Last Updated: September 23, 2019
I tend to see the same questions come up again and again regarding Andrew Yang’s $1,000 per month Freedom Dividend universal basic income (UBI) plan. Here are the answers.
2019–03–30: Won’t giving everyone money just cause inflation?
2019–03–30: Won’t people just quit their jobs?
2019–03–30: Won’t landlords just raise their rents?
2019–03–30: Isn’t the Freedom Dividend just socialism?
2019–03–30: Where is the money going to come from to pay for it?
2019–03–30: Won’t the VAT just be passed on to consumers?
2019–04–14: Are we really facing a crisis of robots taking jobs?
2019–04–14: Is $1,000 per month enough?
2019–08–10: Why should rich people get free money?
2019–09–23: Does It Dismantle the Safety Net?
Won’t giving everyone money just cause inflation?
Yang’s Answer: No. The Freedom Dividend is not adding new money to the economy.
The Real Answer: No. Inflation occurs when consumer spending outstrips production. In this scenario, buyers offer to pay more to compete for a limited number of goods.
A $1,000/month Freedom Dividend isn’t enough to push consumer spending beyond what the economy can handle. Instead, most businesses have the resources to profitably produce more of their products at current prices. The higher production would match the higher levels of consumer spending.
The fact that no new money is created is irrelevant. The Fed keeps prices stable using monetary policy. And they have plenty of room to raise interest rates in response to any inflationary pressure.
If the amount of the UBI were too high, it would push consumer spending beyond what the economy can productively respond to. The Fed would no longer be able to keep prices stable and there would be a period of inflation until the inflation brought consumer purchasing power back down to a level the economy could handle.
It’s important to remember that inflation is not about the amount of money “in the economy.” It’s about the amount of spending. More precisely, it’s about the level of consumer spending relative to the level of production of consumer goods.
See this blog post for more.
Won’t people just quit their jobs?
Yang’s Answer: No. $12,000 per year is not enough to quit your job.
The Real Answer: Of course some people will quit their jobs. When you hand people money, it changes their incentives. Because the Freedom Dividend gives people more freedom to spend their time in different ways, some will choose to do exactly that. This could mean people working at jobs that pay less or it could mean people spending time doing unpaid activities.
This is a good thing. If we have the resources to provide people with more freedom, then we absolutely should. Otherwise, we’re unnecessarily constraining people.
Don’t forget that the labor market is a market. If the market needs people to work, it will pay them to work. Because people will have more freedom, the Freedom Dividend will increase the amount we need to pay for less desirable jobs and decrease the amount we need to pay for more desirable jobs.
If we happen to set the UBI too high, then the reduction in labor may cause the productive capacity of the economy to fall below the level of consumer spending. This would result in a period of inflation until the purchasing power of the UBI fell back down to the level necessary to incentivize people to work again. But $1,000 per month is a conservative amount that poses no danger of disrupting the labor market to such an extreme.
Won’t landlords just raise their rents?
Yang’s Answer: No. Competition will keep prices down.
The Real Answer: No. The opposite will happen. Most landlords will lower their rents. Real estate prices will decrease.
There are a few interesting effects here. The first effect is just the same as the general effect on prices that we’ll see in the economy. More people will have money to buy cheaper housing, so that makes it profitable for developers and landlords to provide cheaper housing. This is the housing that previously-homeless people will have the money to pay for. See Won’t giving everyone money just cause inflation?
The second, arguably stronger effect is due to the fact that UBI is an income source that’s not tied to a specific location. Because money stretches further in cheaper areas, UBI increases quality of life in cheaper areas more than it increases quality of life in expensive areas. This creates an incentive for people to move away from places that have higher rents.
By giving people more places to live, UBI does the equivalent of flooding the market with more housing. People will have more choice about where to live and more of their options will be cheaper. Landlords will be forced to compete for rent and sellers will be forced to compete for buyers. This will make housing cheaper in general.
Certain specific rents might increase slightly in places that nobody wanted to live before. But this rent increase merely reflects the fact that everyone is better off.
See this article for a more complete explanation.
Isn’t the Freedom Dividend just socialism?
Yang’s Answer: No. It’s capitalism that doesn’t start at zero.
The Real Answer: Call it what you want. The market won’t function unless consumers have spending money. If you don’t like the idea of a UBI, how would you suggest consumers get spending money? Jobs? So you want the government to interfere with the labor market to force money to consumers?
UBI is the only way to get the free market to operate efficiently. A UBI combined with an efficient labor market means we don’t have to force people to do useless work as an excuse to pay them. $1,000 per month is probably not enough to get us all the way there, but it’s a start.
See this blog post for more.
Socialists will probably be offended if you call the Freedom Dividend socialism. Typically, socialism is about sharing the means of production. The Freedom Dividend is about giving people access to the means of consumption (i.e. money).
Where is the money going to come from to pay for it?
Yang’s Answer: We pay for it using a value-added tax that takes a “slice” of every Amazon & Google transaction.
The Real Answer: You’re asking the wrong question. What matters isn’t where you can get the money from. What matters is whether the money has somewhere to go. We can hand people as much money as we want as long as they have something to spend it on. But when the economy runs out of room for the spending, we’ll see inflation.
Taking the UBI money from another part of the economy isn’t magically going to create room for additional consumer spending. Either the economy has the productive capacity to respond to the additional consumer spending or it doesn’t.
From an economic theory perspective, taxes aren’t what make UBI possible. A properly-implemented UBI has no tax associated with it.
See this blog post for more.
Andrew Yang’s VAT does help make the Freedom Dividend possible, but only in the political sense. It’s a lot easier to get revenue-neutral policies passed through the legislature. If you’re going to have a tax anyway, a VAT might be one of your least disruptive options.
Also, it’s fun to tell people a story about how you’re sticking it to the Amazons and Googles of the world.
Won’t the VAT just be passed on to consumers?
Yang’s Answer: We will exempt certain consumer staples from the VAT.
The Real Answer: No. Regardless of whether certain goods are exempted, the Fed’s job is to keep average consumer prices stable. They do this using monetary policy. Consumers will not bear any burden from the tax.
As far as the tax burden is concerned, a VAT is equivalent to a sales tax. We all know that a sales tax is regressive. VAT is regressive too. But that all goes out the window when the VAT (or sales tax) is being enforced across the entire economy. Because the effect on consumer prices is zero, the regressive effect is also zero.
Some people might talk to you about tax incidence and start making various price predictions based on information about targeted or regional VATs that have been implemented in other places. These people are well-intentioned but misguided. So long as monetary policy is working properly, it will cancel out the consumer burden of an economy-wide VAT.
A caveat is that the consumer price stability is not necessarily uniform. Even if average prices remain the same, some goods may become more expensive while others become cheaper. By exempting certain goods, Andrew Yang’s VAT influences which prices will go up and which will go down.
I have heard people argue that monetary policy might fail to respond properly to a newly-implemented VAT. The result would be a permanent increase in consumer prices. But I have yet to see any evidence suggesting that this would happen in real life.
The VAT does cause a problem though. Because an economy-wide VAT is a tax on production, it creates a disincentive to produce. This decreases the highest possible level of UBI that the economy can sustain. But it shouldn’t decrease that level to anywhere near $1,000 per month, so the Freedom Dividend should be fine.
This blog post explains the problem in more depth.
Are we really facing a crisis of robots taking jobs?
Yang’s Answer: We are in the third inning of the greatest economic and technological transformation in the history of the country.
The Real Answer: No. Not really. The politics surrounding the current wave of automation merely highlight the fact that jobs have always been the wrong way to get spending money to people.
An efficient labor market does not provide consumers with enough income to reap the full benefit of what the economy has to offer them. But that’s OK. The labor market is a market for getting people to do things. It’s not supposed to be a tool for funneling money to consumers.
Nevertheless, we use it that way. Our society has gotten really good at generating make-work. It’s baked into our culture and into our laws. To the extent that we’re creating jobs to push money to workers, we’re not creating those jobs because there’s actually work that needs doing.
We’ve been getting jobs wrong for hundreds of years. UBI gives us an opportunity to get the labor market right. A high enough UBI will allow us to live in a world where jobs only exist because there’s work that needs doing. Every task automated and every job eliminated will be cause for celebration.
Despite Yang’s political framing, UBI isn’t a response to some looming robot takeover. It’s the other way around. Providing people money independent of the labor market will finally allow us to eliminate the jobs we should have been eliminating for centuries. We won’t have to feel guilty anymore about letting robots do the work that we don’t want to do anyway.
A Freedom Dividend of only $1,000 per month won’t take us all the way there, but it’s a start.
Is $1,000 per month enough?
Yang’s Answer: On its own, the Freedom Dividend brings everyone almost up to the poverty line.
The Real Answer: It depends what you mean by “enough.” Enough for what? Is it enough to bring everyone up to the poverty line? Sure. Is it enough to replace wages from a job that paid more than $12,000 per year? Certainly not.
The question we should be asking is what’s the point of UBI? What’s the problem that UBI solves? Is the purpose of to replace income from lost jobs? Is it to lift everyone out of poverty? I don’t think either of these is the right answer.
Fundamentally, UBI solves the problem of how to get spending money into the hands of consumers. Why should the amount ever be less than what we can afford? The answer to this question is determined by the level of consumer spending can the economy handle. It’s hard to say what that level is, but a UBI of $1,000 per month is fairly conservative.
To ensure that the amount of the UBI payout is enough to maximize people’s prosperity, we would want the policy to be implemented as an algorithm that automatically adjusts the amount based on the economy’s sustainable productive capacity. Under such an algorithm, the amount of the payout would normally increase over time.
See this blog post for more of an explanation.
Why should rich people get free money?
Yang’s Answer: If everyone gets the money, then it feels more like a right of citizenship. This eliminates any stigma associated with taking the money.
The Real Answer: Everything Yang says is true. But those aren’t the most important reasons why we should give the Freedom Dividend to rich people. The problem is that if we place restrictions on who gets the money, then some people who need it will inevitably fall through the cracks.
Furthermore, the government will save money in their budget any time they fail to provide the benefit to someone who qualifies. This creates a perverse incentive for the government to let people fall through the cracks. The people who need the money the most are the ones who are least equipped to navigate the system.
If we really want a targeted income program, we can use taxes to achieve the exact same distributional effect. This means we give everyone the same basic income and then tax it back from the people who shouldn’t have it. Now, if the government fails to apply the rules correctly, they’ve only failed to collect a tax. Not a huge deal.
Does It Dismantle the Safety Net?
Yang’s Answer: No. We’re not touching any existing welfare programs. But, if you opt in to the Freedom Dividend, you will be forgoing certain cash-like benefits.
The Real Answer: Many people will choose the Freedom Dividend, thereby disqualifying themselves for SNAP, TANF, and similar programs. It’s reasonable to frame this as a partial dismantling of the safety net. But Yang’s framing is also valid. Take your pick depending on whether you want to paint the Freedom Dividend in a favorable light.
What matters isn’t the political framing. What matters is the actual effect it has on people. The net effect of the Freedom Dividend is that it only adds to what people are currently getting. It doesn’t take anything away.
People who disqualify themselves from SNAP & friends will receive less of a boost from the Freedom Dividend. This is indeed a flaw in the plan. But the Freedom Dividend is still far more universal than Social Security. And most people would insist that having Social Security is better than not having Social Security. I think we’ll end up feeling the same way about the Freedom Dividend.
And yes, the Freedom Dividend does stack with Social Security.
Shout outs to Bethany Burum, Zack Sargent, Tommy AKA TsBandit, and the Massachusetts Yang Gang for feedback on this article.