Paradigms: Minimum Standards of Living

by John Moser

Paradigms show up in everything from business structures to basic social policy.  People don’t often immediately recognize, accept, and integrate new paradigms; those who see them ahead of time are often called visionaries, and those who come late to the party are often called old-fashioned or outdated.  Frequently, a visionary can come so early that the new paradigm isn’t viable yet, and so failure occurs.

As of 2013, the cost of a new, more-effective paradigm for maintaining a minimum standard of living, in the United States, sits slightly below the cost of our modern social policies.  Those modern policies include minimum wage and public aid; the new, more effective paradigm is called a Citizen’s Dividend, a specific form of a Universal Basic Income.  The change in viability and appropriateness of these minimum-standard-of-living policies stems from changes in economic climate, including technology and wealth, which I will cover in a future discussion.


Transitioning onto new systems requires more than just changing the rules and flipping a switch.  Besides the time for the market to catch up, policy makers must consider financing, support of existing benefits recipients, and the safe decommissioning of current systems.  These represent complex and necessary changes which need to remain within the realm of affordability, while not cutting out the means for survival from under existing benefits recipients.

The Modern System

I’ll call our modern system a divided minimum standard system, or DMS.  In DMS, working individuals garner a minimum wage, a standard requiring any employer to pay no less than a certain dollar amount per hour of work; non-working individuals collect public aid, provided based on bureaucratic analysis of eligibility to those we believe need it.

Our modern system provides minimum wage and public aid.  Part-time workers may qualify for partial unemployment—underemployment—covering the difference between full-time and actual hours worked.  Non-working individuals and low-income working individuals may apply for earned income credithousing assistancefood stamps, and other public aid.

Minimum Wage:  The Working Man’s Support

Minimum wage was the appropriate policy for the 1900s:  its benefits safely and effectively offset the economic costs throughout the century.  The minimum wage provided workers with a baseline standard of living for full-time hours worked, and protected the unemployed worker from accepting low wages out of desperation.

Unfortunately, minimum wage inherently increases labor costs, which encourages employers to find lower-labor methods of production and discourages them from hiring new labor.  Consider a hypothetical $6.25 hourly wage compared to a $12.50 hourly wage, along with a Traditional method of production with $15 of overhead and a Low-Labor method with $25 of overhead.

Wage impact on total cost

Wage impact on total costs

In the above example, the Traditional method, using three (3) hours of labor at $6.25 per hour, costs less than the Low-Labor method which uses only two (2).  Once we raise the wages to $12.50, the Low-Labor method actually saves a little money.  It’s still more expensive than the Traditional method under a lower wage:  the product costs about 50% more to produce, and so can’t be sold at such a low price.

This impact doesn’t spread especially far throughout the economy because minimum wage jobs are not the bulk of all costs in the economy.  After the Federal minimum wage increase from $4.25 to $4.75 in 1995 and from $4.75 to $5.15 in 1997, Card measured a loss of 0.4% of jobs among teens, the bulk of minimum-wage workers at the time.  Minimum wage has historically provided a good trade-off in that respect.

When methods to reduce the workforce are low-impact, expensive, and spread in cost, the impact of a minimum wage increase is minimal, as shown here.  As those methods become closer together in proportional cost and more high-impact, the increase in unemployment mounts.  The upcoming potential for high automation of warehouse inventory, fast food, and other minimum-wage employment creates a threat of higher unemployment and slower job recovery similar to the historical impact of the Industrial Revolution; we must recognize these facing forward, and prepare new policies.

Public Aid: Protecting the Unemployed

Public aid was also an appropriate policy for the 1900s.  England started this with the Old-Age Pensions Act of 1908 and the National Insurance Act of 1911; The United States supplied the same form of benefits in the Social Security Act of 1935, with Federal old-age pensions and state-run unemployment insurance.  Food stamps, housing assistance, and other minor services came later.

Public aid has been historically inexpensive.  By using unadjusted gross rents (FactFinder) consumer expenditure shares, home sizes, and historical government spending, we can estimate back to 1950.

Welfare vs Dividend

Welfare vs Dividend as a Percentage of adjusted gross income

Update 2016-January-23:  I have determined the original chart was not quite right and used a new methodology.

The blue bars indicate welfare as a percentage of the total Adjusted Gross Income (AGI) reported to the IRS as taxable income.  That’s the percentage of your paycheck we’d have to collect if we levied a flat tax dedicated solely to welfare.  The cost of welfare has slowly risen across spans of decades, and has its roots in costs as low as 1.7% in 1950 and under 12% as recently as the year 2000.

Public aid programs have two glaring flaws:  administrative overhead and the whole gambit of problems caused by qualification.  Qualification for aid raises a long list of issues, including, but not limited to:

  • Failure to provide aid to those in need but not meeting qualification;
  • Delays in aid provisioning, leading to a time when aid is needed and qualification is met, but aid is not provided immediately when needed;
  • Manipulation of the qualification system, including qualifying for aid when aid is not needed and obtaining unqualified aid through fraudulent means;
  • Aid is lost when qualifications are no longer met, and so aid competes with employment

In other words, public aid relies on bureaucracy which may fail to approve aid when needed, may approve aid several weeks after it’s needed, or may approve unneeded aid applied for legally or illegally.  Further, the welfare trap of qualified aid reduces the benefit of employment:  employment wages are discounted by the amount of public aid lost when employed, and so employment may provide an extra $1 hourly wage or even reduce the laborer’s total income.

The last flaw requires a good eye for finance and history:  costs expand.

In 1950, the total cost of our public aid programs—Social Security old-age pensions, supplemental disability insurance, unemployment insurance, food stamps, housing assistance, and so forth—was 1.5% of the Adjusted Gross Income (AGI), or total taxable income filed with the IRS.  By 2013, these systems commanded a total cost of 17.2%, by way of steady cost expansion rather than the sharp steps of new aid programs.

This trend suggests public aid programs provide good benefits, and worked well for their time; but also suggest we should welcome newer systems, if any can supply greater benefits at lower costs in comparison.

The New System

We can replace both minimum wage and public aid with a Citizen’s Dividend, itself a type of Universal Basic Income.  I’ll refer to such a system as a Unified Minimum Standard system, or UMS.

Universal Basic Income

Universal Basic Income refers to a subset of Basic Income systems.  Basic Income systems provide a Unified Minimum Standard of living via a capitalist solution:  nobody has less than a certain amount of income, and businesses can make a profit by selling minimum standard-of-living goods and services within that budget.  Businesses entering that market sector have relatively little risk—their demographics aren’t going to lose their income stream (e.g. job)—and so can project their potential profit from market conditions with a high degree of accuracy.  Profit opportunities draw niche market suppliers looking to make fast money.

Basic Income systems come in many varieties, including:

  • Negative Income Taxes (NIT)—Everyone receives a tax credit, such that those with no income receive the full credit as payment, and those with income first pay it by deduction from their tax credit;
  • Guaranteed Minimum Income (GMI)—The Government provides anyone receiving less than a minimum established income with enough money to make up the difference;
  • Universal Basic Income (UBI)—Everyone receives a flat payment as an income, with no adjustment for their income or living situation;
  • Partial Basic Income—The Basic Income does not pay enough for a single individual to survive;
  • Full Basic Income—The Basic Income pays enough for an individual to survive indefinitely

Universal Basic Incomes can come as NIT or as Social Security monthly or bi-weekly payments.  Like Social Security, they can represent taxable income; however, a taxable UBI would effectively face a higher tax rate when the recipient has more income.

A Universal Basic Income carries two distinct advantages:  it’s logistically easy to finance and it produces no complex rational decisions.  A UBI pays the same regardless of income or life situation, and so no decision on employment or other life changes risks the loss or reduction of income from the UBI.

Because the Universal Basic Income provides a guaranteed income source, anyone with a good grasp of finances can compute all financial risks involved in getting into the niche low-end market of supplying basic needs.  We know how many unemployed, poor, homeless, hungry people live in the United States; we know how many families collect food stamps and housing assistance vouchers; we know where these people live and how they’re distributed.  A well-defined UBI system would even make it possible to track how much money people would have in any economic system—from economic booms to another Great Recession of 2007—and predict the impact on business profits.

Although a full UBI eliminates homelessness and hunger, that only changes the labels:  we can still track how many of these people we have.  If there’s money to be made, shrewd business owners will find a way to make that money; and putting people in houses with adequate food is the only way.

The American Citizen’s Dividend

Universal Basic Income systems are like fire:  they’re dangerous if mishandled, but critical for our survival.  A poorly-implemented, ineffective UBI would destroy our economy with high taxes and non-functional welfare; while continuing with modern minimum wage and public aid systems will bring excessive taxes and, eventually, a complete collapse of the economy by massive unemployment through the means of a new Industrial Revolution.  We must handle such systems with both care and urgency.

The American Citizen’s Dividend (ACD) provides a stable, long-term Universal Basic Income for the United States.  The plan covers financing and long-term viability, along with considerations of transitioning and risk controls.  Its primary goals are:

  • End the constant increase of welfare costs;
  • Eliminate homelessness and hunger;
  • Remove the disincentive to work from America’s welfare system;
  • Reduce the concern of welfare fraud to a triviality;
  • Avoid an economic collapse from rapid unemployment by delaying, slowing, and spreading out the transition onto new automation technology while simultaneously increasing the pace of re-employment after each labor reduction

It accomplishes all of these through the reduction of labor costs and increase of consumer buying power, while avoiding general high taxes and specialized wealth taxes.  In other words:  we try to avoid tax hikes on the rich as a solution to anything.

Viability

As shown in the earlier chart, our public aid system commanded 1.7% of our adjusted gross income in 1950; implementing the American Citizen’s Dividend would have cost in the range of a dozen twenty times that—enough to deter any sane person.  By 2013, the cost of the American Citizen’s Dividend had fallen to 17.0%, comparing favorably to our public aid system’s cost of 17.2%.

Interpolated

Welfare vs Dividend as a Percentage of adjusted gross income

Update 2016-January-23:  Using the corrected line chart instead of the uncorrected bar chart.

Aside from a statistical artifact around the dot-com era in the late 1990s and early 2000s, where the cost of living as a proportion of the total income suddenly became unusually low, and a 1.5% estimated increase in 1960, the cost of supporting a Dividend (in red) has slowly dropped over time.  We can also summarize the comparison with public aid costs briefly in pictures:

Public Aid vs Dividend

Cost of Dividend as a percentage of the cost of Public Aid

Again: The American Citizen’s Dividend is the wrong system for 1950; it’s the right system for 2015.

Cost Computations

I computed the cost of the American Citizen’s Dividend against the market prices of various consumer goods, plus additional risk controls.  Risk controls in each category handle cost fluctuations for those goods; and an overall risk margin on top accounts for total system fluctuations, such as the cost spike in 1960.  In short:  the amount of money projected is actually larger than the bare minimum, just in case something goes wrong.

Comparing low-income apartment rent, I’ve seen prices ranging as low as 60 cents per square foot; I settled on the more common $1 per square foot, rather than the extremes.  With a 224 square foot apartment intended for single-occupancy—essentially a large hotel room with a kitchen added on—I projected a rent of $300 per month, supplying a 33% risk margin. Rental prices already include an average 33% profit margin; on average, the proposed price reflects a 77% profit margin for the landlord.

These additional margins provide risk management.  In case of overspending, economic recession, inadequate understanding of the cost of living, or other mistakes resulting in a Citizen’s Dividend providing too little to survive on, these margins provide additional income to cover those mistakes.  The final total includes an 8% additional risk margin as of 2013; this margin increases over time, so long as the Dividend represents exactly 17% of AGI, and so the Dividend becomes more stable and the standard of living improves year by year.

My computations included housing, food, utilities—water, heat, electricity—clothing, and personal care. The housing model I used included landlord-supplied high-speed Internet; I make no provisions for public transit, medical care, or cellular service.  Altogether, each category looks as below, using 2013 numbers:

Costs, retail prices, and allotment

Cost, retail prices, and amount of Dividend allocated for each expense per single individual

When you put all of these together, the Dividend in total pays out quite a bit compared to a razor-thin ideal:

Allocation in total

Allocation of the Dividend in total

This suggests the bare, zero-profit cost of supporting a single individual in absolutely-ideal conditions with perfect, minimal spending is around $215 per month; the market cost is around $300; and the total allocation is almost twice that.  These levels are viable only by creating regulatory and market conditions to support them:  legal micro-housing projects and a steady income above what will supply reasonable profits to businesses selling goods to those individuals out of a job.  With no government intervention, the market will seek profit in these conditions.

Financing

The financing source for the American Citizen’s Dividend must provide a stable income, particularly providing enough buying power per individual to cover the economic cost of providing each good and service they’re intended to purchase on their own.

Because of how scarcity and wealth change over time, the population physically cannot expand beyond wealth limits.  Each population expansion occurs when supply of basic goods can scale without requiring more labor, thus more cost, per unit good:  when feeding families 20% larger suddenly requires more than 20% additional spending on food, families stop expanding.  The opposite is obvious, as well:  when the amount of income does not cover the cost of need, families stop expanding.

These are not rigid, inviolable rules.  They are lent some strength by rigid, inviolable behaviors of economics; but the largest factor in these behaviors is basic human behavior.  These are the same factors which cause barely-surviving welfare families to stop having children once the welfare money can no longer support a larger family—which is why a diminished public aid system provides for children, rather than an additional basic income per child.

The only source which perfectly captures a reliable portion of buying power is a flat, dedicated income tax.  Thus, to fund the American Citizen’s Dividend, I specify the removal of welfare costs from all income taxes, and a dedicated 17.0% tax.  This produces some interesting tax adjustments, which I’ll illustrate on individual filing taxes.

The IRS collects a 6.2% OASDI tax on all personal income below $118,000.  That means the first tax bracket—10% on all adjusted gross income from $0 to $10,000—pays 16.2%; and the tax bracket drops from 34.2% to 28% when income passes $118,000. In order to handle this, we first level OASDI across all income tax brackets, and then remove 55% of the resulting taxes—the proportion of income tax which covers the public aid replaced by the American Citizen’s Dividend. Then we apply the 17% Dividend tax. Finally, we adjust the progressive income taxes to level out the large bump around $118,000 and reduce the first bracket to 17%—0.8% higher than original, all devoted to the ACD.

This moves the middle-class tax up to the top, raising the $413,000 income bracket from 39.6% to just under 43%, but eliminating the sudden tax break on income between $118,000 and $411,000.

We also remove the OASDI payroll tax, and perform the same halving and adding of a 17% tax to corporate income taxes. Thus the American Citizen’s Dividend gets its funding from a 17% tax on all Adjusted Gross Income in America, after all deductions—a stable funding source already mitigated and avoided and evaded to the highest degree anyone can manage, and thus highly predictable.

Removing the payroll tax has an additional benefit:  it reduces the cost of labor.  When a wage worker makes $10/hr and OASDI collects 6.2% from payroll, that wage worker costs $10.62/hr.  If a machine would cost $10.50 per worker replaced, that machine is cheaper than the worker; but without the 6.2% payroll tax, the human only costs $10, and so the human labor is cheaper.  This slows the pace of labor replacement.

Cost Control in Transition

The other side of financing is cost control. We can’t just drop Social Security retirement benefits or food stamps or HUD vouchers right away; we need to transition off these public aid services. Those services currently cost as much as the American Citizen’s Dividend, and so implementing the ACD along side public aid would cripple the economy through mass expense.

We handle this by cutting individual aid by precisely the Dividend pay-out, in total.  This persists for a grandfathering period, after which nobody new may receive aid.  For example:  anyone reaching retirement age within 15 years of the establishment of the ACD receives old-age pensions until they die; nobody younger than that receives old-age pensions.

Recipients of Social Security Old-Age Pensions and Supplemental Disability Insurance would receive the same total income—about $1,400 per month, on average—but split between the American Citizen’s Dividend and OASDI.  For example, if the ACD provides $700 per person per month, a single individual receiving a $1,000 retirement payout would receive a $300 retirement payment plus $700 from the ACD.  On average, the cost of OASDI would fall to $700 per month, instead of $1,400.

We can do the same with HUD vouchers, unemployment, food stamps, and so forth, discounting the dollar amount of total public aid received by the dollar amount of the American Citizen’s Dividend.  For services such as food stamps, this can easily eliminate the benefit entirely; for services such as unemployment, the cost would diminish sharply.

Importantly, families and couples file as households, and would have both of their American Citizen’s Dividend incomes to compare to their combined benefits.  As this represents twice the ACD income yet frequently not twice the OASDI or public aid income, further diminishing of these costs occurs.

Finally, a person who places their entire Dividend into a no-interest savings account starting when they are 18 and ending when they reach retirement age can pay themselves an amortization of slightly more than their normal Social Security income for 20 years after retirement.  The American Citizen’s Dividend roughly matches current old-age pensions in that regard, and makes itself accessible continuously to those who need it now; old-age pensions are of no use to those who die of starvation and exposure alone in back alleys.

Immigrants and Families

Abuse under the American Citizen’s Dividend doesn’t vanish; it only diminishes to a point of insignificance.  The most important abuses are the immigrant gold rush—come to America for free money, or have a baby who will receive free payments—and the familiar “welfare baby” problem (although that’s largely a red herring).

To prevent these problems, the eligibility for the American Citizen’s Dividend is as follows:

The American Citizen’s Dividend provides a basic income for all natural-born, adult, resident, American citizens, including citizens on military base, on naval ship, and in active duty deployment.

The American Citizen’s Dividend provides a basic income for all natural-born, adult, resident, American citizens, including citizens on military bases, on naval ship, and in active duty deployment.  For naturalized, minor, or non-resident American citizens, the Dividend is not paid directly; it is instead deducted as a non-refundable tax credit each year.

Update 2016-January-23:  Some guy on Slashdot suggested I fix the gold rush problem by making the Dividend a non-refundable tax credit for non-eligible citizens.  It’s a fantastic idea.

To cover immigrants and families, I specify a diminished public aid system.  As so few would need such public aid, it makes sense to combine the various administrative departments into one.  This would supply EBT, HUD, and unemployment insurance for first-generation immigrants and for families with children.  These people don’t receive the Dividend as money; instead, it becomes a non-refundable tax credit:  if they pay any Federal taxes, those taxes are reduced by the amount of the Dividend, but not below zero.  That is to say:  If they pay $2,500 in taxes and the Dividend is $8,000/year, they get a tax return of $2,500, and nothing of the other $5,500 of the Dividend.

In this model, the opportunity for abuse is small, and the corresponding abuse is inexpensive.  The cost of fraud prevention and investigation on the scale required by modern public aid systems would far exceed the cost of actual fraud in the new system, and so each state would require a much smaller Office of the Inspector General for the combined public aid administration.  As well, we can provide less-stringent rules for qualification, better ensuring aid reaches those who truly need it.

Conclusions

In total, the transition onto the American Citizen’s Dividend would halt the growth of welfare costs, freezing them at 17% of the total income. As the total buying power and the per-capita wealth increase—a trend persistent through all of human history, and readily explained—this 17% would represent an ever-increasing standard of living per individual.

By instating the American Citizen’s Dividend and transitioning away from both a minimum wage and a public aid system, we foster economic growth and stave off rapid diminishing of employment. The rapid job loss threatened by automation naturally comes more slowly, and the slow job recovery naturally comes more quickly. In the end, many things cost less to produce, and the total buying power and amount of buying power per person increases; the dedicated 17% fixed ACD tax reflects a larger amount of buying power per person, increasing the standard of living of those with no other income as well as those with income from any form of employment.

This system proposes to eliminate a sharp tax break at the OASDI cap and shift the difference to the top or, alternately, spread it along the income brackets between and including the OASDI cap and the highest income bracket. With the tax shifted to the top, we increase the highest tax bracket from 39.6% to just under 41%; the break-even point of the ACD in this model— the amount of income below which the ACD provides a taxpayer with more income in total, after all taxes—is above $600,000.

Regardless, the American Citizen’s Dividend permanently ends all homelessness and hunger in the United States, while increasing wealth more rapidly over time, raising the standard of living of the poor, the middle-class, and the rich, all while stabilizing the consumer base and allowing more business opportunities to produce and sell more goods and services. It is good for all in America—not good for just the rich, and not a way to rob the rich to satisfy the anger and greed of the poor, but good for all individuals of all genders, races, and income classes.

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