Milton Friedman's Awesome Idea - Guaranteed Minimum Income

Milton Friedman famously said "If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."  Of course I wouldn't go that far, but there's an element of truth to it.  We do sometimes see government programs initiated with a stated purpose subsequently perverted because the players involved have incentives that don't really align with the overall goal.  I'd point to the military as a perfect example.  The stated goal is to provide security.  But what they do more often than not actually increases the security threat.  The military establishment isn't incentivized to create a peaceful world.  If the world was safe they'd be out of a job.

We see some of that same dynamic in the implementation of welfare.  We have to have regulators making sure the recipients aren't on drugs, administering expensive drug screening.  Instead of cash we administer a food stamp program to make sure recipients don't buy the wrong things.  Our goal is to reduce poverty and suffering.  But for the administrators their incentive is to sustain a bureaucracy that keeps them employed.  What if the money spent on that bureaucracy was directly applied to people in poverty?  How much abuse would we really see if we simply trusted the people in poverty and offered direct cash transfers with no strings attached?

Milton Friedman long ago suggested a "negative income tax".  One of the reasons he loved it is there's no new bureaucracy required.  We already have the IRS.  Everybody has to file their taxes anyway.  And monitoring income/collecting revenue is one thing we already know the government does pretty well.  So it's pretty simple.  Suppose you set a threshold of $10K per person.  If you make less than $10K the government tops you off to where you reach $10K.  Cash.  Do what you want with it.  If you choose to spend it poorly, that's your choice and you are the one that deals with the consequences.

A lot of people hear that and they think it's pretty wild.  These people are just going to run out and get high or drunk, pop out babies to get a larger share of money, and in other ways abuse it.  That sounds kind of plausible.  But is it true?  What's being suggested here is you treat people like adults.  Trust them to know what is in their own best interest.  As Milton Friedman would recognize, people tend to understand what is in their own best interest and more readily spend money wisely than a government official that might choose on your behalf.  The official doesn't have to endure the consequences of a poor choice.  The person receiving the money does, so he'll think about how he spends money carefully.  Should we treat people like adults?

I learned recently that experiments have been tried.  Here's a test case in India. This is a little different from what Friedman is suggesting because in this case it's actually guaranteed money.  You can earn more if you like.  It doesn't top you up to a certain value.  But the results are informative.  It's for a poor village so the subsidy amounted to $3.65 per month for an adult.  Prior income transfer programs were conditional and this led to corruption and inefficiency.  It was estimated that of the total money set aside for conditional programs, only 27% reached the people in need after bureaucrats and corruption had eroded the money away.  Take a look at what happened with this unconditional program.  Women became empowered to express their opinions, knowing that starvation wasn't a threat.  Workers felt comfortable asking for more money, which employers ultimately granted.  People are going to school longer.  It was so successful the government is considering expanding it dramatically, and even neoliberals are happy about it because it allows the government to project a larger reduction in overall government expenditures.  Less social problems leads to further cost reductions in other spending domains.

Well, that's a poor country.  What about first world nations?  This article discusses two tests, one in Britain and the other that was attempted in the 70's in Canada.  Senator Hugh Segal discussed the Canadian experiment in more detail here.  A family of 5 was guaranteed a minimum income of $18K in a particular town in Manitoba, which happened to be a farming town.  $18K is in today's dollars.  The results were documented but the data stayed in boxes for decades.  The program was ended as different governments came about and different policies were pursued, but recently the data was exhumed and evaluated.  The results were spectacular.

All of the fears you see expressed by those that oppose government handouts did not materialize.  Overall working hours barely changed.  They did drop just slightly because some mothers did stay home with their children (which itself is a potential social benefit that will be realized years down the road), but overall not much change (maybe people generally prefer to make more than $18K/yr).  People stayed in school longer.  This was a farming community and poorer parents had a tendency to pull their kids out of school early for harvest, particularly if it was a tougher harvest with less favorable prices.  Parents left their kids in school longer knowing that if the harvest was bad they would be covered.  When the harvests ended up being OK anyway of course less subsidy was required.  Crime rates dropped, meaning in the long run you'd expect a reduced prison population, a reduced need for lawyers and judges to administer rulings.  Health care costs plummeted.  Possibly happier people that worry less are less prone to accidents?  People that can afford preventative treatment less frequently make use of expensive ER type services?  I'm not sure.

In any case you watch the talk above from Hugh Segal and you see these various benefits described.  In the end for a very small investment, in this case $17 million dollars, you achieve an enormous reduction in overall government expenditures.  No bureaucrats checking to make sure they aren't on drugs, no monitors, less police, less prisons, less judges, less lawyers, lower health care costs, and people that are much happier to boot.  Liberterians would like it because it offers more responsibility to the individual.  Liberals like it because it provides a sort of base line social safety net.

Now, if everybody would like it why hasn't it already happened?  Here's my speculation.  Consider the case of the Indian workers that extracted better conditions from an employer since they weren't desperate.  Consider the recent building collapse in Bangladesh.  If I know that tomorrow and the next day and for all days in the future I'll at least have food in my belly and a roof over my head, I'm not likely to listen to the boss when he demands I work in an unsafe building.  I'm also not going to work for him if he doesn't pay me half way decently.  If a Wal-Mart sweat shop can't find people willing to work for nothing in dangerous conditions, guess what they'll do?  They'll pay more and provide safe conditions.  Because the alternative is the work doesn't get done.  Remember, the heirs to the Wal-Mart fortune, the ones that get the largest share of the money from the work done?  They don't do anything.  The just get the money.  So if people earning wages aren't willing to sew the underwear together then the underwear won't get made, and the Waltons won't get any money.  So they'll pay.  Even if that means less profits.  Less profits is better than no profits.

So there's your resistance to this kind of a program.  For a corporation it's kind of nice to have desperate people.  Desperate people will work for nothing in frightening conditions, and that's good for profits.

It's interesting to consider which of Milton Friedman's ideas has really been implemented over the years.  The ones that are profitable are the ones that have been amplified.  Privatization, which has been implemented throughout Latin America, Russia, and elsewhere has been a huge strain for normal people and a huge boon to the wealth of the already rich.  Friedman's ideas that benefit the poor just didn't get that kind of play.  In fact helping the poor as Friedman suggests is a bit of a threat to the short term profit interest of the wealthy.  That's why Heritage and AEI are not too interested in it, even though their mentor and the evidence show that it's a great idea that works.