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.