Which of these men has it right?

Andrew Yang’s candidacy for President has generated an amplified interest in the idea of a Universal Basic Income. Because Yang is running as a Democrat, his UBI proposal is being marketed to “Leftist-Progressives” as a compassionate, innovative policy proposal that would protect victims of unemployment at the same time it “makes everyone happier.”

I happen to be one of those Leftist-Progressives who — if I didn’t know as much about economics as I do — would probably feel attracted to Yang’s UBI proposal, since it appears on the surface to be a genuine effort to help The Poor & Working Class. But I do know quite a bit about this topic and that is why I am firmly opposed to any version of the UBI non-solution.

There are negative and positive reasons why I’m no fan of UBI:

The UBI “solution” is conceptually flawed, for it is based on a fundamental misunderstanding of the impact that mass distributions of money (to everyone) will ultimately have on the purchasing power of the gift recipients. There is a better way for governments to deal with the problem of unemployment and that is to actually solve the problem for all time. Of all the candidates running for President, it is Bernie Sanders, not Andrew Yang, who proposes the best means of achieving that goal.

Money Illusion vs. The REAL Economy

The most worrisome aspect of Yang’s proposal is his failure to understand why economists make a distinction between money ‘wealth’ and real wealth. An excerpt from Why Rich People Should Insist On A Full-Employment Economy:

…imagine what it would be like if everyone were to somehow become extremely rich in dollars one day and then we all decided to retire and live off of our accumulated “wealth.” We’d all then be able to share the same great experience of luxury living, right? Well, actually no. Instead, what every one of these wealthy retirees would soon discover is that none of them actually possesses any real wealth at all (aside from the material possessions they currently possess). Why? Because no one would be out there producing anything of value that they could buy with their saved dollars (pounds/euros). The only reason why money has value in our eyes is because it gives us a claim on the productive efforts of others. How wealthy you actually are depends more on what others are doing than it does on your personal accumulations of paper notes. Just ponder that for a moment. You think you want money so badly…but what you really want ultimately is people out there investing themselves in economic activities that will make your money actually worth something. What you truly want is a very productive economy, one that is fully engaged in creating real things that you hope your money accumulations will obtain for you. So if one of your goals in this life is to become increasingly wealthy in real terms, then you need to be concerned about more than just the number of disposable dollars you are able to get your hands on. You absolutely must be concerned about the productive status of The REAL Economy, as well.

The single most important failing of the UBI concept is it’s foundational assumption that distributions of ‘money wealth’ to everyone will somehow magically cause a concomitant increase in real wealth to occur, as if by magic.

Since the government is supposed to do nothing other than hand out gifts of free money to people, what process/mechanism is it that Yang is relying on to turn these gifts into real jobs? Answer: the Marketplace.

Andrew, Andrew…

Markets And Prices

Andrew Yang appears to not understand how and why The Marketplace will always defeat any simplistic attempt to improve the economic welfare of everybody by simply giving everybody more money wealth.

Again, from Why Rich People Should Insist On A Full-Employment Economy:

Any competent economist will tell you that the marketplace determines prices by auctioning the scarcest goods/services to the highest bidders. The auction process that occurs in most markets is different from the one we see at Sotheby’s, but the results are the same. The essential element driving the process is the freedom sellers have to charge the highest price for their products that they think the market will bear. With extraordinarily few exceptions, this is precisely what sellers in most markets always do. If sellers become aware that — for whatever reason — supplies of the product they sell will soon be in short supply relative to demand, they will immediately raise their prices. They understand that, given the shortage expected, many people will be willing to pay a higher price for the product rather than do without. How high will the price ultimately go? That is what the auctioning process ultimately determines. A seller starts off by trying to guess the highest price she can charge while still being able to sell all of her products. If her guess is too high, product will remain on the shelf unpurchased. But if instead she finds her products are ‘flying off the shelf’ at the original price she set, she will increase her prices further to see what happens. If they are still flying off the shelf, she will proceed to raise them again. The price she charges will continue to go up until sales slow to a trickle and product remains on her shelves unpurchased. When this happens, she will then lower her price just enough to move the product off the shelf, but no lower. Equilibrium — for the moment — is achieved. In this “Markets Method” of auction, sellers try to guess the winning high bid in advance, ask for it up front, and then allow potential buyers some time to respond. Potential buyers only participate in the auction if they believe they can afford the winning high bid that the seller/auctioneer has already set. The result? The scarcest luxuries always end up in the hands of the richest people. Sellers are always going to do their best to price everyone else out of the market. It is important for us to understand that in a free-market economy, prices are always going to go as high as they can possibly go, until a price is finally reached where no one remains who is willing/able to buy at the price requested. In any market, this ‘highest price’ achieved is always determined by the quantity of buyers who happen to have sufficient disposable dollars (and the will) to buy all that is offered for sale at the price requested.

Thus, if everyone is given more disposable dollars to spend, we can know with 100% certainty that sellers are going to increase their prices up to the point when all those extra dollars have been handed over to the sellers for the things they desire (which have not increased in quantity overnight). In other words, a UBI is certain to cause inflation.

Now it is true that, in the depths of a depression, the inflation would not be such a big deal, because there is high unemployment at such times. In an economy that is mired in a deep recession, the price increases would be largely temporary: factory orders would increase, then hiring, and then increased quantities of ‘stuff’ would be brought to market, forcing prices down again.

But in an economy where the unemployment rate is already near historical lows, the higher prices would not lead to significantly higher levels of output because almost everyone who can work is already working.

In this scenario, most of the extra money people would get from Yang’s Freedom Dividend would be largely ‘burned up’ in purely inflationary price hikes. Which means no significant increase in real wealth would be produced…or consumed.

What ultimately determines whether or not a UBI would give its recipients an actual boost in their purchasing power depends upon the current state of the macro economy. Is it stuck in a recession or experiencing the peak of a cyclical boom?

It’s quite true that inflation is not the horrible Monster it is made out to be, but when an agenda is virtually guaranteed to mostly just inflate prices, it needs to be tossed aside while one looks for a better approach.

The good news is we don’t need to look very far for a better approach to fixing the problem of unemployment.

Bernie Sanders has proposed that we take on the problem of unemployment directly, i.e., by using the powers of government to create the new jobs we need to replace the ones that we know will be destroyed by Artificial Intelligence.

What is Yang’s Problem With “The Government?”

Yang’s enthusiasm for the UBI idea arises in part from his foundational belief that The Government should be restricted to a very minor role in the economy.

Which is to say, he has been brainwashed by decades of Republican & Libertarian propaganda into perceiving The Government as some kind of enemy of economic progress & prosperity. It is a perception that persists within the Corporate Elite in spite of the fact that it is flatly contradicted by the facts of recorded economic history.

The truth is that, over the past three centuries of economic development — against a backdrop of rapid technological change — the Private Sector has demonstrated that it is not able to create enough new jobs for everyone.

It’s simple, really…the immediate consequence of businesses exploiting new labor-saving technologies is a Private Sector that does not need all of the labor available in the workforce to produce all of the stuff it is able to sell to customers.

This much of the equation Yang understands quite well. But then, he nevertheless seems to want to rely on this same job-killing Private Sector to create all the jobs that are needed by society going forward.

It appears years of exposure to anti-government propaganda have made Yang oblivious to one of the most important truths of our economic existence, which is that Governments are — and ought to be—major sources of both [real] wealth creation & job creation.

Once Yang is able to wrap his head around this not-in-dispute nugget of economic truth, it should become increasingly clear to him that one of the primary benefits to society of labor-efficiency gains within the Private Sector is the opportunity it gives the Public Sector to employ more citizens in the creation/production of other forms of real wealth.

More. Total. Wealth. Produced. Through the combined efforts of both the Private and Public Sectors.

Highways and sewers and police forces and fire brigades and schools: all examples of real wealth produced by governments that absolutely does directly contribute to an improvement in the nation’s standard-of-living.

And yet, government-haters tell us a different story, one that has always relied upon the their ability to mislead via clever obfuscations & conflations. It starts with their constant insinuation that almost all government spending is a pure waste.

It’s an assumption that has a lot of currency within the business community, not because there is any compelling evidence to support it, but only because it is repeated endlessly by sycophants of the rich and powerful, most of whom are politicians, lawyers, economists, and media personalities.

On top of this specious claim they then loudly assert that if The Government were to stop wasting money on its own ‘non-productive’ efforts, and give that money to rich people instead (tax cuts), the result would be a wonderful investment boom. And yes, all economists of every stripe understand that Investment is THE key to long-run economic growth.

The only problem with this misleading story is that it relies on an intentional conflation of two very different kinds of ‘investment’ that modern economies experience: 1) economic investments, and 2) financial investments. And only one of these — economic investments — is the kind that actually provides real economic benefits to all the members of the tribe.

Economic Investments vs. Financial Investments

How is an economic investment different from a financial investment? From Why Rich People Should Insist On A Full-Employment Economy:

..

Economic investments: Economic Investments are purchases of capital goods or other economic resources by firms or governments that are used to either produce more capital goods or more final goods that consumers find desirable. Generally speaking, economic investments either increase output or expand the supply-side’s productive capacity. They increase the amount of real wealth produced, either in the short term, or a few years down the road. That is what happens when firms purchase machinery/equipment to improve productive efficiency or when they spend money on the construction of new stores or factories or on the salaries of new employees. However, not all firm expenditures are economic investments, e.g., money spent by firms on advertising that either (a) misleads consumers or (b) does nothing to help them with their purchasing decisions cannot be construed to be an economic investment. And notice also that true economic investments occur when governments increase their spending on infrastructure or on environmental cleanup, or on education, or health care. Financial investments: Financial Investments are purchases or commitments of money that provide the “investor” with an income stream or a capital gain. Saving money is a financial investment because it provides interest income. Purchases of assets can be financial investments if they eventually provide a capital gain. Economic investments made by firms are usually also financial investments because they are expected to generate income that exceeds their cost. The economic investments made by governments that improve infrastructure or human capital are not financial investments because they do not provide the government with an income stream. Some financial investments are also economic investments, but many of them are not. The purchase of a piece of land, for example, is a financial investment if it appreciates in value over time, but it is not an economic investment if it just sits there, undeveloped. Purchases of stocks in secondary markets (NYSE, NASDAQ) are clearly financial investments if the stocks appreciate in value, but they are not economic investments because they involve nothing more than exchanges of titles of ownership of already existing assets. Such transactions do not typically put any money into the hands of firm managers that could be used for economic investments. That normally happens only when stocks are first sold to underwriters, prior to an initial public offering.

For decades, government-haters have implicitly suggested that the financial investments of rich people should be imagined to be economic investments because…well, that’s what they want you to believe.

The actual truth is that only the investments of firms (and governments) are true economic investments. The financial investments of rich individuals typically are not.

They have pushed this false equivalency because they want to convince the managerial class which serves corporations that throwing ever greater amounts of money at rich people is something that will be good for everyone.

Indeed, they are particularly fond of describing the ‘investments’ of rich people as the one thing they do which turns them into “Job Creators.”

Alas, it is a notion that is wrong on almost all counts. When rich people pour their tax-cut money into ‘investments’, nearly all of it is put into the asset markets, e.g., the stock & bond markets, the real estate & art markets. What does all of this ‘added investment’ do for the economy?

Almost nothing, except create pure inflation within the luxury and asset markets. Inflated prices without any concomitant increase in real-wealth-production or in the productive capacity of the economy. Stock prices are going up? Big deal. Almost all of it is pure inflation and nothing else.

If on the other hand, The Government were to recapture that money and then spend nearly all of it on real economic investments, on Infrastructure upgrades & improvements in the quality of Human Capital, society would begin to enjoy some profound economic benefits without ever depriving rich people of their privileged status at the top of the economic ladder.

The Bernie Sanders Approach

The alternative to UBI that knowledgeable Leftist-Progressives should rationally prefer over UBI is a dedicated effort by the government to increase its spending on economic investments to such an extent that its demand for labor creates a sustained Labor Shortage, where there are always more jobs available than there are people to fill them.

There are plenty of economic investments that The Government could be spending its tax revenue on. A massive effort to upgrade America’s Infrastructure (highways, bridges, sewers, environmental clean up,etc.) to make it state of the art — the envy of the world, would create many millions of new jobs.

We could even go back to the worthy idea of beautifying the country by transforming ‘urban blight’ into attractive living spaces, which would be yet another example of real wealth that is enjoyed by anyone who sees it from the highway. Huge investments in Education would create millions more jobs.

After decades of Republican-inspired efforts to improve the quality of education on the cheap (i.e., by essentially ‘demanding more’ of teachers) it turns out that the real improvements in education quality we desire can only be produced by increasing The Government’s economic investments in the tools (= time) that teachers need to be able to improve the grades of their poorest students in their classes, i.e., those who need more personal attention, constant encouragement and even personal tutoring.

Shrinking classroom sizes is the way to fix this problem. Tripling or quadrupling the number of teachers and classrooms would reduce teacher/student ratios to maybe 1:8, instead of 1:30.

Bernie’s idea of an enhanced version of Medicare-For-All would also provide a dramatic increase in the quality & quantity of health care services consumed by the American people. In addition, removing the profit motive from the health care industry would eliminate the perverse incentives which have relentlessly driven up the cost of health care to the public for several decades.

While these virtuous outcomes of Government initiatives are indisputable, it is also true at the same time that the national government should stay out of most markets where there is a healthy amount of competition going on.

For example: the agriculture, commodities, most retail markets, and of course the entertainment industry. A good rule: stay out of any industry that is benefiting from true price competition between the major players in that industry.

Such markets mostly work as they should for the benefit of those on the bottom half of the economic ladder. But when markets are not functioning as they should, the government should consider intervening to nudge those markets in the right direction.

How To Increase Leisure Time Without Losing Purchasing Power

Perhaps the most important blessing of a sustained Labor Shortage: it would give The Government a market-based tool it could use to ‘spread out’ the available work in the economy across the entire population.

Since World War II, economists have simply assumed that continuing improvements in labor productivity due to technological advances would — logically — lead to a future in which the average worker would work fewer & fewer hours per day/week in order to earn a ‘living wage.’

But that hasn’t happened because Private Sector employers have not faced any kind of market-based incentive to make those changes happen.

If, however, The Government were to create and maintain a Labor Shortage with its spending, it would then be able to put competitive market pressure on the Private Sector to match The Government’s offer of reduced-hour work weeks for a very decent compensation package.

If job seekers are able to get the same amount of money from The Government for less hours worked, Private Sector employers would discover that they have no choice but to do the same.

In this way, The Government would be able to effect desirable change without resorting to legislative edicts or rule-enforcement bureaucracies. It would be able to bring about an improved distribution of ‘the available work’ across the whole of the adult population through market forces alone.

It would need only to ‘set the market standard’ that private employers would ultimately need to match in order to get the labor they need to produce and sell their product/service.

There is ultimately no need for The Government to ‘micro-manage’ the practices of Private Sector enterprises, no need for Minimum Wage legislation, Unemployment Insurance requirements, or other such “Do Something!” band-aid remedies, like Yang’s UBI proposal.

By being a major player in the labor market, The Government would be able to influence the marketplace in a way that would ideally serve the interests of those millions of average citizens who do most of the economy’s producing.

Conclusion

Andrew Yang certainly does deserve credit for daring to grapple with “economic malfunction” from a fresh perspective. I believe he is sincere.

It’s just unfortunate, really, that he — and many innocents like him — have been duped by scheming manipulators into believing that The Government is always a threat to average people when it is ruled by “do-gooders” but is not a problem when it is ruled by rich government-haters who are pretty much out to protect what they perceive to be the best interests of rich people.

Contrary to their manipulative propaganda, the problem has never been the existence of “Government”; it’s always been the existence of “Governments when they are controlled by Stupid Rich People.”

And notice I am not saying that any Government that is run by not-rich people is sure to be a wise Government. Quite the contrary; history teaches us that, in order for Governments to produce good outcomes (for all the members of the tribe), they must be ruled by a coalition of Smart Rich People and Smart Not-Rich People.

The economic agenda they push forward has got to be smart re: how to influence the marketplace in a way that will nudge it into optimizing the economic well-being of The Least Among Us.

And while the upper class will be asked to give up some of their money “wealth” to make this happen, they will not be required to give up anything in terms of the real wealth they possess; nor will they be required to give up any of their purchasing power in the marketplace.

It turns out that the Ideal Economy that The Underclass could ever hope for also happens to be the Ideal Economy that Rich People could ever hope for. As more and more rich people come to understand that it is far better to be Smart Rich than it is to be Stupid Rich, we should expect to see an increasing number of them hopping onto Bernie Sanders’ bandwagon in pursuit of a brighter economic future for all of us.