Wednesday, November 26, 2014

Entitlement reform: it seems I'm not alone

Back in September I wrote an article titled "Entitlement reform: an attitude problem?"  I went into detail about the wrong attitudes prevalent in the area, and made this suggestion.

Do you want meaningful entitlement?  Here's one way to do it.  I'd dismantle the entire welfare and entitlement system, including unemployment benefits and Social Security, but excluding medical insurance (although that needs reform too).  In its place I'd offer every citizen of the USA (not non-citizens, please note!) a flat sum of money every year.  It would be enough to live at a basic level, without much in the way of luxuries - say, $1,500 to $2,000 per month, or $18,000 to $24,000 per year.  Let's make it tax-free, too.  The total cost would be a lot less than what we, as a nation, currently spend every year on welfare and entitlement programs.  Even better, because everyone would get this, we wouldn't need the plethora of government departments, bureaucrats and administrators that currently manage the existing dysfunctional system.  We could shrink government substantially and save even more money!

By doing that, we'd all start with a level playing field, rich and poor alike.  Those who are prepared to work hard will earn more than that, with which they can live at a higher standard.  Those who aren't prepared to work will at least be able to support themselves at a basic level.  The 'entitlement culture' will be overturned, because success will once again depend on your own efforts.  What's not to like?

There's more at the link.

My suggestion aroused quite a bit of criticism, not least because some respondents calculated that the cost of such largesse would be too high.  Nevertheless, I continue to believe that it might be a better way forward than our current morass of entitlement programs and culture.

It seems some people in Switzerland are feeling the same way.

Switzerland could soon be the world’s first national case study in basic income. Instead of providing a traditional social net—unemployment payments, food stamps, or housing credits—the government would pay every citizen a fixed stipend.

. . .

The proposed plan would guarantee a monthly income of CHF 2,500, or about $2,600 as of November 2014. That means that every family (consisting of two adults) can expect an unconditional yearly income of $62,400 without having to work, with no strings attached. While Switzerland’s cost of living is significantly higher than the US—a Big Mac there costs $6.72—it’s certainly not chump change. It’s reasonable income that could provide, at the minimum, a comfortable bare bones existence.

The benefits are obvious. Such policy would, in one fell swoop, wipe out poverty. By replacing existing government programs, it would reduce government bureaucracy. Lower skilled workers would also have more bargaining power against employers, eliminating the need for a minimum wage. Creative types would then have a platform to focus on the arts, without worrying about the bare necessities. And those fallen on hard times have a constant safety net to find their feet again.

Detractors of the divisive plan also have a point. The effects on potential productivity are nebulous at best. Will people still choose to work if they don’t have to? What if they spend their government checks on sneakers and drugs instead of food and education? Scrappy abusers of the system could take their spoils to spend in foreign countries where their money has more purchasing power, thus providing little to no benefit to Switzerland’s own economy. There’s also worries about the program’s cost and long term sustainability. It helps that Switzerland happens to be one of the richest countries in the world by per capita income.

The problem, as with many issues economic, is that there is no historical precedent for such a plan, especially at this scale, although there have been isolated incidents. In the 1970s, the Canadian town of Dauphin provided 1,000 families in need with a guaranteed income for a short period of time. Not only did the social experiment end poverty, high school completion went up and hospitalizations went down.

. . .

In 1968, American economist Milton Friedman discussed the idea of a negative income tax, where those earning below a certain predetermined threshold would receive supplementary income instead of paying taxes. Friedman suggested his plan could eliminate the 72 percent of the welfare budget spent on administration. But nothing ever came to fruition.

Again, more at the link.

I still maintain that a system of this kind would be far fairer than current entitlement programs, and would put everyone on a common economic foundation.  Those prepared to work hard would make a lot more money, and deserve it.  Those who aren't, wouldn't, and would deserve that too.  Best of all, we'd eliminate almost all of the huge administrative overheads - costs, personnel, bureaucratic inertia, etc. - that plague our present system.

I'd like to see it tried.  I think the results might surprise naysayers.



B said...

It'll actually be inflationary, if you think about it.

pricing will rise to meet the level of income and stop there again.

This will only hurt those who work, as their income level will (on a percentage basis) fall.

Until you actually reform the folks receiving the "entitlements'. (and I hate whoever invented that term) and reduce the amount og GDP spent on them, you'll never fix the issue.
Basic living stipends have been a socialists dream for many years. It won't work.

Rolf said...

If it was something like $300 a month per person (i.e., homeless but not starving) so that there was a real incentive to actually WORK, with no arbitrary cut-offs that strongly dis-incentivize work, then I might consider it. But something that would pay more than a "minimum wage job" would destroy to soul by destroying the incentive to work. The economy would crash, and poverty would be rampent. Yeah, they might have money, but what would they buy? nobody would be willing to work for that cheap.

Peter said...

I agree that the Swiss figures are probably too high (even though the cost of living there is also much higher than ours). For the USA you could probably cut those figures in half, or close to it. Nevertheless, I'm not sure that the advantages might not outweigh the disadvantages. The latter certainly couldn't be worse than the bureaucratic, wasteful, soul-destroying morass of the 'War on Poverty' that we have now!

Inconsiderate Bastard said...

In the IT biz we have a saying: "Doing the wrong thing faster is not a benefit."

A compassionate society does not abandon its members in need, nor apply undue burden to those not so.

I question the entire concept of "entitlement" and consider it an anathema to freedom and liberty; one party cannot receive without a second party suffering a taking. There is a huge difference between "assisting temporarily" and "entitlement." To subscribe to entitlements as necessary, and creating a structure to make them palatable and easier to accomplish strikes me as succumbing to a mental disorder - doing the wrong thing more efficiently is not a benefit.

A societal and economic structure (which is inextricably linked to education, or more accurately, learning) that offers the greatest opportunity for individual achievement and success is, to me, the Holy Grail and greatly more desirable than any form of externally-directed collective action, especially on dependent upon mandates.

I realize that our country will not achieve that without first suffering a cataclysmic upheaval, unless we become smart enough, and honest enough, to recognize the failings in the basic concept of "entitlements."

Brad Richards said...

FWIW I'm Swiss... This program won't eliminate poverty, because we don't have any. Neither does the US. Recall your time in Africa - you have seen real is poverty. What the US has (and Switzerland to a much smaller degree) are people who have a low standard of living as compared to the rest of the society, and a "basic income" program is not going to change that.

Worse, the people at the bottom of the economic scale are often really awful at managing what money they do have. At least with food stamps (or whatever you call it in the US nowadays), they have money that cannot easily be spent on things other than food. If they blow this on TV dinners, frozen pizza and other uneconomical things - at least they're not spending it on lottery tickets and cigarettes. If you just give them cash, well, too many will blow it on stupidities, and the media will decry that the US is letting people starve in the streets.

Which will be the excuse to retain the old programs in addition to the new one. "Excuse", because the real reason is that governments are incapable of eliminating bureaucracies. Instead, yet another bureaucracy is required. Reduce the size of government? Blasphemy!

Finally, the math doesn't make sense. Pay every adult CHF 2500/month, 12 months/year, roughly 6000000 adults = CHF 180 billion per year. Our current (generous) social programs cost CHF 20 billion per year; the entire federal budget is only CHF 60 billion. Just exactly where is that money supposed to come from? Do the math for the US; it's a bit better, but still impossibly expensive.

Finally, specifically to the Swiss situation: We are a country with nearly 25% foreigners, some of whom have permanent residency. Permanent residents do have a right to social services. There is already a racket in place where people are offered "permanent" jobs, immigrate to the country, gain permanent residence, and then...the job disappears (or was never really there). Remember that we are a small country easily accessed from all of Europe. If we start paying people cash, no questions asked, the level of fraud is going to go through the roof.

tl;dr: "Basic income" is an attractive idea, but ultimately naïve. There are just too many problems with the realization.

PeterW. said...

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Where is the "fairness" in taking from a man who works, and giving to a man who could work, but chooses to live idly?..... Let alone the economically depressing effect of high taxes reducing the incentive to create and grow businesses that actually employ people. The best driver of income is not paying people to be worthless, but by making them worth more through creation of a high demand for labour.

Divemedic said...

There are a number of problems here:

1. The cost. Paying each citizen in the US $20,000 a year will cost $6 trillion a year. Far more than it costs now.

2. If this is such a great idea, why not just mail everyone in the country a check for $1 million?

3. If I get $20K a year for sitting idle, why would I work? If I won't work, who will keep the lights on and grow the food? There are only two possible solutions:

a. Import workers to do the work, and tax their labor at a level that will support the programs. We tried that already, and the 13th Amendment stopped that practice.

b. Raise wages until they are sufficient to induce people to come to work, and then raise prices to afford the new labor costs.

If old wages are X, your entitlement check is Y, and new cost of living is Z, the formula is:
Z= X+Y

You cannot lift yourself up by standing in a bucket and tugging on the handle, no matter how hard you pull.

EgregiousCharles said...

A lot of the criticism I'm seeing of the basic income idea Peter is putting forward is far more applicable to the programs it's intended to replace than to the actual proposal. The essential feature of it that makes it so much better than other programs is that people who work hard and do well still receive it; so there's far less disincentive to work than with other programs. With current need-based programs, you have your choice of working and getting income, or sitting on your ass and getting about the same. Of course you don't work. With basic income, any working income is added on top, so if you work, you do better (as it should be).

Then there's the criticism based on the idea we shouldn't be giving money to people who don't work at all. This is correct and risibly foolish at the same time. Getting voters to eliminate current programs without replacing them with anything at all is not a possibility.

Opposing a possible improvement because it's not an impossible ideal is counterproductive. It reminds me of how self-proclaimed "environmentalists" oppose anything better for the environment than coal, especially nuclear, because the alternatives are also less than perfect.

Now opposing basic income because we can't afford a politically-sellable income level even with replacing the current spending, as some of the commenters are doing, that's different. I haven't seen any convincing analyses that it can be done.

EgregiousCharles said...


1. The cost. Paying each citizen in the US $20,000 a year will cost $6 trillion a year. Far more than it costs now.

Good point. I haven't been able to find out how many citizens there are in the US, all my searches only reveal residents, but offering it only to citizens (not illegals or visa-holders) will cut those numbers down. Also Peter only wants to pay adults (otherwise we'd be effectively paying people to have children). If we use his off-the-cuff figure of 200 million adult citizens, and make it $1000/month $12,000/year, that brings it to $2.4 trillion. 2.4 trillion is current budgeted federal spending for pensions, healthcare, education, and welfare for 2014.

2. If this is such a great idea, why not just mail everyone in the country a check for $1 million?

It would require money we don't have. Peter has stipulated all along that the idea it's to replace existing spending. The other problems that would cause, such as inflation, follow this difference. I'm guessing you're misapplying the principle behind the criticism of minimum wage where the problems are demonstrated by a thought experiment with a super-high minimum like a thousand an hour.

3. If I get $20K a year for sitting idle, why would I work?

Because you can get $40K a year for working a $20K a year job as well. I'm damn sure not going to quit my job to live on a $20K a year when I could add it to my current income instead. Which is the key difference in this program. Currently if you don't work as a single parent with 3 kids, some estimates bring your disposable income to the equivalent of having a $60K a year job. Now that's a real incentive to not work.

Divemedic said...

@ EgregiousCharles:
At your #3 point: That is the problem. There will ALWAYS be people with less than others. So now the poor will have x+12,000 to spend, and the rich will have x+12,000 to spend. Prices will increase by 12,000 a year to pay for it all.

y is now equal to X+12,000

Roy said...

There are a lot of good arguments on both sides. But where I think it breaks down is the fact that a very large portion of the poverty in this country is caused by ignorance and bad decisions. This universal stipend will not change that.

What happens when the single mother of 2 young children blows her $1500 per month on crack or meth? Do the kids starve? If not, then that means we have to implement yet another program to take care of those kids. What about the mother herself? Do we let her starve? If not, then we are right back where we started, except with another $6 trillion added to the public burden.

However, Peter's proposal does illustrate one of the major problems with the system as it exists today - the built-in negative work incentive. Right now, someone on AFDC or section 8 etc. loses some or all of those benefits if they find work - even minimum wage work. Right now, that person would need to find a job that pays about $20,000 just to break even. What kind of jobs pay $20,000. Usually, low skilled, back breaking labor of one kind or another.

Roy said...

By the way. The "negative income tax" idea has been tried. It's called the Earned Income Tax credit.

EgregiousCharles said...

"Prices will increase by 12,000 a year to pay for it all."

To pay for what all? As I demonstrated, we are already spending that 2.4 trillion a year. If you print 2.4 trillion and hand it out to adult citizens, prices will definitely increase, but this is a different scenario. Moving money around doesn't increase prices in itself, unlike printing money.

Moving money from a worker to a non-worker tends to increase prices because more money means more workers, more workers produce more stuff, and as supply of stuff increases, cost falls. Moving money from government welfare, pensions, and health care spending to adult citizen's discretion won't bring any big price increases I can see. There will probably be a temporary increase in price of things people actually want, due to scarcity, until supply catches up, and a large decrease in price of things only a government would buy.

EgregiousCharles said...

I think Roy's objection is cogent. While I think the idea is politically workable, it would be very obviously beneficial to blue-collar voters, later all the other welfare programs might be added back on top.

Anonymous said...

The guaranteed annual income, sometimes implemented through a negative income tax has been subject of limited experiments in the USA, in Seattle and Denver during the 1970s. I won't try to post the links here, but look up those two terms in Wikipedia.

More information about the experiments is available on teh intarwebz generally. Search for the terms "Seattle Income Maintenance Experiment", and "Denver Income Maintenance Experiment".

smithgift said...

IMHO, entitlement/welfare/social justice should cut to the chase.

There are many places in the US that guarantee free food, shelter, and clothing for a fixed period: they're called correctional institutions.

It seems ludicrous to me that we treat our prisoners, in this sense, better than our homeless. Suppose we had essentially the same sort of shelters, open to all without question, with about the same level of treatment?

One paper on the internet shows that the cost per prisoner is about $20-30k, depending on security level of the prison. But this assumes such things as personal rooms, constant supervision, security, barbed wire fences, indoor gyms, televisions, etc.

Cut out the nice stuff. Just dormitories full of bunk beds, three full meals a day, maybe some lockers for personal possessions, showers, and that's it. Nothing shiny. Maybe not even electrical outlets. Just beds, food, and hygiene, free, no questions asked.

Medical care would be an entirely story, but most of our problems are systemic, not due to the actual cost of care. A recent hospital stay I know of cost about $1,000 a day for one thing. Not for food. Not for medicine. Not even for the doctors. Just for room and board. Seriously?

PeterW. said...

In a mood to comment a little more this morning.

What seems to have been left out here is the question of where the money is to come from..

As a taxpayer, it does me no good whatsoever if the government "gives" me $20,000 when my tax bill goes up $20,000 to pay for it. Why not leave that money in my own pocket to start with. This pointless transfer of funds from my account to the government and back again had no benefit, while costing transfer fees and the interest that I lose while the money is not actually in my account. Meanwhile, the government is employing extra people to administer the scheme, thus creating the extra inefficiency that Peter wants to avoid.

That's me as a middle-class tax-payer.

How about the wealthy and the big business who actually pay the majority of the tax?

Most wealth is created by people who invest and take risks. Increasing the tax rake-off has the following effects. Reduced investment. Reduced risk-taking by entrepreneurs. Reduced expansion of business. More crony-capitalism as people ask that their industry be treated as a "special case". .......... All of which has a depressing effect on the very thing that actually creates jobs.

Keynesian economics - the theory that increased government spending increases aggregate demand and hence stimulates the economy, has proven a a failure everywhere it has been tried. Whether the $$ were derived from taxes or borrowings, it depresses the very spending that you need to create jobs, and increase the value of the jobs that already exist.

There is an old children's story about a pudding that, no matter how much there was eaten, there was always more to eat. This scheme is that same "magic pudding" thinking on a grand scale...... Popular only with those who pay no tax.

Anonymous said...

I propose that all "citizens" get a check equal to 40 hours of minimum wage. All taxes would be withheld as with any other workers paycheck. That way the entitlement people will have not incentive to vote for Tax Increases. That would create the "level playing field", and those who want more out of life can work for it.

Anonymous said...

There is one problem nobody seems to address. There are a number of folks who are already not working that depend on an income they have "earned" through Social Security. Per the comments so far, many of those on Social Security would see a decrease in income. Granted that SS is a ponce scheme, but some folks do rely on that income; and would see their lifestyle minimized by this scheme. Some SS recipients, such as myself, are unable to work because of medical conditions. What would I do in such a case?