Andrew Yang's Math Doesn't Add Up

February 1, 2020

 

For over half a century, the idea of a universal basic income (U.B.I.) in America has been largely confined to the fringes of American political thought. Yet in 2020, the proposal has found its champion in the form of businessman Andrew Yang. Yang’s campaign is unique in its embrace of solutions it deems “not left, not right, but forward” and as a result, he has forged a diverse coalition of young progressives, former Republicans, and the politically disaffected. At the center of this ideology is Yang’s U.B.I. proposal, patriotically branded as the Freedom Dividend.

 

To understand the Freedom Dividend, we must understand the general guiding principles of U.B.I. Fundamentally, U.B.I. is a fixed basic income that would be transferred via check from the federal government to every adult American, young or old, rich or poor, working or disabled. Unlike means-tested programs like the Earned Income Tax Credit (EITC), basic income payments are uniform in their amount and are distributed without requiring recipients to fill out paperwork to request them or confirm they qualify. Unlike the EITC and the American healthcare system, access to benefits is not contingent on employment. These U.B.I. benefits range from around $10,000 a year to $20,000 on the more generous side (Yang’s U.B.I. would give $12,000 a year to every American).

 

As a transformative idea that would completely restructure the American economy and challenge Americans’ long-held reticence to embrace social and economic rights alongside civil and political ones, U.B.I. is not merely a policy proposal but a statement of its proponents’ values and how they define economic stability. As U.B.I. proponent Annie Lowrey of The Atlantic wrote in her critically-acclaimed book, Give People Money: How a Universal Basic Income Would End Poverty, Revolutionize Work, and Remake the World, “A U.B.I. is a lesson and an ideal, not just an economic policy.” The ideal is more or less that government has a stake in providing for the basic needs every person needs to survive. The lesson is that cash transfers rather than progressive taxation alone or at all (depending on the design of the U.B.I. program) can provide for these needs while promoting positive individual social outcomes and certain political-economic outcomes that are sought by those enacting the policy (for conservatives, reducing the number of Americans on welfare and encouraging stable families and for liberals reducing income inequality and bolstering the social safety net).

 

Unfortunately for Yang, he is selling his Freedom Dividend as something it is frankly not. His proposal contains far too many unnecessary errors to be considered as progressive as he says it is. Indeed, the Freedom Dividend more closely resembles U.B.I. plans put forward by libertarians and so-called “reform conservatives” like Milton Friedman and Paul Ryan respectively. That would be understandable if Yang were running on the professed conservative goals of U.B.I. to get the government out of the market by replacing other safety net programs. But while his proposal may actually do this (more on this later), it is not what he is running on in the Democratic primary and in fact runs counter to it. Yang claims he is instead calling for a massive emergency government intervention in the market to offset dramatic technological changes that he believes pose a threat to American workers. Simply put, Yang’s argument and diagnosis of the problem fundamentally differ from the substance of his policy and if he switches his argument to say what his policy actually seeks to do, it will conflict with his goal of winning a progressive Democratic primary. As such, Yang does more harm than good to the progressive case for a U.B.I.

 

If It Ain’t Broke, Don’t Fix it

 

U.B.I. proponents face a single critical decision that will shape whether their specific proposal is more progressive or conservative. This choice will shape whether U.B.I. is a revolutionary project to reform the American economy and strengthen the social safety net or a savvy ploy to weaken the welfare state and promote individualism. 

 

A more progressive U.B.I., like that championed by Clinton Administration Secretary of Labor Robert Reich, Martin Luther King, Jr., and Jim Pugh of the Basic Income Project, would build upon the existing social safety net, with U.B.I. supplementing rather than replacing existing public assistance benefits. For instance, a qualifying individual who is eligible for Supplemental Nutrition Assistance Program (S.N.A.P.) benefits and U.B.I. would not have to choose between the two.

 

At the other end of the spectrum is the more conservative U.B.I. as supported by Richard Nixon—though he professed support for a more progressive U.B.I. before flip-flopping—and Milton Friedman. This proposal, generally speaking, proposes U.B.I. as a replacement for the current social safety net. It either outright cuts existing social programs like S.N.A.P., Temporary Assistance for Needy Families (T.A.N.F.), and Social Security or forces recipients to choose between U.B.I. and these programs. It increases individual agency but also paperwork.

 

The Freedom Dividend as proposed by Yang would clearly fall into the second category. His plan makes clear that recipients of current social benefits would have to choose between their current benefits and the $1,000. On his website, Yang argues that his U.B.I. will be funded in part by “consolidating some welfare programs.” This would achieve a conservative goal in reducing government spending while assuredly leaving some Americans better off. It is also worth noting that there are some benefits that the Freedom Dividend would not replace, chiefly those from Social Security, Medicare, and Medicaid.

 

From a progressive point of view, this plan raises several doubts and questions. First, how much better off would these Americans be as a result of the Freedom Dividend? According to the U.B.I. Center, 86 percent of Americans would have more disposable income as a result of the Freedom Dividend. However, the same source’s analysis estimates that the average increase in disposable income was just over $400 per month once taxes and reduced alternative benefits are considered. While this will (according to the U.B.I. Center) reduce income inequality, poverty, and child poverty, $400 a month seems like settling for half a loaf of bread. If you are going to do something as ambitious as spending $2.8 trillion per year on a universal basic income and claim it is the logical extension of Franklin Roosevelt’s New Deal, you might as well just go all the way in and build in a U.B.I. on top of the wildly successful New Deal programs. To do otherwise is to meddle around the edges rather than produce the revolution of the American economy that Yang claims to be championing.

 

By contrast, a U.B.I. stacked on top of the current social safety net would represent the whole loaf. The progressive Roosevelt Institute recently modeled the impact of a $1,000 per month U.B.I. paid for by increasing the federal debt and concluded that it would expand the economy by over 12.5 percent over the baseline over eight years. Additionally, whether the policy was tax or debt financed, there resulted an increase in output, employment, and wages. 

 

A more comprehensive U.B.I. would increase aggregate demand, thereby growing the economy while reducing poverty. Of course, on top of this, one would avoid defunding government transfers like S.N.A.P. or T.A.N.F. for recipients and redistributing those funds that are specifically targeted to the poor upward to everyone else (which could have the unintended impact of increasing poverty). And while it would not be cheap, the amount spent would not be completely unprecedented. If you were to add the annual cost of Yang’s Freedom Dividend to all existing federal, state, and local spending, the U.S. would still spend less than France, Denmark, Belgium, Sweden, and other O.E.C.D. countries as a percentage of G.D.P. From a budgeting and economic policy standpoint, it is nothing that a little progressive taxation cannot solve.

 

The Regressive V.A.T.

 

Another major problem from the progressive perspective is the way Yang chooses to fund his proposed U.B.I. While Yang deserves plaudits for his intent to impose a financial transactions tax on Wall Street and his willingness to lift the income cap on Social Security payroll taxes (both of which are shrewd and innovative ways to take on wealth inequality), there are serious issues with his decision to fund the Freedom Dividend primarily through a 10 percent value added tax (V.A.T.).

 

In short, a value added tax is a tax on consumption that is applied to each step in a product’s production and sale. In terms of economic burden, a V.A.T. is similar to a sales tax in that it either raises the cost of the product to the consumer or limits the amount of revenue available to compensate a business’s workers. V.A.T.'s are not uncommon, as Yang himself notes. More than 80 percent of the countries in the world either have one or “something similar.” But that alone does not mean V.A.T. should be any progressive’s dream tax.

 

Like other consumption taxes, a V.A.T. is horribly regressive. Existing economic research concludes that, as with tariffs, the tax is passed to consumers through increased prices for goods. As poorer families are much more likely to spend a greater portion of their income on basic consumption rather than investment, they are hurt more than wealthier families by a V.A.T. 

 

Yang makes two main arguments in response to these points, but neither is particularly strong. First, he argues that since his V.A.T. will not apply to certain basic necessities like clothing and groceries, low-income families with a greater likelihood of spending their next dollar will not be adversely hit. While these types of exemptions historically have reduced regressivity, they have done so only modestly if they had any effect at all. Furthermore, as Eric Toder, James Nunns, and Joseph Rosenberg argue, exempting goods is an inefficient way to achieve such modest reductions because average spending on commonly exempted goods rises with income, so higher-income people see their tax burden decrease more than low-income people do.

 

Yang also argues no lower-income person could ever buy enough of the non-exempted goods that the V.A.T. cancels out their U.B.I. But that’s not the point. A V.A.T. need not entirely cancel out the U.B.I. for it to significantly reduce the impact of the U.B.I., especially if prices for non-exempted goods rise in response to the new influx of cash in consumers’ hands. For the low-income Americans who rely on the social safety net Yang proposes to cut, the Freedom Dividend is already partially offset and therefore any increase in their consumption costs as a result of a V.A.T. will leave them with a minimal improvement in financial security, if not worse off. In short, the plan to finance the Dividend with a V.A.T. is regressive at its worst and self-defeating at best.

 

The Automation Debacle

 

Equally problematic is Yang’s reasoning for why the United States needs a U.B.I. In his book The War on Normal People and on his website, Yang makes an argument that essentially boils down to the idea that the U.S. is mired in the middle of a period of technological change that has replaced manufacturing jobs with robots and threatens other industries in the near future (truck driving, which employs over 3.5 million Americans, is a common example he gives). In the candidate’s mind, a U.B.I. would help keep Americans who lose their jobs to automation on their feet and save society from unraveling as a result of the backlash to automation.

 

His stump speeches and Twitter timeline are full of fascinating stories of Yang persuading former Trump voters that automation, not immigration is to blame for job losses. HIs beliefs and experiences as recounted in his book assuredly come from a place of personal political introspection and good intentions. But on the issue of automation, his predictions are complete speculation that runs counter to much of the recent research. In essence, his vision of the American economy is premised on BS and exploits fear when fear may not be warranted.

 

If the research is to be believed, Yang is focusing on the wrong boogeyman (er, robot). Unfettered and harmful trade policies perpetuated a gross, multinational corporate race to the regulatory bottom and the evidence that trade and not automation is the culprit is compelling. 

 

This was assumed to be the case when the number of American manufacturing jobs rapidly declined in the mid-2000s. As the decline coincided with China’s admission into the World Trade Organization and its subsequent emergence as an industrial power, many economists assumed offshoring from trade and job losses were linked. But some dissented, arguing that factory outputs were still rising during the period of job loss and therefore it was possible that technology and robots were taking the place of workers where they would be more efficient and productive. Yang and these economists promoted a 2015 study by Ball State University, claiming it vindicated them in attributing 87 percent of the job losses during the 2000s to automation and just 13 percent to trade. But there were major problems with the Ball State study, and more recently, Susan Houseman of the Upjohn Institute argued that the rise in productivity was almost entirely attributable to the unique way the government measures output in the computer and semiconductor industries and not automation. Only within those sectors did manufacturing productivity grow at a sizable rate, proof that automation could not explain job losses in all manufacturing sectors.

 

Furthermore, Houseman noted that the number of factories declined by over 20 percent as well during the time period, which could clearly not be explained by robots taking the jobs of workers. Additional research by M.I.T.’s Daron Asemoglu and Boston University’s Pascual Restrepo concluded that the trend toward industrial robots could explain just 360,000-670,000 job losses since 1990 (for context, at least 6 million manufacturing jobs were lost between 2000 and the Great Recession).

 

As the case exonerating automation strengthened, so did the case implicating trade policies. The U.S.’s decision to grant China permanent normal trade relations (P.N.T.R.) in 2000 (decreasing tariffs on Chinese imports) gave U.S. companies confidence that tariffs would remain low. This encouraged them to build supply chains around Chinese manufacturers (read: send jobs overseas to cut costs) to compete with low-cost Chinese imports. Justin Pierce of the Federal Reserve and Yale’s Peter Schott recently found that P.N.T.R.’s impact explained the vast majority of the decline in manufacturing employment, even when they controlled for Chinese policy changes. Similar research estimates this cost to be over a million manufacturing jobs (and 2.4 million jobs once effects on local communities at large are accounted for- a figure the authors estimated was on the conservative side) between 1999 and 2011 attributable solely to cheaper Chinese imports. There is also research suggesting that the devaluation of the dollar hurt American manufacturing by making U.S. exports more expensive. 

 

New technology may change the way the American economy works, but the historical record Yang purports to utilize as evidence goes to show that his fears about automation are very overblown and misplaced. As Slate’s Jordan Weissman writes of Yang, “Therein lies the real problem with Yang’s outlook. It’s not just unrealistic. It’s lazy. When you buy the sci-fi notion that technology is simply a disembodied force making humanity obsolete and that there’s little that can be done about it, you stop thinking about ideas that will actually prevent workers from being screwed over by the forces of globalization or new tech. By prophesying imaginary problems, you ignore the real ones.”

 

Caution for the Left and a Look Towards Iowa

 

Although Yang is a poor messenger for a progressive version of U.B.I., that should not scare Democrats from considering it and it is disheartening to hear those on the left fall into the trap of opposing U.B.I. from the right based on assumptions without basis in reality. 

 

For example, I have heard the argument from some liberals that those who receive U.B.I. would not necessarily spend it wisely. Putting aside that this is a mere reflection of the racist “welfare queen” stereotype thrust into the national consciousness by Ronald Reagan and a generation of conservatives, existing evidence seems to point in the other direction. In Stockton, California, which is in the midst of a basic income trial program, recipients have been spending their benefits mainly on necessities such as food, clothes, and utility bills (Stockton’s mayor has criticized the Freedom Dividend for its cuts to the social safety net). In England, which has a child allowance (essentially a U.B.I. for kids), poor parents were able to spend more on books, toys, and healthy foods while in Canada, child allowance recipients were less likely to spend their money on alcohol or drugs. This ought to correct a common misperception that people become poor due to deficiencies in decision making and self-control. The reality is that poverty imposes significant cognitive burdens on people, which impairs their decision making abilities.

 

Secondly, a general affinity for means-tested programs continues to prevail in opposition to subsidizing U.B.I. for billionaires and their kids. What this fails to account for is that poorer Americans are more likely to spend their next dollar and do so productively, whether it helps them pay the rent or afford groceries. This has a much bigger impact on the economy and people’s lives than a billionaire saving another $1,000. Furthermore, our means-tested social programs are filled with arbitrary cutoffs for eligibility, specific requirements, and a whole lot of bureaucracy that makes the system difficult to navigate for low-income people. People lose access to the life-saving services of Medicaid every day because they make some sort of error when they fill out paperwork to certify they met their capricious work requirement. Andrew Yang gets this, once noting, “Our welfare programs are designed to be difficult.” The universal nature of U.B.I. avoids imposing unnecessary and undue burdens on working families.

 

U.B.I. may not be the best, most urgent, or most effective economic policy that Democrats could champion in their primary. Indeed, I believe that wage insurance for those transitioning from a job that paid them more than they earn in their new job, a federal jobs guarantee, and expansion of unemployment insurance are more pressing and potent fixes. But U.B.I. should not be dismissed out of hand as an unserious proposal because its champion in 2020 failed to give it a progressive bend. And we need to be honest about the good it could do and refuse to fall back on old, refuted talking point assumptions about human behavior and motivation or we are no better and no more progressive than Andrew Yang. 

 

There are progressive cases for an American U.B.I. But Andrew Yang is not in any way making a progressive argument or one based in fact, regardless of how many times he calls it progressive. In doing so, he has succeeded in parading a right-wing trojan horse through the gates of the Democratic primary debates. Instead of progressive policies that lift all boats and revolutionize the American economy, millions of Americans will be left with a mere $12,000 consolation prize for those left behind by an economy that works well for Wall Street and Silicon Valley but leaves Main Street behind. The American left does not need a millennial-friendly version Ross Perot. It needs (and deserves) another Franklin Roosevelt.

 

A.J. Manuzzi is a third-year International Relations major in the School of International Service. He is Deputy Editor for Domestic Affairs for the Agora and a former Editor-in-Chief.

 

Image courtesy Stephen McCarthy, Creative Commons

 

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