QE for the people: Today and Tomorrow?

Standing amidst millions of people on live television on the eve of the 2015 Labour Party leadership elections, front runner Jeremy Corbyn blessed the citizens of a UK with a radical new idea: Quantitative easing (QE) for the people. Proposed as an alternative to traditional methods of economic recovery, QE for the people is a simple idea on face. To combat recessions, the government would simply print out money and spend it on the people. Whether that be through public infrastructure, education, or most popularly, direct payments to the people. On paper, People’s QE seemed to be a win-win, as it would benefit the economy as well as the individual citizens. Yet, almost seven years and a pandemic later, People’s QE and much less a UBI is nowhere in sight. And although Mr. Corbyn did win the election, his unconventional economic policy did not, with the opposition and fellow party members alike calling it “economically illiterate”. For the next five years, this realm of thought did not gain much spotlight, save for Andrew Yang’s short-lived presidential bid in the US. However, as the turn of the decade brought a radical change in life with the onset of a global pandemic, a change was brought forth in the economic world as well. When closures and lockdowns spurred waves of lockdowns and layoffs, calls for UBI returned throughout the world. Thus, it is pertinent and timely for us in the US to ask the question: Would an UBI help individual citizens and the nation as a whole recover from economic downturn? While some say that a universal basic income would be a panacea towards recession recovery, I believe a UBI would destroy our traditional methods of recovery, significantly increasing the impact and cost of recessions on people.

The concept of a universal basic income is not foreign to the US. With it being brought into the mainstream by former presidential candidate Andrew Yang, the plan is simple: every US citizen would receive cash every month, regardless of their income, employment status, and other factors. This cash can then be used for whatever that citizen wants to use it for, be it rent or luxury goods. Primarily a libertarian thought, a pure UBI rests on the idea that the government should not tell citizens how to use their money. Instead, if the government wants to give out welfare, it should give out cash, and let the citizen choose what to spend their money on. Yet while the idea comes from libertarian origins, it has support from many political parties. However, all supporitng parties come to one consensus- that this cash is much needed to help the average American. And as support rises, people have began to seriously discuss this topic within the broader scope of the media.

Whenever a plan for a UBI is brought to the forefront of discussion, a single question remains unanswered: How does one pay for it? Indeed, politicians and think tanks alike have created three separate funding mechanisms to fund the plan. The first is a tax-funded plan, where the entirety of the plan is funded based on income tax, industry tax, a value-added tax, or a combination of all three. While morally sound arguments can be made on how these taxes can be used to make industries and the wealthy pay “their fair share”, the implementation of a tax-financed program is dubious at best. A major problem comes in the form of Congress. While polls have shown that a sizeable portion of Americans to be supportive of such a program, its support on Capitol Hill has not progressed beyond the handful of progressive outliers. The truth is, a tax-financed UBI would likely never pass through the congressional floor, as Conservatives and moderates would have to vastly change their own viewpoints or their constituents’ to align themselves with such a policy.

Thus, we come to the second venue of funding- an externally financed one. The concept of an externally financed UBI is not foreign. In fact, externally funded UBIs are in implementation across the world. For example, the Alaska Permanent Fund was amended into the Alaskan Constitution shortly after the rise of the oil economy. Even today, the APF distributes $1600 annually to every Alaskan resident. Globally, externally financed UBIs are currently in place in many parts of the world. Whether it is Kenya’s GiveDirectly program, where a charity has sent out monthly payments to 20,000 families for the last 12 years or India’s pilot project, where a UBI was given out to over 6000 citizens with funding given by UNICEF, an externally funded basic income has been proven to be successful. However, is this a sustainable funding method for the entire United States? In essence, it would not possible. While the Alaskans enjoy their $1600 a year from the sizable profits of the oil industry and Indian citizens get monthly payments from the United Nations, there is no source of revenue large enough to fund a UBI for the entirety of the United States. The US does not have a predominant industry that can be used to provide the money, nor does it have the backing of a global entity sympathetic towards giving out cash transfers to one of the world’s richest countries.

Indeed we arrive at the last funding mechanism, deficit financing. Proponents of this method generally argue that a UBI of this scope and size would be financed by increasing the debt and cutting other discretionary spending. Specifically, means-tested welfare programs would be cut in order as UBI would be seen as their replacement. The remainder of the cost would then be supplemented by borrowing or simply minting new money. It is through this mechanism, I believe a modern-day UBI will be funded. This is simply due to the fact that it passes the litmus test that the previous two financing strategies fail to address. First, deficit financing is the most politically reasonable method of funding such large projects. For example, our recent response to the pandemic-induced economic downturn was to pass over two trillion dollars of deficit spending. While heavy spending is typically eschewed by some members of both parties in the US, making cuts to means-tested welfare that certain parties have longed to defund is a concession that will make the large price tag of an UBI easier to swallow. This is contrasted to a tax-financed spending, which has a direct impact on voting Congress members and their constituents. And while deficit financing may not be the best towards the future fiscal health of the United States, the lack of a real immediate effect makes it the most presentable option towards implementing the program. With a method of funding established, what would an avec UBI, sans welfare US look like?

Unfortunately replacing means-tested welfare with a universal basic income would make recessions worse in two ways: The first is automatic stabilizers. They are, as the name suggests, automatic. In times of economic downturn, automatic stabilizers both serve to ease the financial stress on poor families and stimulate aggregate demand in order to boost the economy out of recession. On an individual level, the idea is simple. As hard times hit the economy, more people make use of welfare programs and thus, receive the monetary and spending benefits of the program. As a result, a prosperous cycle is induced wherein people benefit the economy by helping themselves. When the recession passes, fewer individuals are utilizing welfare, as they have benefited from both a recovering economy and the welfare programs themselves. In essence, welfare itself is an automatic stimulus measure. Fortunately, our current means-tested welfare system and the safety net serve as automatic stabilizers for the economy, providing a safeguard against deep recessions. Economists Alisdair McKay and Ricardo Reis quantify the impact of these programs in the peer-reviewed journal, Econometrica, finding that if we cut funding for current welfare programs by 0.6%, economic volatility would increase by 7% (McKay & Reis). A volatile is deadly towards any sort of recession recovery because it undermines spending. The more volatile an economy is, the more risky, thus making investors and consumers hesitant to spend, destroying the possibility for recovery. Proponents of an UBI use the same proposed benefits of recession recovery as a reason for an UBI. In fact, it is why an UBI is often called “QE for the people”. Quantitative easing is often a tool used for recession recovery, and a basic income distributes the spending that would of went to big banks to the pockets of the people. UBI supporters argue that an UBI would serve in the same capacity as welfare and quantitative easing. In times of recession, people would get their basic income, thus boosting us out of recession and helping the world just as much, if not more than previous programs that only encouraged spending from the less fortunate. By their logic, UBI is thus the best tool for recession recovery. Unfortunately, this logic is flawed. Replacing these programs with a UBI would not help at all. This is because a UBI is not an automatic stabilizer for the economy because it provides everyone a payment regardless of income and the economic status of the country. Put simply, since an UBI is a constant payment that continues whether we are in good times or bad, it acts as a constant stimulus to the economy. And just as drugs lose their effect as we build up a tolerance to them, our economy will build a tolerance to such spending as well. Constant excess aggregate demand will thus shift the supply curve to accommodate for it, and create a new, artificially inflated equilibrium, negating all effects of the stimulus. A basic income might pull us out of downturn for the first few recessions, but it is not sustainable in the long run.

Worse, an UBI will undercut traditional recovery measures as well. Because cutting welfare programs would not be enough to fund a UBI with solely former welfare spending, a study from the Wharton School of Business finds that the US would be forced to finance it through borrowing, quantifying that a UBI would increase the debt by 81% by 2032 (Paulson). Problematically, in times of need, high debt limits the government’s ability to jolt the economy out of downturn. This is because Congress will hesitate to pass fiscal stimulus to avoid a dramatically larger debt. The trillions of spending on the recovery from the pandemic in a world without an UBI had already vastly pushed our debt limit to the ceiling, making the debt increase in a UBI world unfathomably large. Even worse, high debt prevents fiscal stimulus from being effective because the private sector responds by decreasing spending and precautionarily saving in anticipation of future tax increases. While this sounds counterintuitive at first, it is in fact logical. Large corporations and banks, the traditional big spenders in a recession, will often invest billions into the economy. However, in a world with such high debt, companies will logically surmise that the government will increase taxes post-recession, and cut spending in anticipation of such. UBI proponents often respond with the claim that the government can simply give agreements of a tax freeze to convince the private sector to spend. However, they do not address the fact that the US is a federal system. And while the federal government can run an exceedingly large debt, state and local governments are less financially and legally equipped to do so. Thus, a tax increase would be very likely, regardless of the assurances that come from D.C. Overall, Christina and David Romer, professors of economics at UC Berkeley, found in a study of 24 advanced economies that countries without fiscal space respond less aggressively to recessions, citing countries such as Greece and Italy in 2008 whose high debt limited their ability to use fiscal policy well. Thus, they conclude that countries without fiscal space experience recessions 5 times more severe and longer-lasting (Romer & Romer). Without the necessary tools to combat recessions, the US will be left defenseless to next cycle of bust.

Thus the UBI presents itself as a lose-lose solution. In the past, government intervention prevented the Great Recession from becoming another Great Depression. US News reporter Chad Stone, citing former Vice Chairman of the Federal Reserve, Alan Blinder, finds that the 2008 recession would have been “three times deeper, two times longer, and destroyed twice as many jobs without the stimulus” (Stone). For the average citizen, the effects of an unrecoverable recession would be extremely harmful. A recession creates many secondary human effects that may not be apparent at first glance. The International Monetary Fund explains in a study examining the human cost of recession, finding that “unemployment can persist up to 20 years after the job loss and lead to an average loss of life expectancy from 1 to 1.5 years”, as well as the fact that “parental job loss increases the probability that a child repeats a grade in school by nearly 15 percent” (Dao & Lougani). Recession affects the employed as well. For example, the unemployment of one person may increase stress for the remaining employed family members. Thus, while an UBI may benefit those who need the funds, a recession affects everyone and spreads beyond the United States. Since our current economies are so interconnected with other countries, it is likely that a recession in the United States would lead to downturns elsewhere.

While an UBI may sound appealing on paper, it is, unfortunately, too idealistic. It ignores the basic theories of efficient and effective economics and shuts down traditional forms of recession recovery, such as automatic stabilizers and stimulus spending. And while a UBI will have our legislators working hard to find a suitable solution towards the next recession, Chairman Powell’s printers will undoubtedly work harder, printing trillions of dollars that will never be spent. Lucky for us, for the time being, Mr. Corbyn’s idea will remain just that: an idea.

Works Cited

Loungani, Prakash, and Mai Dao. “The Human Cost of Recessions: Assessing It, Reducing It.” SSRN Electronic Journal, 2010, https://doi.org/10.2139/ssrn.1711933.

McKay, Alisdair, and Ricardo Reis. “The Role of Automatic Stabilizers in the U.S. Business Cycle.” Econometrica, vol. 84, no. 1, 2013, pp. 141–194., https://doi.org/10.3386/w19000.

Paulson, Mariko. “Options for Universal Basic Income: Dynamic Modeling.” Penn Wharton Budget Model, Penn Wharton Budget Model, 3 Sept. 2019, https://budgetmodel.wharton.upenn.edu/issues/2018/3/29/options-for-universal-basic-income-dynamic-modeling.

Romer, Christina, and David Romer. “Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why.” Brookings Papers On Economic Activity , 8 Mar. 2019, https://doi.org/10.3386/w25768.

Stone, Chad. “It Could Have Been So Much Worse.” US News, 23 Oct. 2015, https://www.usnews.com/opinion/economic-intelligence/2015/10/23/the-great-recession-would-have-been-much-worse-without-stimulus-tarp.