Thursday, January 9, 2020

Andrew Yang's Flawed UBI Proposal

First off, a UBI is a fine economy policy and this is a critique of Andrew Yang's evidence to support it more than the policy itself and his methods of implementing it that make it questionable. 

UBI 

  • Everyone receives $X per year after taxes.
  • So, Income = (1-t)*Pretax + UBI

So, Andrew Yang cites a Roosevelt Institute as a justification for his UBI. He claims that a UBI would increase growth enough to finance a substantial portion of the UBI. 

The Roosevelt Institute projected that the economy will grow by approximately $2.5 trillion

The paper simulated 12 different scenarios. These are the scenarios for $1,000 a month for every adult.  

Yang cherry-picked the two scenarios with the highest growth and left two where there was minimal or no growth. The two scenarios that show high growth assume that the UBI is 100% deficit-financed. They're under the assumption that you don't pay for the UBI so it would make no senes to use them if Yang wants to pay for it without deficit spending.

Scenario 6 uses the Levy model which simulated a fully tax-funded UBI. Scenario 6 is a flat read line, meaning they found no impact on real output. They wanted to take into account the higher marginal propensity to consume of poor people so they made scenario 12. The Levy model explicitly ignores the costs of lower savings rates (which doesn't make sense if you're trying to calculate long-run effects) and they found some real output growth at $500 billion. Thats 5 times lower than the number Yang cited.

Yang's own evidence doesn't say a UBI will grow the economy as much as he says it will and he also has some extreme shortfalls in spending. Although he has added a few new methods of taxation like a financial transaction tax(which generates low revenue anyways), a VAT, stimulus and cutting/using current welfare spending still creates a massive shortfall in spending.

A better policy would be to implement universal Pre-k, a monthly child allowance, a moderate negative income tax(effectively the same as a UBI) and wage subsidies(a better alternative to the minimum wage)