Universal Basic Income Made Easy: Applied Markonomics101

Universal Basic Income Made Easy: Applied Markonomics101.

One of the more controversial topics on various internet sites, and one threatening to go Full Mainstream, is a financial engineering plan commonly known as Universal Basic Income” (UBI).  While there are many hoped for “societal benefits” from the implementation of UBI, this analysis doesn’t consider them for the moment.  It focuses only on Dollars and Cents.

From the First Law Of Markonomics101:  

“It’s Always About the Money, NOT the Principle”.
To describe anything as “Priceless” is to not understand the basic function of Money, which is to quantify the RELATIVE and ABSOLUTE value of everything by a common denominator: the Dollar, the Euro, Gold, or even Bitcoin.  NOTHING is “Priceless”, even a human life.  Courts and juries routinely assign a Dollar value to injuries, death, and even emotional “pain”.   (https://markonomics101.com/2018/07/08/the-9-laws-of-markonomics/)

What is Universal Basic Income?

Universal Basic Income is a monthly allowance paid in cash to every resident of a country.  UBI in the United States, as currently conceived, seeks to provide each Resident with $1,000 per month or $12,000 per year.

 

 

The Inescapable Math.

The United States has 325 Million residents.  If each received a UBI of $12,000, that would require the creation and distribution of $3.9 Trillion PER YEAR (325 Million times $12,000).

Compare this to:

U.S. Money supply M1 of $3.7 Trillion (https://www.federalreserve.gov/releases/h6/current/default.htm).  (M1 is the total value of currency in circulation plus checking accounts.)

Total US Government National Debt of $21.5 Trillion.
Current Annual Gross Domestic Product of $20.5 Trillion.
Annual Federal Taxes Collected of $3.4 Trillion.
Annual Cost of Medicare/Medicaid ($1.09 Trillion) plus Social Security ($.98 Trillion) plus Military ($.62 Trillion) equaling $2.69 Trillion in total (http://www.usdebtclock.org/).

A UBI of $3.9 Trillion per year would exceed the size of the number 4 Economy in the World, Germany.  Only the U.S., Chinese, and Japanese economies would be larger (https://www.investopedia.com/insights/worlds-top-economies/).

Who Pays?

If UBI is enacted, it would certainly cost much more than the $3.9 Trillion cited above, since such an undertaking would require the establishment of an enormous bureaucracy.  The 3 largest components of spending, Medicare/Medicaid, Social Security, and Military, add up to substantially less than UBI and already take into account administrative costs.  For now, let’s use 15% of the program cash flows as the administrative cost.  Whether it turns out to be higher or lower doesn’t matter.  What does matter is this ambitious plan will entail substantial administrative expenses that need to be considered.

When we factor in the administration, UBI’s costs will increase from the initial paper transfer of $3.9 Trillion by the administration cost of $585 Billion (15% times $3.9 Trillion) for an annual total of $4.485 Trillion.  Now that we’ve defined the enormity of the cost, the important question becomes: HOW to pay for it and by WHOM?

If all 325 Million residents are obligated to pay, then each would owe $13,800 ($4.485 Trillion/325 Million) versus the $12,000 they received.  The average resident must lose because now they are also paying for the new bureaucracy.

If all 120 Million Taxpayers are obligated to pay, then each would pay an additional $37,000 in taxes versus the $12,000 they received. Their tax obligations would increase from $3.4 Trillion to $7.9 Trillion ($3.4 Trillion plus $4.485 Trillion), an increase of 132%.  Some taxpayers will be put in marginal income tax brackets of greater than 100%,  a level at which additional hours of work return less than the incremental taxes owed.

If UBI is financed with borrowed money, the National Debt will DOUBLE in less than 4 years.  The deficit, now running at $800 Billion annually, would explode to  $5.3 Trillion ($800 Billion plus $4.485 Trillion) in the first year alone.   The largest holders of National Debt are the public through their purchases of Treasury Bills and Treasury Bonds and various agencies of the Federal Government (https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124), such as the Social Security Administration.  In other words, “We The People” will be Borrowing From, AND Lending To, “We The People”.

If UBI is financed with NEW printed money, M1 will double in less than 10 months.  Everyone will have more dollars but each will be worth less and less as the endless devaluations begin.  Since this new cash stream does NOT result from new goods being produced, the number of dollars needed to purchase the same number of goods goes up.

 

Hyperinflation is therefore inevitable.  In Venezuela, now suffering from hyperinflation, the value of the Bolivar is less than that of toilet paper.  Each roll goes for 2.6 million Bolivars.  Essentials like food, require mountains of paper for even the smallest supply.   For more on how Venezuela has been affected by “too many dollars chasing too few goods”, please see (https://www.zerohedge.com/news/2018-08-27/10-shocking-photos-show-value-gold-currency-devaluations).

 

 

 

The mere creation of a cash stream cannot, nor will not, create a single job, produce a single widget, nor “Create Prosperity”.  UBI moves paper but does NOT change what that paper buys.  It puts money in one pocket, takes from a different pocket and has no “NET” discernible beneficial effect.   UBI is deceptively appealing to prospective Recipients who anticipate a well-defined “Freebie” ($12,000) without considering the substantial “Price Tag” on themselves and Society.

 

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Comments (3)

  1. B. Dar
    Aug 30, 2018 at 7:47 pm

    Your latest article on “UBI” is again very interesting, easy to understand and timely. Everybody dreams of making a lot of $$$ with as little effort as possible, or preferably with no effort at all. Of course, there are those, who insist on working hard for living – bless them all!
    Keep your thoughts coming, they are fresh and interesting to explore!

    • Oct 13, 2018 at 4:13 am

      People seem to think UBI is some magic. Once the numbers are revealed the utter stupidity is revealed.

  2. Rui Lourenço
    Mar 07, 2019 at 8:40 am

    This post seems very misleading and excludes any real arguments for UBI.

    Most UBI proposals also propose a non-progressive tax for everyone (Either sales or income tax), under those conditions, UBI is MATHEMATICALLY equivalent to a progressive tax rate with negative taxes for the lower brackets. Which is something the US ALREADY HAS. In this form, UBI is simply a restructuring and simplification of the tax code. Instead of overall confusion over how many taxes you need to pay, everyone pays the same income tax as a percentage, and receives the same amount of money, as a flat amount. It is therefore, and quite simply, a natural redistribution of wealth that takes into account the very real Engel’s law (that the more you earn, the lesser percentage of your income you use for basic needs) and helps reduce poverty. If this policy is followed by a simplification of all social nets and incentives, so that all subsidies are encapsulated into the UBI (giving the same to everyone) and all [income/sales] taxes are encapsulated into a single, easy to understand percentage. This should overall REDUCE administrative costs. Specially if the bloated, ineffective, and overall quite stupid Social Security Service was abolished.

    Of course this will never get done. Career politicians only need a portion of the votes to get re-elected, so benefiting everyone equally is never as good as benefiting a group of people (farmers, students (and their parents), the poor, the rich, etc) a little more. Specially if it comes with the publicity of a separate bill and agenda.

    UBI, in my opinion, would also come with benefits in terms of removing any unclear incentives. Technically it might incentivize people not to work (not generally a problem in any tests. People still earn more if they work, so people still work), yet subsidies and individual taxes far often have very strange consequences that would be excluded from a UBI+flat tax system. The clarity of receiving a regular check from the government regularly would also give employees much more freedom of negotiating, as that money would be guaranteed and already present, with all the bureaucracy accounted for. If quitting benefited you, you could. While in the current tax system you’d have to wait until the end of the year to get your check, making it impossible for many people to negotiate with their bosses. This lack of negotiating power no doubt causes a lot of unequal contracts, where people aren’t happy in their position yet can’t afford to change jobs, as missing a pay check is not something they can ever afford.

    In the same vain, UBI could make certain jobs make more financial sense. Artists, entrepreneurs and other positions often need time to produce content. Time where they’re not earning anything. Technically those people would be unemployed, and have access to all those benefits, yet not only are those efforts unequally distributed towards farmers and the population of states that are actually important to win an election, they only come at regular intervals at the end of the year. If these checks could support a solo enterprise until the time it took to build their project, we’d have a lot more artists and entrepeneurs, and society would benefit much more from them, than from the mountains of employees working 1 hour of the 40 they’re paid for in an office job where they do work that could be automated by a spread sheet. If a job could be automated, it should be. And we should incentivize other areas of advancement where human skills are still required. Like arts, sciences and new endeavors much more than blue and white colour jobs. The safety provided by a monthly or fortnightly check could generate that. Living market value to promote automation as it becomes cheaper is all well and good, yet there’s a lot of inertia in the system that slows down the process. Companies suffer penalties from firing their employees because employees need some security in order to live comfortably, yet employees that might want to leave are unable to take that step because the safety nets in place only apply to the very poor, and take bureaucracy and time to put in place if you were to suddenly take the leap into technically becoming very poor. With UBI, the checks (hopefully bank transfers, checks are a very outdated and weird way to handle transactions) were already coming, you were just paying more in taxes than you were getting from UBI.

    It doesn’t raise inflation or anything of the sort because it’s literally working like a regular tax bracket works. It just makes a lot more sense and produces different incentives, specially if it’s implementation comes with a bump in the amount of the UBI, compared with the equivalent tax bracket harnessed from a removal of most other benefits. One tax, one benefit. Of course other taxes should be levied to take into account people that make most of their money from sources other than income but those two should be simple and straight forward and paid by everyone equally, even if the people would be affected disproportionally by them.

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