Veronique de Rugy writes in the March 2014 issue of Reason.com:
Switzerland will soon hold a nationwide referendum on granting a guaranteed and unconditional minimum monthly income of $2,800 for each Swiss adult. In America, where Lyndon Johnson’s War on Poverty just celebrated its 50th anniversary of failing to achieve victory, liberals jumped on the Swiss news to reconsider the un-American-sounding idea of a universal basic income.
Surprisingly to some, they were joined by many libertarians. The list of intellectuals who have made cases for a guaranteed minimum income over the years includes suchlaissez-faire luminaries as Milton Friedman, Friedrich Hayek, and Charles Murray.
Friedman favored a negative income tax (NIT), in which taxpayers who earn less than the established minimum taxable income level would receive a subsidy equal to some fraction of that difference. (A watered-down version of this became the Earned Income Tax Credit.) Hayek defended a minimum income floor, in which the government provides a conditional income to each adult. Murray’s 2006 book In Our Hands argued for an unconditional $10,000 annual cash payment to all adult Americans, coupled with a repeal of all other welfare transfer programs.
Their proposals aim to fully replace the current welfare state with a less-bad alternative. In a world where government already redistributes income, with all of the inefficiency that comes with overlapping bureaucracies, the idea of direct cash payments has an intuitive appeal because of its comparative simplicity and fairness.
Any alternative might seem preferable to the welfare system we currently have. Federal welfare in the U.S. today consists of a highly complex maze of 126 separate anti-poverty programs, many of which are redundant. (There are, for instance, seven different housing programs.) While the system benefits the many government employees who manage these duplicative programs, it is neither easy for poor Americans to navigate nor is it an effective way to deliver anti-poverty services.
According to Cato Institute analyst Michael Tanner, the federal government spends close to $1 trillion each year at the federal, state, and local levels on anti-poverty programs-everything from Medicaid to job training to food stamps. After adding in the bureaucracy that attends to applying for food stamps, rent subsidies, and everything else, it isn’t hard to imagine how moving to a cash transfer system would make the entire process far less time-consuming and humiliating for the poor. In addition, getting rid of the bureaucrats who administer these programs would save between 10 and 15 cents on every welfare dollar, a significant amount.
Welfare programs are demeaning by design, because they dictate to poor people what they must spend on food, housing, or health care, rather than letting them make those trade-offs themselves. The government even dictates what food poor people may or may not buy with food stamps. The libertarian interest in a guaranteed income scheme proceeds not simply-or even mostly-from the desire to make government smaller and more cost-efficient. It stems from a belief that all individuals have the capacity to promote their own interests, and in fact are better able to make decisions about their lives than anyone else.
However, the abstract idea loses some of its appeal when one starts looking at its realistic cost. The details vary from one version to another, but even in the best of possible worlds, none are likely to save much money, if any. Consider a plan to provide a $12,000 annual subsidy to every adult above 18.
Giving $12,000 a year to the 237 million adults in the U.S. above the age of 18 would cost $2.8 trillion a year. If we add this amount to the other big-ticket budget items, such as the $550 billion we spend on the Pentagon and the $200 billion devoted to misguided corporate welfare and other wasteful programs, this plan would break even with the current system, if and only if we get rid of all other anti-poverty programs and tax breaks, unemployment insurance, Obamacare subsidies, Social Security, Medicare, Medicaid, and so on.
Another possibility would be to limit transfers to the estimated 106 million individuals who currently qualify for welfare programs by earning less than 200 percent of the federal poverty level (i.e., $23,440 a year). That would cost $1.3 trillion a year, an amount that exceeds the current $668 billion in welfare spending at the federal level and the additional $284 billion at the state and local levels (not all of which would disappear if Washington replaced the old federal welfare state with a basic income). Restrict payments to the 100 million people currently receiving means-tested public assistance, and it will still cost $1.2 trillion.
Even if we assume that all other anti-poverty programs will disappear (which is assuming a lot), it’s conceivable that taxpayers would not save money compared to the status quo. Don’t forget, they would still be on the hook for the military, for corporate welfare, and-if middle-class entitlements stay in place-for part of Social Security and Medicare. In 2012, the government spent roughly a trillion dollars on Medicare and Social Security recipients (excluding the Social Security benefits that go to Medicaid recipients). That amount will grow as more baby boomers retire in the next decade.
A cash transfer program to adults at the poverty line level ($11,720 a year) would still cost around $600 billion a year. And, of course, if the transfer extends to those above the 200 percent level, that cost would go way up.
The appeal of a guaranteed income also diminishes when judged against its ability to move people away from government dependency. There is some evidence that a guaranteed minimum scheme would undermine incentives to seek employment. Four landmark experiments in the 1960s and ’70s examined the Negative Income Tax’s impact on labor supply. The recipients of NIT grants tended to work fewer hours compared to control groups that did not receive the grants.
Making the NIT more progressive in order to placate these disincentives to work, as Milton Friedman suggested, does not seem to help. Pointing to a series of 30 welfare experiments conducted in the 1990s, National Review‘s Jim Manzi argued in 2011 that of all the policy options tested, only welfare policies that included work requirements pushed people off welfare and back to self-sufficiency. Manzi concluded that taxpayers’ moral aversion to subsidizing sloth will ultimately undermine any move to a guaranteed income or negative income tax scheme that lacks work requirements. People, he demurs, seem to prefer the paternalism.
But my main objection to a guaranteed minimum income is rooted in the wisdom of public choice: The poor structure of government incentives ensures that good intentions and elegant theories rarely equal expected results in public policy. The biggest risk in implementing a guaranteed income is that it won’t completely-or even partly-replace existing welfare programs, but instead simply add a new layer of spending on top of the old. Friedman learned this the hard way: After years of promoting the NIT, he wound up opposing Richard Nixon’s NIT-inspired Family Assistance Plan precisely because it would not displace the preexisting welfare state.
So what are libertarians to support? If nothing else, more research: We could use a new series of voluntary, dispersed trials aimed at finding ways to avoid work disincentives while delivering payouts more efficiently and tying the hands of special interests and politicians.
But more importantly, as economists Peter Boettke of George Mason University and Adam G. Martin of Kings College in London remind us in a recent paper, libertarians shouldn’t forget that “the most robust protection against poverty comes from institutions that generate a harmony of interests rather than those that foment distributional conflicts.” A guaranteed income may or may not be an improvement over the current state of affairs, but a massive transfer and regulatory state harms the poor either way.
Most people would probably think that it would be great to receive a guaranteed income without having any responsibility for contributing to society as a wealth-creating productive citizen. A guaranteed income would also enable people to stay unemployed and retire knowing that a monthly check from the government is there for them throughout the year.
Such proposals for a guaranteed income are yet more attempts to address the fact that Americans are not saving enough for retirement. But the proposals fall far short by “trillions” of dollars, if we are to service our present slate of government programs, whether welfare for the rich or for the poor.
The plain truth is that more than four in five older Americans expect to keep working during their latter years, a sign that traditional retirement is out of reach for vast swaths of society. According to a new survey poll conducted by the Associated Press-NORC Center for Public Affairs Research, among Americans ages 50 and older who currently have jobs, 82 percent expect to work in some form during retirement.
In other words, “retirement” is increasingly becoming a misnomer.
For those who have been dependent on employment and/or welfare, the problem is that financially sustainable retirement is and will no longer be a reality. Even with Social Security, which is funded through payroll taxes called the Federal Insurance Contributions Act tax (FICA) and/or Self Employed Contributions Act Tax, (SECA), one must have had a job to be eligible for the entitlement––and the amount of Social Security is based on the income level generated from one’s employment record of payroll tax contributions.
Employer-provided pensions continue to decrease and personal savings is not the norm among the vast majority of American households who must spend virtually every earned dollar on living expenses. While increasingly individuals are finding it necessary to continue working in retirement to supplement their income, most older Americans discontinue full-time career work and struggle to meet obligations with minimum-pay part- and full-time jobs. A proportion of retirees also receive income from welfare programs, such as Supplemental Security Income and other life-support services funded through tax extraction and government debt.
This perspective should serve as the “reality” from which to explore prospects for effectively dealing with eroding retirement security.
Thus, proposals, such as a guaranteed income, all claim to offer lifetime income security funded out of current savings, meaning further reductions in consumption out of already inadequate incomes.
But such ill-conceived schemes to redistribute income generated from the creation of wealth assets will never succeed in providing any real, substantial retirement security for the majority of Americans. And without substantial growth of the economy jobs and the worth of labor, which are constantly threatened by people-replacing tectonic shifts in the technologies of production, will not produce more than substance week-to-week and month-to-month wages. While other plans are designed to encourage Americans to save for retirement and require personal savings and denial of consumption, such are unrealistic given that the Americans with the least opportunity must reduce what is inadequate consumption income in order to accumulate savings for retirement, which for most Americans will be inadequate.
Does anyone really believe that the interest rate to have been paid under a guaranteed income program would be sufficient and able to avert the decline in the value of the money as the government continues to flood the economy with increasingly non-asset-based debt?
Any proposal that requires people to reduce consumption in the economy will be ill-fated. The reality is that this is a time when what is needed is expansion of the economy supported by increased consumption.
With proposals based on saving, American consumers are being put into an impossible situation of being asked to consume more to drive the economy and reduce saving, and at the same time are being told they must reduce consumption dramatically in order to accumulate sufficient savings for retirement.
Of course, the whole problem would go away if we financed both retirement and wealth-creating, income-producing physical productive capital needs out of “future savings,” thereby increasing the capacity to consume and support the economy while simultaneously building financial security for every American citizen.
A far better and productive approach would be to create a new way for working and non-working Americans to start their own retirement savings: MyCHA. CHA stands for Capital Homestead Account. It would be a super-IRA or asset tax shelter for citizens. The Treasury should start creating an asset-backed currency that will enable every child, woman and man to establish a CHA at their local bank to acquire a growing dividend-bearing stock portfolio comprised of newly-issued stock representative of viable American growth corporations to supplement their incomes from work and all other sources of income.
We can create new asset-backed money for investment through the existing but dormant Section 13(2) rediscount mechanism of each of the 12 regional Federal Reserve banks that would be backed by “future savings” (that is, future profits from higher levels of marketable goods, products, and services).
The CHA would function as a savings and income account that effectively would build a nest egg over time, using interest-free, insured capital credit loans. A CHA would be offered to EVERY American, whether employed or not. Of course, those employed may also have additional opportunities to acquire personal ownership in their companies using an Employee Stock Ownership Plan (ESOP) trust financial mechanism.
The CHA would process an equal allocation of productive credit to EVERY citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets. The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition interest-free loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares. There would be no prerequisite requirement to qualify for an annual set capital credit loan other than American citizenship.
This idea to stimulate economic growth and provide retirement security for EVERY American is based on the premise that what is needed is for the system to facilitate spreading the ownership of productive capital more broadly as the economy grows with full payout of dividend earnings, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate productive capital wealth assets. In doing so, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader.
This would benefit the traditionally disenfranchised poor and working and middle class, who are propertyless in terms of owning productive capital assets. It would also result is tremendous economic growth, which would benefit everyone including the already wealthy ownership class, and create opportunities for real jobs, not make-work as an expanded economy is built that can support general affluence for EVERY American citizen. Thus, as productive capital income is distributed more broadly and the demand for products and services is distributed more broadly from the earnings of capital, the result would be the sustentation of consumer demand, which will promote economic growth. That also means that over time, EVERY child, woman and man could accumulate a diversified portfolio of wealth-creating, income-producing productive capital assets to provide economic security in retirement and not be dependent on having to work during retirement or rely on government-assisted welfare.
One might ask how we failed to grasp the significance of productive capital’s input and the necessity for broad private sector individual ownership? Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment––thus the political focus on job creation and redistribution of wealth rather than on full production and broader productive capital ownership accumulation. This is manifested in the belief that labor work is the ONLY way to participate in production and earn income. Yet, the wealthy ownership class knows that this notion is idiotic.
In real productive terms, productivity gains are the result of tectonic shifts in the technologies of production, which consequently eliminates the need for human labor, destroys jobs, and devalues the worth of labor.
One should ask what form would the structural reforms take. Employment in this new enlightened age would start at the time one enters the economic world as a labor worker, to become increasingly a productive capital owner, and at some point to retire as a labor worker and continue to participate in production and to earn income as a productive capital asset owner until the day you die. As a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose asset holdings exceeded $1 million. This would encourage those owning concentrations of productive capital assets (effectively the 1 to 10 percent) to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.
Other stipulations for the structural reform would entail tax policy reform to incentivize corporations to pay out all profits to their owners as taxable personal incomes to avoid paying stiff corporate income taxes and to finance their growth by issuing new full-dividend payout shares for broad-based individualized employee and citizen ownership with full-voting rights.
We need to encourage the insurance industry to expand their product lines to market Capital Credit Insurance to cover the risk of default for banks making loans to Capital Homesteaders under the proposed Capital Homestead Act. Under the provisions of the Act, risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance issued by a new government agency (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.
The end result is that ALL American citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing our country’s trend where all citizens are becoming more dependent for their economic well-being on the “state,” our only legitimate social monopoly.
Implementing the Capital Homestead Act would significantly empower ALL Americans to accumulate over time a viable, diversified ownership portfolio in our nation’s growth companies and create a truly unique, global-leading just and environmentally responsible Ownership Society that fosters personalism, creativity and innovation. Embarking on a new path to prosperity, opportunity and economic justice will expand growth of our market economy in ways that democratize future ownership opportunities, while building a future economy that can support general affluence for EVERY American.
In conclusion, a redistributive tax-supported guaranteed income, as well as any other program that depended on savings, would be completely unnecessary if we had Capital Homesteading.
See two references to the proposed Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm.
For more on how to accomplish such structural reform, see “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at NationOfChange.org http://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624 and “The Income Solution To Slow Private Sector Job Growth” at http://www.nationofchange.org/income-solution-slow-private-sector-job-growth-1378041490
http://www.huffingtonpost.com/gary-reber/yes-retirement-security-i_b_4747659.html
