Remarkl
Remarkl
Sep 8, 2018 · 3 min read

Where is M. Bastiat when we need him? I’m a UBI fan, but I don’t find the arguments here to be its best.

The UBI only increases aggregate demand if it is funded by printing money. I’m all for that, but if the UBI is budget neutral, someone is being deprived of the amount of money being distributed. That leaves redistribution of demand as the only first-order effect of a budget-neutral UBI. We can worry about whether the UBI’s increasing the money supply is inflation only after we decide that it will increase the money supply, in which case, we need to consider through what fiscal mechanism that would happen.

If instead we assume that the UBI merely reallocates purchasing power downward, we have to examine the claim that lower income people really do have a greater propensity to “spend” than higher income people. Lower-income people clearly have a greater propensity to consume, but that’s not the same thing as “spendiing” when we are talking about job creation and economic growth. If poor people spend $10,000,000 at Wal-Mart, the demand for low-marginal-cost goods from China increases. If rich people invest $10,000,000 in a new apartment building, demand for local construction labor increases. Not all such comparisons are so stark, but investing is capital “spending,” so arguments about growth arising from the propensity to “spend” aren’t persuasive.

One of the better arguments for a UBI is that it improves the laborer’s bargaining position for actual wages. The UBI enables the wage earner to go a bit longer without a job, which enables the worker to negotiate higher pay. Thus, one can argue that the UBI, rather than subsidize wages, would actually cause them to rise, because wages are the result of negotiating power.

The argument that wage increases from the minimum wage are not passed on, because competition drives prices down, proves too much. If Burger King would be under competitive pressure to keep its prices low after an increase in the minimum wage, then why isn’t it under competitive pressure to keep them as low as possible now? Competition drives price to cost, including cost of capital. BK must compete not only for customers but for capital. If it reduces its profits, its cost of capital rises (the stock falls in value). An exogenous increase in cost (like an increase in the minimum wage) must then increase the price of what it sells, although only in the aggregate and after taking into account any Fordist increase in volume.

But, as Mr. Parrish says, the wage argument is not exactly relevant to UBI, because with UBI, the temptation is to increase prices to capture some of that new money (again, we are begging the question of funding). But, again, the competition argument proves too much. Prices do rise when too much money chases too few goods. To say that prices won’t rise as a consequence of any particular policy change, because competition will prevent the rise, is simply to say that there would not be “too few goods.” I like that argument, but I believe it should be made straightforwardly, not through the back door of competitive pressure. The real issue is marginal cost and the output gap. If supply is increasingly elastic, then inflation is less likely to occur as a result of increasing demand.

At the end of the day, UBI is a dividend “funded” by the economic strength of the nation arising synergistically from our being a law-abiding, innovative, effectively self-governing polity. Very few societies have been able to pull that trick off, and there is no reason to believe the achievement should not entitle its participants to a tangible reward “funded” by reaching into the output gap grab-bag via a UBI of newly printed money. Everything else, as the sage observed, is commentary.

    Remarkl

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    Remarkl