Tag: inequality

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Against Broad Student Loan Forgiveness

student_debt

May 11, 2022 was a financial watershed for my friend Laura Davenport. A teacher at Alamo Colleges in San Antonio, on that day she received an email from the Department of Education informing her that her $155 thousand of student loan debt had been suddenly forgiven – from one day to the next – through a program called Public Service Loan Forgiveness (PSLF.) She couldn’t believe it at first. 

She had been working for years to qualify for just this event. She described to me a Kafka-esque journey with her loan servicer and the Department of Education, in search of a way to take care of the loans she took out for her Master’s degree and PhD in creative writing. Between 2009 when she completed her degree and now – despite more than 10 years of payments – her loans had grown from $119,921 to $155,399. 

I bring this anecdote up in part to call attention to the PSLF. If you or someone you love has student loans and has or will accrue ten years in public service work or non-profit work, they may qualify for this massive debt relief. There’s an October 2022 deadline for getting your case for loan forgiveness reviewed by the Department of Education, with relaxed standards for qualifying, compared to the past. 

I also bring this up because  the Biden Administration has strongly implied that it will soon forgive $10,000 of debt (or more!) in a kind of blanket amnesty program for student loan borrowers. A progressive movement has grown to a crescendo in the past few years in favor of broad-based student loan forgiveness. 

I’m the kind of jerk that thinks this type of amnesty is a big mistake. I don’t really enjoy writing financial opinion pieces that I know will garner a lot of hate mail. Ah well, I’m still going to state my unpopular view. Regular student loan forgiveness currently contemplated by the Biden administration (of $10,000, or more!) is a bad idea. 

The pro-student loan forgiveness movement makes the following points.

  1. The cost of higher education has become outrageous. Tuition Inflation has run at an average of 6.2 percent for the past 20 years, well in excess of the rest of the economy, and certainly of wage increases.
  1. State universities used to be an affordable option, but no longer. Over the past 20 years the cost of public education has nearly tripled on average. The children of middle class families cannot afford public education. Despite robust public university systems, the average student borrower in Texas has over $31,000 in debt. The average!
  1. Unlike nearly every other type of personal debt, student loans are not dischargeable in bankruptcy, making it a harsher debt burden than credit cards, home, car, or business loans.
  1. Student loan debt balances are bigger than credit card debt balances, roughly $1.7 trillion compared to $840 billion. About 13 percent of Americans have student loan debt, making it a widespread burden.
  1. Wealthy countries in Europe do not make higher education unaffordable like we do. It’s typically free or very affordable there.

I agree with all of this. And yet, I still don’t think the Biden administration should offer $10,000 or more in student loan amnesty.

I oppose wide-scale debt forgiveness from two angles. First, student debt forgiveness is inequitable. 

In part because of the demographic of who enrolls in higher education, and in part because of high debt balances that accrue to high-income potential degrees like medicine, law, and business, academic studies all conclude that debt forgiveness plans are regressive. That means that the higher benefits of this public good goe to higher income populations, while the lowest income populations enjoy less benefit. Understood similar to a regressive tax policy, broad debt forgiveness doesn’t pass the fairness smell test.

Second, it’s bad politics. Here’s a partial list of people who have good reason to resent broad based higher education loan forgiveness:

  1. Americans who have not studied for a higher degree. (This is a majority of Americans, by the way. Only 48 percent of people 25 or older have completed an Associate’s, Bachelor’s or higher degree).
  2. Americans who took out higher education loans and who have paid their debts back one way or the other. They did the hard thing, and now they will feel like suckers.
  3. Americans who will take out higher education loans in the future but who will not receive loan forgiveness. When my girls go to college, by an accident of birth, they will most likely not get their debts forgiven.

This is a recipe for political resentment. Of course we may anecdotally know or be somebody “deserving” of debt forgiveness, but as a matter of policy it’s not a good idea.

So what kind of relief should we offer? I’m very pro debt forgiveness for people who have done public service. The military, government service, public education – these all seem like worthy ways to earn debt relief. You earned less with your degree than you could have in the private sector, but you contributed to society, and then society pays you back. A fair deal, and politically palatable.

As for Davenport, who qualified after working 10 years in public service, I’m thrilled for her. During the last administration, PSLF approvals dropped to nearly non-existent, to the point that the Government Accountability Office found that a mere 1 percent of applicants qualified by 2019.

A shift in policy in the past year however has suddenly opened up borrowers for massive relief. 

A second group that should get relief are people scammed by higher education. On June 1st the Education Department wiped out $5.8 billion owed by 560 thousand student borrowers to Corinthian College, which went bankrupt after 20 years of dubious promises and under-delivery. Seems right to me, but it would have been even more satisfying if the Corinthian College leadership had been prosecuted for costing the public billions of dollars.

The Biden administration’s plan to simply forgive loan debts – not linked to service – seems unfair and politically unwise.

A version of this post ran in the San Antonio Express-News and Houston Chronicle.

Please see related posts:

Past Student Loan Forgiveness Failures

Not Holding my breath on Student Loan Forgiveness

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UBI is Coming This Year – Permanently

As of this week we have the results from the Democratic primaries, and we have a surprise winner. I didn’t expect to say this, but tech entrepreneur Andrew Yang has run away with the 2020 Presidential election.

Andrew_yang
Mandatory Credit: Photo by John Locher/AP/Shutterstock (10532388f) Democratic presidential candidate entrepreneur Andrew Yang speaks at the Charles H. MacNider Art Museum during a campaign event, in Mason City, Iowa Election 2020 Andrew Yang, Mason City, USA – 21 Jan 2020

No, I don’t mean literally Yang becomes President next year, obviously. But his central, formerly kooky-sounding idea of Universal Basic Income (UBI) is about to become reality. With bi-partisan support. And more than that – I think it becomes permanent.

What the Trump administration and key Republicans Senators propose to pass in the next week or so – as a response to the COVID-19 crash – is an unconditional cash transfer to American adults. As of this writing, they are still debating the amounts and timing, but it all seems likely.  Maybe $1,000 per adult on April 6 and May 18th, according to a Bloomberg news report.

This cash transfer represents a previously-untried-in-the-US solution to alleviating the effects of a recession. For what it’s worth, it feels to me like exactly the right thing to do right now. The traditional “lower interest rates and let it trickle down” is insufficiently targeted to the people for example who face imminent poverty because their bar, restaurant, retail store, theater, or gymnasium where they work is either forcibly closed, or effectively closed, until the virus stops passing around.

As Americans, we think we’re opposed to transfers like this. We tend to think in shorthand like “bootstraps” and “no work, no pay.” But just as there are no atheists in foxholes, there are fewer libertarians in a pandemic-induced recession. Nobody is to blame when their restaurant-employer shuts indefinitely, by order of the city. People want to work, but they can’t. The only humane response is a bit of cash to cushion the blow until normalcy returns. 

So why do I think this one- or two-time cash transfer becomes permanent? For a bunch of virulogic, economic, and political reasons. 

I’m not an infectious disease expert (although I am married to one!) but I can imagine scenarios where we do not have the “all clear” signal to return to public places 3 months from now. Which means severe economic pain among households continues 3 months from now.

So, now follow my train of thought. Let’s say the COVID lockdown and recession continues for not just 3 months but 6 months to 12 months. Restaurants, bars, theaters, gymnasiums, stadiums, concert halls, and retail stores have to remain basically empty, either by law or by prudent health practice, to prevent the continued spread of the virus. Every shuttered business represents people who can’t afford to pay rent, pay the mortgage, or buy groceries. The pesky thing about food and shelter is that we all have to pay for it every single month. The federal government is going to have to make another unconditional cash transfer 3 months from now.

Alaska_Permanent_Fund

And then, if the virus continues to circulate among the population, another month after that.  Pretty soon we’re looking at a monthly, universal basic income. 

Why will it become permanent? Let’s look at the example of Alaska. And then Social Security.

For Alaska residents, a basic income check known as the Alaska Permanent Fund Dividend – recently around $1,600 per year – sure is popular. Even though oil revenue has plummeted, and the state can’t necessarily afford it, Alaskan politicians would not dare eliminate the dividend. It turns out – and you’re going to have to just trust me on this one – people tend to like free money.

There was a moment in time, in the mid-1930s, when Social Security looked to some people like a radical Socialist idea. Now, only paleo-conservatives find the idea of Social Security to be un-American.

So I bet by month 6 of this recession – just before elections – that a majority of Americans will have swung around to deciding that a universal monthly basic income is a comfortable and necessary thing.

Perhaps the biggest whiplash is happening among political leaders. 

How did the Republican Party suddenly become advocates for this unconditional cash transfer? 

Mitt_Romney

Trump undoubtedly has an instinct for what his key supporters want and need. A strong case could be made that the Rust-Belt swing state voters of Michigan, Pennsylvania, and Ohio who delivered Trump the electoral college victory in 2016 are eager for this type of economic lifeline. When you live in a manufacturing town, and manufacturing jobs are going overseas, a little monthly help goes a long way.

Trump – nominally a Republican – has an unorthodox approach to economic policy. Certainly he’s proved willing to reject the free-trade, open borders, global market approach of the Bushes and Romneys of his own party.

But then, Utah Senator Mitt Romney himself kicked off the cash transfer idea on the Republican side on March 16th by urging $1,000 be sent to every American adult.

Arkansas Senator Tom Cotton – a Republican with deep conservative bona fides – jumped in to support $1,000 payments for every American, introducing the idea that payments should be made monthly, as needed.

Embedded in Senator Cotton’s proposal, and his critique of existing measures, is the reason why conservatives might – and should – endorse cash transfers and UBI. Cotton said on Fox News that “we worry that the [already passed rescue] bill is setting up a new and complicated system relying on businesses giving paid sick leave and then getting a refundable tax credit that won’t move quickly enough and could give pressure on those businesses to lay workers off.”

To Cotton, and possibly other conservatives, unconditional cash transfers and the related idea of UBI have the huge advantage of simplicity. And simple means smaller government.

Charles Murray, a staunchly conservative intellectual, wrote in his book In Our Hands, A Plan To Replace The Welfare State that UBI represents a far preferable system to the patchwork of federal programs currently in place. 

It does not take a massive government infrastructure to send money transfers. Traditional welfare programs for households like SNAP and EITC require giant bureaucracies. Small business tax credits are complicated, and slow moving. UBI is easier than housing subsidies or unemployment checks. Faster than rent or mortgage freezes. If you squint your ideas a bit, the idea of trusting people to use money as they personally choose, rather than nanny-stating them around food, housing, and employment status, is a deeply conservative, small-government idea.

Tom_Cotton

I’m just saying, when conservatives like Cotton, moderates like Romney, and unorthodox Republicans like Trump unite around an economic idea that feels pretty lefty, you have the makings of a permanent feature of American life. 

I haven’t mentioned the Democrats yet. Senate Minority Leader Chuck Schumer has already argued that the one time cash transfer does not go far enough. “This is not a time for small thinking. A single $1,000 check would help someone pay their landlord in March. But what happens after that?” he said. 

New York Congresswoman Alexandra Ocasio-Cortez has weighed in with support, but not if it comes at the expense of existing social welfare programs. 

At the end of the day though, if given the chance to implement a permanent UBI, would Democrats support this idea? I don’t know, what do you think? Is the Pope Catholic? They are never going to allow Republicans to get to the left of them on this idea. 

The final matchup between Vice President Joe Biden and Vermont Senator Bernie Sanders has left neither candidate with a viable economic plan. Biden, because he never had any forward-looking ideas except to replace Trump. And Sanders, because his forward-looking idea of “Medicare For All” has precisely zero chance of implementation over the next twenty years. So that leaves Yang as the ultimate winner of the Presidential race, even if he’s not the one who will occupy the Oval Office next year.

Money_for_Nothing

“Money for Nothing” as Dire Straits used to sing. 

I bet nobody is as surprised as Yang that he won the war of ideas, far more quickly than he imagined. And further, I think he won this idea permanently. You read it here first. We’re getting UBI in the United States, starting this year, and we’re never going back.

A version of this post ran in the San Antonio Express News.

Please see related posts:

Cash is Better Than Good Intentions

UBI – That Right-Wing Idea?

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The Capital Gains Tax Cut Proposal – Dead Letter?

About two months ago the Trump Administration floated the idea of a new tax break on income from capital gains, requesting a review by the US Treasury of the idea.1 The tax break would in effect protect investors from having to pay capital gains taxes that result from inflation.

The response from the lamestream media – of which I am a proud member – was swift and condemnatory. “Unilateral Tax Cut for the Rich!” said the New York Times headline. “$100 billion tax cut for the rich” wrote Vox, and “Huge Windfall For The Richest 1%” said The Washington Post. The Times followed up with an Op-Ed questioning its legality, “Trump’s Crony Capitalists Plot a New Heist.”

As a general rule, I enjoy new income tax proposals. They’re fun and instructive. That doesn’t mean I think we should frequently enact new tax laws willy nilly. I just mean that, because taxes are the means by which government leaders most clearly enact their philosophy of what makes for a good society, tax proposals are a great way of figuring out what our leaders care about, and also what we care about.

In reviewing tax proposals, generally we should ask the following questions: Is it practical and enforceable? Does it reward or discourage economic behavior that we want? Is it fiscally prudent? Finally, is it fair? I’m interested in all these questions.

So how would the tax break work?

Capital gains occur when you buy an investment – a business, a stock, some real estate – and then sell that for a gain. If you made a profit of $100,000 on buying and selling your investment, the money you make gets taxed, generally at 20 percent, or $20,000. The proposal would allow you to avoid taxes on the portion of your gains attributable to inflation. But if inflation accounted for half of that $100,000 gain then under this new proposal you’d only owe taxes on half the gain, or $10,000. So yes, this represents a potentially big tax cut.

The tax cuts would be especially beneficial under two scenarios. First, if inflation is high, and second, if the investment is held over a long period of time, such that inflation accounts for a significant portion of the gains. One theory floated by proponents of the tax cut is that wealthy people holding highly appreciated stock, for example, would be motivated to sell if they faced a lower tax bill. Texas Representative Kevin Brady, Chairman of the House Ways and Means Committee is reported to favor this reform, because “I think we ought to look at not penalizing Americans for inflation.”

Beyond those ideas, what’s the main case for this tax break? If you ascribe to the idea that investment and risk-taking is the engine of the economy, then rewarding risk-taking should lead to a more revved economic engine. Lower taxes might mean higher rates of investment, which should mean more economic growth. It’s a theory.

More than a theory, it’s an axiomatic beliefs of Republican leadership, currently in charge of the executive and legislative branches. These beliefs drove the tax changes of December 2017. Larry Kudlow, the top economic advisor to the White House, favors lowering capital gains through inflation-adjustment.

Is it legal?

Critics object to the idea that the US Treasury would enact this inflation-adjustment rule, rather than have Congress pass a tax reform law. Traditionally, constitutionally, the power of taxation resides with Congress. In practice however, the executive branch often leads the charge in proposing changes to tax laws.

What has taken some commentators by surprise is the Trump administration’s proposal that they enact the tax break through executive means. Hence the claims of illegality.

Smaller-scale capital gains on home ownership, small commercial properties, and small businesses – already benefit from targeted tax breaks and tax deferrals like homeowner exemptions and Section 1031 exchanges. Middle-class owners of stocks would tend to own them through tax-protected IRA and 401(k) retirement accounts. so would not pay capital gains taxes, and would not benefit from this change. This proposal seems specifically calibrated for larger-scale investments and the wealthiest taxpayers.

So is it fair?

This is where societal context matters the most, at least to me.

This proposal, theoretically sound or not, legal or not, smacks of class warfare from above. Here’s the context.

If we started from a relatively equal society then I’d be open to the theory of juicing investment through a targeted capital gains tax break. That’s not where we are.

The trend of the last 30 years has sharply increased inequality.

An estimated 65 percent of the gains from the 2017 tax law change will go to the top 20 percent of earners, who will benefit from the drop in corporate tax rates.

The Washington Post – citing a Wharton School study – found that 86 percent of the estimated $100 billion tax cut over the next 10 years would benefit the highest earning 0.1 percent of Americans, the top one-in-a-thousand wealthiest folks. $95 billion of the $100 billion tax cut would benefit the highest earning 5 percent of Americans. So, yeah, this tax cut overwhelmingly favors the people who are already well off.

We already have an income tax system that greatly favors “capital” over “labor.” What I mean by that is that if you are well off and primarily make money from your money – from investments in stocks, businesses or real estate – you generally pay a 20 percent tax rate on the money you make each year.

When you make money from your labor, however your tax rate increases with your salary but above about $50,000 your tax rate on labor will range between 22 and 37 percent.

Finally, can we afford it?

We are far from fiscally sound. The 2017 tax change is likely to increase the deficit by $1 trillion. By comparison, with a price tag of only $100 billion over ten years, this proposal is only a small bad thing, but definitely not a move in the right direction.

 

 

 

 

 

 

 

 

 

 

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  1. This week, President Trump floated the idea of yet another tax break, although Congress – the folks who write tax laws – claims it has no idea what he’s talking about ↩
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Book Review: The Upside of Inequality by Edward Conard

upside_of_inequality

Can we talk about wealth inequality? I think it’s a top three problem within the United States.

Obviously, many disagree with me.  In The Upside of Inequality, Edward Conard effectively makes the capitalist’s case for the importance of unequal results in household wealth. At the risk of my simplifying a book-length argument, I’d say Conard justifies his view on the upside of inequality in two main ways.

First, we need unequal incentives to push innovation and risk-taking, the engine of a capitalist economy. Without the promise of outsized rewards, where would the urge for improvement come from? Take away the outsized rewards through taxation and redistribution and we remove the innovative engine of the economy, writes Conard. Ok, I’ll admit, I’m sympathetic to that idea.

Second, Conard argues, we need concentrations of wealth in the hands of risk-taking capitalists, to fund the innovative ideas of entrepreneurs who have more talent than money. Take away the piles of money in the hands of capitalists, and you remove the fuel from the engine. Ok, I find this argument of Conard’s plausible as well.

I don’t say I celebrate Conard’s view because of any ideological attachment to capitalism. I say it because practically speaking the miracle of lifting billions of people out of poverty in recent decades happened under market-based economies that innovated and encouraged hard work and risk-taking. Countries that squash markets and enforce a state-driven equality – Cuba, Venezuela, North Korea, Zimbabwe come to mind – tend towards horrific poverty.

But I still worry about inequality.

upside_of_inequalityIn households with children under age 18, a recent New York Times piece explained, the bottom 50 percent of households actually have negative net worth. They have more debt than savings or assets.

That New York Times piece also describes a straight-line 3-step mechanism of inter-generational poverty:

  1. Wealth correlates strongly with the likelihood of attending and graduating from college.
  2. A college degree correlates strongly with higher lifetime earnings.
  3. No higher degree means a much harder path to attaining or maintaining a middle class life.

Those steps alone suggest that at the bottom rung of society, poverty begets poverty, and inequality tends to beget more inequality.

Meanwhile, at the upper end of the economic ladder, the power of compound investment returns, reduced taxes on intergeneration wealth transfers and favorable tax rates on dividends and capital gains, tend to maintain the status quo among wealthy households. Wealth begets wealth. I don’t like the idea of stagnation at the top and bottom.

Further into The Upside of Inequality, Conard challenges deeply held beliefs. Traditional measurements of the lack of wealth for the bottom 50 percent of American households miss a key factor. Namely, measuring consumption at the bottom half – due to social safety net programs including government transfers Medicare and Social Security – shows a strong reduction in poverty over the last 20 years. If we measure consumption instead of wealth our society looks far less unequal.

Conard also makes some disturbing counter-arguments about the usefulness of investing in education to overcome economic immobility. His skeptical arguments will make people on both the left and right of the political spectrum uncomfortable.

My fondest wish on this topic is not to bash capitalism – or socialism for that matter – but to ask: Can we talk about a middle ground?

Conard worries about killing – through redistribution and taxation – the golden goose that has raised billions out of poverty. I worry about the fact that negative median net worth of the bottom 50 percent of households in America. A hollowed-out middle class has both economic effects and effects on social cohesion.

I’m worried that the concentration of wealth in the United States at the very top is too high and getting higher. In developing that view, I look to Thomas Piketty’s 2014 masterpiece Capital, in which he shows we’re on trend to return to 19thCentury Gilded Age levels of wealth-concentration in the US. I don’t love the idea of an entrenched aristocracy in America.

While Conard celebrates the positive economic effects of that inequality – more pools of wealth encourage more innovation, which leads to economic growth – I’m worried about the moral problem of an entrenched aristocracy permanently separated from the other 99 percent of society.

My view: I’m ok with some inequality. I’m a capitalist. To the extent more hard work and more talent leads to more money for some people than others, I’m fine with that. That’s great.

I’m not ok with permanent inequality, or inter-generational inequality, or inequality that suggests a fixed, rigged, game. If being born into poverty is a life-sentence to an underclass, then inequality is something I’m less ok with.

What do I want in terms of a conversation? I want people on my side of the debate – people who think inequality is a top problem – to read more smart people on the other side of the debate, like Edward Conard. Because if you don’t know where your own assumptions are weak or wrong, it’s hard to enact change.

Of course I also want folks worried about “creeping Socialism” in America to consider the moral consequences of a system in which children don’t get enough to eat, and the next generation’s children might not either. You can talk all you want about “bootstraps,” but are kids still in elementary school responsible for yanking on their own straps?

I really don’t have an answer. While I disagree with Conard – more on moral grounds than economic grounds – he’s also done far more reading than me on the subject.

Before you write to tell me that I’m either a greedy capitalist or a lefty socialist (I admit, I’m giving evidence of both here), can you instead just read Conard’s book? And then Piketty’s Capital?

Sometimes I think the only solution to these arguments, at the individual level, is to consciously set out to read the things we’ll probably disagree with.

 

Please see related posts

Book Review: Capital by Thomas Piketty

Book Review: Unintended Consequences by Edward Conard

 

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UBI – That Radical Right-Wing Idea?

basic_incomeLast week’s post — on a poverty eradication experiment in Africa of giving no-strings-attached cash — was a bit of a Trojan horse for this week: UBI is the idea of granting all adults a small amount of income, for life.

UBI is having a moment right now. Finland launched an experiment in 2017 to address joblessness with basic income, and the Netherlands is also attempting small-scale trials. Swiss voters rejected it in a referendum in 2016, but Swiss UBI supporters rejoice that it at least came up for a vote. A Silicon Valley startup Y-Combinator plans to launch a basic income experiment in Oakland, California, this year.

Futurists see UBI as the solution to the automation problem, when robots eliminate all of the human jobs. 1


The best advocate in the United States for UBI that I’ve read is Charles Murray, in his 2016 version of his book “In Our Hands: A Plan to Replace the Welfare State,” in which he calls for a universal basic income of $13,000 for every adult in the United States. Somewhat to my surprise, I found his book, and the ideas, very compelling.

Is Charles Murray a fellow traveler of Bernie Sanders, attempting to socialize America with his plan for free money? No. Actually, he’s just the opposite. He is a hard-core Libertarian, opposed to big government. In his version, UBI is meant to replace the welfare state built by President Franklin D. Roosevelt’s New Deal of the 1930s and President Lyndon B. Johnson’s Great Society programs of the 1960s.

Murray’s unexpected advocacy is what got me intrigued enough to read his book.

Charles Murray first came to wide academic prominence in the 1990s with his controversial book “The Bell Curve,” which placed him somewhat to the right of Attila the Hun on the political spectrum. Why, I wondered, would a right-wing guy propose UBI?

Murray’s idea, briefly, is this:

charles_murrayEvery American 21 years or older would receive a $13,000 annual stipend, of which the first $3,000 must be dedicated to catastrophic health insurance.

As a Libertarian, Murray believes that giving recipients a choice of how to spend their money, rather than relying on a massive federal bureaucracy to control choices and incentives over housing, nutrition and work will improve the lives of people in poverty.

Although the UBI would cost $2.58 trillion per year (in 2014 dollars), Murray points out that our welfare infrastructure, as currently constituted, costs $2.77 trillion per year (also in 2014 dollars.), offering the federal government — and therefore, U.S. taxpayers — savings from UBI from the start.

Murray makes the interesting point that for people in poverty — in particular unwed mothers or unemployed young men of working age — a guaranteed income suddenly changes certain incentives. Those incentives, he argues, could address the roots of endemic poverty.

Murray speculates that UBI could directly benefit single mothers, for example, by providing a guaranteed source of income even if they cannot join the workforce while caring for a child. In addition, the fact that a child’s father receives a guaranteed income — easily tracked through a known bank account — would greatly aid collection of mandatory alimony payments. Murray further speculates that unemployed working-age men who might have previously lived for free with a relative or girlfriend may suddenly find themselves forced to pay rent, as they have known sources of cash.

A UBI could increase labor mobility for people who would like to move to where jobs are more plentiful, but do not have enough financial cushion to take the risk of relocation. Although $10,000 in available annual income is not very much money for any individual, when pooled by cooperative adults it could also serve as a boost to solve collective housing needs.

The long-term benefits of UBI remain speculative because only short-term and small-scale experiments have ever been tried in the United States — the largest being a 1970-1980  experiment in Seattle and Denver, with 4,800 participants. It produced data and policy directions thatresearchers found inconclusive.

Look, I know that it’s incredibly easy to criticize UBI. Just twenty seconds of thought gets me the following word salad:

  1. Politically untenable
  2. Disincentive to work hard, or work at all
  3. You might snort money-for-nothing straight up your nose
  4. Without necessity, where is the invention?
  5. Higher taxes
  6. Now we’ll REALLY need a wall
  7. Replacing some or all our social safety net programs at once sounds scary
  8. Is $13,000 the right amount?

I’m sure you will be able to come up with additional objections in another twenty seconds, and we’d probably agree on those as well.

robots_for_basic_incomeInterestingly, in the United States UBI receives the harshest criticism from the left.

Robert Greenstein, an advocate for traditional Democratic Party-sponsored programs to reduce poverty, came out strongly against UBI last year, calling it both politically unrealistic and a distraction from programs such as subsidized housing and minimum wage increases. Roosevelt Institute fellow Mike Konczal has argued that Libertarian claims of a bloated welfare state obscure the important work that social programs accomplish. Bernie Sanders has been asked repeatedly about UBI but always expresses a preference for “basic standard of living” policies rather than “basic income.”

Personally, I find the idea that people in poverty could be trusted with no-strings cash highly compelling, when compared with the complex alphabet soup of federal programs, including SNAP, Section 8, TANF and EITC. We should pay attention to poverty-relief experiments with direct cash payments in Africa, as they may do better than targeted programs that attempt to control the behavior of people in poverty.

In the face of financial dysfunction and the persistence of poverty — despite our great national wealth — we ought to be able to have a conversation about speculative and interesting ideas to address poverty.

 

A version of this ran in the San Antonio Express News and Houston Chronicle.

 

See related posts:

Cash Transfers in Africa

Inequality in America – the Washington Post Map

Video: Inequality in America

 

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  1. Except finance blogging, obviously, which can never be automated. It is too essential and too creative to ever fall prey to Skynet. ↩
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Cash Rather Than Good Intentions

give_directlyHere’s a radical thesis about the best way to eliminate poverty:

Give money. Don’t give stuff. Also, don’t give conditional money, either, expecting the recipient to do something you want them to do.

I’m intrigued by an international charity called GiveDirectly which puts this radical thesis to the test. I understand this “just money, no stuff, no strings attached” approach runs contrary to our most cherished charitable instincts. It also goes against our typical “Don’t give a man a fish, teach a man to fish” plans, delightful as that cliché may be.

International groups addressing poverty usually focus on building infrastructure capacity in poor areas – stuff like digging wells for clean water, or building housing. Other groups might provide a family with a goat, enroll a girl in school, or teach sustainable farming techniques. These are all super-nice, well-intentioned plans. One teensy problem, however, is that international development like this might not really work very well for eradicating poverty.

I named “give only cash, no strings” above just a “thesis,” because I don’t actually know if it’s better than traditional poverty-relief or traditional development projects. But a series of well-conceived experiments are going on right now to test the thesis. And they are on the cusp of launching an even bigger test.

A group of economists who believe in the thesis of “cash only, no strings” founded GiveDirectly, an organization that I think of as a radical critique of both traditional development organizations and traditional poverty-reduction schemes. Here’s what they do: They just give cash, unconditionally, to poor adults in Africa. Right now they mostly operate in Kenya and Uganda, but are also expanding into Rwanda.

good_intentionsGiveDirectly doesn’t demand recipients raise a specific protein-rich crop, get sober, or build a type of fuel-efficient oven out of local mud.

They simply transfer money to households in extreme poverty, accessible through a mobile payments system. And then they let the poor recipients themselves figure out what they need. In that way it’s the simplest poverty-eradication plan imaginable.

Governments around the world have experimented – even before GiveDirectly – with programs like this, known in policy wonk circles as “unconditional cash transfers.”

Unlike most development or poverty-relief charities, however, GiveDirectly measures the results of their programs using the gold standard of data analysis, a series of randomized control trials. That means picking cash recipients randomly selected according to a set of criteria (poverty being one criteria, obviously) and then comparing their outcomes with people under the same conditions who did not receive the cash. Then they try to improve their program design, based on the evidence.

Max Chapnick, Communications Director for GiveDirectly, told me that last year they raised and earmarked close to $45 million for direct cash transfers. That’s not as big as legacy international development organizations like Save The Children or Oxfam or international governmental aid, but it ain’t chicken feed either.

If radical disruption of an industry, evidence-based practices, randomized-control trials and continuous design improvement all sounds very “Silicon Valley” to you (it does to me) then you will not be surprised to learn that Facebook co-founder Dustin Moscovitz, and Google.org are early and aggressive backers of GiveDirectly.

Objections to Cash

It’s very easy to list objections to this program.

Let’s start with: What if poor people quickly spend their unearned money on vices?

And that’s where data can be very interesting for testing that risk, and for testing the original thesis itself.

A research paper published in April 2016, based on cash transfer payments made by GiveDirectly from 2011 to 2013, found no increase in alcohol and tobacco consumption among recipients.

Not only that, but other research on unconditional cash transfers suggests this fear about cash transfers may be overblown. A December 2016 study from the University of Chicago of 19 cash transfer programs worldwide also found no increase in alcohol or tobacco use among recipients.

mobile_paymentsOr another big objection: What if “free money” discourages people from working?

An MIT study from 2015 of 7 randomized controlled trials found no evidence that cash transfers discouraged work.

You can choose to believe these researchers, or your own lying eyes.

GiveDirectly’s next experiment, for which they’ve targeted a $30 million fundraising campaign, will be their biggest cash transfer program yet.

They have $23 million raised so far, but if they reach their $30 million goal, their next experiment will be in something known as Universal Basic Income (which wonks call UBI), which is closely related – but distinct from – unconditional cash transfers.

With their new plan, GiveDirectly will transfer cash to Kenyan households in three different ways, to compare the effects on poverty:

  1. 12 years of 75 cents per day (in US Dollars) to every adult in 40 villages, paid monthly,
  2. 2 years of 75 cents per day to every adult in 80 villages, paid monthly; and
  3. 2 years’ worth of 75 cents per day to every adult in 80 villages but paid in a single lump sum.

Researchers will compare effects on the health, well-being, poverty, education, stress and local economy of households and villages between these groups, as well as compare results to a control group of 100 villages that does not receive payments.

This program is “Universal” because every adult in a chosen village will receive income. GiveDirectly chose 75 cents per day because it approximates the poverty level in Kenya, and therefore is “Basic.” With their 2-year and 12-year commitment to incomes, they will have a way to measure both short-term and long-term effects of the Universal Basic Income theory on poverty.

I know this all may sound a bit kooky and maybe too radical and hard to take. It goes against our charitable instincts. We naturally want to bequeath tangible goods instead of free money, and we want to control and improve the poor recipient’s behavior.  But what if that approach – and a few centuries of failed development work – is totally wrong? Every 10 year-old knows the coffee-mug wisdom: “instead of giving a man a fish, you should teach a man to fish.” What if we learned that all wrong?

As one of the co-founders of GiveDirectly, Paul Niehaus, cleverly tweeted recently: “The implicit hubris in ‘teach a man to fish’ is that we’re great at fishing lessons. We’re not.”

 

A version of this ran in the San Antonio Express News and Houston Chronicle.

 

 

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