Free Money

Back in March I wrote a couple of posts about how it made sense for governments to shovel some money into the wallets of people displaced by the COVID pandemic. What I did not anticipate was that the free money train would run into October. Nor did I anticipate that the virus itself would continue along for this long.

Now, the good news is that while case numbers are still high – and getting higher in some locations – the hospitalization, ICU and death rates have dropped significantly. COVID is still a nasty disease that you do not want to catch, but it is not anything like a death sentence for the vast majority of people who catch it.

The consequences of “free money” turn out to be more difficult to determine. Garth Turner does a short survey at his blog today:

“Third, did Canadians blow this? Handing over $94 billion in direct deposits made real estate less affordable, goosed motorcycle sales and drove the price of two-by-fours through the roof at the same time 25% of all homeowners with mortgages decided to stop making payments and unknown numbers of tenants welched on rent. There’s a growing sense we might come out of this in way worse shape thanks to the unregulated flow of CERB cash. More spending did not reduce debt. In fact, household borrowing just hit a new high of $2.33 trillion.

Covid really messed things up. The political response was extreme. Maybe that was the right response. Perhaps not. Obviously a lot of people needed income support when their livelihoods were erased. Others found CERB cash replaced the need to look for a job. Others quit work to collect it. Small businesses complained of a lack of willing employees. And the gush of cash, along with crashed interest rates, has inflated prices and increased personal obligation. Now we have an unfathomable shortfall in public finances, and a government unbothered by it.”

Add to “free money” significant changes in how people actually live – working from home being the biggest – and the idea that the old normal is coming back is fading.

For lots of people, the old normal was not all that great. Minimum wage is pretty unattractive when you have had six months of no deductions $2000 a month. An hour’s commute each way to a cubicle in the sky is not enticing when your current commute time is 10 seconds. Going back to university classes seems a little pointless when it can be taught remotely – and yes, university is about more than just the classes. Same with high school. It is not obvious who misses shopping in malls or shopping in general. Some of this might return when the virus is finally contained; but it will not return unaltered.

Justin Trudeau is planning on rolling out a comprehensive strategy for the re-opening/re-structuring of Canada in the post COVID world. I expect a hodge-podge of dim green ideas and some sort of Universal Basic Income. Unfortunately, I do not expect any serious proposals as to who is to pay for it and how. Unless I miss my bet completely, Trudeau and his people will take the position that additional spending can simply become part of the Canadian National Debt financed at the current incredibly low interest rates. Which can work for a while provided that the money is cycled into economically productive activity (like building pipelines or very small nuclear reactors). Somehow, I doubt that is what the Liberals have in mind.

Instead, I suspect we will get a bunch of witless green energy schemes along the lines of the green disaster which hollowed out the Ontario economy.

Which will be a missed opportunity as an intelligently designed UBI combined with a serious infrastructure commitment might well serve Canada. By well designed, I mean a program which consolidated all of the payments government – federal and provincial – make to individuals into a single monthly payment. The would include welfare, disability, Child Tax Benefit, GST Credits, EI, CPP, OAP and a raft of other payments. In 2019, on just CPP, OAP, EI and the Child Tax Benefit, the federal government spent 100 billion dollars. In 2017 (the last year I could find numbers for) the provinces and territories spent 69 billion on “social protection” programs which include welfare and disability.

There are roughly 30 million Canadians over the age of 15. A $24,000 a year UBI would cost 720 billion, a little less than twice the federal goverment’s total program spending for 2019. However, a UBI program properly designed would likely make full monthly payments to no more than 10% of the adult population. The rest of the population would have the right to claim the benefit only if their income fell beneath a certain threshold. By basing the UBI on income some of the perverse incentives inherent in the scheme (such as work shyness and the penalization of effort) could be reduced.

The great advantage of a UBI lies in its elimination of the need for everything from EI to OAP to welfare. It is not administratively complex – just like the GST Credit or Child Tax benefit, you file a tax return and receive your payments if eligible.

Now, if you do the math on a 10% eligibility at $24,000 per year, the program would cost 72 billion a year, far less than the $169 billion the federal and provincial governments are now spending. In fact, if 20% of Canadians were eligible, this UBI would still be cheaper.

A critical feature of a well designed UBI is making sure that additional income from employment is encouraged rather than punished. Realistically, $24,000 is not much money (though still better than BC current welfare or disability rates). Being able to earn without forfeiting the UBI is very important. Were it up to me I would set maximum earnings at at least $12,000 a year and, ideally, $24,000 before the UBI was tapered off. And I would treat couples as individuals as is the case under the current tax system.

This sort of well designed UBI with the corresponding elimination of other forms of income support would take a while to implement effectively. Which is where having a bit of “free money” would be a very good thing. But the best part of this sort of UBI is that, net, it would actually reduce income support spending at both the federal and provincial levels. Reductions which will be vital because “free money” is not going to last forever.

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2 thoughts on “Free Money

  1. Justausername says:

    Nope, first a Universal Basic Income means free money for everyone. Isn’t that the idea of Universal? Second, TANSTAFL – there ain’t no such thing as a free lunch. Socialists around the world have proven that over and over, thank you Venezuela et al. Your idea isn’t a UBI, it is a means based payment system, with those who work and save will have means and be disqualified from collecting. This leads to the “why the hell should I work and that guy collect, I’ll just stop and get my cash too”. Atlas Shrugged, but no one cares.

    Why would anyone get a job if they could get free money? I remember then a Saskatchewan government floated the idea of having people on welfare pick up roadside garbage. The screams were loud and long. No one talks “workfare” anymore, it is somehow demeaning to ask people who are physically able, but unemployed, to do anything but collect their cheque.

    We are well and truly screwed, because I am sure that the little potato is caving to the orange party, Greenies are irrelevant, and getting quid pro quo support, just for a few special programs.

    • Jay Currie says:

      UBI does mean free money for everyone but only a set percentage will get to keep that money after tax.

      TANSTAFL is both true and beside the point. We are already spending 169 billion dollars a year on the various social support programs at a federal and provincial level. Switching that spending to a CERB like UBI would probably save money simply by rendering redundant the layers of public “servant” who are needed to administer the various programs. It would also save money because the total amount sent out under my proposed UBI would likely be less than what is being sent now.

      Whether people would work if they have an alternative is an interesting question. I don’t know about you, but I can’t imagine a life where my total income was 2K a month. Which is why I would build in the capacity to earn without losing the UBI entirely. I hate the term “the working poor” because it illustrates how badly screwed people who make minimum wage or work part-time actually are. At the same time, I had a friend who made a few bad decisions and found herself on welfare with two kids and who was terrified of using her amazing sewing skills to make an extra buck or two. If she did she could have lost her welfare and her subsidized housing.

      I don’t think for a moment that the little potato and the idiots who surround him are bright enough to come up with a serious, revenue-neutral (or even positive) UBI program. They will do something and it will likely be both expensive and dumb with or without the orange party’s input. However, Erin, or more interestingly, Max could propose a program such as I am suggesting and instantly change the conversation.

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