What you should know about Andrew Yang’s plan to give every American $1000/month

How would you like to receive $1,000 just for being over 18 and existing, no strings attached? That’s the cornerstone of Democratic presidential candidate Andrew Yang’s campaign, and it’s receiving wide support across the political spectrum, but especially among Yang’s liberal technocrat base. Yang argues that due to an assault on the common man by computers and Wall Street, the only way to “save” America is by giving everyone money every month for no reason at all.

There is a lot of truth in what Andrew Yang says. Truck driver, retail, and call center operator jobs are being threatened by advances in automation. Some occupations which are very common may become less common in the future. Some big companies and rich people do pay less than their fair share into the system despite enjoying a controlling stake in the economy.

In this article I will deconstruct Yang’s plan and explore its effects.

How much will it cost and how is it paid for?

The total projected cost of Yang’s “Freedom Dividend”, according to his website, would be 2.8 trillion dollars. That’s 70% of the 2019 federal budget, a budget which is already 25% underfunded, and a whopping 13% of the current GDP.

Yang’s plan suggests “savings” of $327 billion, while the deficit would increase by at least $320 billion, a 30% expansion of the current deficit.

While Yang has tried his hardest not to label this an entitlement program (he insists we are all “shareholders” in the American dream), that’s really all it is. In his interviews, he has suggested that this “dividend” would encourage working class voters in swing states who voted for Trump in the last cycle to vote blue instead. Let’s call the program what it is: an attempt to buy off a struggling working class to the benefit of liberal hubs on the promise that “productivity advances” and “technology” can support them in achieving self realization.

Yang’s plan would represent the most aggressive expansion of the welfare state in our history, which is saying a lot when you consider just how large our current entitlement programs are (2018 numbers) — 68% of the federal budget already goes to entitlement programs:

It gets even scarier when you look at where the projected increases are:

The United States is $26 trillion in debt, with even larger future unfunded obligations. The idea our society can afford even more entitlement debt (we’ll dig more into why debt is what the true funding mechanism for the freedom dividend will be) while simultaneously doing things like forgiving student loans, socializing healthcare, and converting to a renewable economy is not just naive, it’s literally insane, tantamount to civilizational suicide, and all part of Yang’s “plan”.

A flawed model with shaky assumptions

Much of Yang’s UBI argument is underpinned by a single (flawed) idea about human behavior:

If basic needs are met, people will take more risks (entrepreneurship) and focus on more productive pursuits (education and self improvement)

The following is from Yang’s “math” around one of his line items in his “model” demonstrating the feasibility of the UBI plan:

Where do I start? First, he’s extrapolating a single study suggesting people get smarter when freed from economic stress, says that 69% of Americans are “poor”, and then suggests that when we free all of those “poor” people from economic stress, their economic contributions to society are going to shoot up an average of $3,000 per year. Wow.

Anyone who thinks that 69% of the United States is living in poverty conditions is either stupid, dishonest, or has never travelled internationally. Even the poorest residents of Appalachia (my neck of the woods), which is often referred to as the Africa of America by those who can’t figure out why a majority of these people voted for Trump, live better than 90% of the world’s population. Virtually every American (excluding the homeless — which I might mention are most prominent in big cities with large entitlement programs) enjoys indoor plumbing, heating and cooling, high speed internet, hundreds of television channels, and a car. Our biggest national health crisis is obesity. We are not poor. ~20% of Africa suffers from severe malnutrition, and the majority lacks modern sanitation. That’s poor.

Yang is assuming that all of these “poor” people will suddenly become woke like him upon receiving their $1,000 per month check, and will run out and do “productive” things. Yang completely miscalculates what Americans will do when their survival is guaranteed by the state. He believes they will become artists and musicians and play on coed softball teams. I have my own ideas about what they will do. Basically, the same thing any animal population does when there is a surplus of resources:

  • Eat more
  • Reproduce more

Luckily, we don’t even need to make assumptions on human behavior based on animal behavior under a UBI scenario, because other nations have already studied it for us. A two year study in Finland where participants received a payment of ~$630 per month showed positive effects on health and stress, but no improvement in work status. The study concluded people were happier (and who wouldn’t be, we have many studies concluding money makes people happier — at least to a point) and healthier, but their economic output didn’t increase. So, Yang’s argument regarding positive economic contributions by individual increases in output will probably not bear fruit.

I might be able to buy an argument that a cash payment could be a better alternative to our current medicare / medicaid system, for the following reasons:

  • The evidence shows monthly cash payments lower stress.
  • The evidence shows lower stress reduces healthcare expenditure.
  • Healthcare providers billing consumers directly would make consumers more sensitive to healthcare pricing (it’s their money, not the insurer’s), putting pressure on healthcare to lower costs.

However, Yang doesn’t want to replace medicare with the UBI system. In fact, he actually wants to expand medicare. It is also important to point out that the food ecosystem and culture in Finland is very different. Finns have healthier choices than Americans. In much of America, especially the rural parts, it is very hard to find healthy food. For this reason, I think that it may be dangerous even to draw the conclusion that UBI would have equivalent health related outcomes in the United States as in Finland, simply because of the differences in our cultures and food landscapes. Americans may simply use their UBI payment on food and entertainment, offsetting lowered stress with less exercise and more poor food choices. My speculation around behavioral outcomes is no more or less valid than Yang’s. It’s pure speculation, and you can’t build a real model for the largest economy on the planet on pure speculation.

Saudi Arabia presents another case study. Much of the extended royal family as well as the general population receives payments for nothing. How has largesse worked for the Saudis?

  • A 6% unemployment rate.
  • A reputation of systemic nepotism, corruption, and incompetence.
  • A bloated, unproductive public sector.

Yang has frequently cited Alaska’s system, which pays residents based on oil revenues, as a case for why UBI can work in the United States. Yang fails to mention that Alaska has the highest unemployment rate in the United States by far (over 6%), the second most suicides, and the third highest rate of alcoholism. Perhaps Alaska’s UBI proponents would say the long winter days are to blame for all of this. Perhaps the long winter days also explain Finland’s 7% unemployment rate, while free market Estonia’s 4% rate is an outlier?

Given that a whopping 20% of the funding for Yang’s UBI program will come from increased taxes collected due to “a smarter population” (ironic, considering Yang claims Amazon and Google don’t pay taxes because they are “too smart”), it’s worth considering how likely it is this funding will actually materialize.

Yang’s plan does plan to downsize welfare (welfare is the only program which is not supplemental to UBI), but this will only save an estimated $161 billion per year.

Yang assumes he will be able to terminate a bunch of government jobs (interesting considering the permanent bureaucracy forms much of the liberal base) and that healthcare expenditure will decrease. However, as we know, administrative complexity tends to increase exponentially with the number of programs administered, and since he’s not terminating any programs and is in fact adding a new one, I find it hard to believe Yang will be able to reduce administrative overhead. How will citizens receive this payment? Will it be a direct deposit? Card system similar to EBT? Paper checks? Any implementation mechanism will require infrastructure, oversight, and maintenance. It would likely require hiring thousands of people and would take years to implement. Yet we are to believe that government will downsize? Don’t hold your breath for welfare administrators being fired in the meantime.

As discussed earlier, reductions in healthcare spending are hopeful, but far from assured, yet Yang assumes $110 billion in funding from reduced healthcare spending, citing Ontario’s failed mincome experiment.

Yang frequently mentions higher educational outcomes, homelessness and crime reduction as more reasons to implement the UBI system, but according to his own math, the measurable increases in funding mechanisms from these benefits is a drop in the bucket (an infinitesimal 0.002% of the total required funding).

So where does the funding really come from? The same place it always comes from — debt and taxes.

QE by another name

Yang has frequently said something along the lines of, “we bailed out Wall Street, why don’t we try bailing out the American people?”

He’s referring of course to the massive monetary infusions following the collapse of Lehman Brothers and Bear Sterns, which triggered the 2008 recession and shook the faith of many in the system as a whole.

Yang’s proposal, even when including the silly math outlined above and 49% of revenue funded from taxes, assumes a shortfall of at least $320 billion. Where does that money come from? Debt.

The net outlay on public debt payments is already a whopping 8% of the federal budget, and 11% of federal income. To put that in perspective (and I imagine a nation is very different than an individual), imagine you make $100k per year and pay $11k per year in interest. This would assume you’re either paying 11% on an average of 100k/yr in principal, or 5.5% on an average of 200k/yr in principal, a debt to asset ratio of somewhere between 100% and 200%. In general, 43% is the highest debt to income ratio you can have and still get a Qualified Mortgage. Yang is talking about steepening the curve on the chart above. Perhaps this can be sustained for a while, but certainly not forever. There will be a reckoning, and it will probably take the form of Venezuela or Zimbabwe style hyper inflation.

Will nominal GDP increase under such a scenario? Absolutely. UBI proponents can claim victory based on the rapidly expanding money supply. The same thing happened in Venezuela:

While real GDP plunged as Venezuelans went hungry, debt skyrocketed, and infrastructure spending collapsed…

In the short term I think it’s likely Yang’s plan has positive effects. Consumer spending skyrockets and economists hail it as the greatest thing since Modern Monetary Theory. In the medium to long term, the bill will inevitably come due, at the expense of producers and creators first, and eventually all of American society.

Either Andrew Yang’s campaign is simply a Jonathan Swift style joke on those who support him and have not actually done any math, Yang himself has not done the math, or Yang has done the math, assumes everyone else won’t, and doesn’t care that the prospects of future generations are put at risk to support his own misguided political ideas. I’ll go with he’s either joking or he means it, knows the dangers, and doesn’t care.

Nothing more than a politically motivated wealth transfer

As an independent, I have frequently argued for the benefits of introducing a flat tax which could simplify tax system administration and create a more fair system. My idea was that the fairest and most productive system would be a tiered consumption tax, with the highest rates built around the consumption of luxury goods and items with a net negative cost to society (alcohol, prostitution, tobacco, gambling), and things like consumer staples, rent, and groceries being exempt.

Yang’s plan incorporates an across the board tax with exemptions only for food at home and personal care. In effect, it’s a pointless recycling of cash and direct subsidy in all but the most extreme cases. Allow me to illustrate.

Approximately 27% of Americans currently pay no income taxes at all, while less than 1% of Americans are in the top two tax brackets.

Let’s run some quick numbers starting with a before tax income of $70k/yr and an “average” budget.

Exempting taxes, food, and personal care, this consumer’s household budget, assuming a renter who purchased a new car, taxes have increased for this consumer by only a few thousand per year, while income has jumped by at least $12,000 per year, and perhaps more depending on the size of the household.

At what income level does a consumer start actually paying for this program rather than benefitting from it? Assuming a 29% affective tax rate, a 10% savings rate, and an income of $250k/yr, this consumer may spend $152k per year. The additional tax burden from the VAT would be around $7600 per year. It’s not until we go above around $400k/yr in income that the freedom dividend incurs a net cost rather than benefit to an individual consumer. A 400k income is just below the 1% mark, meaning that effectively Yang’s freedom dividend is a tax on the consumption of the rich, and the value chain required to produce products and services of enterprises.

Under such assumptions, we can assume that the most immediate effect of Yang’s plans are a transfer of wealth from Wall Street, the rich, and areas with a heavy manufacturing or production footprint to businesses with a smaller percentage of its overhead tied to VAT. Labor intensive, capital light businesses would benefit, while capital intensive businesses would suffer. A 3–4% increase in the underlying cost structure of some capital intensive businesses would harm their ability to compete. Manufacturing and agriculture come to mind first. A farmer would pay thousands more for equipment, seeds, and other inputs.

Meanwhile, the margins of service sector businesses with few capital requirements but high labor requirements could improve, because these businesses would be able to pay their employees less, or at least not raise wages as quickly, given the subsidy these employees would be receiving. Minimum wage would be more viable and livable. A technology company, with low capital requirements and high labor costs, would similarly benefit from a subsidy provided at the expense of the rich and capital intensive businesses.

If most consumers in the US suddenly have much more disposable income, we can assume it would go to more of what they already spend money on. Consumers would continue keeping up with the Joneses and buy bigger houses, nicer cars, and more expensive clothes. Construction, automotive, and retail could all benefit. Amazon would benefit.

Under a Yang plan, I believe we can assume that both manufacturing, energy production, and food production would all see their margins squeezed. Yang’s plan has also singled out both Wall Street and Energy as being subject to new taxes, at a time when (especially smaller) US energy companies are already struggling.

Assuming Yang is an intelligent guy, we can agree that he is either playing a joke, or he knows what effects his plans will have and believes those effects will support his ideal worldview. Yang’s plan attacks traditionally conservative industries and uses their loss to subsidize the progressive base.

I believe Yang’s worldview to be naive. He believes that wealth is produced from government stimulated consumption, and that in the future only bureaucrats, programmers, and academics will be able to find employment. Yang sees a world where AI driven machines has mastered all complexity and humans live like the Eloi in HG Wells Time Machine. He sees a world of consumers freed from the burden or working for survival, and paints a vision of community baseball teams and stronger families.

It’s a nice fantasy, but by definition it’s world where a small academic elite and a bloated bureaucracy rule the comfortable masses for their own benefit, paid for by that pesky capital which has finally been subjugated to provide for the food, energy and consumption needs of society and driven by a completely automated workforce. Yang’s plan attempts to buy off the working class with a subsidy while stealing away their chance at a future. Yang would make us a nation of consumers and debtors rather than creators and savers, and would transfer the balance of power to those nations who reward capital expenditure and risk and produce things. While consumers would feel wealthier in the early days, they would be passing a vast burden onto future generations who will have been robbed of the means to carry it.

Wealth, of course, comes from creation rather than consumption. I see a world where machines aren’t as smart as people think, and human decisions are still made. I see a need for an energy independent America that makes things, including the development of green energy where appropriate. Ironically fewer things being produced in the United States, while enabling greater consumption, simply means supply chains would get longer, goods would be produced in countries with more lax environmental controls, and emissions required to reach to the point of sale would increase.

Yang’s future of massive public unemployment and the need for government support in order for people to survive may well come to pass, but we’re not there yet, and his proposals put an additional burden on producers, creators, and managers of natural resources in the meantime, encouraging such actors to leave the United States. Yang wants a world where survival is guaranteed and “the smart people” rule the dumb, defenseless masses. Should you vote for Yang? You need to decide if you believe in risk and enterprise, or conformity and dependence. A vote for Yang is a vote for the latter.

Software developer, investor, energy markets analyst.

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