The Trump Tax Cut versus Universal Basic Income
Evonomics, by Tom Streithorst
Hillary Clinton lost to Donald Trump because she did not provide a solution to the grave economic problems facing the American middle and working class. Hillary pretended the economy was getting better, and of course in some ways it was. Unemployment is considerably lower than it was when Bush left office and in 2015 wages finally went up. But after 35 years of stagnant wages the American people are no longer trusting in elite optimism. Personal experience tells them otherwise. The median male inflation adjusted wage is lower today than it was in 1973. For a while, wives entering the workforce allowed household income to rise but that ended with the last millennium. Typical household income peaked when Bill Clinton left office.
Trump won because he acknowledged the decline of the American middle class and promised a cure. Hillary Clinton and the neoliberal Democrat establishment pretended things were fine, and a huge swath of Americans resented their sanguine attitude. Unfortunately, Trump’s solutions won’t work. Tax cuts directed to the top .01% certainly won’t help most Americans and tariffs on Chinese goods will not bring industrial jobs back to the Rust Belt. All protectionism will accomplish is higher prices at Wal-Mart. Automation, as much as globalization is responsible for the disappearance of high paying jobs. Even China is losing manufacturing jobs. Its output is increasing but robots rather than humans are getting the work.
It is tragic that the populist revolt against the neoliberal establishment should have been led by a right wing billionaire reality TV star. The left should learn one lesson from this debacle. Let no longer pretend things are all right. If the Democrats are to regain power, they must provide a solution for the growing insecurity in most working American’s lives. The old strategies no longer work. Technological progress has become a job killer.
Every year, technological progress allows us to make more goods and services with fewer inputs of labor and capital. Stagnant wages tell us we need fewer workers. Infinitesimal interest rates tell us we need less capital. And more jobs are set to disappear. The most common job in most American states is truck driver. With self-driving cars only a few years away from mass production, those jobs too will soon evaporate.
There is a solution: Universal Basic Income, a cash payment to every adult citizen.
Everyone gets it, the poor, the rich, the middle class, the deserving and the undeserving alike. You, me, Rupert Murdoch, Beyonce, and the homeless man sleeping in the gutter get exactly the same cash payment. It is nothing if not equitable and fair. UBI is not a new idea. It was mentioned in the Bible, proposed by Tom Paine, almost enacted into law by Richard Nixon in 1969.
The Bible advocated it because small Neolithic communities always took care of their own. Tom Paine favored it because it reflected the value of the land that he considered the heritage of every citizen. Richard Nixon almost made it real (how different it would have made our world, how amazing that Richard Nixon in 1969 was to the left of Barack Obama in 2016) because he wanted to provide a safety net for every American without creating a large bureaucracy.
Help the poorest among us, by giving them what they really need, money in their pocket.
Provide a safety net for all Americans that will allow entrepreneurs to take more risks, the young to attend university, workers to tell unreasonable bosses to “take this job and shove it”.
All good things but not why I expect it will, sooner rather than later, be enacted into law. UBI solves the fundamental problem of modern capitalism, lack of demand. We have, to an extent unimaginable to our grandparents, solved the problem of supply. We eat better, dress better, entertain ourselves more extravagantly and more cheaply than they would have dreamed possible. But they had job security and more and more of us don’t.
If things keep going the way they are, our society will divide into a small elite who own the technology and a huge army of the unemployed living in squalor. A robot can make an iPhone but it cannot purchase one. If we want to maintain demand, we must put money into people’s pockets. A Universal Basic Income stimulates demand far more effectively than any tax cut.
The problem with UBI, the reason it is not yet within the Overton window is it sounds too good to be true. How can we afford it? How can we pay people without demanding work in return? Fortunately, Donald Trump is giving us an opening.
President-elect Donald Trump is planning to propose a tax cut. Over the next decade, it is expected to cost $6.2 trillion, or $620 billion a year. The Republican Congress, deficit hawks whenever a Democrat is in office will most likely approve his giveaway to the very rich. They will argue, quite correctly, that a tax cut will be stimulative and that it will help spur economic growth.
Every Keynesian knows tax cuts will stimulate the economy but we also know that tax cuts give the least bang for the deficit buck. That is because tax cuts, like this one, generally go to the richest among us and rich people have a greater propensity to save than the average citizen. The rich can save their bonus, the rest of us spend it, which is what the economy needs.
The Trump tax cut gives the top 1% an average windfall of $215,000. The top .1% will save over $1 million. Someone at smack in the middle, on the other hand, will garner less than $1000. Those in the bottom 20% will get $100. Were we to divide the cost of the tax cut by all adult Americans, we can give each citizen $2600 a year. If we can afford a tax cut that will go disproportionately to the very rich, we can also afford a helicopter drop of cash to every adult citizen.
During the post war Golden Age of the American middle class, the benefits of technological progress were shared equitably, through wage hikes. As technology made workers more productive, their wages went up commensurately. Since Reagan, technology has continued its inexorable progress but wages stopped rising. Assets prices (homes, stocks, bonds) instead absorbed the benefits of productivity increases. The rich got richer, workers didn’t.
It would be nice if we could make wages go up but they won’t. Wages, like all prices in a capitalist economy, are set by supply and demand. During the Golden Age, wages rose because firms needed more workers. To hold them, they needed to pay them well. Today, the supply of labor far exceeds its demand. Secure high paying jobs are not likely to come back.
It would be tragic if technological progress immiserates rather than enriches the average citizen. UBI is the solution, a fair and equitable way to share the benefits of growth throughout society. Some advocates of UBI insist the payments be large enough to guarantee every one of us enough money to survive. Ultimately, I think they are right. $2600 a year certainly is not enough for subsistance. But Rome wasn’t built in a day. Let us take advantage of Trump’s deeply inequitable tax cut proposal to experiment with Universal Basic Income.
When the banks went bust, central banks printed billions to bail them out. When the economy did not recover, we printed more billions in the various quantitative easings and again, through bond purchases, gave them to the banks. Trump is proposing to give each of his super rich friends millions. We can do better. When his tax bill comes to Congress, the Democrats have a chance to propose a Universal Basic Income grant to every adult American that won’t raise the deficit any more than his give away to the very rich.
To stimulate the economy, UBI is better than any tax cut. Politically too, it is a winner. The great majority of Americans will prefer a grant of $2600 than the piddling amount they would receive under the Trump tax cut. Trump’s victory has shown Americans are tired of the neoliberal consensus. Let’s take this opportunity to introduce Universal Basic Income to the American people. It can transform our society, stimulate growth, and begin to revitalise the American middle class. It will also help the Democratic Party win elections.