Because most philosophies that frown on reproduction don't survive.

Friday, June 13, 2008

Economics Thought Experiment for the Day

This is slated for a busy day, so my substantial post creation abilities are limited. However, I wanted to throw out for discussion a thought experiment that has been bumping around my head for a few weeks. (And yes, this is probably something of a political/economic Rorschach test.)

Picture, if you will, that in an effort to guarantee a minimum standard of living for all Americans, a law was passed guaranteeing a minimum income to every US citizen aged 18 or over. According to this law, if you are 18 or over, you will always make at least $24,000/yr. Hourly wages and work week are in no way fixed -- in fact, the minimum wage is abolished, but all your wages up to 2k/mo are collected as a payroll tax and sent to the Central Payroll Administration. Every citizen 18 or over, regardless of whether he or she works, receives a check for $1000 on the 1st and 15th of every month (generally conveniently deposited to the bank account of your choice.) If you work at a job that pays more than 24k, you receive the rest of your salary directly from your employer.

This means that single people are guaranteed an income of just over twice the poverty line, and couples have a combined income about twice the poverty line for a family of four.

My theory is, under such a system: unemployment would go up (a lot); mobility between economic classes would decrease; income inequality would increase and the productivity of those who did work would also increase. Why I can go into later if it seems non-obvious.

Thoughts?

12 comments:

Kevin said...

Rents would increase by a little over $24000 a year per bedroom.

Benjamin said...

That sounds very similar to Charles Murray's suggestion in "In Our Hands". This probably is something of Rorshach test, in that it helps to bring one's understanding of human nature to the fore. In general, I think all of your predictions would come to pass, except perhaps for the technical point that people who aren't interesting in working do not factor into the unemployment rate, but I nonetheless understand what you mean.

Perhaps the prediction that struck me most forcefully was that the productivity of those who did continue to work would go up. I could see myself desiring to make the most out of my work, since I do enjoy what I do, and I feel that my work contributes to the common good.

Plus, all the idlers and wasters wouldn't be around anymore.

Paul, just this guy, you know? said...

You're certainly right that this would serve as a huge disincentive to work. The marginal benefit of entering the workforce would be negligible.

Too, many jobs would go undone. Not every job is worth $24K/yr. We'd all be bagging our own groceries and suchlike. Who would work at any job that paid less (or even a little more) than $24K, if they can make $24K for doing nothing?

Anonymous said...

Business that employ unskilled labor would run out of workers real fast. It would be interesting if society could funnel these workers into productive channels rather than idleness. Unemployment is a measure of the amount of people who want to work that don't have jobs, so Unemployment would probably go down at first.

I don't understand why you think productivity of those who still work would increase.

Since there is more money out there, I think that inflation would probably go up for a number of everyday items (though commodities would probably be relatively static?). Retail and service sector would have to raise prices to cover the new wage demands.

The key point would be what you could convince those who decide to not work for wages would do. It could be a cultural boom, or they could decide to use their free time to volunteer or career training. The worst thing would be to encourage idleness.

Kevin said...

Average productivity per worker would certainly increase, but I'm not sure that individual productivity for those who continue to work would increase.

I mean, wouldn't my productivity go down if I had to do chores like empty the garbage can and vacuum around my cubicle?

Kevin said...

RV sales would go through the roof because of people trying to avoid the very high rents.

The price of RVs would increase to offset this.

The price of everything would go up. Inflation would be crazy.

I think landlords who owned property BEFORE the law change are the ones who would end up reaping most of the benefit in the long term.

Darwin said...

I should clarify:

People are correcting me accurately that it would be total percentage of people not working that would go up, not the "unemployment rate", which would probably be near zero at first.

I was thinking of the statistic of productivity, not the productivity of individual workers. In other words: there would be a massive incentive to use labor-saving devices rather than unskilled or lowskilled labor, and the people still working would be the ones in the most productive jobs.

A thought: I imagine there would be a non-negligable number of people working for less than 24k per year -- either out of boredom, or because you had to start at an "entry level" job in order to win promotion. However, those choosing to take low wage jobs would invariably be people who wanted to rise out of them quickly, so there'd be an incentive to structure jobs around skill acquisition and promotion.

And a lot of business models would have to change drasticly in order to work around a lack of "warm body" workers. (retail and service being his hard as someone observed)

TJR said...

I guess I am just an idealist. If someone gave me that much money a year for doing nothing, I would quit my current job and start working full time on creating new works of music, My output of recorded music would increase exponentially, plus I would be free to work full time on my music business and create a profitable enterprise with it. I would also be employing other musicians to work with me on live performance, writing, recording and releasing music. Not to mention the people I could employ to work promotions, street teams, coordinate tours, etc.

If anyone wants to give me this much money per year I promise to do good and productive things with it.

Kyle R. Cupp said...

I suspect we'd see a massive increase of bloggers.

DMinor said...

Darwin,

Interesting post, as usual. My first impressions:

- Other taxes would rise significantly. The movement of the money to and from workers every month nationwide would not be a trivial undertaking. Some government employee (actually probably large amounts of government employees) would have to supervise the collection and then redistribution of money. Those folks would need to be paid, as would their office overhead, etc.

-the amount distributed under this program would far exceed disbursal; other taxes would be necessary both to make up the difference and to operate all other government functions.

-the market would adjust the price of goods and services (you mention rents) to reflect the injection of money into the economy every month.
$24,000/year would soon become a negligible amount of money.

The economy would initially be very unsettled (probably yielding shortages of certain goods) until the price scheme took into account the "new" money, which would probably take a few years. In the end, the poverty line would eventually move approximately $24,000 up, landing both the unworking and working poor population back in the same predicament.

LogEyed Roman said...

Hmmmm. I don't think this would work out too well.

First of all, how about the number of people like tjr who would be willing to live on $24K per year if they did not work at all? With 200 square feet of garden, I could grow enough veggies (because I could add plenty of "staple" items like potatoes) to cut my food bills way down. I could also make yogurt and bread (both of which I have done in the past). I could cut my food bills to less than half what they are now.

I would not even have to own a car. No car or insurance and I could easily rent a pickup truck once a month for the "heavey" shopping I had to do.

And I believe a huge number of people would grow up who settled into a tolerable lifestyle and never felt sufficient motivation to switch from not working at all to full time work for just a few thousand dollars a year. In fact, in Los Angeles, if you had to have your own transportation to work, and didn't have the time to use the bus for your shopping and other errands, a huge number of people would not be able to afford to go to work for less than, say, $10-15 thousand a year over the base salary.

Will we have to make the $24 a baseline, and add subsidies for people living expensive locations?

And what's to stop me and millions of others from moving out to places like abandoned farms? I bet I could collect a hundred fellow deadbeats in a cult, move out to an abandoned farm with a dormitory in the garage, and we could live mighty fine on our $200,000 per month.

Lots and lots of drug addicts and later-state alcoholics would just settle in and suck it up.

There would be large communal groups of druggies renting "trash" houses and splitting the costs. They do this already, but give them this kind of money and it would balloon.

There are homeless, mentally ill, and generally clueless people who could easily be bilked out of their $24,000 per year; if they had a job they would quickly lose it, but if they never had to show up for work, many of them could be victimized indefinitely.

And regarding illegal aliens, could we keep them off these rolls? They can't keep them from voting in San Diego. Talk about an additional incenteive to illegally immigrate...

Finally, of course, there's the huge buraucracy required to administer all that complicated bookkeeping.

Of course, perhaps the next step would be to financy cheap housing near work for everyone; to subsidize private cars for those who needed it, to create a giant corps of caseworkers to investigate everybody and make sure they are not being ripped off or settling into drug or alcohol abuse, and also a hute corps of social workers to help people overcome their inertia, drug abuse, and victimization by others.

Oh wait, this kind of thing has not worked before, has it? Is taht because the budget was too small?

Forgive me for getting carried away, Darwin. As I have mentioned before, I am even more cynical and disillusioned than your mother.

Myron said...

The key question is, where does the money for this scheme come from? Sales tax? Income tax?

The argument that this will cause broad-based inflation fails, unless the government pays for the program by printing more money or taking on debt. If the program is revenue and money-supply neutral, shifting money from one place to another in the economy doesn't cause broad based inflation. There would, however, be deflation in the things that people who had the money used to buy with it, and inflation in the things that the people who now have the money will buy with it. The net effect will be a change in allocation of economic resources, but without rampant inflation and economic collapse or anything like that.

If it was easy to predict the effect of a change in economic incentives, centrally planned economies would work. The problem is that there is so much information packed into a the "price" number, predicting its direction is difficult. But here goes.

Assumption:
The source of income to fund $24,000 for people who are not working is some form of progressive taxation. One example would be a sales tax, which the rich pay a greater amount into than the poor by virtue of buying more stuff. Other alternatives I've heard are things like a "profit ceiling", or serious, serious estate taxes. But let's stick with a nice simple percentage sales tax, on all items in the economy so as not to distort purchases.

Effects:

1. Another source of revenue could be the dismantling of other income subsidy programs, and the redirection of disbursments from these programs into the "basic income guarantee" you're talking about. Given that these other programs are complex to administer since there are so many rules (and thus loopholes people can exploit) the overhead of administering this system may actually be less than the current system, and will not be as huge as you might think. After all, we can collect taxes from everyone, under a system with very complex rules, so why would we not be able to give money to everyone, under less complex rules, as well?

2. Consumption (spending on things for immediate use) would go up, investment would go down. This is because the limiting factor on consumption is often available cash flow (if people could buy more stuff, they would). Since the program is funded through progressive taxation, redistributing income from the high-earning groups (which invest much of it because they have too much to realistically spend on their own consumption), investment in new technology will go down somewhat. Prices of consumer goods would go up, shifting the allocation of economic resources towards the production of those consumer goods, and away from areas such as ultra-luxury goods and long-term research.

3. At the same time as available investment capital will go down, as people have pointed out, the capital requirements of business would go up, because low-skilled labour for tasks people don't want to do would become more expensive (supply would go down because people wouldn't be forced to do it). So, demand for investment capital up, supply down. Result: higher returns on investment required to attract the needed capital. Fewer business ideas "pass the cut" in terms of being able to achieve the required return. Corollary result: Shifting from consumption back towards investment, bringing the cost of capital down to somewhat higher levels than it had been, but not as high as immediately after the introduction of the basic income guarantee.

4. Fewer people cleaning toilets, more machines doing these tasks, and much, much more revenue to the makers of labour saving devices. In the end this brings the demand for labour down to the point where the price is reasonable, even with reduced supply. I don't see high-skilled workers doing these tasks, because in this world nobody really HAS to do anything distasteful, since they can leave the workforce freely, so they would be treated well by their employers.

5. Severe difficulty for unions. Since workers now have less reason to put up with bad working conditions, employers will not attempt to squeeze their workers in that particular way. Similarly, objection to labour saving technology or improved work processes will be less, because the consequences of losing your job to a machine are less stark than they are currently.

Effectively what you're looking at is a society with a "flatter" income scale, where more money is used for consumption rather than investment, that which is used for investment earns a higher return, and workers have greater freedom.

Is this a "better" or "worse" society? It appears freer and more equal, but what about that disincentive to work?

Well, it appears to me that it's a society where power is less concentrated. Fewer mega-projects to help the poor like the Gates foundation, but more opportunity for individuals to help the poor if they want (or do whatever else it is they decide to do). The incentive to work rather than game the system is, I think, a socially learned phenomenon. If it is socially unacceptable to be lazy, you won't do it even if you don't have to "work" in the traditional sense (after all, right now you could game the system too, if you wanted, but you don't do so). You may just find something that uses your natural talents, even if it doesn't pay well and wouldn't count as "real work" in today's society, but can get you social approval, or is something you value intrinsically. There would be a lot more writers, artists and thinkers. And a lot more stay at home parents, now that I think of it.

Much of this is assuming any shortfall in the basic income guarantee is funded by progressive ("tax the rich more heavily" rather than flat or regressive) taxation. Are you not assuming this is the case, which is why income inequality would increase, or is there something I'm not seeing (there probably is, which is why I ask).