The unemployed are sicker and spend more on health-care costs. They suffer from increasing rates of alcoholism, physical illness, depression, and anxiety, make more trips to the doctor and take more medication …. These multifaceted health effects create a vicious cycle that prevents the unemployed from reentering the labor market …. Furthermore, unemployment has significant, robust, and lasting negative effects on individuals’ social participation …. The isolation that unemployment causes erodes the social network that a person often needs for reemployment.
If a big-box store or manufacturing plant is shut down, throwing hundreds out of work, it’s often the case that those displaced workers commute from adjacent communities. Those unemployed spend less money in their home towns, spreading the effects of unemployment from the shuttered site to surrounding districts like ripples in a pond when a stone is dropped. In time, those affected communities suffer their own unemployment, which spreads the jobless virus even further.
It’s a species of analytic malpractice for government officials and Wall Street economists to parrot phrases about full employment and tight labor market conditions when labor market reality looks more like the Great Depression. Still, many scholars are not so blind. If the unity of conservative and progressive scholars in diagnosing the labor crisis is surprising, even more surprising is their unity of opinion on what is to be done. While details differ, there is a consensus of left and right that the time has come for a guaranteed basic income, or GBI, or public service employment, PSE, for all Americans. The GBI/PSE movement is potentially the greatest revolution in public policy since Lyndon Johnson’s Great Society (1965) or Franklin Roosevelt’s New Deal (1933). The implications of this policy revolution for fiscal and monetary policy, and for investor portfolios, cannot be overstated.
The GBI (also called universal basic income, UBI, or simply basic income) is an old idea offered as a new remedy for an economy that produces too few jobs with decent wages. The idea is strikingly simple. Government will pay every citizen a basic income from public resources. The basic income is sufficient to provide a reasonable, if not luxurious, standard of living. It is paid without any requirement for work, and regardless of any other income. Every citizen in a society receives the basic income unconditionally.
The idea of a GBI has explicit roots in Thomas More’s Utopia (1516), where it is discussed as a way of obviating theft. Of course, public welfare of various kinds has existed at least since the creation of the grain dole in the Roman Republic in the mid-second century BC. The original grain dole instituted by Tiberius Gracchus and his younger brother, Gaius, consisted of sales of inexpensive wheat to citizens on a first-come, first-served basis. While the dole was originally considered temporary, a later tribune, Claudius, won election by offering free wheat. By the time Julius Caesar became consul of the Roman Republic in 59 BC, he found 320,000 Romans receiving the grain dole. Through most of the Middle Ages, poor relief was provided by the Catholic Church. Public assistance, later known as the Poor Laws, was available in England as early as 1531 in the reign of Henry VIII. Later government efforts to assist the poor included Bismarck’s social insurance scheme (1883), and Roosevelt’s Social Security Act (1935). More recently economists such as Milton Friedman and politicians including Richard Nixon have endorsed variations of GBI, including the negative income tax and earned income tax credit.
What distinguishes the pure form of GBI from these earlier schemes is the absence of so-called means testing (looking at your income to determine eligibility) and conditionality. You do not have to be poor to receive GBI, and you do not have to work. It is given to every citizen, rich and poor, young and old, by the government as a matter of right.
The fullest explanation of this twenty-first-century vision of GBI, including arguments for and against, is presented by Philippe Van Parijs and Yannick Vanderborght in their book, Basic Income (2017).23 The Van Parijs-Vanderborght proposal is that countries around the world set their GBI payment at 25 percent of per capita GDP. Obviously, richer countries could afford higher GBI payments. Using 2015 data, they estimate the GBI payment at “$1,163 per month in the United States, $1,670 in Switzerland, $910 in the United Kingdom, [and] $180 in Brazil.”24 Using the Van Parijs-Vanderborght data and converting to 2018 dollars, their proposed GBI payment to Americans today amounts to $15,000 per year, per person, no strings attached.
Van Parijs and Vanderborght have one of the more extreme, but also simplified versions of GBI. They would pay GBI individually to every member of a household regardless of household size. Payments would be unconditional, so there would be no reduction in GBI if the recipient got a job or received a raise. Reduction of current government assistance when recipients get a job is one of the main criticisms aimed at social welfare programs today. This creates a welfare trap, where the recipient never gets a job for fear of losing benefits. This problem disappears under GBI because there is no means testing and no conditionality.
While Van Parijs and Vanderborght are European scholars, they bring a globalist perspective to the issue. They argue for GBI mainly on grounds of autonomy and human dignity defined in part as freedom of choice. GBI recipients can choose to work or not. They can also refuse what the authors call “lousy, poorly-paid jobs.” The two scholars do not expect such jobs to disappear; they expect wages and working conditions to improve as employers compete with GBI itself for workers.
Human dignity is not the only argument for GBI in their view. They also base their support on “the new wave of automation already on the way and predicted to keep swelling in the coming years: robotization, self-driving vehicles, a massive replacement of human-brain workers by computers.25 It enables the wealth and earning power of some—those who design, control, and are in the best position to exploit the new technologies—to reach new heights, while that of many more plummets.” They explain that minimum-wage laws will not protect the most vulnerable. By raising labor costs, minimum-wage laws simply accelerate the replacement of workers by robots.
Van Parijs and Vanderborght are not alone. At the World Government Summit in Dubai in February 2017, Tesla CEO Elon Musk said, “I think ultimately we will have to have some kind of universal basic income, I don’t think we are going to have a choice.”26 The San Francisco Chronicle reported on July 19, 2017, “Facebook co-founder Chris Hughes, venture capitalist Marc Andreessen and Y Combinator president Sam Altman have all said [GBI is] worth exploring.”27 In a Harvard University commencement speech on May 25, 2017, Facebook founder Mark Zuckerberg said, “Every generation expands its definition of equality ….28 Now it’s time to define a new social contract for our generation. We should have a society that measures progress not just by economics metrics like GDP, but by how many of us have a role we find meaningful. We should explore ideas like universal basic income to make sure everyone has a cushion to try new things.” On January 29, 2018, the mayor of Stockton, California, announced plans to begin a basic income pilot program consisting of a five-hundred-dollar-per-month payment to one hundred families below the poverty line. Based on results, that program could expand to as many as seventy-five thousand individuals in a city of three hundred thousand residents.
The idea for a UBI or GBI also enjoys wide and growing popular support. A poll commissioned by the Huffington Post in January 2014 reported only 35 percent of Americans supported GBI. That support grew to 48 percent by February 2018, according to a Gallup poll. This 37 percent increase in support by Americans for GBI in just four years during an economic expansion with steady job creation shows the appeal of GBI, independent of recession or downturns in the business cycle. These poll results reflect increasing support for GBI among millennials, now coming of age and entering the workforce. If these trends hold, which is likely, GBI will command the support of a majority of American adults in the run-up to the 2020 presidential election.
Applying the Van Parijs-Vanderborght formula to the United States, for a GBI consisting of 25 percent of GDP distributed on a per-
capita basis, amounts to a new U.S. government entitlement costing $4.8 trillion dollars per year at a time when the United States is already facing $1 trillion and greater annual budget deficits for years into the future, while the U.S. debt-to-GDP ratio is the highest in over seventy years, not including contingent liabilities for existing entitlements. Even a single year of such a program would push the U.S. debt-to-GDP ratio past 125 percent. Two years of the program would put the U.S. debt-to-GDP ratio at 140 percent, higher than any economy in the world except Greece, Lebanon, and Japan. The political feasibility of such a program given existing entitlements and debt burdens is nearly nil, despite growing popular support.
In response to these hurdles, politicians and public intellectuals from left and right are proposing modifications to the pure form of GBI to make it politically palatable. From the right, Charles Murray proposes a GBI of thirteen thousand dollars per year, with three thousand dollars automatically directed to the purchase of health-care insurance and the remaining ten thousand for use as the recipient sees fit.29 However, his GBI would be paid to adults only, not to all Americans, and would replace almost every existing entitlement, including Social Security, Medicare, Medicaid, welfare, farm subsidies, and corporate tax benefits. By eliminating all of these government handouts and the inefficient bureaucracies that administer them, Murray’s plan costs less than the existing income security system and reduces the U.S. budget deficit slightly. Murray makes a case similar to Van Parijs and Vanderborght, that his proposal is based on human freedom and dignity and empowers individuals to make personal choices rather than live lives confined by the narrow boundaries of existing entitlement programs. He also gives specific examples of how individuals with jobs who can save the GBI payment and invest it at market rates with compound returns can fund a retirement income greater than existing Social Security benefits. Murray’s succinct summary of his proposal is, “Here’s the money.30 Use it as you see fit. Your life is in your hands.”
Despite the financial and philosophical attractions of Murray’s proposal, it is also a political nonstarter. Politicians cannot even discuss let alone reach compromise on modest adjustments to existing entitlements that would slow America’s headlong charge into unsustainable debt. That those entitlements would be scrapped entirely, even with a GBI replacement, is inconceivable. Murray deserves praise for advancing the debate and showing what’s possible. Still, his solution is not a solution susceptible to political support.
The American left, in contrast to the European left, has taken a pragmatic approach to the issue. Opposition to GBI is potent and predictable. Movement conservatives, talk radio, and alt-right media will take to the barricades to denounce GBI as a handout to those too lazy to work and a free ride on a shrinking number of Americans who are working. The attack on GBI will include allegations that, far from providing a stable base from which to pursue work, it destroys incentives to work at all. While the GBI movement has received notice and commentary from think tanks and public intellectuals, it has gone largely unobserved by the right-wing electoral base precisely because of the assumed remoteness of its coming to pass. The minute GBI advances to a prominent place in the progressive policy agenda, the right will mobilize to destroy its chances. The left knows this.
Instead of a guaranteed basic income, the left will propose a government-guaranteed job—the acceptable face of universal income security. Once a job guarantee is in place, pay scales and benefits can be calibrated to provide a guaranteed basic income. The work itself can be nominal in substance and meager in productivity; that doesn’t matter. The work is merely an interface between public spending and guaranteed income. Yet the presence of a work requirement separates this program from the more radical basic income proposals of Van Parijs and Vanderborght, who insist that GBI be unconditional. The work requirement neuters objections based on free riding and laziness. As soon as the debate pivots away from bumper-sticker sentiments on laziness to more technical factors such as labor productivity, the public loses interest and the advocates win.
The only politically potent objections to a government-guaranteed job are the ongoing costs and the impact of those costs on deficits and debt-to-GDP ratios. It is precisely this point in the debate when progressive MMT factions rise to the defense of government-guaranteed jobs. If central bank balance sheets, government debt, and money supply are infinitely elastic, as MMT claims, then the cost of government-guaranteed jobs is a red herring and progressive advocates sweep their conservative opposition off the board.
In April 2018, MMT’s leading lights—Kelton, Tcherneva, L. Randall Wray, Scott Fullwiler, and Flavia Dantas—coauthored a manifesto titled “Public Service Employment: A Path to Full Employment.”31 The timing of their publication during the run-up to the 2018 midterm elections, and the 2020 presidential election campaign that began the morning after the midterms, was no coincidence. The public service employment plan was clearly intended as a touchstone for every progressive candidate for public office from Bernie Sanders on down. Obama won by offering Americans “hope and change.” Trump won by offering to “make American great again.” Bernie Sanders and his supporters are out to win in 2020 by offering Americans the one thing they care about most—a decent job at decent wages. With that, a host of social issues from family cohesion to student loans start to self-repair.
Kelton, Tcherneva, and their coauthors of the manifesto begin with a refutation of official employment numbers along the lines described above. They then turn to a succinct description of the PSE program:
We propose the creation of a Public Service Employment (PSE) program that would offer a job at a living wage to all who are ready and willing to work.32 This is a “job guarantee” program that provides employment to all who need work by drawing from the pool of the otherwise unemployed during recessions and shrinking as private sector employment recovers. Federally funded but with a decentralized administration, the PSE program would pay $15 per hour for both full- and part-time positions and offer benefits that include health insurance and childcare. In addition to guaranteeing access to work on projects that serve a public purpose, the PSE program establishes effective minimum standards for wages and benefits.
The political appeal of PSE compared to GBI is obvious. PSE effectively sets a national minimum wage of fifteen dollars per hour (which presumably would be adjusted for inflation through the legislation authorizing PSE). Technically, employers could pay less under existing minimum-wage legislation, but those employers would lose employees to the PSE jobs as individuals sought the higher wages available under PSE. This would force private employers to match the fifteen-dollar-per-hour rate, effectively putting a floor under wages. The same holds true for benefits.
The most clear-cut objection to PSE is the expense. Even the PSE proponents acknowledge that the impact on the U.S. budget deficit would be over 1.5 percent of GDP in the early years (2018–22) and over 1.0 percent of GDP in later years (2023–27). Using current GDP levels, PSE would increase the deficit by $300 billion per year in fiscal year 2019, and by higher amounts thereafter. This deficit hit would come on top of projected deficits in excess of $1 trillion per year, even without PSE.
This is where MMT fits in. It’s no coincidence that Kelton, Tcherneva, and their coauthors are also leading economists in the MMT school. A program such as PSE is exactly what MMT preaches—improve public welfare and don’t worry about deficits. PSE advocates point to a number of benefits that mitigate the deficit damage, including mystical “multiplier effects,” as well as improvements in state and local government finances since they would be able to tax payments going to PSE recipients. They also cite lower social costs related to health care, crime, and drug addiction as benefits from PSE, compared to the alternative of no work for millions of adults. PSE jobs would be focused on “projects that serve a public purpose,” presumably improvements in infrastructure and public amenities.
Even allowing that some of these benefits are real, it is likely most of
the benefits will prove illusory and costs will be greater than anticipated. The fact is, jobs are plentiful today even without PSE. The employment problem facing the millions of missing workers is the result of a mismatch of skills, family dysfunction, drug addiction, motivation, and the welfare trap of existing benefit programs. GBI might address some of those issues, but PSE does not. More to the point, the Reinhart-Rogoff research shows that the U.S. economy is past the point of no return when it comes to multiplier effects. Once the debt-to-GDP ratio exceeds 90 percent, additional spending impedes rather than stimulates growth. By adding $300 billion per year to the national debt, PSE makes the problem of secular stagnation worse. PSE offers work to those willing to work, but those willing to work can already find jobs. PSE is not a solution for unmotivated workers. It is a politically attractive way to raise the minimum wage and improve benefits through the back door. Despite this critique, it’s unwise to dismiss PSE as just another progressive chimera. PSE commands near majority support without a sustained campaign on its behalf. Once the 2020 presidential election cycle is under way, the campaigns of Bernie Sanders, Cory Booker, Elizabeth Warren, and other prominent Democrats will become a full-time platform to promote the positive aspects of PSE. Majority support will then emerge. Even the mercurial Donald Trump may become a supporter because he is not bound by the conventions of movement conservatives or mainstream Republicans. PSE could rank with FDR’s New Deal as the pinnacle of progressive policy in the past hundred years.
Yet there’s a hidden danger in PSE or GBI that even conservative critics and debt doomsters like Reinhart and Rogoff have elided. The danger is inflation. Given the headwinds to growth identified by the Reinhart-Rogoff thesis, the persistent secular stagnation highlighted by Larry Summers, and the millions of missing workers described by Eberstadt, the prospect of inflation seems remote. The Federal Reserve has been trying to create inflation for ten years without success. The Bank of Japan has been trying to create inflation for thirty years, also without success. These cases should lay to rest the central bankers’ mantra that inflation is caused by increases in the money supply; it’s not. Money is a necessary condition for inflation, but it’s not sufficient. Inflation is a psychological phenomenon driven by consumer behavior and expectations. The result of the dot-com meltdown in 2000, the mortgage meltdown in 2007, and financial panic in 2008 was to traumatize a generation of savers and investors. The effects of that trauma may last thirty years or more, as happened after the stock market crash of 1929 and the Great Depression that followed. A powerful catalyst is needed to overcome investor trauma and transform expectations about inflation. Either PSE or GBI could be that catalyst.
Aftermath Page 20