Thursday, March 24, 2016

What is the Opportunity Cost of Basic Income?

There are days when our little globe feels as though beyond comprehension, and answers to important questions feel even murkier than usual. Today being one of those days, I thought, perhaps a good excuse to ask an "impossible to answer" post title! What are the upsides and downsides, for adopting Universal Basic Income? Is this one of those policy decisions which may not fully face the scrutiny of opportunity cost discussions beforehand, because of underlying budget considerations?

For that matter, opportunity cost as concept, is mostly a brief discussion topic in economic studies. Timothy Taylor makes the point in a recent post, that opportunity cost doesn't receive the educational consideration it would appear to warrant. Taylor cites an essay from Michael Perkins which argues that "opportunity cost is more useful based on the quantity of what is given up, rather than on attempts to calculate the value of what is given up". From the essay:
The idea of opportunity cost helps to address five issues that range from the simple and basic to the complex and sophisticated...the fundamental economic problem: Faced with scarcity we must make choices, and in choosing we are confronted by costs. The second purpose, equally basic, is to see cost as an alternative foregone rather than dollars of expenditure. Its third purpose is to identify, and to correctly establish, what the foregone alternative is. Its fourth purpose is to use the appropriately identified cost alongside an appropriately identified benefit to make (and to analyze) a rational choice. Its fifth purpose, and its most complex and sophisticated, is to derive theorems about the determination of relative prices.
Among the important factors to stress regarding Basic Income, in spite of appearances, is the reality this is a scarcity choice, in the general equilibrium terms of national budgets. Ultimately, one of my main concerns about Basic Income, is the negative effect it could have on a nation's future output potential, due to the marketplace structure which was previously funded by government budgets. Different nations have different approaches, hence outcomes depend on how services organizational patterns contribute to a national medium of account. As Guy Sorman notes in a recent City Journal article, for instance, in the Finnish model, everyone will receive this income, but the welfare bureaucracy will also be shut down.

And that is precisely my concern. Even though welfare bureaucracy is inefficient and worthy of being rid of, knocking something down because it is "tiresome" is no way to maintain structural output at national levels. Worn down by budget battles, some may find it advantageous to be done with various programs and earlier legislative commitments. Even so, are the private marketplace alternatives which comprise aggregate supply, being actively pursued? Left unaddressed, existing limits in private organizational capacity would mean negative supply shocks. Will output in terms of knowledge and time based services, be lost? Even though Basic Income may be touted as bureaucratic innovation, the reality could be a downsizing of economic expectations.

While a Basic Income approach seems improbable for the U.S., deep fissures in the Republican party (ht Arnold Kling) suggest that something similar could occur - simply out of default circumstance. Given the lack of cooperation between parties on policy and programs, budget issues for healthcare in particular could eventually force the issue. One reason Basic Income appears an unlikely fit for the U.S., is the fact that many welfare subsidies tend to be routed to service providers instead of recipients. While grappling with the potential costs re Basic Income, Nick Rowe wrote in comments to a recent post:
When I think about switching to UBI I "see" a graph with disposable income on the Y axis and market income on the X axis, and I see a total mess representing the current system, and I see UBI as using OLS to fit a line through the existing plot. And so it's self-financing by construction assuming no behavioral changes.
Of course politics being what they are, behavioral changes can be expected. What happens, after the implementation of Basic Income? The "money for all" selling point, makes it easy to initially ignore the reality of general equilibrium conditions for services consumption, and their associated level of aggregate demand. Consequently, it's easy to downplay the fact that opportunity cost for Basic Income would be quite real.

Nevertheless, "income for all" is appealing for those who worry about long term job prospects, alongside those now weary of paying for "services for all". What a disparate coalition! In short, Universal Basic Income appears as though a general equilibrium experiment, equivalent to decimating an unwieldy structure without building a replacement. Even though Basic Income would be fiscal policy, in a sense this is fiscal policy which has come up against hard limits. Monetary policy would be better positioned to overcome those limits and resume a strong trajectory for long term growth. Still - in order to regain a strong growth trajectory, production reform is also needed, on real economy terms.

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