Timothy Spurlin: Yang and UBI — possible even if not probable

Sunday, September 22, 2019 - 3:46pm

The 2020 presidential election is over a year away, and it’s already running at full speed. A field of more than 20 Democratic candidates has already been cut in half, and the remaining candidates are laser focused on setting themselves apart from the rest of the pack. The spectrum ranges from ultra-progressives such as Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt., to more moderate candidates like former Vice President Joe Biden and Mayor Pete Buttigieg of South Bend, Ind. The most recent Democratic debate saw the presidential hopefuls discuss the most pressing issues to voters for the 2020 election: health care, gun violence, immigration and trade.

The one thing all the candidates have in common: political experience in one form or another. Except, that is, for Andrew Yang.

Yang, an Ivy League lawyer turned entrepreneur then non-profit founder, is running on a central platform surrounding universal basic income, labeled by Yang and his campaign as the "Freedom Dividend." The Freedom Dividend is a proposed governmental social program that gives every U.S. adult $1,000 a month for the rest of their lives. On the surface, this might seem to be the first step toward a socialist utopia and not something feasible in America. However, when weighing the costs and benefits of such a program, it becomes more complicated than labeling it simply as “socialist” or “impossible.” 

The economics of Yang’s Freedom Dividend are anything but straightforward, as there are different estimates on the exact costs and benefits associated with his policy. According to Yang’s website, the cost of UBI will be offset through a variety of new taxes and reduction in government spending. First of all, Yang plans to fund the Freedom Dividend through something called a Value Added Tax, or VAT. This is a type of consumption tax  that taxes products whenever value is added, at any point in its supply chain — from production to the final sale. Almost all industrialized countries employ some form of VATs and it is most commonly among countries in the European Union (the only major industrial country who does not use a VAT is the U.S.). In addition to a new VAT, Yang says funding for UBI would come from a reduction in current government expenditures, new revenue generated by economic growth as a result of the policy and increasing taxes on things such as financial transactions, capital gains and carbon pollution. 

In reality, funding UBI may not be as simple as Yang makes it out to be. According to the UBI Center, a think tank researching universal basic income policies, when factoring in all forms of revenue generation that would occur on top of all the separate costs, Yang’s Freedom Dividend would add about $1.4 trillion to the budget deficit annually. The Tax Foundation published their own calculations that put the net effect at just under $1.5 trillion. That is not to say that implementing UBI necessarily increases the deficit. Those same reports conclude a version of UBI can be revenue neutral but only with different variables plugged in. For example, the VAT rate would have to be closer to 22 percent and the freedom dividend would have to be reduced from $1,000 to $750 — as opposed to Yang’s 10 percent proposal — according to the Tax Foundation. 

The sticker cost is not the only concern in regard to UBI. Other worries include that of inflation: If every American is receiving $1,000 guaranteed each month, won’t prices just increase at the same rate? In short, not really. Inflation tends to arise from the supply of money, or governments’ printing of new money, and Yang’s UBI plan is funded through “established” money (taxes on money already in circulation). We could expect prices to increase marginally, but only as a result of taxes increasing production costs. Yang’s main argument is that for the average consumer the net benefits would outweigh these marginal price increases. Another common concern is that cash transfer systems discourage people from working. However, $12,000 a year is not enough to live off of, so naturally people will still need to work. In fact, a report published by MIT researchers that looks at cash transfer programs in six developing countries found “no systematic evidence that cash transfer programs discourage work.” 

For those who claim UBI could never work in the United States and is only possible in wealthy Scandinavian countries, there is already one U.S. state that has been practicing UBI since the ‘70s: Alaska. Alaska set up the Alaskan Permanent Fund in 1976 which generates revenue from oil and mineral leases to fund an annual stipend. Not only do Alaskans now receive more than $2,000 a year, a working paper from the National Bureau of Economic Research shows that the implementation of Alaska’s UBI did not decrease work in the state — a clear reinforcement of UBI’s benefits.

There are other somewhat intangible, yet incredibly attractive, benefits to UBI as well. An example that Yang often speaks of is compensation for work that is currently undervalued, such as a stay-at-home mom taking care of young children or people putting more resources into creative projects. It could also help small businesses compete with larger retailers, something incredibly important to local communities and cultures. It’s impossible to calculate the exact economic benefit from these examples, but they are invaluable to our society. UBI is one way to support them.

Universal basic income is a mixed bag that comes with clear benefits and setbacks. While the economics show it is technically feasible, and has even been successful in the U.S., it seems Americans are still hesitant to embrace UBI with open arms. According to a recent Gallup poll, only 48 percent of Americans support UBI as a way to help Americans who lost their jobs because of advances in artificial intelligence, and the data suggests a major split between pro-UBI younger voters and anti-UBI older voters. Essentially, the argument over UBI boils down to political will. On one hand, the benefits it would generate both abstractly and in real terms are genuinely exciting and theoretically possible. On the other hand, Yang’s current plan would be a massive economic burden on the system as it stands today. Would the benefits be worth the increased debt? Or the increased taxes needed to make it revenue neutral? I’m not yet convinced it would be. 

Ultimately, I find myself torn on UBI and Yang as a candidate. He seems to be the Democratic Party’s ultimate wild card: breaking away from the traditional progressive policies supported by other candidates while also avoiding the typical anti-Trump rhetoric found in the rest of the field. Many people like to throw around the word “electability” when talking about who deserves support, but I’m cautious of such ideas. After all, an entrepreneur with no name recognition has no business being tied in the polls with the likes of Sen. Cory Booker, D-N.J., yet here we are. Even if Yang does not become the Democratic nominee, his ideas are refreshing and worth talking about. Whether you are a moderate Democrat, a strong progressive or a curious conservative, you should give Andrew Yang and UBI more attention.

Timothy Spurlin can be reached at timrspur@umich.edu.