There's a Hole in the Bucket

EconTalk Extra
by Amy Willis
Michael Munger on the Basic In... Sam Quinones on Heroin, the Op...

leaky bucket.jpg There has been a lot of talk lately about the idea of a basic income guarantee, or BIG, which has garnered support from across the ideological spectrum. In this week's EconTalk episode, host Russ Roberts welcomes back listener favorite Mike Munger, a supporter of the idea. The virtual sparks fly as the two friends discuss the the reasons for and against a BIG. After listening, what do you think the potential for a BIG is? Could it really replace all other welfare programs? Would welfare be more effective or cheaper? Would we get bigger or smaller government as a result? Would we--at last--begin to define ourselves not by our jobs but by something more personal? And what of unintended consequences...they always emerge!

We hope you'll share your thoughts with us in response to these prompts, over at EconLog, or in the episode's comments. We also hope you'll take a few minutes to give us your feedback on EconTalk over the last year as well. Remember, we love to hear from you.

1. What are Munger's grounds for support of a BIG? What are Roberts's grounds for his skepticism? By whom were you more convinced, and why?

2. Munger argues that we should be more concerned with the substitution effects, rather than the income effects, of a basic income guarantee. What does he mean by this? Which type of effect do you think would be greater? Why?

3. Charity plays a pretty big role in this week's conversation, as one of the primary motivations behind a BIG is to help the poor. Is charity a public good? Why or why not? How does your answer to this question shape the way you think about the potential efficacy of a BIG?

4. Roberts says the "ugly" way of putting the "big argument" for a basic income guarantee is as follows: "Life is hard for some people, and so it's OK that they live off the rest of us because we have good lives." To what extent is that a fair restatement?

5. By his own admission, Munger makes several "ridiculous" claims throughout the conversation. Which of his claims regarding a BIG did you find the most remarkable, and just how ridiculous did you really find the claim?

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COMMENTS (11 to date)
Sam writes:

Again you are not doing some basic arithmetic. I suppose if you did there would be no reason to argue about this any further ...

For the record Munger's $15,000 per person adds up to $4.9 trillion, add healthcare, defense and interest on national debt and annual government spending passes the $7 trillion mark.

Yousef writes:

Using a BIG can possibly lead to a stronger economy. Not to be anecdotal, but, I lived in a poor neighborhood in Florida. Knowing many people in my community that would have wanted to start a business, go to university, etc. and would have possibly used this type of assistance the way they would have liked. It is a big step up from telling them exactly how to spend money from the government.

If I recall correctly, Hayek, in "Road to Serfdom" addresses the role of a safety net in an advanced society. He claims that there should be no reason why there isn't a safety net. This can be the safety net that helps jump start and protect people's livelihood.

Of course there will be negatives because in public policy there is always a trade-off. This can impede incentive to work and government can ultimately ruin everything that the BIG is set out to do by sticking more welfare assistance to it depending on your circumstances.

Also, there has to be much more research on costs and the people who lose money to this effect. Munger has much more work to do! I am excited to hear more research on this topic, especially from Munger.

SaveyourSelf writes:

3. Is Charity a Public good? …..Yes.
Charity is “a gift for public benevolent purposes.” (Merriam-Webster 2017).

Public Good = non-rivalrous and non-excludable.

The usual definition given for Public Goods is not very useful and is probably incorrect to some degree. To understand why, we must understand why public goods are interesting and concerning in the first place. The reason we care about Public-Goods is because the natural outcome of a Public-Good is, ultimately, extinction. This predictable outcome happens for a variety of reasons which I will describe and then use to form alternate working definitions for Public-Goods.

To begin with, let’s lay down a few general logical statements. First, human wants are unlimited. Second, the universe is finite, so scarcity is the norm. Since scarcity is the norm, rationing of scarce resources is unavoidable. Markets are the most efficient rationing tool ever discovered. For markets to operate, though, property rights must be delineated and enforceable. For some goods, for various reasons—some natural, some artificial—property rights are not enforceable, which means those goods cannot be rationed by markets. When rationing by markets is not possible for goods that are useful, first-come first-served becomes the primary principle of rationing. Thus, there is a rush to acquire and use the good before someone else does—a mad orgy of consumption if you will—which can quickly lead to overuse of the good in question. The overuse is usually so extreme that the Public-Good is used up entirely. It goes extinct.

Extinction is an undesirable outcome in complex systems made up of continuous, interlinked cycles in equilibrium with one another. Extinction of a good can end one or more cycles, causing massive disruptions in the balance or equilibrium and simplifying the complex-system, which is bad because simplicity is synonymous with fragility.

So before constructing a new definition of public good, note that “rivalrous” and “excludable” in the old definition both describe barriers to access--one describing the natural results of numerical rarity and the other artificial rarity resulting from man-made barriers to access. A Public-Good, therefore, is understood to have no barriers to access, which is in line with the observation above that markets cannot ration Public-Goods and markets require defined and enforceable property rights. Importantly, there are lots of other potential barriers to access that are not included in that non-rivalrous non-excludable definition. Cost to consume, for one. Accessibility, for another. Additionally, for a good to be a Public-Good it must be useful. Dog poop, for example, generally has no property rights associated with it and is ubiquitous in the environment but it does not get used up until it is extinct. So it is not, evidently, a Public-Good. So I think these observations give us enough to make a passable initial working definition of a Public-Good.

A Public-Good is any useful resource with no barriers to acquire. Put another way, a Public-Good is any useful resources for which property rights are absent and/or unenforceable.

Whales in the ocean are my go to example of a Public-Good. There are a limited number of whales in the world which suggests they are rivalrous, but no one knows where they all are or how many there are. Because they are spread out and their locations and numbers unknown, it is impossible to protect them and therefore impossible to own them. In other words, it is not possible to lay down enforceable property rights over whales. So if some people desire to kill whales, it is very difficult, if not impossible, to stop the practice. This satisfies the working definition of Public-Goods stated above. The whales are useful to someone and there are no property rights impeding hunters from acquiring the whales. This may lead, therefore, to overuse of the whale-resource and may even lead to whale extinction. Total whale extinction is bad for the web of nature, which means it is bad for human society since we-the-people depend on that web for survival. Whale hunters are part of the web as well, so extinction of the whales is even bad for them.

That example out of the way, let’s return to the question of charity. For simplicity, let us presume that all charity is money. Money is in no way a Public-Good. It is useful, certainly, but there a clear property rights defined and enforced regarding its use. It is perfectly acceptable to kill a person trying to take your money. The money is your property, therefore it is considered part of you. Someone trying to take it is, therefore, trying to harm your body. Everyone is entitled to self defense against harm of that type. So, if all charity is money and all money has strong property right protection, then charity, it seems, cannot be a public good. That said, charity behaves an awful lot like a public good. Charitable money gets used up fast, in a mad rush of people and is rationed through a first come, first served basis. But, importantly, it doesn’t go extinct. It gets used up, true, but then is reappears, like magic. It acts like a Public-Good but it is sustainable. What is going on?

I’ve written in the past that the concerning Public-Good outcome—overuse and extinction—is also the regular, predictable outcome whenever costs and benefits of a decision are separated by any means—natural or artificial—in such a way that the costs fall on someone other than the decision maker experiencing the benefits. In retrospect, there is something crucial missing from that observation that this question about Charity will bring to light.

When money is set aside for charity by a philanthropist, the opportunity cost sacrificed when that money is consumed is paid by the philanthropist. The benefit for use of that money, however, is experienced by the recipient of the charity. Costs and benefits of consumption of the resources are paid by different people. So why, then, does it not go extinct. The answer is telling. It is because the person experiencing the costs, the philanthropist, has control over the quantity of the charity consumed. He can, therefore, sacrifice money in a sustainable way, from surplus, but still protect the principle. Importantly, that only describes private, voluntary charity.

Redistribution, which is all the rage for addressing the problems of poverty, is the same set-up as private charity, except the decisions regarding the quantity of charity consumed is not made by the philanthropist, it is made by whoever is managing the redistribution machine. In a majority rule democracy, that is usually the majority. And when the majority just happens to also be the beneficiary, we have a circumstance where a useful recourse—money in the possession of a minority—has little protection due to ill defined, flexible, or permeable property rights—the money is no longer considered the property of the minority, it is the property of the state through taxes—and the decision on the quantity available for consumption is made by the beneficiary—the majority—but the opportunity costs on the use of that money is paid by the minority. This is a situation tending strongly towards a Public-Good scenario--the kind of scenario that leads, predictably, to unsustainable overuse. Ultimately, therefore, extinction of the source of the charity is possible.

In summary, there are at least three potential definitions of Public-Good considered in this discussion. 1) a non-rivalrous and non-excludable resource; 2) any useful resource with no barriers to acquire; 3) a useful resource whose costs of use and benefits of use fall on different parties and the party experiencing the benefit is the one making decisions regarding use. Combining them all, I arrive at:

A Public-Good is a useful resource with no barriers to acquire and very low costs associated with its consumption or costs of consumption paid by someone other than the person making decisions regarding consumption.

Given this definition, voluntary (private) charity is NOT a Public-Good but involuntary (public) charity IS a Public-Good. This model predicts, therefore, that involuntary (public) charity is not sustainable.

Max writes:

The important question that an experiment might answer is:

# Will a BIG lead to a disincentive to do "low status" jobs? Who will collect trash? Who will work in a spice factory? Who will scrub toilets?

It might change the price system a lot or it might not. I think there is no way to estimate it before trying it out.

Bill writes:

How would a BIG affect immigration policy? I imagine the negative income payments would have to restricted to citizens. If so, it would require some sort of proof of citizenship. Non-citizens would of course be able to claim the $15,000 income exemption.

Anthony OFarrell writes:

Great episode! I'm a fan of BIG for two reasons. Firstly, I read and listened to Milton Friedman explain the Negative Income Tax (call it BIG if you like but they are effectively the same idea) and I was sold on the efficiency of it over the existing byzantine welfare infrastructure and also how it resolves the large disincentive effects that welfare creates.

But I also lived the disincentive effects when I was out of work in Dublin, Ireland, 2010. I was out of work and receiving $140 per week plus rent relief (i.e. free rent) - enough to live on. I was a civil engineer and the construction bubble had burst - there were effectively no openings. So I decided to go back to college to study data science, but in doing so I would lose the $140 welfare. That was intended to be a jobseekers allowance and as a full-time student I was deemed to be not job-seeking. The govt was effectively incentivising me to remain unemployed rather than switch to a rapidly growing field. Luckily for me, my father was able to help me out while I went back to school for a year. But others are not so lucky.

Other problems I experienced that I think a BIG/NIT could avoid:
- It took over 2 months to process my claim to get my first welfare payment, I had savings that I ate into but many don't.
- When I went back to school, they kept paying me. I had to go to them and tell them to stop. You think everyone is this honest?

So I am very much on Munger's side in this! I get the feeling Russ is open to being convinced too.

SaveyourSelf writes:

I’m still not satisfied. Every time the question of Public-Goods comes up in Econtalk I revisit and revise my understanding of the issue. Each time my model improves and it’s still just not good enough! Perhaps changing the emphasis from defining "Public-goods" to understanding "sustainability" or "resources at risk" will help. I don’t know. The major problem with my current approach to the discussion of Public-Goods is that I assume that resources which meet that definition are at increased risk of extinction. The problem with that assumption is that, at least sometimes, it is false.

For example, in my first essay on Public-Goods [above] whether a resource is likely to go extinct had nothing to do with whether it was rivalrous or not. Whale, for example, is a resource that is, without question, rivalrous, which means whale does not qualify as a Public-Good by the non-rivalrous & non-excludable definition. But whales have gone near to extinction more than once. So it appears that whether a resource is rivalrous or non-rivalrous helps not at all when trying to determine whether a resource is sustainable or not. Okay, then what about the other variable, non-excludable? Excludable means definable and defendable, which, as it happens, is the exact definition of “property rights.” Carrier pigeons were once protected by property rights, but they’re now extinct, so excludable or non-excludable is not perfectly associated with sustainability either. What about the method of rationing? In my example, I noted that resources at risk of extinction seem to utilize first-come, first served as their primary means of rationing. If we take a look at charity again, and think of charity simply as resources with their property rights removed, then beneficiaries establishing new property rights on those unowned resources counts as consumption of the charity and extinction is a situation where no charity becomes available in the future for consumption. For extinction to take place, therefore, the source of charity would have to be eliminated—in this case the philanthropist or the property/principle from which the charity is “created.” So it’s really not the rationing device used for charity (first come, first served) which predicts extinction; it is injury to the source. In reality, therefore, we are talking about an equilibrium. Equilibrium is a balance point established by the relative rates of creation and destruction; production and consumption. Perhaps that is the key.

Property rights, by definition, restrict access to a resource, reducing its destruction by increasing costs of consumption, and they also generate rewards for creation [assuming the property rights go to the creator]. Thus property rights necessarily reverse the rates of the processes that can lead towards extinction. Importantly, positive rate changes in the direction of creation and away from destruction do not guarantee sustainability. They are just a move in the more-sustainable direction. So if the goal of understanding “Public-Goods” was to predict which resources would go extinct, it’s probably necessary to couch predictions as probabilities and not certainties. So, as a general rule, it is probably safe to assume that extinction is more likely in a setting where it is difficult or expensive to establish and maintain property rights.

Applying this acceptance of the impact of property rights to the question of sustainability, let’s once again consider charity. Charity is a property rights vacuum created when the owner of the property stops protecting it. If the person in possession of the resource happens to also be the producer of said resource, and that producer requires a certain amount of resources to maintain their given level of production, it is almost certain that the producer would stop providing charity when the marginal cost of the charity began to eat away at his principle. On the other hand, if the decision regarding the amount of charity set aside is made by someone without knowledge of those costs or any incentive to care about the costs--like Government--, then it is possible, even likely, that the quantity of charity set aside for consumption will be set so high as to negatively impact the productivity of the producer. Logically, therefore, the outcome in question—extinction—is less likely when producers or people who have traded with the producer for property are responsible for rationing and more likely when the rationing is determined by someone—anyone—else.

And that is a model: In systems at equilibrium, changes which increase destruction or reduce production move the equilibrium towards extinction. Property rights reduce the processes that can lead to extinction to some degree, but only if the property rights are controlled by producers.

cjh writes:

1. The affordability of BIG hinges on how willing the poor are to working when they don’t have to. Munger doesn’t defend this, instead just accuses Russ of thinking that the poor would not work if they don’t have to. Russ doesn’t press the issue, possibly because he is afraid of being thought of as condescending. Well, I don’t think the poor will work as hard if they don’t have to. Unlike professors, not everyone gets to do what they want to do. I know that I wouldn’t have tried as hard to study in school if I knew that I could safely play computer games for the rest of my life. In fact, many single males don’t need much regarding sustenence. My prediction is that a large portion of the population will reduce working hours if the BIG is introduced. Many men may never even join the workforce. If this becomes realized the tax rates required to sustain the BIG will be much higher than what Munger expects.

2. The unintended consequences of BIG may be beyond anything in our imagination. It is said that the welfare state destroyed the fathers of the black family. If the BIG is introduced, the family itself may be threatened. What’s the point of marriage? What’s the point of parents? The child no longer needs to stay with its parents. Since the government will provide the child with $15,000 / year, why would they need parents? They are more than capable of going off and living on their own. If the $15,000 belongs to the child, how can the parent take from the child’s money? That would be like stealing. Is there a good justification of giving $15,000 to adults but not to children? Or keeping it away from them? In fact, it could be argued that children need it more than adults. If the family is destroyed, what lies ahead for humanity?

3. Given the extreme risks involved, it would be foolish to implement the BIG because some experts think it will work under unrealistic/politically correct assumptions. Also, consider the possibility that the BIG will be irreversible. If the BIG is introduced over a long period, and many grown to rely on it, how will anyone be able to take it away from them? It is easy to imagine how greedy capitalists will be blamed for not paying their fair share required to sustain BIG, and how it could lead to socialist totalitarianism.

cjh writes:

4. As mentioned by another commenter above, the BIG also has implications for immigration. Will the US be able to maintain birthright citizenship? It will now be worth something like $15,000/r for the child. If there are large numbers of people who want to emigrate to the first world for economic reasons now, imagine what that will be like when the BIG is introduced. Immigration was a part of what got Trump elected. Given the inevitable conflict between natives and immigrants under BIG, it is scary to think of what can happen.

Ralph writes:

In general I think the discussion about BIG started on the wrong end! On the long run with greater automation and AI we will have to re-think our tax system anyways ... Firstly a consumption tax would be a solution and secondly at the same time get rid of corporate tax and income tax! And then as a next step you could think of implementing a BIG only as a replacement of all welfare programs.

Prema writes:

I enjoy your podcasts very much. Except for this exchange with Munger (slightly exaggerated):

"That was a cheap shot".
"That was a filthy cheap shot".
"That was a dirty, filthy cheap shot".

The economist doth protest too much?

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