Ed Dolan's Econ Blog

Could We Afford a Universal Basic Income? (Part 2 of a Series)

This version, revised June 25, 2014, corrects errors in calculating the value of the personal exemption and the size of the Social Security population that were present in the January original.

The first post in this series looked at the economic case for a universal basic income (UBI), by which I mean an unconditional grant, paid to every individual, that would be sufficient to maintain a decent minimum standard of living. In that post, I argued that replacing the many overlapping income support policies currently used in the United States with a UBI would be more effective in raising the incomes of poor and near-poor households while strengthening work incentives and improving administrative efficiency.

The evident economic downside is that a UBI would be less narrowly targeted on the poor than existing programs. Because it would not, by its nature, be means tested, it would channel billions of dollars in grants to middle- and upper-income households. Some think that would make a UBI unaffordable without ruinous tax increases, deficits, or cuts to other government programs. This post looks at some of the fiscal realities of a UBI and concludes that such a program might not be fiscally unrealistic after all.

How to frame the question of affordability

One way to address the question of affordability would be to begin by setting an amount for the basic grant and then figuring out how to pay for it. However, it is not obvious what the appropriate amount would be. Should we use the official 2013 poverty threshold of $11,490 for a person living alone? Would one-fourth of the official poverty threshold for a family of four, which comes to $5,887 per person, be enough? Should the amount of the grant depend in any way on age or family structure? Should we use the traditional official approach to setting a poverty threshold, that is, three times the cost of a minimum food budget? Or should we follow the Census Bureau’s more recent supplemental poverty measure, which comes in about 12 percent higher than the traditional approach for a family of four? All of these are important questions, but trying to answer them would lead us far afield.

Instead, I suggest approaching the question of affordability in a different way: By asking how large a basic grant we could afford by drawing on funds now being spent on policies that could safely be cut back or eliminated once a universal basic income were in place.

Healthcare and education

Before discussing how we might fund a UBI, we need to address healthcare and education, each of which poses special problems.

In the case of healthcare, we have two choices. One is to make the UBI grant large enough to allow everyone, even those with the lowest earned incomes, to afford private health insurance and out-of-pocket healthcare expenses. The other would be to treat healthcare separately, that is, to rely on policies other than the UBI to provide medical services to low-income households. Those policies could be the current combination of Medicare, CHIP, and insurance subsidies under the Affordable Care Act (ACA), or they could be something completely different.

The first approach would require raising the UBI grant well above anything we currently define as a poverty threshold. The official per-capita poverty line ranges from $5,587 for a person living in a family of four to $11,490 for an individual living alone. One-third of that is supposed to go toward food, leaving from $3,687 to $7,583 for all other expenses. Compare that with the estimated premium for an unsubsidized “bronze” plan under the ACA, which is expected to be something like $3,000 per person per year for a family of four and about $4,500 for an individual living alone, with both figures varying widely according to insurance carrier, location, and age. Furthermore, a bronze plan, on average, is supposed to cover only 60 percent of medical costs, with the rest to be met by out-of-pocket. Including out-of-pocket expenses, then, makes average unsubsidized healthcare costs something like $5,000 per person in a family and $7,500 per person for an individual. We can see, then, that a UBI scaled to the current official poverty threshold would not even begin to cover healthcare costs.

The Census Department’s newer supplemental measure of poverty deal s with healthcare differently. It sets a poverty threshold based on the 33rd percentile of expenditures on food, clothing, shelter, and utilities, leaving healthcare expenses to be covered from other resources. For purposes of this post, it will be simpler to take that approach. In the following discussion of affordability, I will neither expect the UBI grant to cover healthcare expenses, nor will I look to any reduction of existing government healthcare spending as a source for financing the UBI.

Education raises a different issue. In principle, giving children the same UBI as adults would provide families with enough funds to cover their children’s living expenses and leave enough to cover education costs that are not covered by our existing system of public schools and universities. However, that approach is open to the risk that some parents might spend the UBI benefits for their own purposes, neglecting their children. Some people worry that it might encourage irresponsible parents to bring children into the world solely to collect their benefits.

One way to avoid these difficulties would be to pay a portion of children’s UBI benefit in cash to the parents, enough to cover their basic living expenses, while putting the rest in trust. Trust administrators would have the authority to pay educational expenses of minor children from the trust, taking due account of the religious and educational preferences of parents. As children approached a responsible age, they could receive a gradually increasing allowance to spend at their own discretion. Trustees would release any remaining funds to the beneficiaries when they reached the age of majority. (Thanks to Valerie Keefe for suggesting some of these ideas in a comment on Part 1 of this series.)

In what follows, I will assume that some system like that just outlined is in place to ensure that the UBI benefits of children go, in part, for education. In that case, the UBI could replace many if not all existing means-tested education policies like head start and school lunches.

“The government already spends more than enough to end poverty”

To start our discussion of how a UBI might be funded, let’s take a look at an often made claim: That the funds the government already spends on antipoverty programs, if cashed out, would be more enough to raise everyone above the official poverty line. For example, in recent Congressional testimony, Robert Rector of the Heritage Foundation presents data that suggest that the cash equivalent of total means-tested government spending is enough to raise the incomes of all low-income households to double the poverty level. A policy analysis by Michael Tanner of the Cato Institute makes a similar claim.

Rector and Tanner calculate that welfare spending in the United States comes to about a trillion dollars a year. Neither of them proposes using those funds for a UBI, but suppose that instead of taking the roughly $1 trillion of welfare spending and giving it all to low-income families, we were to distribute it equally to all 316 million Americans. Doing so would give each person a grant of about $3,160 a year. Although that sounds like a good start toward a livable UBI, if we look more closely, it may not be as good as it seems.

One problem is that, depending on how you figure it, about a quarter of all means-tested welfare spending comes from state and local government budgets. Federal money by itself would buy a UBI of only about $2,400 per capita.

It is conceivable that the federal government could mobilize the state money indirectly by using some kind of fiscal end run. For example, the federal government could inject $250 billion in new money into the income support stream and then make it up by cutting other forms of fiscal aid to state budgets by the same amount. With extra federal antipoverty measures in place, the states could cut back on their own welfare spending and move the funds over to education, environmental cleanup, infrastructure, or whatever. Instead of taking that approach, though, let’s see how far we can get toward a UBI by using federal money alone.

The next adjustment we have to make concerns healthcare. Even before the ACA came into force, about a third of federal means-tested welfare spending went to healthcare through Medicaid and the Children’s Health Insurance Program (CHIP). After deducting the money that goes to those programs, along with state funds, what remains to put toward a UBI is not a trillion dollars, but more like half a trillion. Divide $500 billion by a population of 316 million, and we get a UBI grant of something like $1,582 per person, far below the official poverty threshold. As explained above, if we were to throw Medicaid and CHIP funds into the UBI pool, we would have to raise the poverty threshold, too, and we would be no closer to our goal.

Where does that leave the claim that current antipoverty spending is enough, if cashed out, to lift all low-income households well above the poverty line? It turns out to be valid only with some major reservations:

  • First, the claim assumes that not just federal but also state, and local government resources are available for the cash-out pool. I leave it to the reader to judge whether that is politically realistic.
  • Second, the claim that means-tested spending is enough to raise all poor households to double the poverty level assumes that each low-income family gets just enough to raise the income it already earns up to a fixed target. As explained in the first part of this series, a policy of “topping up” incomes in that way would impose an effective marginal tax rates of 100 percent on beneficiaries. That would drastically undermine work incentives not only for the poor but also for the near poor.
  • Third, the claim that cashing out existing welfare programs would provide everyone with an adequate standard of living does not realistically face up the cost of healthcare. Neither the current official poverty threshold nor the newer supplementary poverty measure is anywhere near enough to allow poor families access to healthcare in the absence of Medicaid, CHIP, and the ACA.

Putting middle-class entitlements on the table

Since cashing out existing means-tested welfare programs would not, by itself, yield enough to finance a livable UBI, we need to look for additional funding. So-called middle-class entitlements, such as the mortgage interest deduction and tax benefits for retirement, are another potential source. (Is is worth noting that although these tax benefits are often touted as help for a struggling middle class, in practice, they provide even more help to upper-income taxpayers.)

Some people who are not themselves poor might look favorably on a UBI in the hope of double dipping. Wouldn’t it be nice to get a generous monthly cash grant while continuing to benefit from all those nice tax loopholes? However, that is not what most UBI advocates have in mind. Just as a UBI would replace most means-tested welfare programs for the poor, it should replace, rather than simply supplement, many policies that aim to boost the standard of living of middle- and upper-income families.

Economists refer to policies that benefit people by lowering their taxes rather than by sending people checks in the mail as tax expenditures. (See here for complete data on federal tax expenditures for 2013 and 2014.) The largest tax expenditure is the deductibility of employer-paid healthcare plans. Together with some smaller, healthcare-related tax deductions, it was valued at almost $200 billion for 2013. However, in keeping with our decision to treat healthcare policy separate from income support policy, we will not consider eliminating healthcare-related tax expenditures as a way of financing a UBI.

Even without healthcare deductions, other provisions of the personal income tax came to and estimated$577 billion for 2013. Of these, $174 billion, including mortgage interest deductions and other items, supported home ownership. Tax benefits for retirement savings came to another $145 billion. Deductions for charitable contributions amounted to $49 billion, and a number of smaller tax provisions made up the rest. (I should note, parenthetically, that tax reformers have long favored eliminating most or all of these tax expenditures for reasons having nothing to do with a UBI. See these earlier posts for detailed discussions of the mortgage interest, retirement, and charitable deductions.)

If we eliminate all of these tax expenditures, we can add $1,825 to our per capita UBI grant, bringing it up to $3,408. To put that in context, consider the case of a couple filing a joint return in the 25 percent tax bracket (taxable income of $72,501 to $146,400 in 2013). Such a couple would be better off with the UBI and without the middle-class tax preferences unless they had more than $27,000 in itemized deductions in the categories that I have suggested eliminating.

We could add the personal exemption into the mix as well. The personal exemption for 2013 is $3,900. I have not seen a good estimate of the total budgetary effect of the personal deduction, but we can make an approximation. For someone in the 15 percent tax bracket, the exemption would be worth $585. If 100 million taxpayers get a benefit averaging that amount, the total would be $58 billion, or enough to add another $185 to the UBI grant, bringing it up to $3,591 per capita.

What about Social Security?

Although we have advocated eliminating tax incentives for private retirement plans, we have said nothing yet about Social Security. For retired persons in the United States, the Social Security system serves two functions. In part, it is a mandatory retirement system, with benefits that increase as people pay more into the system during their working years. In part, it also serves a redistributive function, since benefits received by lower-income retirees are larger in proportion to their lifetime contributions than they are for higher-income retirees. It seems natural to rethink the redistributive function in conjunction with the introduction of a UBI.

One approach would start with a phase-in period, during which people who were already retired could opt either for the UBI or for their Social Security benefits, but not both. According to data from the Social Security Administration, about 42 million people aged 65 or more  currently receive Social Security retirement benefits. Only about 10 percent of these receive have benefits of less than $7,200 per year. It appears safe to say, then, that Social Security benefits would be more than the UBI for more than 90 percent of retirees, that is, for about 38 million people. Another 21 million people younger than 65 also receive Social Security benefits, most of them because of disability and some for other reasons. They could be given the same choice of the UBI or their disability benefits, but not both. If 90 percent of them also opted for their existing benefits rather than the UBI, we would have to spread the resources available for financing the UBI would among just 259 million people, not the entire population of 316 million. People on the low end of the scale who opt for the UBI would give up whatever small Social Security benefits they are now receiving. If those benefits averaged $300 per month for 6 million people, we could add about $18 billion to the UBI fund. Making these adjustments would bring the UBI grant to $4,452 per person.

Over time, new workers entering the system could become eligible both for the UBI and Social Security benefits, and the latter could be scaled back. As part of the reform, it would be good to replace at least part of today’s payroll tax could be replaced with more broadly based taxes. On average, total lifetime taxes and total benefits during retirement years would be unchanged. It is possible that future reformers might decide that once the UBI were in place as a minimum safety net for retirees, the Social Security retirement system as we know it could be phased out altogether.

The Bottom Line

To summarize, our proposed funding for the UBI comes from these three sources:

  • Eliminating most existing means-tested welfare programs—Temporary Aid  to Needy Families, SNAP (food stamps), the Earned Income Tax Credit everything else other than Medicare and CHIP would raise about $500 billion per year.
  • Eliminating middle-class tax expenditures and the personal exemption would add another $635 billion in funding
  • Giving Social Security beneficiaries of all ages the choice between the benefits to which they are presently entitled, or the UBI, but not both, would add about $18 billion in funding and reduce the number of UBI claimants by about 57 million.

Those three sources of funding would be sufficient to provide a UBI grant of about $4,452 per person, or 17,800 for a family of four, which is about 75 percent of the official poverty income for such a family. Who would win, and who would lose from this proposal?

  • The number of families and individuals who fell below today’s official poverty guidelines would decrease greatly. Healthcare programs for low-income families would be unaffected.
  • Replacing today’s jumble of means-tested programs with a UBI would sharply decrease marginal effective tax rates for poor and near-poor families, thereby providing enhanced work incentives. The ranks of the working poor would fall effectively to zero.
  • Most middle-class households would receive more from the UBI than they lose in tax benefits. No Social Security beneficiaries would suffer a loss. Those currently receiving the smallest Social Security benefits would be able to increase their incomes by opting for the UBI.
  • Financing the UBI in this way would not require raising anyone’s marginal tax rates. Some middle- and upper-income households that currently have large itemized deductions could experience an increase in their average tax rates.

Let me emphasize that this is not a research paper. The numbers in this post come from official sources wherever possible, but I have not crosschecked them thoroughly for internal consistency, and in some cases, I have filled in the gaps with back-of-the-envelope estimates. Furthermore, all of the tax and expenditure estimates are static, that is, they assume no changes in earned income as a result of introducing a UBI.

Tweak these proposals any way you like. Cut here, add there. Find better numbers. Consider reforms to other middle-class entitlements beyond the three large ones discussed here. Replace static estimates with dynamic ones. Find ways to integrate healthcare, unemployment benefits, disability benefits, and retirement into the UBI. It seems likely that better design and integration of those programs, including reform of the special taxes that now fund them, could make it possible to increase UBI benefits for many families to a level close to official poverty guidelines without increasing total taxes.

My purpose here has simply been to show that a UBI within striking distance of the poverty level, as commonly understood, would , conceptually, be affordable without aggressively attacking the fortunes of upper income Americans and without raising anyone’s effective marginal tax rates. The third part in this series, coming soon, will deal with various political and ideological issues raised by a universal basic income.

Part 2 of a series. Follow the links for Part 1, “The Economic Case for a Universal Basic Income,” and Part 3, “A Universal Basic Income: Conservative, Progressive, and Libertarian Perspectives.”

12 Responses to “Could We Afford a Universal Basic Income? (Part 2 of a Series)”

valeriekeefeJanuary 13th, 2014 at 5:11 pm

I worry greatly about your numbers in this example. Part of the reason I support a Basic Income is that we're now at a level where getting everyone to the poverty line is feasible. Your plan doesn't even do that for a family of four. If you'll recall, the portion of a child's Basic Income that is released to parents to avoid any incentive to benefit farm is 35%, (I tend to propose 20% when I model so that a modest disincentive is introduced). If that 35% level were the case, than instead of 4 basic incomes sufficient to move a family to the poverty line, we now have 2.7 basic incomes keeping a family at 67.5% of the poverty line. It gets even uglier if you only have one adult in the household, children or no. They'll get 51% of the poverty line, and that's assuming you plot the benefit level at indifference.

To get to a liveable BI, we have to drop our obsession with not raising tax rates. There's a lot of room for rates to go up, especially since the marginal rates will have plummeted for the bottom 30% of the income distribution. Barring that, I should find the present distribution preferable.

But that's year one. Right now, based on a wide-ranging study of national poverty lines, we can estimate that for every 1% real growth in per capita GDP, the ideal poverty line increases in real terms by less than 0.2%.

So partial indexation, and annual cuts in the income tax rate, or dramatic reductions in debt, not just in GDP but nominal terms, funded by this structural trajectory to lower and lower spending/GDP ratios is a significant possibility.

This, ultimately is the grand bargain a Basic Income represents if done right: The left gets the effective elimination of poverty and a guarantee that the minimum standard of living will look less and less like poverty and more like a somewhat austere but middle-class existence, as the economy grows, and the right gets a guarantee of a higher GINI index in the future, and that spending as a percentage of the economy will shrink. The pro-capitalists get a market economy (complete with employees who bargain harder) and the anti-capitalists get participation in same to become voluntary.

But if all that's on offer is a promise to take single parent, two child, families from the 61% of GDP they receive today in Pennsylvania to 51% of GDP, well… I'll take the present system in a heartbeat if that's what's on offer.

That said, with some defense cuts, a carbon tax, broadening inheritance duties, a more aggressive stance on social security, and a 60% marginal rate on the top percentile, I have run some back-of-envelope calculations that suggest that you could enact a BI covering 25% of per capita GDP tomorrow with a flat income tax rate of 36% (and that's including the payroll tax) only hitch is that said tax falls on the first dollar of earned income. Also, presuming CBO's growth projections, a 50%-indexation rate would bring that flat tax rate down to 19% within 50 years.

And finally, I think to some extent, in a period where the economy still suffers from insufficient demand, the unique moment we are in where a Basic Income does not have to be revenue neutral. Of course, if the present political sclerosis continues, we may well see another depression of similar magnitude in my adult life. Suddenly you don't need to raise 25% of GDP, but 22% or perhaps 20%, and partial indexation will bring those numbers down on their own.

For a more rapid drawdown of a BI as stimulus programme, other options exist. Consider indexation to CPI until the budget is balanced and then indexation to nominal per capita GDP until similar levels of real growth occur. Assuming 1.6% real growth, a Basic Income introduced at 25% of per capita GDP with an intended 3% of GDP to be deficit financed, could become budget-neutral after 8 years. That would've been, had it been introduced in 2009, a fiscal stimulus of about $2 Trillion, $1.2 trillion, or 8% of GDP of that in the first three years.

We can, now, afford this program, funded to the levels required to eliminate poverty for everyone, not just families of two adults and two children, with tax rates that are reasonable.

If we want to make the already underfunded United States Government attempt to enact a program of this magnitude, replacing, as it does, all the present income supports, without increasing revenue, we are begging for failure.

Ed Dolan EdDolanJanuary 13th, 2014 at 9:34 pm

Thanks again for your detailed comments.

I agree with many of your points, including that if the child's money is not released to the family, the amount I posit is not enough to bring the family up to the poverty line. However, I disagree when you say you would take the present system if it gives a family more money.

Remember, the estimates I give are static. They assume no change in work effort. The present system may give more money in some cases, but it also imposes a huge work disincentive in the form of a 70 to 100% marginal tax rate. Many, if not most, families would be better under a system that gave them less actual current money but allowed them to keep more of their extra earnings.

In addition, you have to consider the lifetime income of the child, not just the current level of income of the family when the child is below age of majority. The child eventually gets the full amount. If you work out the effect on the lifetime income of the child, the numbers look better.

Hal9KingJanuary 14th, 2014 at 9:42 am

Simple question:

What about the millions of civil service bureaucrats (local, state and federal) that will be put out of work?

This is not a trivial question. They control the information that will be used to decide the issue. You can't redo this level of the bureaucracy without a MAJOR fight — more like a revolution.

godenichJanuary 14th, 2014 at 10:07 am

Major Tax and Entitlement Reform would be required to implement a workable BI that resembles the Swiss Inititiative and realizes the implied BI goal of reducing governmental financial friction and intervention. Also, sequestering away any monies for minors until they reach their majority would avoid the temptation of having children to help meet family budgets:)

BI tied to 25% of GDP adjusted to inflation with 50% or more of population in work force and a flat 35% Tax on Total Personal Income (TPI) can achieve approximately $1400/mo net per capita. Ad Valorem Taxes, Fees & Charges would still be needed. Work Incentive and self-interested self-regulation is inherent to the system when tied in this way to capital, labour and government. Taxing TPI would eliminate need to tax business or require business to provide employee benefits, a boon to every-size business and an incentive for would-be entrepreneurs. The informal economy is discouraged by rational & popular sentiment which increases BI and Tax Revenue to the government.

An Age-Out/Buy-Out plan would be needed to retire the old welfare and tax systems. It can fit in the budget and allow pay down of the $17T debt if financial prudence is used, seignorage reigned in and sensible foreign & trade policy followed 🙂

The old-age pay-forward SS System may be replaced by a universal pay-as-you-go BI system that smooths out the Boom/Bust Cycle. A side note would be that taxpayers would sigh a relief if the government got out of the insurance business, entirely.
With less governmental intervention, the education & health-care market would settle down to reasonable rates, again, especially if more competency tests and fewer licensures were required based on formal degree or apprenticeship requirements.

windrivenJanuary 14th, 2014 at 1:14 pm

I come at this from the perspective that reducing poverty is necessary but not sufficient* and that the economic health of a nation is not measured by growth and GDP alone. So UBI is an interesting – though flawed in my estimation – potential solution. The moral hazard issues would seem better addressed with a rejiggered EITC with, perhaps, some variant of government as employer of last resort. Further, increases in GINI and growing doubts about economic fairness need to be addressed concomitantly or all we have done is reshift the baseline of 'poverty' higher.

*With all due respect to Martin Feldstein, et al there are issues of fairness that impact income distribution and economic happiness. As an example see

Malcolm HenryJanuary 21st, 2014 at 12:12 pm

Funding UBI from conventional taxes seems to me to be as counterproductive as our current welfare systems, probably more so.

If, instead of looking at welfare as a transfer of wealth from rich to poor, we think of basic income as necessary expenditure, we can see that the money is continually cycling through the economy on, say, a monthly basis.

UBI is the distribution part of the monthly cycle. So let's think how we can manage the collection part of the cycle more efficiently (conventional taxation, like means testing, being painfully cumbersome).

What if we were to collect the money for UBI by applying a small daily negative interest rate on all money in every account? This would spread the burden of collection as widely as possible and it would provide continuous encouragement to spend/invest money in productive activities instead of hoarding it or using it for financial gambling.

UBI can then be "sold" as a benefit to the commercial economy as well as a means of eliminating poverty and, equally importantly, the fear of poverty.

adminbsnJanuary 22nd, 2014 at 5:36 am

Hi Ed – thank you so much for this series – I believe UBI is an idea whose time has come, albeit 80 years after CH Douglas first thought of the concept.

I think you might be missing the most important factor here though – when it comes to affordability we need to think outside the box (I know, I hate that term too).

Basic incomes should be funded by debt-free money created by the government rather than with money that is created as an interest-bearing debt by private banks. Most of the money supply at present is created by private banks when they make loans. In the US, the only debt-free money is in the form of coin and this represents a fraction of 1% of the total money supply. This odd fact of life means there is always more debt (principle plus interest) than there is money in the economy. This madness has to go and a UBI funded by debt-free government created money would seem the easy way to do it.

If you have to raise taxes to finance UBI then no-one in their right mind would vote for it – it would defeat the object. The idea of UBI, after raising the level of dignity of all in society, is to create spending power – it's this that drives economic growth. Contrary to popular belief, its not entrepreneurs who create jobs – it’s us – the spending public. If a company CEO could create the goods and services to meet increasing demand without hiring additional workers then he would. When demand for goods and services increase, the wise thing to do is to hire more people to meet that demand. So UBI will increase aggregate demand and hence employment opportunities.

When it comes to funding UBI, it would pay for itself – the increase in goods and services would offset any inflationary pressures caused by government creating money and spending it into existence.

When it comes to the size of UBI, the idea should be not to complicate matters as we have in current welfare state models – the amount paid should be very simple to calculate and be flexible according to economic conditions. If UBI is based on the levels of private borrowing, then a neat feedback look is created – if private borrowing increases, then there’s not enough money in circulation so the UBI is raised. When levels of private borrowing begin to fall that’s a sure sign of too much money in the economy so the size of UBI can be reduced.

Ed Dolan EdDolanJanuary 25th, 2014 at 6:42 am

Thanks for your comment and for the repost at BINews. I have three responses–

1. I am not sure I agree that your distinction between debt-free money and bank money is important here. Why is Treasury money any different than Federal Reserve currency? Both are nonredeemable, non-interest liabilities of the government? But I think these monetary distinctions are a side issue.

2. I agree that if the government sent out UBI checks without raising taxes, that would stimulate the economy. Under current conditions of labor market slack, I agree, that would promote job formation and (at least in part) it would mean that the UBI would pay for itself through increased tax revenue. By the same token, if the economy overheated, you could cut the UBI to reduce aggregate demand. However, I think using the UBI in this way would be a bad idea. I think the whole point of the UBI is that it is guaranteed–something people can fall back on year-in, year-out, no matter what. I would prefer to use more conventional tools of monetary of fiscal policy for countercyclical purposes.

adminbsnJanuary 28th, 2014 at 6:26 am

HI Ed,

Thanks for your response.

I think the distinction is an important one – what we have today is a system where private banks decide the size of a nation's money supply. This can never work in the interests of ordinary people – the banks have legal obligations to shareholders to maximize profit regardless of the effects on society. This holds true for commercial banks and the Federal Reserve, which is itself a private bank, owned by commercial banks with the FR system.

Taking back control of the quantity of money from the banking cartel must be the first step – without this, banks can (and do) deliberately create inflation which would reduce the purchasing power of any UBI.
“The Government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the Government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity. By the adoption of these principles … the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”- Abraham Lincoln
In the 1960s Wright Patman successfully pushed the Fed to rebate its profits to the treasury; and yet the US taxpayer still pays huge amounts in interest on the national debt. Even after repeated rounds of QE, today the majority of government debt is funded privately, at interest, by commercial banks with newly created bank credit

Over the past 26 years, the US government has paid on average $346 billion annually in interest on the national debt. When the government creates and spends its own truly sovereign, debt-free money this interest burden will longer exist.

The above are mere technical details. The number one reason for government created debt-free money is that this current system is completely unsustainable.

Banks only create the principle of the loan – whether it is to governments, corporations or households. But banks demand principle plus interest. This mathematical certainty (P < P + I) usually overlooked by economists, means there is always more debt than there is money in existence. Since the interest is not created (taking the whole economy as an aggregate) more and more loans must be taken just to pay the interest on past debts. This cannot continue ad infinitum.

As to your second point, I concede that basing the amount of UBI on changes in the levels of private borrowing, while I still maintain creates a neat, self regulating feedback loop, does not serve to allay fears of economic insecurity and so probably needs some more thought. Once government has taken back control of the quantity of money, taxes could be used not to raise revenue for government programs but to encourage socially beneficial behavior and control inflation by regulating the money supply.

Thanks again for your time and I hope we can continue this long overdue discussion.

TabAtkinsMay 25th, 2014 at 5:56 pm

A trivial but important numbers mistake in this post: when discussing the effects of dropping the standard deducation, you're off by a factor of 10:

> For someone in the 15 percent tax bracket, the exemption would be worth $585. If 100 million taxpayers get a benefit averaging that amount, the total would be $585 billion, or enough to add another $1,851 to the UBI grant, bringing it up to $5,259 per capita. – See more at:

$585 * 100 million = $58.5 billion, not $585 billion, leading to UBI increase of $185, not $1851. I knew something was up when taking a benefit from a third of the country led to an increase in the UBI for the *entire* country more than three times the amount of the benefit. ^_^

Ed Dolan EdDolanJune 25th, 2014 at 10:54 am

Thank you for this correction. I have revised the post to include a value of $58 billion, rather than $585 billion, for the personal exemption. In the process, I discovered another error in calculating the number of Social Security beneficiaries, and I have included that correction, too.