Welfare by Another Name

One of the first things I learned as a registered Washington lobbyist, (yes, I admit it, I was a lobbyist in the 1990s), is “you can’t beat something with nothing.”

That’s a Washington insider’s way of saying that if you don’t like an opponent’s policies, it’s not enough to moan and complain about them and throw insults. You have to come up with a policy of your own that appeals to voters and can be offered to the public as an alternative.

This has been a problem for Democrats lately.

They can’t stand Donald Trump and insult him all day long, but they won’t prevail in major elections scheduled in 2018 and 2020 unless they offer the voters something other than constant ridicule of Trump.

A few smart Democrats, including Bernie Sanders and Cory Booker, have figured this out. Their alternative to Trump’s policies is a government guaranteed job for every American who wants one. The jobs will be low or negative productivity government jobs requiring few or no skills and offering no advancement.

This proposal may sound odd coming at a time when the official unemployment rate is 3.9%, the lowest in almost twenty years. Unemployment is 3.7% for adult white men and 3.5% for adult white women, while African-American unemployment is approaching historic lows.

Why roll out a jobs program now?

The answer is that the official unemployment statistics are highly misleading. They do not count approximately 10 million able-bodied working age adults who have simply given up on work.

Adjusted for those “missing workers,” the real unemployment rate is about 10%, a depression level figure.

Interest in the guaranteed jobs program is high. Critics say the program will destroy incentives and undermine the traditional work ethic. Supporters say it will help to raise wages because private employees will have to match the wages being offered by the program itself in order to compete with the government jobs.

In that sense, this is really a backdoor way to raise the Federal minimum wage and increase benefits. Whichever side you’re on, get used to hearing about this debate in the years ahead.

Who knows, maybe Trump will end up supporting it. Trump is not a traditional conservative, but he is a shrewd politician who may just steal his opponent’s best idea. You can’t beat something with nothing.

There is also a parallel idea beginning to gain traction in important circles…

I’ve been writing lately about something called “GBI,” which stands for guaranteed basic income. GBI is the new buzz phrase that’s the talk of academia, Silicon Valley and the elites on both coasts.

GBI goes by other names including universal basic income, UBI, or just basic income, but the policy is the same regardless of the name. The idea is that governments will guarantee every citizen a certain basic income as a matter of right. Everyone making below a certain amount of money gets a check.

It’s really just welfare by another name, but it would apply to a much broader group than just the poor and you would not have to pass any income tests or work requirements to qualify.

There is no means testing and no work requirement. The government just hands every man and woman a check every month whether rich or poor, young or old, employed or unemployed.

The idea behind GBI is that technology is making many jobs obsolete and those jobs are not coming back. Some Americans can compete in the new high-tech high-reward world, but most cannot.

If people cannot get jobs and incomes stagnate, then there will be no consumption and no one to buy the gadgets that the tech companies are making. Instead, everyone will get a check so they can spend freely.

My reason for highlighting GBI is that you’re going to be hearing a lot more about it in the next two years. Instead of a guaranteed job, leading Democratic Party politicians in the U.S. support GBI as part of their platform.

Polls show that about half the American people favor it as well. The argument in favor is that GBI gives everyone a firm financial foundation on which they can seek other employment, turn down “lousy” jobs, get education and training, provide household services to family, friends and community, or maybe just be artists.

The argument against GBI is that it encourages laziness, discourages productive work, is unaffordable by heavily indebted governments, and will produce inflation, which destroys savings and impedes capital formation.

But, what about hard evidence? Some countries around the world have already started GBI programs and the initial results are not favorable.

Finland has decided not to expand a pilot program of GBI. The program’s results in terms of job gains were disappointing. This tends to support the views of those who claim that GBI discourages work rather that encourages it through training. This is a small sample; there will be a lot more discovered about the effects of GBI in the years ahead.

Meanwhile, the political debate is going full-speed ahead. And it is not going away soon. The advocates for GBI see no problem with the budget deficit aspects of this. In their view, the Fed can monetize the debt forever; so there’s no problem finding the money.

The guaranteed jobs plan sounds better to politicians than GBI, but it still causes massive budget deficits without much in return.

In the end, the GBI and guaranteed jobs plans will fail as they always do. But that does not mean they won’t be tried. You should expect this to be a big political issue in the 2018 mid-term elections later this year and the 2020 presidential election. The deficits that go along with GBI will guarantee that America continues to go broke.

The combination of tax cuts and massively expanded government already guarantee ballooning deficits ahead. And this is when the economy is supposedly strong.

But the economy is long overdue for a recession. The typical post-WWII economic expansion lasted only 58 months or so. The current “expansion” — and I use the scare quotes because it’s been so week by historical standards — is 108 months.

What happens when the inevitable recession does strike?

Tax receipts will dry up and the government will almost certainly unleash a flood of deficit spending to stimulate the economy. And the Fed’s current policy of quantitative tightening (QT) will swing into reverse.

Debt, already at frightening levels, will spike. But the economy is in the condition it’s in today because of too much debt and not enough growth. More debt will only make things worse.

Central banks have little room to cut rates or print money in a future crisis, even with the Fed’s recent hikes. That’s why the Fed is so determined to raise rates, so it can cut them again when it needs to.

Meanwhile, taxpayers have no tolerance for more bailouts. And governments around the world are experiencing political polarization. It’s not just here in the U.S. There is simply no will and no ability to deal with the next panic or recession when it hits.

The systemic dangers are clear.

The next panic will be unstoppable without extreme measures — including IMF money printing, and lockdowns of banks and money market funds.

The calls for a guaranteed job or guaranteed basic income will soar. Unfortunately, the money won’t be there to support it.

Regards,

Jim Rickards
for The Daily Reckoning