Niklas Blanchard calls for a basic income

Niklas Blanchard points me to his solutions for wealth inequality. He makes several good points:

It is clear that in order to deal with poverty through cash transfer, the system is going to have to be designed in a way that, first and foremost, aligns incentives with goals. However, it is important that this program be a program that allows individuals to succeed by imposing self-binding constraints. That is why I advocate what could be termed a “graduated income transfer system”. Under this system, there is a (and small) cash grant, guaranteed income, if prefer. This is given to everyone under a certain threshold regardless of their intentions. However, to move into the more generous system of cash transfers, individuals (or families) will be required to sit down with a DHHS financial planner to create goal thresholds. Payment of subsequent tranches of income support will be contingent upon successful completion of these goals. While there may be some “automatic” goals that make it in the list, the idea is for people to adapt the goals to their personal situation. In this way, we aren’t so much imposing the heavy hand of the nanny state upon people, but rather creating a system whereby people who suffer from hyperbolic discounting can credibly commit to a self-binding strategy. Nearly every successful petro-state has elected to lock up the rewards away from people and politics, so they will not be plundered.

This is the gem that Noah missed in his post earlier today. The gap between education and actual financial planning, as I noted, is vast. My only quibble with Niklas is I would appreciate an option where local firms can provide an alternative to DHHS planners. A centralized bureaucracy won’t adapt to local needs nearly as well as, say, a planner at the local Walmart. 

The tenor of his argument is institution of a strong basic income replacing all other welfare programs:

From the outset I want to make clear; my first-choice “solution” to the issue of addressing the needs of the poor from a income support standpoint is simple cash transfers through a EITC-style tax rebate scheme fully-funded by a progressive consumption tax. For everything. That means no food stamps, no rent control, no housing assistance, no cell phone program, no child care assistance. Nothing but a periodic cash endowment to supplement income. This cash grant would fade over a wide income range, as to minimize marginal tax rates at the low end. Once the cash is dispensed, people can do with it what they will, and post hoc complaints. The outcome of peoples’ actions after the endowment is completely upon them. The end.

And with this, I strongly disagree. First, let me clarify. In my opinion, the argument for a basic income rather than government spending is the efficiency of market forces. If transfers are provided in full liquidity, proponents argue, the market will optimally allocate the needed services, be it Internet, education, healthcare, or food. I’m usually in favor of this approach. For example, I’m not particularly happy about subsidizing the solar energy industry (classical example being Solyndra). I’d rather have the government price carbon including all external costs which would force the market, not a few bureaucrats, to pick the best alternative. Indeed, the market-oriented carbon tax is six times more efficient than Obama’s CAFE standards.

But Niklas also notes that the poor are not very good at spending their money. This sounds paternalistic, but reaches for a sad truth. When families earning under $15,000 spend almost a tenth of their income on lottery tickets, something is deeply wrong. A nonzero portion of the basic income, further, would be directed towards cigarettes, alcohol, and car loans. 

If your goal is to provide a better life for all at this moment, a basic income is smart. However, it will never level the playing field between kids born in poverty and affluence (nothing will, but this won’t even make a dent). Government provision of education, books, technology, and healthcare all have large, external benefits. So, to the end that our goal is a sustainably fair society, a basic income will not help.

The negative income tax also reduces the hours worked, even against our current welfare state. I’m always skeptical of conservative claims that welfare fails to align incentives with desired goals, but the evidence against basic income seems pretty clear to me. Indeed, there’s no reason to believe a basic income would be any simpler than our welfare state. Sure, our transfer system has been gouged by vested interests and lobbyists, but there’s no reason to believe a basic income system won’t be subject to the same decay. In economic debates, our tax code sounds rather simple and progressive, but in reality it’s table of contents is longer than the Bible and our own Treasury Secretary can’t do his own taxes. 

Basic income sounds like a beautiful idea in theory, but fails to align incentives with stated goals. These, of course, may differ. As a market progressive (Miles Kimball might say supply-side liberal), I want widespread access to capital markets, high investment in human capital, and socialization of risk. 

I have yet to be convinced a negative income tax can achieve any of the above.