The Down to the Countryside Movement has been done before in history, and was a massive failure driven by exactly the same kind of idea about learning from the poor (Hille, 2013). (EDIT: Some have said it was voluntary. So was the original Down to the Countryside Movement. Many things are voluntary, but pressure can force people to do things they do not want to do). So while I like the guy, he has some worrying ideas that we’ve done before, and have already failed before. Let’s hope his Freedom Dividend (F.D.) isn’t one such idea, and give it a look.

The idea is simple; give each citizen $1,000 per month (or $12,000 per year) to replace current social spending benefits.

Yang proposes a 10% VAT (Value-Added Tax) and removing the current social spending to pay for this scheme (Politifact, 2019).

Let’s run some very quick numbers (rounding to the nearest 100 million):

The U.S. population is roughly 330 million (U.S. Census, 2019).

If we take only those over 18, as Yang states on his website, we have 210 million people being given $2.5 trillion (although Yang states it is around $1.8 trillion; not sure how he works that). Note: according to Yang, people who get more from benefits get to choose to keep the higher number, so this is a minimum level of expenditure, and it may well be higher.

So where can we find $2.5 trillion per year to pay for this? Let’s get together his own example.

Yang’s Rogan Budget

On Joe Rogan’s podcast, Yang (2019b) states he will pay it as such:

Price:

Basic Maths Price: $2.5 trillion

Yang’s Price: $1.8 trillion

Costs:

VAT 10%: $0.8 trillion

Stop Social Spending $1 trillion

Missing:

VAT 10% unlikely to reach $0.8 trillion; likely to be below $0.3 trillion.

Up to $0.7 trillion missing in paying everyone the F.D.

Where to get the last $1.1 trillion? Easiest to cut would be Medicaid and Medicare. Read on for more. Yang believes that the VAT will make up for it; he mentions the VAT will get the corporations to pay their taxes. As people need things more than companies do, it will likely be the consumers who pay for the tax except in the most competitive markets. The usual response to getting the companies share is capital gains tax, but then you’ll see every U.S. company relocate to Ireland.



10% VAT

One proposal by Andrew Yang is a 10% tax on buying things. The average family in the United States consumes $61,000 per year (Bureau of Labour Statistics, 2019). Let’s assume two models: first, that we have an average family of four, who all receive the F.D. This is the true Universal Basic Income. The second model shall be only those over 18 (Yang’s Freedom Dividend); we shall assume families of 2.

Model One (True Universal Basic Income)

Assuming people spend at the same rate, they would have $109,000 per year of income. Let’s assume that people spend all of the F.D., we would find that £10,900 per individual would provide about $3.4 trillion of VAT revenue.



Model Two (Yang’s Only Adults Basic Income)

These families spend $85,000 per year, and assuming it’s all spent, that would raise $1.8 trillion of VAT revenue.

However, Yang has said he doesn’t want a VAT on food, energy, or housing (a narrow VAT). According to the Bureau of Labour Statistics (2019), That removes $46% of the possible VAT gathered (as 46% of the average consumers’ budget is spent on these items). Putting that into the two models above:

Narrow VAT Model One: $1.8 trillion raised Yang’s Narrow VAT Model Two: $1 trillion raised (Yang [2019b] himself used this method, and his numbers came to about 80% of this estimate, so we agree so far).

However, you want to know how much would be likely to be raised? The above numbers I’ve given are the best case scenario, where 100% of the new money is spent, and all VAT is collected perfectly, and no one stops working, or works less, with no inflation, nor tax evasion, or saves any portion of the F.D. I’ve simply taken the current average consumption, given them the Freedom Dividend, and slapped a VAT on it with and without exemptions. Let’s have a look at some different bodies:

Yang himself (2019b) believes that a VAT at 10% would produce $0.8 trillion. According to the non-partisan Congressional Budget Office (2016), a 5% VAT would raise the following in 2021:

Broad VAT 5%: $0.29 trillion. Narrow VAT 5%: $0.19 trillion.

If we simply double it, we get about $0.58 trillion from a Broad VAT of 10% (best case scenario), or $0.38 trillion from a Narrow VAT of 10% (best case scenario).

Current Government Budget

Firstly, the U.S. Government total deficit neutral spending is $3.5 trillion; it is currently spending $1 trillion in deficit, increasing the national debt (Trump, 2019).

According to the Budget of the U.S. Government (Trump, 2019), the U.S. currently spends $1 trillion on social spending. Medicare and Medicaid also cost $1 trillion in 2019 (Trump, 2019).

But Yang has promised that people already receiving benefits can keep them (Yang, 2019b); therefore, we can assume there is a proportion of the population that makes more than $12,000 per year in social welfare payments, and would refuse to decrease it. Therefore, even if this were implemented, anyone receiving more than $12,000 in social spending would refuse to decrease it; all you’ll be doing is adding more people onto the social spending bill via F.D.; this will be unable to reduce the cost of existing programs by much unless you do not allow people to remain on their plans.

Yang believes that this would compensate for the cost of the F.D. as people will move to the F.D. instead of receiving higher levels of welfare previously. He doesn’t provide any data for this so far, and it seems counter-intuitive.

Yang states that the increase in the economy from the additional economic behaviour will lead to an increase in $0.4 trillion, but I don’t know where he gets those numbers (Yang, 2019b). There is also another underlying problem that increasing consumption will lead to the increase in environmental damage. I also agree with Yang’s wish, that if the government must spend money, it is better it flows to the people of the U.S., especially the poor and raises them up, than to costly institutional expenses that decide to occasionally overthrow democratically elected governments (Yang, 2019b).

Can It Be Funded?

BEST CASE SCENARIO

The scenario in which case every citizen spends all of their money, every month, completely, without reducing working hours, without changing their consumption behaviour, and without inflation.

True Universal Basic Income

Cost: $4 trillion

Implement full 10% VAT ($3.4 trillion) and stop all existing Social Spending regardless of existing commitments ($1 trillion).

Implement narrow 10% VAT ($1.8 trillion), stop all existing Social Spending regardless of existing commitments ($1 trillion), and either Medicare or Medicaid ($1 trillion) and you’ll still be short.



Yang’s Only Adults Basic Income

Cost: $2.5 trillion

Implement full 10% VAT ($1.8 trillion) and stop all existing Social Spending regardless of existing commitments ($1 trillion).

Implement partial 10% VAT ($1 trillion) and stop all existing Social Spending regardless of existing commitments ($1 trillion), and either Medicare or Medicaid.

CONGRESSIONAL SCENARIO

The scenario with the numbers from the Congressional Budget Office (2016). More realistic.

True Universal Basic Income

Cost: $4 trillion

Implement full 10% VAT ($0.58 trillion), stop ALL government spending on everything ($3.5 trillion).

Implement a broad VAT of 70% = $4.1 trillion*

Yang’s Only Adults Basic Income

Cost: $2.5 trillion

Implement full 20% VAT ($1.1 trillion), stop all government on social security, Medicare, Medicaid.

Implement broad VAT of 45%: $2.61 trillion*

*Even though I simply multiplied it out, the real fact is that a VAT of 45% would effectively cut a F.D. by nearly half in real terms, but would also cut the remaining income of Americans by nearly half as well in terms of buying power. Not only that, but these figures wouldn’t make this much money; people would buy less because they have less real purchasing power; even 45% VAT wouldn’t come close to what would be needed.

Criticisms

Value Added Tax

A full VAT is regressive; food and housing make up around 50% of the spending of single people (including single parents). Tax that, and find people struggling to make it up; in the United Kingdom, people have fallen into debt to try and pay for necessary goods in an austerity economy, and India is also facing massive issues of household debt. But without a full VAT, most versions of Yang’s Freedom Dividend cannot be done. Even with a full VAT, it’s quite possible it cannot cover such ambitious plans.

A partial, narrow VAT is less regressive, but will discourage spending and consumption in general (and Yang is banking on massive consumption to fund his ambitious plan). Not only that, but taxing luxuries means that the relative price of those luxuries will increase; those who can afford it may buy it abroad (as the Chinese do for luxuries) or simply eat the cost, but those domestically cannot afford it will be less able to afford it; as such, you’ll be placing the ability to buy luxuries away from the poor.

Finally, as we’ve seen, there is little evidence outside of pure theory that VAT will raise the kinds of numbers that Yang thinks it will. It will raise between $1.8 trillion to $0.29 trillion, and even less depending on how he chooses to implement it. But a VAT is a direct tax to consumption; for example, if he adds a 10% tax, your rent increases from $1500 per month to $1650. If you want that car or iPhone, you need to hand over more money. We should consider that excessive taxation is very invasive, and a good case has to be made for such massive confiscation of wealth whether directly or indirectly.

Long Term Growth

Short-term growth is made through consumption; it pays your wages, it pays for goods, it lets you eat, and it gives you a job. The weakness of neo-classical economics is that it simply ignores this for efficiency.

But long-term growth is driven by the increase of capital stock among the population per capita (Blanchard and Johnson, 2013); to have the long term growth which creates new jobs in new industries, maintains international competitiveness, and improves the living standards of everyone in a country as well as the benefits for technological improvements (such as clean air, efficient consumption, better enjoyment of technology), we need people to save money, which cuts directly against the idea of the Freedom Dividend, and as such, this may undercut the technological development of the U.S. long-term. We have discussed this issue with China’s long-term growth based on this.



If you like your Social Welfare, you can keep your Social Welfare

We have already discovered that the promise to keep your existing benefits plan will mean that people who make less than $12,000 will now make $12,000 under Yang’s F.D. However, those who make more than $12,000 will not change their mind (if they’re rational).

But with keeping both systems, we end up with maintaining a large amount of the civil servants who are required to monitor this, which increases costs. We have the chance of people falling between the cracks, which increases risks. We have the problems of governments being bad with information; what if someone dies and the government is not notified quickly enough? What if someone is overpaid? What if people falsely register? The idea of the Freedom Dividend is simplicity (no need for civil servants if everyone gets a payment for being born). Keeping the previous system keeps the inefficiencies of the previous system.

Equity

Getting rid of the existing program is also less equitable; the reason means-tested benefits are so beloved by governments is because it targets people who need the money, rather than a shot-gun approach to firing money at anyone in the country.

A model by Compass in creating a Basic Income in the United Kingdom discusses this; when a flat income is given, the people who suffer and lose out are the poorest part of society. If a means-tested income is maintained with the basic income, they do well (which is what Yang is saying); but they have to be supplemented together, which he is not saying.

While the current system of means-testing is a leaky bucket of trying to prove your citizens are not sick enough to be looked after and aggressive public servants trying to save money, Yang’s model of F.D. would not lead to the same equity that means-testing does provide.

Medicare For All

Andrew Yang promises to give Medicare for all as one of his big three promises. All of the funding models above require the cutting of state medical expenditure; increasing it makes the Freedom Dividend nearly impossible. Healthcare is certainly expensive, but I believe it is a much easier argument for the wide-scale implementation of healthcare for the improvement of the standard of living of the poor than UBI.

What are the costs for ‘Medicare for All’? The Committee for a Responsible Federal Budget (2016) put the cost at $2.5 trillion per year (over the first 10 years; cost expected to rise afterwards). The Mercatus Center at George Mason University put the cost at $3.2 trillion per year over 10 years, and expected to rise afterwards (Blahous, 2018). The Center for Health and Economy (2016) believes it to be closer to $3.5 trillion per year; as much as the Freedom Dividend! (over the first 10 years; cost expected to rise afterwards).

We are not even discussing how supply and demand of healthcare would change, and how to maintain anything similar in quality to the current U.S. system; this is just the numbers.

As difficult as the Freedom Dividend is, having both would be impossible. Pick one, Mr. Yang. Funding $2.5 trillion alone for the single cheapest scheme will be difficult enough.

Consumer Behaviour

There is an old economic truism; “If you want less of a behaviour, tax it. If you want more of a behaviour, subsidise it”.

So let’s see how people will react; taxing consumption? Less consumption. Subsidise not working? Less people will work (or have to; parents can be stay at home parents, or look after the elderly. Moral behaviour, but not good economic producing behaviour). Subsidising people regardless of employment or education? People will be less likely to be employed, and less likely to become educated. Yang himself states that people (especially men) are less likely to get re-educated after unemployment (Yang, 2019b). We have seen that the poor in the United Kingdom are less likely to get educated or employed, and writings on the welfare state reducing employment have been common since Christopher Hood (1995) in the 1980’s wrote about ‘English awfulness’, or ‘Anglo-American awfulness’ and how countries who have high welfare states have massively blooming governments and unemployed populations.

Inflating Benefits Away

If inflation kicks in? That will decrease quickly as well. Let' say the inflation rate is 2.5%. Your real $1000 in 2021 is $975 in 2022, and $951 in 2023, $927 in 2024, and at the election period of President Yang, $904.

Inflation is the killer; most countries with wide scale welfare systems have CPI’s of 2% and over 3% is not uncommon. What causes inflation? Firstly, putting a VAT of 10% would cause an initial jump in prices; the more you cannot refuse to pay for a good, the more likely you’d be the one paying the tax, rather than the producer. This is a problem that is causing massive problems in China, a country with massive public spending that doesn’t even drive public consumption.

It seems that Andrew Yang is a monetarist in nature (as many in the U.S. are); he believes that inflation is purely a cause of monetary supply, and that a deficit neutral version of UBI wouldn’t cause inflation. This is a view held by the Roosevelt Institute, an institute that Yang has referenced several times in interviews. This means that the fact that we cannot easily afford the Freedom Dividend becomes more problematic; even Yang admits that deficit spending (currently $1 trillion over budget) will kill this project, and Yang wants to enact a $2.5 trillion project while removing that deficit spending. It’s ambitious, to say the least.

Secondly, things that increase the price of inputs for producing and selling goods. Let’s imagine we make a chair.

Buy wood (+VAT on wood) > Drive the wood to your factory (+VAT on oil) > Build the chair (+VAT on tools) > Move the chair to the store (+ VAT on oil) > Sell the chair (+VAT on sale) > Get the chair home (+VAT on oil).

Depending on how VAT is structured, it can be taxed multiple times as taxes may apply to each step of value adding (when you change wood to a chair, you’re adding value, and being taxed for that). It is cumulative. Also, what happens when you give people money in terms of rent?

Give Tim $1,000 > Tim wants to rent a house > Tim (and other renters) now bid to rent the house > Price of rent driven up by competition

Or job-hunting?

Give Tim $1,000 > Tim wants to take a job > Employer offers a position cheaper than normal > Tim can take this job because he has other sources of income > Price of Tim’s labour drops > Aggregate price of labour drops due to competition.

Or general increase in prices from competition?

Give Tim $1,000 > Tim wants an orange > Everyone wants an orange > Everyone has $1,000 more > Everyone bids for orange > Increased demand causes price of oranges to rise

So prices can rise due to increased demand from this new money, or relative wages can fall due to this new money reducing supply of labour. We’re not discussing the Leisure-Wage Trade Off, or the inflation caused by monetary printing and deficit spending (when the government spends more than it makes); even on a simple level, inflation is inevitable.

Summary

For a person who is so careful with so much he says and whose image is based on the intellectual technocrat, his mistakes loom the larger in his speech. He says that Friedman was pro-UBI; not at all. Friedman was pro-Negative Income Tax, which is not universal, but focuses only on people who make below a pre-set income; the wealthy or families who make above that receive nothing, but pay those taxes. Not quite the same idea at all, although Yang and Friedman agree that giving the poor the choice on how to spend their money is the same.

I would also recommend people stop looking at U.S. total GDP ($20 trillion-ish) and say they’ll find the money; GDP does not equal money floating around the economy, it equals the production, sales, buying, and trade of goods and services at the value of money, not literally money that we can skim off to pay for government activity (nor should we want to; government should step in at market failure, not at market activity).

So let’s answer the questions you want to hear.

Will Basic Income give more poor people money? Yes.

Will the poor spend this money and push the economy? Yes.

Will it make people healthier and happier? Absolutely, all the UBI literature agrees on this.

Does it help move the local economies? Yes, but only if people spend their money locally.

Can we afford it? Not really.

We still don’t know how to pay for it initially. We cannot have Medicare for All, and the Freedom Dividend at the same time (which Yang promises at the same time). We have no answer for the very likely massive inflation we can expect to occur and remove the advantage that the Freedom Dividend would provide. Yang’s plan for a 10% VAT does not seem likely to cover it under the best circumstances.

People will say “Well, he is adding up to $2.5 trillion into the economy; that will pay for itself!”. Inflationary pressure will reduce that quickly and then the U.S. will be caught in an inflationary spiral trying to maintain the monetary injections to keep people having any real increase in spending, or it will simply correct itself within a couple of years via massive inflation, which also ruins the wages of anyone making more money as they are inflated out of a good wage, while being taxed. It has been a basic part of economic theory since Ricardo and Smith that the economy will always shift to the poorest affording only the basics; it is technological growth and cheaper inputs that changes this, not increasing the nominal amount of money in their pocket.

Getting rid of means-testing would be efficient; it also means that anyone who actually needs the money will be getting less. Alternatively, keeping the means-tested option keeps that inefficiency, but is more equitable to the poorest in society. With only adults being paid, if large scale unemployment does come, we will end up with the poor stretching out their benefits among the family while the wealthy enjoy free money and greater freedoms through this money. If a true UBI were implemented, we would find the poor having more children to try and maximise the household payments.

During his interview with Rogan, Yang (2019b) points out that simply retraining people is not an effective response to the reduction in jobs (a success rate of 0%-15%) from automation.

Jordan Peterson (2017) points out that an IQ below 83 means that you cannot work in the military; not even cleaning floors as your IQ is too low. 10% of the population is at 83 or below. In a world with increasing complexity, the demand for IQ will increase as the technological ability required to work increases; remember that 50% of people have an IQ of 100 or below.

Knowing that IQ has a 0.5-0.6 correlation with employment (Peterson, 2017), we can foresee the rising technology demands on IQ will lead to further technological unemployment; something that Yang foresees as a rising danger (Yang, 2019b).

Yang is correct in believing that a method must be done to find a solution; he is also correct for recognising the logic of the problem lies in the margins and the curve of the problem, rather than a silver bullet (Yang, 2019b). He is, I believe, also correct for seeing the same thing Trump does; people have been left behind in the poorer parts of society and America is not made better by leaving the worst in society to wallow. Yang is also one of the few people who regards the poor with respect rather than contempt among the political class, and seems to be interested in policies that help them rather than efficiency.

However, you could say he is simply being a savvy politician in his media image, and he is being a demagogue promising the riches of the elites if they’ll help him take power; an issue since the writings of Plato and Aristotle.

I’d love if he could release more numbers, but they just aren’t there except in the most fantastical circumstances. He has also simply not answered about inflation in any real number that I’ve seen, and inflation is the silver bullet to his plan.

There is one more thing to cover. Yang is trying to answer the problem that is rising across the world; rising populism in the face of economic devastation. Yang correctly perceives that when you destroy people’s ability to make a living, they will revolt and choose to become violent instead. Look at the Yellow Vest riots, for example. We have seen this in the E.U. elections, we have seen it in the election in India, the rise of the Brexit Party in Britain, and we have seen that economic factors are falling for the poorest in the West. If we do not address these economic conditions now, we will see something nasty in the future. At least Yang is trying to do something about that.