Forget Guaranteed Income - Governments Need to Stop Prohibiting Income

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This article was written by Lee Friday and originally published at Mises Institute / Alt-Market

In most countries, numerous government welfare programs provide benefits (often means-tested) to eligible recipients. Whether these payments arise from unemployment compensation, child tax credits, old age pensions, or a myriad of other programs, the outcome is the same: recipients receive guaranteed payments. The ultimate goal of many poverty warriors is a Universal Basic Income (UBI), often promoted as a supposedly cheaper alternative to the numerous welfare programs it is intended to replace. The UBI is a guaranteed income from the government which varies with age, but is otherwise unconditional. It is not means tested, which means everyone receives the same Basic Income, regardless of their employment status or employment income.

Alexandria Ocasio-Cortez, Kamala Harris, Bernie Sanders, Andrew Yang. These are just a few of the many proponents of UBI or a negative income tax , or some version thereof. The political justification for implementing UBI is to reduce, or even eradicate, poverty, though poverty is a relative term . The problem is that many advocates of the welfare state mistakenly believe that inequality causes poverty. Moreover, they do not understand that poverty reduction comes through the operation of free markets, not through government welfare programs which tend to benefit the bureaucracy by encouraging dependency.

Therefore, if UBI proponents are genuinely concerned about those on the lower rungs of the income ladder, they should abandon their minimum income crusade and instead pressure the government to do two things. First, immediately abolish all regulations which prohibit people from earning income. Second, announce that all welfare programs will be abolished in six months. In this environment, special interest groups (the 1%) lose the regulatory benefits they lobbied for, while the level of prosperity rises considerably for the former welfare recipients and other members of the 99%.

What are these regulations? And if they are abolished, how much higher can the level of prosperity be for the 99%?

Regulations

This is a good definition of regulation: the imposition of rules by a government, backed by the use of penalties, that are intended specifically to modify the economic behavior of individuals and firms in the private sector. That is an accurate definition, and it should concern anyone who recognizes and supports the wealth enhancing effects of free enterprise.

When a special interest group (e.g. a corporation or group of corporations) lobbies the government to enact a new regulation, they are the intended beneficiaries, and they often write the regulation themselves. Politicians promoting a new regulation also act out of self interest, collecting rewards from the regulatory beneficiaries, such as political campaign contributions, corporate jobs after departure from political office etc. The propaganda used to justify regulations is that the government must protect consumers . This conveniently ignores the fact that in an environment of unfettered competition, profit-seeking firms who fail to satisfy consumers will lose those customers to competitors producing superior products. In other words, consumers benefit the most when they, not the government, pick the winners and losers.

Regulations have the effect of lowering the level of competition for the corporations that lobbied for the regulations, exactly as the lobbyists intended. This situation arises because regulations impose significant regulatory compliance costs on many companies. Kel Kelly explains the enormity of the regulatory environment:

There are hundreds of thousands of pages of regulations dictating what can and cannot be produced, how things should be produced, what prices can or cannot be charged, what workers should be hired and at what prices, and what requirements, approvals, licensing, and reporting must be undertaken or performed for each type of business, product line, or transaction. Further, government directly manipulates prices and production.

All firms may pass their regulatory compliance costs onto consumers and workers through higher prices and/or lower wages, but small firms operate at a disadvantage. Smaller firms have fewer employees and a smaller customer base, compared to larger firms. Therefore, the dispersal of compliance costs within small firms can produce larger price increases and/or larger wage reductions, as compared to larger firms. Thus, many small businesses are unable to compete, not because the entrepreneurs, managers, and workers are not good enough, but because they are compelled to obey authoritarian laws favouring large firms with more political influence. Consequently, many entrepreneurs are forced out of business, while many others are dissuaded from starting a business.

(Note: the regulatory ‘compliance cost’ which is ultimately paid by consumers and workers, is estimated to be almost $15,000 annually for each U.S. household.)

As per our definition, we see that regulations, by coercively “modifying economic behavior,” interfere with the voluntary interactions of individuals on the free market. Economic production falls considerably when the regulatory state is used to eliminate competitors. Less competition = less wealth creation, which is reflected in fewer jobs and lower incomes for the 99%. This does not concern the 1%, whose objective is to grab a larger slice of the smaller economic pie. This is not capitalism. This is crony capitalism.

Prohibited Income

In 2013, John Dawson (Appalachian State University) and John Seater (North Carolina State University) published a long-term study (see here or here ) of the effects of U.S. Federal Regulations on economic growth. They estimate that “annual output by 2005 is about 28 percent of what it would have been had regulation remained at its 1949 level.” Their sample period ends in 2005, but under the assumption that the ratio of 28 percent carries forward to 2011, they say that nominal GDP in 2011 would have been $53.9 trillion instead of $15.1 trillion, and “an annual loss of $38.8 trillion converts to about $277,100 per household and $129,300 per person.”

Remember, they are estimating the amount of economic output which has been prohibited by all U.S. Federal Regulations implemented since 1949. So, in 2011, each U.S. household was legally denied the opportunity to increase their income by an average of $277,100. Imagine this happening each year, because that is the reality. For those who would disbelieve, Dawson and Seater simply point out that “Our estimates are consistent with previous estimates obtained from both aggregate and disaggregate data. In fact, our estimates are on the low side compared to many previous results.”

Their calculation captures data only at the federal level. The figure of $277,100 would be higher in consideration of the lower economic output due to prevailing regulations at the state/city/county level.

If all regulations were abolished, individuals’ creative juices could flow freely because innovation would no longer be suppressed. Unfettered competition would produce new products, higher quality, and lower prices. The demand for labor would explode, and incomes, as we have seen, would rise considerably.

Conclusion

As Senator Elizabeth Warren officially launched her 2020 presidential campaign, she expressed concern about “a rigged system that props up the rich and powerful and kicks dirt on everyone else.” She is correct, but this is nothing more than a sound bite designed to resonate with the general public. As with most political speeches, Warren’s comments are vague, providing no details about how the system is rigged with thousands of regulations. Instead of accurately describing the problem, we get hypocrisy: “She wants large companies to be more tightly regulated.” Beware of people like Elizabeth Warren. There are many like her. They are wolves in sheep’s clothing.

Welfare programs and wealth taxes: the government’s pretense of transferring a little bit of wealth from the rich to the poor is a smokescreen for the massive amount of wealth surreptitiously flowing in the opposite direction. So, when Ocasio-Cortez, Harris, Sanders, or anyone else proposes any type of guaranteed minimum income scheme, tell them “No, my preference is to liberate all prohibited income.”

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http://alt-market.com/articles/3691-forget-guaranteed-income-governments-need-to-stop-prohibiting-income