UBI Science?

Some problems with a study on Universal Basic Income…

Yet now liberals want a UBI not to replace welfare programs, but to supplement them. Congress’s pandemic checks and potpourri of refundable tax credits, including $3,600 for each child under age 6, are essentially a UBI. Democrats want to make these handouts permanent, and in support they’re touting a recent study of a small privately funded experiment in Stockton. “Study: Employment rose among those in free money experiment,” an AP headline declared.

Not quite. The study randomly selected 125 Stockton residents from low-income neighborhoods and gave them $500 a month on a prepaid debit card. Another 200 residents served as the control group. Asian/Pacific Islanders and homeowners comprised a larger share of the debit-card recipients than of the control group , which could have biased the results.

The study’s small sample and reliance on self-reported outcomes are bigger problems. It’s difficult to assess a statistically significant effect on employment among such a small group over a one-year period—from Feb. 2019 to Feb. 2020—especially given high labor-market turnover among lower earners.

Full-time employment rose in both groups but was slightly lower among the free-cash recipients at the beginning and slightly higher at the end. Hence the study cagily concludes: “Unconditional cash enabled recipients to find full-time employment” (our emphasis)—not that it actually increased employment. Most media ignored this nuance.

Students of incentives might also point out that people receiving free cash might be more likely to claim they are working even if they’re not. In any case, the unconditional Stockton cash grants are temporary, and there’s a graver risk that recipients would drop out of the labor force if the grants were made permanent.

The study says free-cash recipients were virtuous, and “less than 1% of tracked purchases were for tobacco and alcohol.” But about 40% of the money loaded onto their prepaid debit cards was either transferred to a pre-existing bank account or withdrawn as cash. Researchers don’t know how this money was spent.

The researchers were promoting UBI on their Twitter feeds less than halfway through the experiment. One claimed “it’s embarrassingly straightforward, without #guaranteedincome, you get a guaranteed recession.” Their progressive bias is transparent.

They conclude that even UBI is “not nearly enough,” and they also want a higher minimum wage, universal child care, and rental assistance, among other income transfers. The left wants to obliterate Congress’s 1996 bipartisan reform that linked welfare to work, and they’re well on their way.

Sorry Bernie Bros But Nordic Countries Are Not Socialist

The myth of Nordic socialism is partially created by a confusion between socialism, meaning government exerting control or ownership of businesses, and the welfare state in the form of government-provided social safety net programs. However, the left’s embrace of socialism is not merely a case of redefining a word. Simply look at the long-running affinity of leftists with socialist dictators in Cuba, Nicaragua, and Venezuela for proof many on the left long for real socialism.

To the extent that the left wants to point to an example of successful socialism, not just generous welfare states, the Nordic countries are actually a poor case to cite. Regardless of the perception, in reality the Nordic countries practice mostly free market economics paired with high taxes exchanged for generous government entitlement programs.

First, it is worth noting that the Nordic counties were economic successes before they built their welfare states. Those productive economies, generating good incomes for their workers, allowed the governments to raise the tax revenue needed to pay for the social benefits. It was not the government benefits that created wealth, but wealth that allowed the luxury of such generous government programs.


Socialism can take the form of government controlling or interfering with free markets, nationalizing industries, and subsidizing favored ones (green energy, anyone?). The Nordic countries don’t actually do much of those things. Yes, they offer government-paid healthcare, in some cases tuition-free university educations, and rather generous social safety nets, all financed with high taxes. However, it is possible to do these things without interfering in the private sector more than required. It is allowing businesses to be productive that produces the high corporate and personal incomes that support the tax collections making the government benefits feasible. The Nordic countries are smart enough not to kill the goose that lays the golden egg.

If the left insists on naming a system of generous government benefits combined with a free market democratic socialism, I cannot stop them. That seems unnecessarily confusing since the government is actually running no industries other than education (and meddling somewhat in healthcare). It certainly isn’t socialism. In fact, the only reason most such countries can afford those benefits is that their market economies are so productive they can cover the expense of the government’s generosity. Perhaps a better name for what the Nordic countries practice would be compassionate capitalism.

“Transferism” — Not socialism, just plain greed

When polled, Americans express relatively well-defined views on both. And while nowhere near a majority of the American electorate favors a completely socialist system, a recent Gallup poll indicates that more than four in ten Americans think “some form of socialism” is a good thing. But what is “some form of socialism?” A society is either socialist or it isn’t. The state either owns the means of production or it doesn’t. There is no middle ground. Even our openly socialist politicians rarely advocate anything near as drastic as government control of the means of production.


These four in ten Americans, and the politicians who speak for them most vocally, are not advocating socialism at all; they are advocating what we should really call “transferism.” Transferism is a system in which one group of people forces a second group to pay for things that the people believe they, or some third group, should have. Transferism isn’t about controlling the means of production. It is about the forced redistribution of what’s produced.

Federal transfers are money the federal government gives directly to people or to state and local governments. These are not purchases. To be a transfer, the money must be given in exchange for nothing. The earned income tax credit, income assistance, and payments from various welfare programs are transfers. So, too, are Social Security benefits. While workers tend to regard Social Security benefits as returns on their Social Security taxes, legally, Social Security taxes are simply part of the government’s tax revenues. Workers are not entitled to Social Security benefits. Who says so? The Supreme Court in Flemming v. Nestor (1960). In reality, Social Security benefits are simply transfers—gifts—from the federal government to retirees.


Contrary to type, politicians speak in very clear terms about the benefits they would like to finance by transferring money from one group to another, and they have had predictable success with it. Most Americans cannot imagine a country without Social Security, Medicare, and the Earned Income Tax Credit. And politicians never seem to run out of new ideas regarding what they might be able to achieve with even more transfers of wealth. New ideas are typically well-defined, at least on the benefit side. Student loan forgiveness, universal basic income, Medicare for All, and every other piece of proposed redistributive legislation offers an obvious benefit for an equally obvious group of people.

The lack of clarity comes when the politicians get around to explaining who will pay for all of it. Their answer is inevitably some form of “the rich,” who will finally, we are told, pay “their fair share.” None of this is ever defined, which explains the United States’ present $23 trillion debt. Transfers are tricky political business because politicians need to point to who benefits and by how much while at the same time hiding who will actually be paying.


Can Socialists Define Socialism?

I’ve written many times about socialism, which is sometimes a frustrating task because the definition is slippery.

I suspect the average supporter of Bernie Sanders or Alexandria Ocasio-Cortez thinks that socialism is big government with lots of handouts financed by class warfare taxation. Since that’s the common perception, is that the definition we should use?

The technical definition of socialism, though, is government ownership of the means of production, which entails central planning, price controls, and other forms of intervention. So, at the risk of being pedantic, is that how the term should be defined?

As an economist, I prefer the latter approach, which is why I’ve pushed back (though not necessarily in a favorable way) against those who called Obama a socialist.


More Welfare for Workers


Bernie Sanders billionaire welfare taxation defies all economic logic
Bernie Sanders has officially introduced legislation in Congress aimed at forcing large companies to reimburse the government for providing public benefits to their employees. Targeting Amazon in particular, the Vermont senator recently tweeted, “All over this country, many Amazon employees, who work for the wealthiest person on Earth, are paid wages so low they can’t make ends meet. The American taxpayer should not be subsidizing Jeff Bezos so he can underpay his employees.”

Not only is this proposal unworkable and likely to harm the small number of people it targets, but it also mischaracterizes companies like Amazon and Walmart as reaping the benefits of lower wages, while the government picks up the tab. This argument fails on basic economic principles and ignores investments that many of these companies make in their entry level workers. Rather than “taxing” major companies for giving jobs to low skilled workers, Congress should find ways to make it easier for them to educate and train their entry level workers.

One of the major problems with the proposed legislation is that it assumes that wages are set by the whims of company executives. But in a competitive labor market, wages are set by the supply and demand for labor, not some arbitrary decision making by executives. As economist Arindrajit Dube argued, research shows that benefit programs like food stamps and housing assistance actually reduce labor supply because they make work less attractive, which drives wages up instead of not down. He writes, “The key point is that it is difficult to imagine how food stamps would lower wages. If they don’t lower wages, they can’t be thought of as subsidies to low wage employers.” For the argument that safety net programs “subsidize” employers to ring true, wages would be higher in their absence, something I doubt proponents believe.



Workers on Welfare

From Bloomberg Opinion:

Senator Bernie Sanders is all set to propose legislation that proposes to put a tax on large businesses with employees who receive benefits from safety-net programs. The idea is simple: If a business isn’t paying enough to keep its employees from qualifying for, say, food stamps and public housing, then the business should be taxed an amount equal to those benefits. If a McDonald’s employee receives $400 in food stamps, then McDonald’s would owe the government $400 in additional taxes.

Fox News host Tucker Carlson thinks this is smart policy. In a tweet last week, Carlson pointed out that Jeff Bezos, founder and CEO of Amazon, is “the richest man in the world. Many of his employees are so poor, you’re paying their welfare benefits.”


Whether motivated by concerns about inequality, as the Vermont senator is, or by the increasingly common view on the political right that when it comes to certain corporations, big is bad, both Sanders and Carlson betray a fundamental misunderstanding of economics and of the proper ordering of society.

Forces in a market economy will push the wage earned by workers toward the amount of revenue they generate for their employer. It is simply unrealistic to expect a company to pay, say, $15 per hour to a worker who is only generating $9 per hour of revenue for the business. Under such an arrangement, the company is losing $6 every hour the worker is on the job. That situation is untenable.

My argument may sound off given the amount of attention currently paid in some circles to issues like “market concentration,” “monopsony power” and the like. To be clear, I do not deny that these factors play a role in determining wages. But particularly in the low-wage labor market, a worker’s productivity plays a very important role in determining his wage. And large gaps between wages and productivity are ultimately unsustainable for many workers.

So in some sense, Sanders and Carlson have it exactly backward: Walmart, Amazon and McDonald’s are not being subsidized by taxpayers because some of their employees receive assistance from safety-net programs. Instead, employers of lower-wage workers are surely reducing safety-net rolls. In the absence of these jobs, more people, not fewer, would likely be receiving government assistance.

The logic underlying the claim by Sanders and Carlson also leads to a place that the senator at least probably doesn’t want to go. Sanders argues that if Amazon has employees on Medicaid, then taxpayers are subsidizing Amazon. At the same time, the senator supports single-payer national health care (“Medicare for All”). Should we view any national health-care program as a multitrillion-dollar taxpayer subsidy to business?

Of course not. And we shouldn’t view food stamps as a subsidy to business, either. Doing so reflects a fundamental misunderstanding of how U.S. society has chosen, through politics, to assign different roles to different actors.

And while we’re at it, this from National Review:

Both Senator Bernie Sanders and Fox News host Tucker Carlson have recently slammed Amazon, Walmart, Uber, and other large companies for paying workers and contractors too little. In a withering monologue last week, Carlson claimed that the companies are all effectively subsidized by the taxpayer because many of their employees’ incomes are supplemented by various federal welfare benefits, such as food stamps. Sanders agrees. Yesterday, he introduced legislation (the so-called Stop BEZOS Act) to tax large corporations one dollar for every dollar their workers receive in government food stamps or health-care benefits.

If nothing else, it is amusing that neither Sanders nor Carlson fully acknowledges the logical implications of their position. If Sanders is right that programs such as food stamps modestly subsidize employers who pay low wages, then his hugely expensive Medicare-for-all and free-college-tuition proposals would constitute a massive subsidy to low-wage employers. If Carlson truly believes that large firms have the power to suppress wages below competitive rates, then he should support raising the minimum wage to combat that power — something that he has, in the past, sensibly advocated against.

Snark aside, the pair are simply wrong on the economics of the matter, and shortsighted to boot. An employer’s responsibility is to pay employees for the work they do, not to ensure that they have some societally agreed-upon level of livable household income. Indeed, it is a peculiar worldview that suggests that, when setting wages, a company employing low-skilled workers should ignore the value of the tasks the employee actually undertakes for them.

In competitive labor markets, we usually assume that firms pay workers according to their productivity, the marginal revenue product of their labor. Market wages are determined by where this demand interacts with the supply of workers. Firms can’t underpay workers without losing the best to rivals. Nor can they routinely pay employees for more than they add to company revenue without losing capital to rivals at home and abroad and risking going out of business. There is no evidence that Amazon, Walmart, or Uber have high-enough degrees of labor-market power that they are the single hirer of workers in any one geographical area. For Carlson to imply that their pay rates are evidence purely of corporate greed is the worst form of populism.

There is a basic conundrum hanging over this debate: In a world with no minimum-wage laws, no out-of-work benefits, and no in-work benefits, some workers with low productivity levels would obtain work but find it difficult to live comfortable lives on market income. The real questions then are: Who should help, and if it is the government, will that end up subsidizing firms?

One form of help comes in the form of means-tested programs that apply regardless of work status, such as basic food stamps. These explicitly do not subsidize employers as Sanders and Carlson allege. Actually, we’d imagine that transfers of this kind would have the opposite effect, because they replace income obtained from work: The more you earn, the less in transfers you receive. These programs therefore reduce the supply of workers, by raising the wage people would have to be offered to return to work, which in turn raises market wages if the supply of workers is upward-sloping. Far from a “subsidy,” then, means-tested federal welfare benefits are more like a “tax on employers.”

Indeed, the only forms of welfare that can theoretically subsidize employers through lower wages are transfers that supplement income from work and so increase labor supply, such as the earned-income tax credit (EITC). As a wage subsidy, the EITC encourages more potential workers to seek low-paying employment, because the earnings from that employment plus the subsidy are higher than the means-tested benefits they forfeit by going back to work. The EITC thus increases the labor supply by design, which is great for EITC recipients but can hurt ineligible groups, such as those without children, who see their wage rates fall as a result.

The benefits of such supplemental subsidies are indeed captured by a combination of the employer and all employees. Academic experts Auston Nichols and Jesse Rothstein, using reasonable assumptions, estimate that for every $1 put into the EITC program, employees receive $0.64 of the outlay and employers capture $0.36 owing to reduced market wages. One therefore could, if he were so inclined, call the EITC an “employer subsidy,” though strangely neither Sanders nor Carlson has bothered to mention it at all.

Given that Sanders’s and Carlson’s critique focuses instead on means-tested welfare programs, it makes no sense. Cajoling companies to pay more by imposing high minimum-wage rates or taxing those whose employees receive government assistance would simply make it more difficult for lower-productivity workers to find jobs, putting taxpayers on the hook for more safety-net spending. Only supplementary welfare programs such as the EITC have the effect that Sanders and Carlson describe, and cutting these programs would certainly hurt the workers who rely on them as much as, if not more than, employers.

This is going to ramble a bit. I ended up going a completely different direction from what I had in mind when I started. If you give a man a fishyou feed him for a day, the old saw goes. And if you teach him how to fish, you feed him for a lifetime. As […]

via If you give a man a fish… — The Writer in Black

I’ve been having a discussion with a friend, and he brought up the “how hard people have it” argument. One thing that occurred to me is that economic and technological progress didn’t occur in areas where people had it easy.

Polynesia didn’t develop engineering, but Scotland did. The expert sailors of the Mediterranean became experts because they had to leave their rocky islands in order to find food.

And then there’s the socialist dream: give everyone an income and provide for all their needs and they’ll have time to create artistic masterpieces and invent technological marvels. How’s that working out?

It’s said, if you want something done, ask a busy person to do it. Maybe, if you want a culture to reach the heights, it needs to start in the bottom of a well. By the time it reaches ground level, it’s built up momentum that makes it impossible to catch.

More on the General Effect of Welfare on Wages – Cafe Hayek

Source: More on the General Effect of Welfare on Wages – Cafe Hayek

An answer to the “Walmart Welfare Subsidy” argument.

Here’s a follow-up letter to a correspondent who continues to insist that welfare payments reduce the wages of low-income workers:

Mr. Chris Indovino

Mr. Indovino:

You’re unconvinced by the argument that government welfare payments generally reduce the supply of labor and, thus, cause the wages paid to low-income workers to rise. You write that “if taxpayers are footing a portion of the bill for poor workers to feed and clothe their families employers can get by by paying less to workers on welfare.”

Before I try again to convince you that you’re mistaken, let me acknowledge that there is one form of government welfare in the U.S. that does reduce poor-workers’ wages. That’s the Earned Income Tax Credit (EITC). Because one must work to be eligible to receive the EITC, this program increases the supply of labor and, thus, causes wages to fall. But the typical government welfare program, for which non-workers as well as workers are eligible, reduces the supply of labor and, thus, causes wages to rise.

Here’s why. Suppose you win a billion dollars in a lottery. What happens to your willingness to continue working at your current job? According to the logic expressed in your e-mail, you should now be willing to work for nothing, given that your lottery winnings are now sufficient to pay all of your expenses. But of course you will instead almost surely quit your current job. And if your employer wants to persuade you not to quit, he’ll have to offer you a much higher wage in order to make it worth your while to continue working. (Imagine how you’d react if your employer said to you “I want you to keep working and accept a pay cut to $0 per hour. I don’t have to pay you anything now because your lottery winnings cover all of your expenses.”) Winning the lottery, by reducing the supply of your labor, raises the wage that you must be paid in order to work.

Please don’t mistake me as equating government welfare payments for lottery winnings. They’re obviously different. But they both do reduce the supply of labor and, therefore, they both put upward pressure on the wages that employers must pay to recipient workers. The lottery example is a way of showing that workers do not reduce their wage demands simply because some of their expenses are covered out of non-wage income.

Donald J. Boudreaux
Professor of Economics

This is a follow-up to a previous letter:

Mr. Chris Indovino

Mr. Indovino:

I did indeed read Scot Phelps’s Wall Street Journal letter in which he argues that government subsidization of low-skilled workers’ “housing, food, medical care, and transportation” enables employers of such workers to pay them less than their “true” value. I didn’t respond to it because I had nothing to say about such an economically unmoored argument that I’ve not said in the past. (See also this EconLog post by my colleague Bryan Caplan.) The central economic point is this: the welfare programs to which Mr. Phelps alludes (with the possible exception of transportation subsidies) reduce the supply of labor and, thus, push wages up. Far from employers being subsidized by such welfare programs, employers of workers who receive these government benefits are obliged, as a result, to pay wages that are made artificially high.

But to show just how deeply confused this Mr. Phelps is, let’s pretend that he’s correct to insist that welfare programs artificially reduce wages. Mr. Phelps then asserts that “Failure to pay a living wage gives consumers artificially low prices and increases corporate profits.” Because nearly all employers of low-skilled workers operate in intensely competitive industries such as retail and food service, workers’ artificially low wages would indeed result in artificially low prices for consumer goods, but not in increased corporate profits. The ability to hire workers at artificially low wages would attract new entrants into these markets, as well as cause existing firms to expand their outputs, until the rate of profit earned by employers of these workers is no higher than it would be if wages were higher. That Mr. Phelps is oblivious to this reality is sufficient reason to dismiss his economic analysis.

Donald J. Boudreaux
Professor of Economics

As a commenter noted, welfare doesn’t subsidize work, it competes with it.