There is high demand as the monetary cycle peaks, which probably enhances the short-term effect on the protected industries. 

The greater demand for home-based products (what Breitbart calls “firms hit by tariffs”) creates short-term employment gain in those few industries. A year or two after employment goes up in the specific industries, the prices of the protected products that they make go up, so there is less money to spend, and demand in other areas falls, so people lose jobs in computers, plastics, barber shops, and so on.

The tariffs make the protected industries seem to do better (as Wall Street has done since the 1970s because of monetary subsidies), but in a few years everything else turns sour. You will have made yourself poorer.

Here is an article by Deirdre McCloskey on comparative advantage that may be helpful.

Tariffs are one example of short-term or focusing-on-the-obvious-but-ignoring-secondary-effects thinking that the famous book by Henry Hazlitt, Economics in One Lesson, explains. It is an easy-to-read book, and I recommend it. It is available for free here.

How the New Health Care Law Affects Your Accounting Firm

I just submitted my monthly column to the American Institute of Certified Public Accountants' Career Insider newsletter.

How the New Health Care Law Affects Your Accounting Firm

Mitchell Langbert, Ph.D.

The debate concerning health reform and national health insurance began after World War I.  There have been half a dozen presidential attempts to reform or nationalize health care since the days of Woodrow Wilson, and Barack H. Obama has succeeded where Franklin D. Roosevelt feared to tread.  But the new law reflects the health field’s political complexities and has ramifications that are difficult to predict.  Rest assured that your firm and you personally will be affected.

One way to consider what the effects of the two sister laws, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (“the health care act”), will be is to recall a great book on the art of economics, Henry Hazlitt’s 1946 Economics in One Lesson.  Hazlitt’s one lesson is spelled out in 25 chapters, but he states it in one sentence in the first chapter:  “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

Key Provisions

The law’s most important social welfare improvement is to extend care to 35 million uncovered Americans.  This fall, people who lack coverage now can purchase insurance through a high risk pool.  Premiums will be limited to approximately $500 per month for single insureds, $1,000 per month for families.  State exchanges will be set up by 2014 to facilitate small firms’ purchase of health insurance and purchases by people earning up to four times the poverty line. Starting in 2014, most Americans would be required to purchase health insurance unless there is hardship. Those whose income is more than four times the poverty line must purchase insurance or pay a $695 tax.  Tax credits will subsidize middle-class taxpayers and small businesses.  Medicaid will be extended.  

Insurance companies will not be allowed to rescind coverage of people who become ill.  Several insurance companies have done so.  Pre-existing conditions can no longer be used to exclude children from coverage, and pre-existing conditions cannot exclude adults by 2014.   The law eliminates caps on coverage, both annual and lifetime.  Children will be allowed to remain on their parents’ policies until age 26.  

The law adds some new burdens on highly paid employees to help pay for the plan.  It limits pre-tax flexible spending accounts to $2,500.  It extends the Medicare Payroll tax to unearned income for families that earn more than $250,000 and for individuals who earn more than $200,000.  Also, beginning in 2018 insurance companies must pay a 40 percent tax on health insurance plans valued at a $27,500 threshold for families and $10,200 for individuals (not including vision and dental benefits).  A “health care cost adjustment percentage” multiplies the threshold and it is adjusted for age and gender.  As well, there will be $500 billion in Medicare cuts.  The minimum for itemized deductions for medical expenses increases to 10% in 2012.  The hospitalization tax in FICA will increase from 1.45% to 2.35% for a married couple earning over $250,000.  Fees will be charged to health plans.  

 As well, Section 3403 of the Patient Protection and Affordable Care Act establishes an Independent Medicare Payment Advisory Board.  The Board’s purpose is to reduce Medicare costs by making recommendations as to management improvements such as reducing payments for pharmaceuticals, reducing administrative expenses and reducing high bids for services.  The law states that the Board’s proposals “shall not include any recommendation to ration health care.”  But any serious claim that such a Board will effectuate cost reductions hinges on one or another form of rationing.  A government board will not function competently as a quality circle.  

Unforeseen Implications

The law’s proponents claim that the best-run providers such as the Mayo clinic will provide models for change for smaller, more expensive and worse-managed providers.  But that is akin to claiming that a government board can tell General Motors to adopt the quality practices of Toyota, and then count on GM to run with the ball.  High quality certainly is associated with low cost in many industries.  The reason is what Edward I. Deming calls the “profound knowledge” of the high quality producer.  But a government board lacks such knowledge, and government edict cannot transfer it.  To insist that Margaretville Hospital in Arkville, NY adopt the quality of practice in the Mayo Clinic or the UCLA Medical Center sets hope before reason.  

There is widespread agreement that a large number of additional physicians will be necessary to provide care in response to the extension of coverage.  Anna Fifield of the Financial Times writes that physicians’ organizations predict that 50,000 additional physicians will be needed.

On April 22, National Public Radio reported that the Health and Human Services Department’s Office of the Medicare Actuary found that the law will increase spending by one percent over the next decade.   As well, the report predicted that as much as 15 percent of providers could be thrown into the red because of the Medicare cuts.  But these estimates cannot be considered reliable.  No one, for example, predicted that the baby bust of the 1960s and 1970s would lead to shortfalls and reductions in Social Security benefits.  But it did.

One of the subjects that Henry Hazlitt treats in his book is how the unforeseen effects of government-induced demand include shortages.  Publicly administered health plans from Sweden to Canada are characterized by long waits for care and limitations on care.  Given the predictions of physician shortages, we may count on less flexibility in the system.

Last month, Dr. Marc Siegel wrote in USA Today that Medicare is already insufficient to cover his and other physicians’ costs and that he has been seeing a significant number of his patients pro bono.  Siegel quotes the Association of American Medical Colleges as predicting a shortage of 160,000 doctors by 2025.  He notes that New York has eliminated pre-existing conditions exclusions since 1992 and premium costs have skyrocketed, the reverse of what the health care law’s proponents claimed they would do.  Hence, there may be unforeseeable cost effects.  Siegel writes that he is planning to refuse to see Medicare recipients. 

Separately, I traced the trajectory of federal government spending since 1948.  There was a statistically significant upsurge in 2009.   In effect, all federal spending cuts from 1980 to 2008 (which had already been eroded by the Bush administration) were completely wiped out in a single year, 2009.  The health care act will add to federal spending, pushing the current spending outlier further off the charts.   Excessive demand will increase waiting times and lead to rationing through one route or another.  Americans may find that they can obtain superior quality care in foreign countries.  Medical tourism is already on the upsurge, and I predict it will increase dramatically over the coming 35 years.  Who would have thought that a trip to an Indian hospital would be a key effect of health reform?