By Prerak Arora
Andrew Yang, a 2020 Democratic Presidential Candidate, recently introduced his plans to implement a ‘Freedom Dividend’ which is a form of Universal Basic Income. Through this, he plans to provide $1,000 per month to every American citizen over the age of 18, no questions asked.
He owes it to the fact that automation, that had destroyed nearly 4 million manufacturing jobs by 2015, would further destroy a third of all American jobs within the next 12 years.
The 44-year-old author, lawyer, and businessman argues that the policy would increase the bargaining power of workers because the workers can say no to ‘exploitative wages and abusive working conditions’ because of a source of stable income. He also believes that it would help in expanding the entrepreneurial ventures of the country, simply because people not be bound by the chains of financial insecurity and would have the liberty to fail. Improvement of mental and physical health of the population are added
Why it won’t work?
It’s expensive. The United States 2019 population is estimated at approximately 320 million people according to UN data and giving each person $12,000 a year would roughly cost 3-4 trillion dollars to the US government. Just to give you an idea, the total expenditures in the Federal Budget for 2019 is $4.4 trillion.
A $1000 payment for just being an American may sound good, but where would the money come from? Apart from the exceptions made in staples such as groceries and clothing, he plans to obtain the money from a VAT or Value Added Tax. Now this has a few problems.
It doesn’t account for higher prices of goods. The enormous VAT would get passed onto the consumers, hence, there would be no real advantage to consumers because they would now pay higher prices in exchange for the same goods. Andrew Yang also ignores one fundamental flaw in his proposal-inflation.
The increased purchasing power of American consumers would lead to an increase in
demand, triggering a rise in prices due to a shortage of goods. Imagine this, now that a person can buy a property because of the UBI, he would now call his realtor only to find out that the price of the property rose drastically. This would happen in almost every sector wherein the purchasing power would eventually be nullified by the laws of demand and supply.
His website mentions a vague reason as to why this isn’t true ‘While prices will likely increase on many goods, the increase will, for the most part, be smaller than the VAT as producers find more efficient ways to produce goods and adjust prices to maximize profitability.’ Without a specific plan, he wants to put a country into economic turmoil.
There is a net positive in jobs affected due to automation. While in the next four years, more than 75 a million jobs may be lost as companies shift to more automation, according to new estimates by the World Economic Forum in their Future of Jobs report, 133 million new jobs will emerge during that period, as businesses develop a new division of labor between people and machines, reported the Washington Post.
This data, contrary to Yang’s research, suggests that there is an upside to automation with a disclaimer that asking businesses to ‘reskill and upskill’ their employees.
It ignores irresponsible consumer spending. This theory is largely based on the presumption that people are inherently good, and would use the extra $12,000 on food, education or basic living expenses.
However, one cannot ignore the fact that a lot of people will spend that money on alcohol, drugs, and cigarettes.
Discouragement of labor. While the policy is bound to improve labor market efficiency as people would choose the jobs that provide them with higher job satisfaction, unemployment might increase because the labor might get discouraged from doing their jobs. Here, the policy would just turn into an expense and the hard-working people would be paying for it.
Tax cuts would be better because they would leave more money in the pocket of taxpayers and give them the incentive to work more and work harder. To understand
this, you have to know a bit about ‘The Negative Tax Experiment’.
The experiment, which ran from 1968 to 1980, consisted of four random, controlled trials across six U.S. states designed to test the negative income tax. Similar to the UBI, the negative income tax guarantees a minimum income, which phases out as earnings increase. The experiment’s planners hoped that providing a minimum income would encourage work, but the results showed the opposite. The experiment found that the negative income tax reduced “desired hours of work by 9 percent for husbands, by 20 percent for wives, and by 25 percent for single female heads of families.”
It is unfair. Yang’s campaign presents an advantage in determining who is eligible would be simpler because of the unconditional nature of the policy, hence reducing bureaucracy, however, as rich and poor people would be paid the same, it might be considered as an unfair proposal.
Other systems would be affected. Such large-scale spending often means that spending on other systems such as national security, law enforcement and education might get affected.
Although the proposal sounds attractive, it hasn’t been able to garner as many votes as the other candidates. Yang currently stands at a 3% on the Democratic primary polls by Politico.