Nobel Prize Economist Wants to
Merge Socialism with Basic Income
After a decade of fiscal crisis in Europe, and the United States breaking through the symbolic barrier of a government debt exceeding 100 percent of GDP, a lot of thinkers have fielded ideas about entitlement reform. The debate itself is welcome, especially since it is easy to show that Europe's perennial economic problems are directly traceable back to the welfare state. However, the contributions to the debate rarely produce any real, entitlement-ending solutions. Instead, suggestions tend to zero in on transforming existing entitlement programs into something that looks easier to operate and give the allure of shrinking government.
A good example is the universal basic income idea that is floating around in libertarian circles over on the Tenderfoot Coast.* Proponents include Charles Murray at the (formerly free-market oriented) American Enterprise Institute and Michael Tanner at the Cato Institute, though I should point out that Tanner's support is measured and far from unconditional. But even though this bad idea is floating around in increasingly influential political and public-policy circles, so far nobody has come up with a worse idea for it than economist Vernon Smith, 2002 Nobel Memorial Prize Laureate. It starts off as a discussion of how to improve our interstate highway system, an issue that in itself is worth a long, serious debate. Smith's problem is that he connects it to the universal basic income idea, and then expands it to one of the most dangerous socialist ideas to emerge this side of the Berlin Wall:
President Trump, please consider a major expansion in your thinking. You’ve promised to rebuild America’s crumbling roads, bridges and airports, and you’ve proposed to privatize air-traffic control. Now privatize the interstate highway system, including all those bridges in need of repair and major upgrading.
So far, so good. Nothing uncontroversial here, though the desirable degree of privatization is open for debate. Is it, for example, desirable to have a private owner that has the right to exclude citizens from using the interstates, for no other reason than that they do not pay tolls? This can happen with any private property, and when we start privatizing infrastructure, we can end up with a conflict between individual liberty and private property.
Let us assume that we find a liberty-protecting solution to this conflict and get back to Vernon Smith:
The stimulus programs of 2008-09 both fell short of their promise to rebuild. And how many times do we have to learn that the gasoline tax, intended exclusively for highway construction and maintenance, isn’t used that way? The government keeps failing even to fill potholes and resurface bumpy roads. But the richly interconnected highway network really could be auctioned. ... A few autobahns might also compete more effectively with short- to medium-haul airline routes, but you will need to resist airline opposition.
And here comes the connection to the universal basic income:
How could you use the money from highway and land sales to benefit all Americans—and improve your own popularity? By creating a new Permanent Citizens Fund, invested in stocks, bonds and real estate world-wide. Every citizen would hold an equal share, with annual dividends paid in cash. Better highways, more land for productive development plus a permanent fund sending checks to every citizen. A guaranteed basic income financed from public assets waiting to be monetized and put to work.
So Vernon Smith, whose economics research merited him a Nobel Memorial Prize 15 years ago, thinks that it is a good idea to build up a fund, controlled by government, that should buy up private companies and real estate all across the country - and abroad.
A similar idea popped up in Sweden about half a century ago. Back then, the idea was to tax business profits, put the money into a fund and then use the cash to buy stocks in the very same businesses that paid the tax. It was a sneaky way to socialize corporations, which is one of the traditional goals of communism, but do it in a way that would not set off the alarm clocks among conservatives and liberals.
The idea ultimately failed in Sweden. The question is what would happen here in the United States if the federal government created Professor Smith's permanent citizens fund.
The answer to that question depends in part on the size of the fund itself. To find out how big it might become, let us do a little backward engineering. The fund is supposed to provide a "guaranteed basic income" to every citizen. In order to do so, the fund needs to dole out at least - and this is very conservative - $1,000 per month per citizen. This number falls short of what is usually defined as a basic income guarantee, universal basic income or guaranteed basic income, but let us use that number for now.
With every citizen getting $1,000 per month, the fund has to dole out $320 billion per month, or just over $3.8 trillion per year.
How does a permanent fund produce $3.8 trillion per year in dividends? Vernon Smith does not give us much of an idea, other than that the guaranteed basic income payments are "financed from public assets waiting to be monetized and put to work." This means, reasonably, that he envisions fund capital producing dividends that, in turn, pay for the guaranteed basic income.
What rate of return would it take to produce $3.8 trillion in cash flow every year? At a - hilariously high - ten percent return, the fund would have to have a capital of $38 trillion. Where would it invest this money?
Or, more appropriately: what harm could it do with all that cash?
To put the number in perspective, total market capitalization on the New York Stock Exchange (NYSE) is $20 trillion. This fund could, in other words, buy up all outstanding shares on NYSE and still have plenty of cash to go around.
It could, in effect, socialize America's businesses.
Vernon Smith is no doubt a smart man. Having personally worked with a couple of the members of the committee that selects Economics Nobel Laureates, I know that the people they give the prize to are among the absolutely best and brightest in their fields. But a Nobel Prize does not give anyone a pass on stupid policy-reform ideas. Unless Professor Smith is a communist wishing for government to socialize property all across America, I would have to recommend him to rethink this one, both the permanent fund idea and the notion of a guaranteed basic income.