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UBI vs. guaranteed jobs vs. wage subsidies

Summary:
Scott Alexander has a very long blog post discussing the advantages of a universal basic income program over a guaranteed jobs program. It's probably the best single defense of the UBI that I have ever read. (I wish Alexander had become an economist.) But in the end, I still prefer low wage subsidies. Here's Scott: A steelman of Sarris' point might go something like this: it definitely seems true that there is some complicated way in which a family of eight living in a tiny farmhouse in the Kansas prairie in 1870 was happy and felt financially secure even though they probably only earned a few hundred dollars a year by today's measures. So isn't it weird that people earning twenty thousand dollars a

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Scott Alexander has a very long blog post discussing the advantages of a universal basic income program over a guaranteed jobs program. It's probably the best single defense of the UBI that I have ever read. (I wish Alexander had become an economist.) But in the end, I still prefer low wage subsidies.

Here's Scott:

A steelman of Sarris' point might go something like this: it definitely seems true that there is some complicated way in which a family of eight living in a tiny farmhouse in the Kansas prairie in 1870 was happy and felt financially secure even though they probably only earned a few hundred dollars a year by today's measures. So isn't it weird that people earning twenty thousand dollars a year still think of material goods as their barrier to happiness?

I think explaining that effectively would require a book-length treatment. But I think the book would end with "even though it's weird and complicated, poor people today who make $10,000 or $20,000 are often unhappy, in a way that richer people today aren't, and this involves money in a real sense."

I am not the person to write this book (though see the post on cost disease); I can only relay what poor people tell me. Sometimes it's "my rent-controlled apartment is underneath noisy frat boys who keep me awake every night with their parties, but I can never leave because it's the only apartment I can afford in this town." Sometimes it's "I hate my boss but I can't leave because if I go a month without getting a paycheck I won't have enough money for rent." Sometimes it's "I couldn't afford good birth control, got pregnant, and now I can't afford to support the child, what do I do?" Sometimes it's "Obamacare mandates me to buy health insurance, but I can't afford it, I guess I am going to have to pay a fee I can't afford on tax day instead." Sometimes it's any of a thousand versions of "my car broke down and I can't afford to get it fixed but I need to get to work somehow". Sometimes it's "I am sick but if I miss a day of work my company will fire me, because when you're poor enough legally-enshrined workplace protections somehow fail to exist in real life". And sometimes it's "I work eighty hours a week driving for Uber because it's the only way to make ends meet, I hate everything." A lot of times it involves the same crappy job-centered lifestyle I worry a basic jobs guarantee would perpetuate forever.


I would love to read the book that Scott says could be written on the question of how material wellbeing relates to happiness. It's a very hard question, and one I am utterly incapable of answering. Looked at one way, it seems obvious that having more material goods makes us better off. From another perspective, it seems equally obvious that it doesn't make us better off:

UBI vs. guaranteed jobs vs. wage subsidies
So let's focus on Scott's final paragraph, which lists two types of problems:

1. The problems we face from having too little money.
2. The problems we face from having jobs that suck.

It seems to me that a UBI program doesn't really address the problems we face by having too little money, at least the specific problems mentioned above. The UBI payments would necessarily be set around the poverty level. Thus people relying on UBI would still be at the bottom of the income scale, still struggling to afford health insurance, still living in rent controlled apartments (if they can find them!) above noisy neighbors. It's often said that the best thing about money is that it allows you to avoid having to live amongst poor people. A UBI program doesn't do that. UBI recipients would still struggle to raise children, and still struggle to find money to fix their cars. That's not to say they would not be better off, rather I'll argue there are better ways of achieving the same objectives---more money and more freedom to walk away from jobs that suck.

My preferred system would strive to keep the labor market "hot". Sort of like right now, where I can't get anyone to come to my house and do work. We can do this in several ways:

1. Adopt NGDPLT. That doesn't guarantee a hot labor market, but it's a way of preventing us from occasionally shooting ourselves in the foot. Recessions are very bad for workers, especially workers trying to escape a lousy job.

2. Combine an elimination of all minimum wage laws with a sizable low wage subsidy. (Also eliminate occupational licensing laws.)

Thus let's suppose that in my town, eliminating the minimum wage laws would cause the equilibrium wage for entry level jobs to fall to $9/hour. (I think it would he higher, but I'll use this example.) The government could then chip in enough wage subsidy to boost the equilibrium wage to say $14/hour, which is about $28,000/year for a full time worker.

You might assume that this would require a subsidy of $5/hour. Unfortunately the subsidy would have to be a bit higher, more like $6/hour. That's because the institution of a wage subsidy program would boost the supply of labor, depressing equilibrium wages to something like $8/hour.

Some might wonder if the equilibrium wage would fall all the way to $4/hour, so that a $5 subsidy would produce no net gain. That's impossible, because the demand for labor would rise sharply, boosting the equilibrium well above $4/hour.

Because the demand for labor is more elastic than the supply, the effect of a wage subsidy would be mostly too boost after subsidy wages, and only slightly depress before subsidy wages. In my example, I assumed a $6/hour subsidy would boost after subsidy wages by $5/hour (from $9/hour to $14/hour) and depress before subsidy wages from $9/hour to $8/hour.

[Don't fall into the trap of thinking "Why wouldn't employers choose to blah, blah, blah . . . ." Employers don't choose wages; rather wages are set by the market.]

Having a hot labor market would force employers to treat their workers better, just as minimum wage laws and rent controls encourage employers and landlords to treat their employees and tenants like garbage. Do you really want to live in a country where people are positively encouraged to treat the people they interact with like garbage? (Apparently most voters in California do.)

I would like to see a country where workers can switch from a bad employer to a good employer as easily as consumers switch from a crappy grocery store to a good grocery store.

Scott might counter that almost all work sucks:

I worry we're losing site of the bigger picture, which is that work sucks.
I agree, that's why they call it work. But does it suck less than non-work? Here we need to focus on both the seen and the unseen. Lots of people think of work in terms of how pleasant the job is. But don't forget that work also causes output. Without work, there is no output. And no output also sucks.

Of course I'm exaggerating, as UBI proponents don't contemplate no output, just less output. And the same 1870 farm example that casts doubt on the benefit of poverty programs can also be used to cast doubt on the cost of moderate decreases in aggregate output.

In the end, I'm not ideologically opposed to a UBI program. Maybe such a program will make sense in the future, when robots do most of the work. But at this point in time, I believe a low wage subsidy is better. There's still plenty of useful work to do.

A wage subsidy is also far more politically feasible, which is why the Dems are pushing an inferior alternative---a government job guarantee. They sense that voters would reject a UBI. After all, lots of countries have government jobs programs and/or low wage subsidies. AFAIK, none have a UBI. Not even countries much more "progressive" and socialistic than America.

PS. I realize that my wage subsidy program would not work perfectly. There is the problem of corruption. There are Zero Marginal Product workers. It probably could not apply to the self-employed. But a UBI would also not work perfectly---some would spend all the money on drugs, and end up homeless. There would also be fraud. In a very diverse country of 325 million people, no single program will work perfectly. The real question is; "Which program is the least bad?"

PPS. Scott has a large number of very persuasive arguments against a jobs guarantee program.



Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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