Wednesday, April 24, 2019

The Non-Existent Inflationary Effects of a UBI or NIT

During the economic downturn proceeding 08, the United States adopted fiscal stimulus in hopes of boosting the economy by increasing the money supply. However, the fiscal multiplier was mitigated due to a concept known as monetary offset. Because the Federal Reserve has a mandate of averaging inflation at about two percent, any attempt to shift fiscal stimulus is diluted by the central banks' strong control of the rate of money growth and rates. If fiscal stimulus were to be effective, it would be done by shifting the aggregate demand curve to the right. This would raise prices in the short and long run, and only raise output in the short run. However, in the real world, if the fiscal stimulus shifts the AD curve to the right the central bank must adopt a more contractionary monetary policy in order to prevent inflation from exceeding their 2 percent target. This contractionary monetary policy aides in shifting the AD curve back to the left, a concept, as I said, known as monetary offset.

We can use this knowledge to combat the idea that programs in the form of a UBI or NIT would result in a large amount of inflation. If the government printed money to pay for these programs, the central bank would offset the inflation by exogenously stabilizing it.

If the money were to be funded through taxation then inflation still would not increase. The taxation that pays for the basic income will mean that taxpayers will have less to spend. That will offset the fact that recipients of the basic income will have more to spend. In this scenario, no money is being created. That means there can be no inflation unless the rate at which money changes hand changes - the so-called velocity of money. It's not clear that it would and if it did the central bank would once again take care of it.

This doesn't mean that there would be no effect on prices. UBI/NIT may have an impact on the relative prices of a subset of goods and services, such as housing. That seems plausible because poor people have a larger marginal propensity to consume. Due to the income effect, we'd expect prices, like housing, to rise, but you wouldn't necessarily 'feel’ this in the long term.

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