Why Y Combinator On Basic Income

Going through my Facebook feed the other day, I was scrolling around to just casually find something interesting to read about versus working and saw the words “Basic Income Program”. My initial reaction was curiosity in what I’d find. With the topic of basic income, it’s normally brought into two basic schools of thought; one being the basic income stemming from the Negative Income Tax proposal of Milton Friedman in the 1960s to replace the social safety net, and the other being less practical and more heavily marketed plans by the left as the “You don’t need to work anymore!” plan behind basic income. Where I expected to just get pandering on the issue from one of my random political friends, I was shocked to see Y Combinator head Sam Altman carrying the link. I was even more shocked to see his program seeking to hire a full-time researcher to study the basic income program for a half decade research paper. I was also shocked the most about how where other players in business (Ben & Jerry’s, Trump International, etc.) are making visible pandering for the 2016 cycle. This seemed to have no political bias or interest stemming from it. It was actual research done from genuine interest.

Before diving in further, a bit of background for readers who might be lost in this topic:

 

What the hell is Y Combinator? 

Y Combinator is an extremely prestigious tech incubator and investment program geared towards giving small investments in early phase tech companies, bringing them into their mentor pool, networking them up to hell and having them become larger companies. It’s where Dropbox, Reddit, Airbnb, Stripe and many others all started out and used as a path for them to become large companies. It is an excellent program and the network alone is worth devoting a portion of your life in order to join up.

Sam Altman currently runs the company. He brought in a visionary and cool approach to management where the (for-profit) company does things which doesn’t necessarily bring in money right away, or ever, yet still benefits. With that, Y Combinator wanting to do a domestic policy and economics-driven research case seems like a cool idea.

 

What the hell is a basic income program?

Simplest pitch: Money with no strings attached. It is just as simple as that. Every person gets a basic income promised by the government to be received on a weekly, monthly or yearly basis and they have no means testing, required work or even the promise of getting a job in order to receive the benefits. It is a popular idea to the left and is geared towards trying to help the poor.

This idea, while sounding as if it is the wet dream of the average Bernie Sanders supporter, actually has very libertarian roots. Milton Friedman, when examining the welfare system, created a cousin to the basic income plan with the idea of having a negative income tax program. The vehicle behind that would be using it as a welfare replacement, but having a flat income tax plan to eventually set it as a point where people earn income and it balances out easily. It is essentially the same as the basic income program in its no strings attached approach, but there is more organizational evidence on this.

Now that it’s done, let’s break it down!

It should be noted that this is not an attack on the Y Combinator program or Sam Altman at all. They do excellent work and this is purely just for them and others to see why the idea of focusing in on a basic income program might be a waste of time and money.

There will be three parts on why it won’t work and two parts on why it could work, and, while structured in the Friedman method, could be a very good idea. I will also open with explaining why Y Combinator’s reasoning to even have this study is unnecessary. Noting this, the intention here is to create less of an academic piece and more of a piece for general blogging and conversation. I will not be doing a ton of citations or very long points. Why? Largely due to my decision to write this being me at 2 AM while watching Spirited Away again and monitoring the price of Bitcoin/oil on my other laptop. Luckily, I’m a teetotaler, so this should be more enriching over what the average inventor/activist writes at 2 AM while checking to see if Dogecoin can become a thing again.

 

Why this study is unnecessary.

They hold a belief of which I am shocked they could even entertain. That idea is that technology could kill jobs.

For many people, the future is sadly perceived as a scary place. While I wait for the age of self-driving cars which would allow me to sleep while going from my apartment in Manhattan to Miami, others are afraid of such an innovation. They see the age of robotics and machines as these things which could replace everyone’s careers, and there will be empty sprees of people out of work by cold machines.

This is simply a false vision.

History shows us that it’s false. About 80% of jobs which existed a century ago do not exist anymore. A century ago about 40% of employment was built on the growth, manufacturing, shipping and selling of food products. Today that stands at less than 4%. A century ago, there was an active labor force of people who could get full time employment at the point of post-pubescent life. Today, that has dwindled and now nearly every job ranging from blue to white collar does require some degree of experience. Even those jobs that have remained have been radically altered by computers and technology, where someone a century ago couldn’t perform in the same ways and likely would have required more training. With that however, people live… Not only do they live, but they get far stronger. In fact, while the last 140 years has seen in western culture the greatest shift of labor in human history, despite jobs needed changing, some jobs no longer being needed, some new people (women, the elderly, etc.) entering the workforce and many other changes more people have access to housing, commercial comforts, retirement, vacations and so on. Life has undeniably improved over the last century, last fifty years and even over the last decade.

Why is this? The basic economic concept of supply and demand. A new technology such as a tractor enters the world, being able to have a farm produce far more in terms of crops while requiring 20% of the labor force, and it introduces more crops at a lower cost. This access and transition in the market opens up a new demand for work by replaced labor and also a new amount of capital from the money saved, which allows for other things to do. It is why the person who now, from spending less on food, can develop the capital savings to buy more clothing and now require a new piece of the labor market to make them that article of clothing. Jobs get lost. Prices go down. New demands are made. Jobs are gained. It’s simple, and it works.

In a more modern example, the era of self-driving cars does indeed stand to replace millions of jobs. People never again will have to struggle to find a cab or pay rates passed a small premium on the cost again to travel through cities. Items ranging from commercial goods to food will be cheaper due to shipping price, which normally ranges about $8-20 an MT on shipped commodity goods in North America with the majority of cost being labor, not being a burden anymore. People will also save money in traveling costs, which will likely make the case for traveling more in general. Doing this, it’s very clearly a win and not something to ever fear.

Why do people feel fear? Simple reason: They just don’t really about it enough and tend to overreact in the ways people tend to do (i.e. 9/11, Hurricane Sandy, my girlfriend saying she was considering breast implants, etc.), which has clear problems. They see that self-driving cars could wipe out ten million American jobs, but have the overreaction of believing it would be overnight. They don’t look at it realizing that going from self-driving cars capable of performing well in low traffic suburban areas and self-driving cars moving tractor trailer trucks in the mountains of Colorado in the winter won’t be at the same time. They don’t see a 5-15 year long shift where early introductions skim the market out briefly eliminating new people entering the field, gradual declines shift the cost of labor overtime to compete for remaining work and this balances to a peaceful motion where the older and more experienced are likely to shift into retirement or other careers in this cycle and other people who were younger edged out into other careers early on or just never entered that field. It’s those types of pieces of economics and basics of engineering that make things such as robotics, self-driving cars and more, not a threat.

I’d say the entire nature behind this plan is a false sense of fear and guilt on what will likely never happen.

 

Moving on: why it won’t work?

Reason 1: Supply and Demand 

When looking at the basic income proposal, the most basic Adam Smith-type reasoning on its failures just lays into the core of economics in itself: supply and demand.

With the basic income proposal, say for a moment that the goal was $15,000 a year to people as just a minimum basic grant for doing absolutely nothing. In this, someone who is age 26 can receive it and they are the typical millennial seeking to make art out of garbage and realizing their degree in sociology from the standard Go Again College is only getting them Starbucks as a job offer. The $15,000 offered to them is $15,000 reasons why it is economically possible for them to not go and work for Starbucks. At the same time, this person along with many others has $15,000 coming in yearly as a basic income and now wants coffee at Starbucks over at home. In this process, there is a spree where consumer demand rises, but the desire for participation in labor declines. In the most basic of economic principles ever, companies have to now offer more money for labor and in return higher pricing on goods/services.

Some people in the land of Bernie Sanders economics might on first glance call this a win, but it was in reality a major loss. It essentially was a massive price increase for people, making the basic income borderline worthless, but also for higher income earners showing their incomes as less valuable.

In this pitch alone, the idea of giving people $15,000 a year for doing nothing is a bad idea. That basic scenario shows how due to labor cost and market demands, the basic income proposal is essentially totally useless and only serves as a vehicle to harm higher earners.

Reason 2:  The Fiscal Front 

The next thing to look at is the actual numbers. How would this really work on a budgetary front?

Well, currently the United States from local, state and federal spending has about 30% of GDP that they spend. In that, roughly 6% goes to law enforcement/defense spending, 7-9% goes to education, 5-7% goes into various other programs and expenditures and 9-11% goes into the social safety net which is about 90% done by the federal government. This includes social security, Medicare, welfare, food stamps and Medicaid which total in spending for almost 2 trillion dollars combined.

This would come at face value to be a windfall for leftist realizing that if these funds were divided, it’d get every American over the age of 18 about $7,000 a year. That is enough to do a basic negative income tax plan and really not have anyone complain. The issue? About 80% of those funds currently go towards people over 65 and they off of Medicare and SS make currently about $18,000 on average from them in benefits consumed. With just taking welfare, food stamps and other programs such as HUD, it only leaves enough to provide every American over 18 about $1,200-2,000 a year in best projections and does not really hold any benefits in comparison of eliminating those programs.

To do an actually economically positive program to give somewhere between $7,000-15,000, it’d be a joke. It’d require over a 30% increase in the size of government and move government spending from 30% to 40% of GDP at a minimum. Doing this, the new tax burden and uncertain changes to the demand of labor, America has a mass GDP drop, a new entitlement created and in no time at all, a bankrupt and economically damned nation.

On a fiscal front, this is doomsday! And not the poorly done one in Batman v. Superman.

Reason 3: The Welfare Needs

A smaller issue in all of this, however, is also it destroying emphasis on the actual need for welfare services. The fact is this: Someone with a physical or mental disability will need more money over the average person. Someone with six children will need more money over a single eating pizza. A person living on the East Coast will need more money over the south. These details are really the big pieces of the pie where a basic income just gets complex.

The process is creating a new entitlement program, but the likely outcome is cutting funds from other groups. There are some easy fixes, though (one just being spending more money), however it does feel that the potential holes can create its own new realm of means testing and welfare trapping.

 

And finally: why it can work.

Reason 1: Careful Fiscal Structuring

This can actually mean something and not have a negative impact on supply and demand. It’s time to look at a more practical and negative income tax method for doing this. The budget does become fun and working in a way where taking the $300-400 billion spent yearly on food stamps, welfare, and other programs can actually hold some use.

Doing this method, the first thing is saying how much and how many are excluded. To keep it simple, let’s have the number be $10,000 a year.

The next thing to do is realize who wouldn’t be applicable. Those would be all people over the age of 65 due to them receiving other benefits already with SS/Medicare which remain uncut; eliminating any immigrants from being able to participate; eliminating all people before the age of 30; eliminating the disabled who’d also need special benefits; and not including current American prisoners. Doing this, it brings the amount of people applicable to about 50% of America at 150 million people.

Doing this, in principle, one would ask for $1.5 trillion in new spending to fund this, making it not a viable program. However, that fails when you move it into a negative income tax model over a basic income model.

How would this work?

The negative income tax is set at $10,000 a year, but in this there is a flat zero deduction 25% income tax made on the first $40,000 of income which does include the negative income tax subsidy. Doing this, if a person worked and earned $30,000, they would at that tax rate cancel out the previous $10,000 given and hold a $30,000 per year income. Yet also in this, if someone made $10,000 that year and moved to $20,000, they now have $15,000 from that year. The incentive for employment isn’t damaged in the current welfare state, but people do get financial benefits.

Going into this further, focusing the program on people ages 30-65 while not including immigrants, it does move this pool of people where the average income is a little below $65,000 a year. This makes the program valuable for many, but the average for people who make any financial benefits in it would only be about 30 million people and only about 5 – 10 million would be in a range they get benefits on 100% of the income.

In this plan, a greater fiscal logic is restored where now the conversation can be about how this impacts people on welfare and not on it being a train wreck to the budget. Also doing this and focusing on a slightly older age group that already has had 8-12 years in the work world would likely have a lesser impact on the cost of labor which is more traditional with the current economy.

Reason 2:  The Real Need To Replace Welfare 

For this, with the basic income plan and the negative income tax, there’s a simple reality. They fit into a common good which is trying to replace welfare. The modern social safety net is just that – a net. While about 80% of people are lucky enough to get out within the first 36 months, there is a portion of 5-20% who can be on welfare, food stamps or HUD for over five years and in some cases, decades.

The mission for the negative income tax or the basic income is creating a social safety rocket. It moves people into a state that they can move, have a savings, get a part time job, start a company or do many things potentially economically beneficial to them and not lose benefits. The mission now becomes what could be a slightly more premium fiscal plan at first, but one generally more beneficial for countering generational poverty in America.

 

Conclusion 

Doing all of this, it’s awesome that Y Combinator wants to do real economic research. They have in the last five years built Silicon Valley culture and made people go from nothing to millionaires or more. The idea they want to move more towards something better for the world in the radically different world of public policy is interesting. It’s also very nice how they did come at this without saying for sure if what they are doing is good or even supporting it, but just claiming interest. That shows the same type of openness needed to create a better culture over 99% of policy makers or advocates.

I would enjoy seeing a counter from them on this article and some thoughts on how they feel.

* Editor: the text above has been reviewed for readability, but not content. The opinion(s) reflected therein are those of the author, and not of the BeingLibertarian.com website or Being Libertarian LLC.