Sunday, September 28, 2014

Brian Romanchuk — Consequences Of A Basic Income Guarantee

The idea of a Basic Income Guarantee (hereafter known as BIG) has become increasingly a topic of interest. My views have been greatly influenced by Hyman Minsky and Modern Monetary Theory (MMT), where a guaranteed job was preferred to guaranteed income. (Minsky referred to this as an Employer of Last Resort programme; MMT refers to this as a Job Guarantee.) I explain why I view a BIG as being essentially unfeasible within Canada, using logic similar to their analyses.
Bond Economics
Consequences Of A Basic Income Guarantee
Brian Romanchuk


Dan Lynch said...

Like many people, the author does not distinguish between a BIG and a UBI. What he calls a BIG is actually a UBI.

But I give him credit for doing some UBI math, something that few UBI advocates do:

Any observer of Canadian politics should see an immediate problem - there is no way of doubling the size of the Federal government without there being all-out Constitutional warfare

This is what I have been saying about a UBI all along -- that it would cost a LOT of money and require a major tax increase to "right-size" the budget deficit. In theory it could be done, but lotsa luck getting that tax hike passed.

Author assumes that a BIG/UBI would have to be part of the tax system, similar to Uncle Milt's NIT. Not so, the technology exists to create a week-based means-tested BIG based on one week's income, ignoring annual income. This is no different than how Unemployment Insurance is administered in the US, where the applicant must report his income every single week, and his UI check is based on that week's income.

if it is indexed to the CPI, it would become an "engine of inflation" (Hyman Minsky's description of the welfare state programmes of the 1960s).

Minsky was completely wrong about inflation, and inflation was modest during the 60's despite a major war going on.

This will create the demand spiral that we saw in the 1970s.

There was no demand spiral in the 70's. 70's inflation correlated to oil, but for political reasons conservatives like Minsky tried to blame inflation on labor unions and welfare programs.

FWIW, my suggestion on indexing is to set the means-tested big just above the poverty threshold, since the whole point of a BIG is to eliminate poverty.

Realistically, the upper middle class will have to shoulder the burden of increased taxation

More Minsky BS designed to serve a conservative political agenda. No, you don't have to tax the middle class, you can tax the rich. Wealth tax, estate tax, etc.. But mostly I recommend a means-tested BIG rather than a UBI, then you don't need to increase taxes very much if at all.

Matt Franko said...

"But an amount of 17% of GDP to the fiscal deficit would be a rapid driver of inflation, using Functional Finance principles, a fact which is well recognised by MMT economists. (Functional Finance is associated with the economist Abba P. Lerner; I have a primer here.) (During wartime, governments ran much larger deficits, but that required the government to take over the economy.)"

Brian I cant help but to look at this as monetarist in its basis...

Look we have $bazillionaires still out there doing things...

I dont see how providing balances to people to make sure everyone is adequately provisioned is automatically going to be "inflationary"... unless we think this will lead to a collapse in output as people will "stop working"..

We had the other conversion about "inflation" the other day, for prices to go up like that, we have to see the collapse in output... so is this what we are thinking: "a BIG will cause a collapse in output"?

Seems like we would have to think that output would collapse with a BIG if we think it would be "inflationary"...

I dont see people stopping what they were already doing if the govt provided a basic income... many people are already 'slaving' who really dont have to 'work' for wages for the rest of their lives...

So I dont see how providing some more currency balances to those "the least of us" would somehow "naturally" lead to a collapse in output... many people "work" because they like what they are doing and would like to continue to receive the "wages" they get...


Matt Franko said...

What if we did a BIG and with the removal of the fear of losing ones income, people would stop saving, hence the deficit would collapse (except maybe for the external USD zombies who would probably continue to want to save USDs as they would not be recipients of the BIG)

I see a BIG resulting in a collapse of the deficit... people wont have the need to save as much...


Ignacio said...

So far the only contrarian argument of BIG that is valid seems the one put by Neil based on "social reciprocation" perception, and it would not be socially allowed. Too bad that pretty much the same thing would happen with a JG though.

The economic arguments are also made-up and have ideological basis: "but people won't work anymore!" "inflation is coooooming!" (echoes of hyperinflation hyperventilation that MMT'ers joke about?)

"engine of inflation" (Hyman Minsky's description of the welfare state programmes of the 1960s

Seriously? That's the excuse neoliberals have used to get us in the mess we are now, not the inflation of the 60's (which was natural inflation), but the headline inflation because of oil supply shocks. Maybe if we stopped being oil junkies (we have the dollar zombies there and the west is the oil junkies, you need two sort of junkies to form such a symbiotic relationship), which is apparently happening very slowly, it would spare us a lot of trouble regarding inflation and geopolitical problems (let the muslim world live isolated, who cares, but we need their oil right?).

Maybe Misnky also would support invasion and military control of foreign oil fields right now.

Brian Romanchuk said...


If you are means testing on a weekly basis, you are ending up with an expanded UI. That may be a good idea, but that is not what I hear discussed.

Even if the cheques are mailed out independently of the income tax system, the income tax system would be adjusted to account for it. In other words, it would be de facto integrated with the income tax system.

With regards to the other comments on inflation, a small programme would probably have limited impact on inflation. At 17% of GDP, there is no way an inflationary impect could be avoided. Real GDP could not realistically rise by 17% in one shot, and by the process of elimination, the deflator would have to move.

Oil prices did matter for inflation, but things like indexation kept the inflation going. Canada had persistent inflation problems until the early 1990s, when fiscal policy was seriously tightened.

Brian Romanchuk said...

I find it hard to characterise Minsky as a conservative. But it is clear that with the demise of labour union power, inflation has been lower. The lack of indexation has meant that oil price shocks burn out, rather than cause a general inflation in the 1970s.

That does not mean that the demise of unionisation was a good thing; real wages have been falling. But it is clear that if union power returns, society needs to think more carefully about inflation control. Germany historically had strong unions, yet its policy settings kept inflation under control. The banning of indexation presumably helped.

Plus, I am not saying that I rise in inflation is the end of the world. But if you think that would be a winning political strategy, my feeling is that most professional politicians would disagree. I am not going to tell you what you should campaign for, I am just analysing the situation based on the current environment,

Dan Lynch said...

@Brian, approximately 25% of the unemployed in the US receive UI, with the majority of unemployed being disqualified for various reasons. A means-tested BIG would keep the other 75% from falling through the cracks.

Uncle Milt's NIT proposal made sense at the time he proposed it -- before the computer age -- but now days the technology exists to report income on a weekly basis, and I believe there are advantages to a weekly BIG over an annual BIG. The main issue is that poverty and unemployment are not constants, that people go in and out of poverty, that people work at short term jobs, temp jobs, seasonal jobs, etc.. Many poor people cannot predict their annual income with any certainty. For all those reasons and more it makes sense to me to have a means-tested BIG based solely on one week's income.

Re: settling up the BIG at tax time. I suggest treating a weekly BIG the same way we treat UI in the US -- that it is income that must be reported at tax time and that you have to pay taxes on it, with the rate determined by your annual income.

Alternatively, if the annual income at tax time exceeded the BIG threshold, you could force the individual to pay back his BIG income. That would be a disincentive to work, not to mention an unpleasant surprise, so I oppose "settling up" at tax time.

I totally agree with you that a UBI -- you say 17% of Canada's GDP, I estimate $2.5 trillion or about 15% of US GDP -- would be inflationary without a major tax hike, and IMHO that is a major political strike against the UBI.

Minsky was supposedly a socialist, but a strange sort of socialist who used right wing talking points to criticise "welfare mothers," advocated raising the retirement age and forcing old people to work until they keeled over, and advocated repealing child labor laws and encouraging children to drop out of high school to work in an ELR. Minsky also despised unions. Despite his claim to be a socialist, he struck me as being a typical paternalistic conservative.

I haven't studied Canada's 90's inflation, but a quick glance at a chart looks like it tracked US inflation closely and, other than a brief spike up to 6% around 91 (the Iraq-Kuwait war???), was mostly in the 4% range -- which Milt Friedman considered optimal. I'm not seeing the problem?

CPI chart at link:

Clonal said...


Have you done the feedback analysis as well as a sensitivity analysis as to what would happen if the proportion of Federal to Provincial sharing was F:P? My gut feeling is that there would be a dramatic increase in Provincial tax revenue with a BIG, which could be plowed back in as the Provincial contribution to the BIG.

In any case, the Provinces are the biggest beneficiaries of Federal deficit spending. If the Provinces were equal partners with the Federal Government on administering the BIG (and IMO, it would have to be Provincially administered because of the cost of living differences between geographic areas. The BIG has to be based on real dollars and not nominal dollars.

Tom Hickey said...

It's also necessary to look at the size of government under different welfare programs, assuming that other programs are not going to be reduced unless replaced by the new program.

Piketty notes that since 1870 the public share of GDP has increased markedly. There is considerable difference in this share among developed countries and the Nordic model is quite different from the US model.

MMT shows the policy space of an economic system. Use of that policy space, both how it is used and how much of it is used, is a political question. The answer is different in different countries.

Any proposal should take that into account. Does it repurpose the policy space being used presently, or does it change it and if so, how and by how much.

The right is very clear on this. They desire to reduce the use policy space especially the portion devoted to welfare, or else to repurpose it to enable greater private participation. They have thought out the arguments and objections, too.

Proponents on the left need to do the same. It's not enough to say that it's never an affordability issue but rather a matter of real resources. Well, a lot of the political debate is over how real resources are distributed.

Brian Romanchuk said...

Dan - a weekly means-testing would just create an incentive to game the system, unless the payments are taxed back. If the point is to make the welfare/unemployment system more reasonable, I have no objections. But every description have seen describes the proposals as a universal income, which looks like the UBI.

Minsky could be described as a "traditional conservative", which have largely disappeared. The current crop of "conservatives" are largely right liberterians, which used to be a fringe group.

Brian Romanchuk said...

(another followup to Dan). The Canadian inflation was bad enough politically for the givernment to bring in weak wage and price controls in the 1980s. The level of the inflation does not look to high, but that was in the context of a high unemployment rate. It was a stagflation. The US had similar inflation, but growth was stronger.

Brian Romanchuk said...

Clonal - Politically, the BIG/UBI programme would have to be split between the levels of government, and whatever tax rises also split roughly proportionately.

If the Federal government runs a deficit, it will help the provinces balances. It is highly possible that some provinces would use that room to tighten fiscal policy. If they don't they would be vulnerable to the Federal government tightening in the future. That is what happened to the provinces when the Feds tightened policy in the 1990s.

The provincial governments are often elected on the basis of being from the opposite party of the Federal government, and so it is rare that policies are coordinated.

Marian Ruccius said...

The Job guarantee option, however, poses no constitutional problems, especially when viewed from the macroeconomic angle. The Government of Canada can employ who it wishes to do as it wishes.

Marian Ruccius said...

National inflation is not the danger, but rather regional inflation. In the midst of the recent oil bubble, just before the crash, over-exploitation of Alberta's oil resource led to a scarcity of labour for low-wage service jobs, which the Albertan-led federal government fought by bringing in massive numbers of temporary workers. This predictably led to a huge backlash, in part by the anti-immigration crowd, and in part because temporary workers are systematically abused. Instead of moderating oil exploitation (and planning it over the long term) to mitigate the boom-bust cycle, as Alberta's best-loved ex-Premier suggested, the provincial government pushed ahead, to almost the sole benefit of politicians and the oil companies. Think of what the BIG would do in that context!!!

Matt Franko said...

"Think of what the BIG would do in that context!!!"

Uhhh, prevent the systemic abuse?

Marian Ruccius said...

No, I am pretty sure, given the nature of Canadian politics, the answer would definitely NOT be the prevention of systemic abuse but rather its exacerbation. More lower-end service workers would leave the workforce, which is fine in itself, but, instead of paying these workers more (those willing to return to the labour force) and moderating oil extraction, Governments would encourage greater extraction and bring in many more temporary foreign workers under even less enviable conditions and quasi-indenture.

Dan Lynch said...

@Brian, I'm sure you know more about Canadian history than I do, but some web searching turned up no Canadian private sector wage and price controls since the 1975 Anti-Inflation act that ended in 1979.

In 1982 Canada passed (or decreed, it's not clear) a "six and five" rule that limited public worker wage increases to six and five per cent in the following two years. The private sector was not affected.

In 1991 Canada froze public sector wages for 2 years with the "Public Sector Compensation Restraint Act."

But as far as I could determine on short notice, there were no Canadian wage & price controls on the private sector after 1979 ?????

Re: "gaming the system" with a weekly means-tested BIG. That's no different than the existing UI system, which seems to work well enough. A few people do cheat on UI, when they get caught they have to pay fines and possibly even go to jail.

As information technology increases it will be increasingly difficult to "game the system" by not reporting income. For example, you could simply require employers to report payrolls to the IRS on a weekly basis. Or require the quarterly reports to break down wages for each week in the quarter, and have a computer cross check those reports against the weekly BIG claims.

There will always be an underground economy that doesn't report cash earnings, but that is already the case. If anything, a BIG might entice drug dealers and prostitutes to escape those activities.

Meanwhile, corporations and 1%er's "game the system" for millions and millions.