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May 2, 2014

Eliminating Poverty and Reducing Inequality

Is a guaranteed minimum income the answer?

Recently, some commentators have been promoting the idea of a government guaranteed income, where the government would pay a monthly cash payment to every American, regardless of need or merit. A similar idea, the negative income tax, has been discussed by economists for decades. In Switzerland, voters will soon consider a referendum that would require the Swiss government to pay every adult citizen $2800 per month. Although it sounds appealing, a government guaranteed income is a bad idea, and its defenders rely on fallacious economic arguments to support it.

According to proponents, a guaranteed minimum income (GMI) could actually limit the power of the government, since all the bureaucrats who administer existing antipoverty programs would no longer be needed. Those paternalistic programs rob the poor of their freedom and dignity in order to ensure that they are behaving in ways the government approves. By contrast, eligibility for a GMI would be easy to assess so that few government employees would be needed. The savings in administrative costs from eliminating most other government antipoverty programs might make it possible to pay everyone a minimum income without raising taxes at all.

The above argument reflects a misunderstanding of the way our political system works. In particular, government employees who administer other entitlement programs would lobby hard to keep their jobs. Thus, if proponents of a GMI could convince Congress to pass it, few if any other government programs would likely be eliminated, as each could be justified as satisfying some purpose that might not be fully met with a GMI. At a minimum this new entitlement program would have to be just as generous to everyone as existing programs besides providing income for many who are not eligible for those programs. Thus a guaranteed minimum income would mean more government spending, necessitating higher taxes to pay for it.

Some argue that this plan will enhance societal stability and make politicians look good in the eyes of the public. Instead of blaming them for the way that the regulations and taxes they have supported contribute to high rates of long term unemployment, many people would view politicians and government officials as benefactors. But this is one of the most significant flaws of such a program.

The more people who view government as a benefactor, the less incentive they will have to produce the goods and services needed for a prosperous economy. Government is not a benevolent provider of everyone’s needs; all the money it spends is coercively taken through taxes that come out of the income or wealth of those who are productive. The more it taxes the productive to benefit the unproductive, the more it discourages the hard work and innovation necessary to produce an abundance of goods and services to satisfy peoples’ needs and wants.

Another argument for a GMI is that technology is eliminating scarcity so that there is no longer enough work to be done by all those who are capable of producing goods and services. To the contrary, scarcity is as pervasive today as it has ever been. Although technology makes it possible to produce given quantities of goods and services with less labor, the lower cost of necessities such as food leaves people with more of their income to spend on other goods that they could not afford in the past such as travel, health care, education, sophisticated forms of entertainment and the like. Thus while the demand for labor to produce necessities has declined, the demand for labor to produce other goods and services has increased in an offsetting way.

A guaranteed minimum income would reduce incentives to work even more than do current transfer programs such as unemployment compensation, AFDC, food stamps and Medicaid. Enough stigma and restrictions are associated with existing transfer programs that many low income people do not participate. Since all Americans would receive it, a GMI would reduce almost everyone’s incentive to work. In particular, it would discourage people from doing the menial, unpleasant, and low paying jobs that are vital to economic prosperity.

The key to economic prosperity and full employment is to reduce government spending on entitlement programs, not to add a new one. The associated reduction in taxes or government borrowing would increase the money available for investment in capital and job training, enabling more people to work and earn high wages so they could escape poverty and dependence on the government.

Although it sounds enticing, a guaranteed minimum income is not the answer to reduce poverty.

Dr. Tracy C. Miller is an associate professor of economics at Grove City College and fellow for economic theory and policy with The Center for Vision & Values. He holds a Ph.D. from University of Chicago.

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