August 31, 2017

Against Motivated Modeling

The Roosevelt Institute has a new paper out estimating the macroeconomic effects of a Universal Basic Income (UBI), with some pretty surprising results. According to their model, a $12,000 UBI financed through deficit spending would grow the U.S. economy by 12.56% above the baseline forecast, over an eight-year time frame, leaving the economy permanently richer. That’s an incredible boost to GDP growth — an extra 1.6% growth per year — from simply giving everyone in the country $1,000 a month in borrowed money.

The growth effect of a UBI under different financing scenarios.

The growth effect of a UBI under different financing scenarios.

Arriving at this result obviously requires swallowing some pretty major modeling assumptions, like that the economy is well below potential output, that a UBI of this size would have zero effect on the labor supply, that permanently higher deficits wouldn’t raise interest rates, or, relatedly, that the Fed wouldn’t offset any boost to aggregate demand (AD) with tighter monetary-policy. More generally, it requires embracing a simplistic demand-driven growth model, where, in the paper’s words, “the larger the size of the UBI, the larger the increase in aggregate demand and thus the larger the resulting economy is,” QED.

Now, I’m sympathetic to both basic income proposals and the idea of running the economy hot. But arguments like this are, to me, far too reminiscent of the old saw that “tax cuts pay for themselves.” We associate that argument with the so-called Supply Siders, but I’ve long thought the Supply Siders were misnamed. Any group that obsessed with tax cuts has revealed a much deeper interest in fiscal policy, which is by-and-large the demand side, in contrast to more pressing supply-side concerns like regulatory barriers to new development. And while they wrapped their theory in a story about marginal incentives, in practice the Supply Siders were mostly in the business of inventing high-minded reasons to cut taxes for the rich.

As I remarked on Twitter, there must be a “strong temptation on the left to develop equally simplistic models of the economy but for the Things They Like.” Indeed, I see a close kinship between the Supply Siders of the ’80s and the Demand Siders at the Roosevelt Institute. Both basically assert a Keynesian “expenditure->output” relationship, but at opposite ends of the income distribution, consistent with their respective ideological affiliations.

That’s too bad. It’s concerning when normative commitments become obfuscated as methodological commitments. Regardless of whose side you’re on.

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