So, as we know, Phillippe Van parijs pointed out in his chapter on UBI studies and the feasibility of taxing people that he suspects that middle to upper income people will work less under a UBI. While I have a general understanding of the economic model that would suggest that, basically, higher marginal taxes = less work effort, but I would argue there may be a bit of an elasticity issue that tends to mitigate that. After all, people making $40k, 50k, 60k, etc. aren't like to quit working if they get a UBI. They would be living on a fraction of their income. And while the working conditions in and of themselves might cause them to quit in some scenarios, I'm not overly concerned here.
Anyway, I know I've seen people make weird arguments about work incentives from econometrics and any time I did, I basically dismissed them because these econometrics seem based on models and these models are only as good as their assumptions. And economists like to make a lot of assumptions in "free market" models that tend to have a much more complex relationship in reality. For example, it makes intuitive sense that raising the minimum wage increases unemployment, but then if anything worker bargaining power and a higher minimum wage causes inflation, with a minimum wage increase leading to a small spike of inflation followed by a levelling off, and persistent issues with worker bargaining power leading to a wage price spiral forcing the fed to step in and raise interest rates to reduce the supply of jobs available, thus reducing worker bargaining power.
Of course, pointing this out led to me getting laughed off as one of those anti intellectuals when in reality i just realize that economics is taken with this weird quasi religious faith in it, and that in a lot of cases it makes simplistic assumptions about the world whereas the world is often more complicated. It tries to boil all of human action down to economic calculations and there is more to life than that. That said, it tends to sometimes develop these seemingly valid relationships between variables, but then just make broad wide sweeping claims about them. That said, I want to look a bit more into econometrics.
So what is econometrics? This is going to be one of those quote happy articles, but econometrics is:
Econometrics uses economic theory, mathematics, and statistical inference to quantify economic phenomena. In other words, it turns theoretical economic models into useful tools for economic policymaking. The objective of econometrics is to convert qualitative statements (such as “the relationship between two or more variables is positive”) into quantitative statements (such as “consumption expenditure increases by 95 cents for every one dollar increase in disposable income”). Econometricians—practitioners of econometrics—transform models developed by economic theorists into versions that can be estimated. As Stock and Watson (2007) put it, “econometric methods are used in many branches of economics, including finance, labor economics, macroeconomics, microeconomics, and economic policy.” Economic policy decisions are rarely made without econometric analysis to assess their impact.
This is kind of straightforward, and I already kind of touched on this, but they basically take relationships between variables and try to make a model charting how one variable impacts the other.
Certain features of economic data make it challenging for economists to quantify economic models. Unlike researchers in the physical sciences, econometricians are rarely able to conduct controlled experiments in which only one variable is changed and the response of the subject to that change is measured. Instead, econometricians estimate economic relationships using data generated by a complex system of related equations, in which all variables may change at the same time. That raises the question of whether there is even enough information in the data to identify the unknowns in the model.
Yeah and this is kind of what I am saying. I mean, variables are complex, the world is complex, and social science is hard. Social science has increased difficulties over hard sciences in the sense that human behavior, especially on the aggregate level, just has so many variables that it's hard to know whether soemthing is valid or not without significant research. Much research has limitations (as van parijs pointed out with UBI experiments), and economics just tends to make a lot of broad assumptions which might have surface value, but the reality behind them is more complex.
The second step is the specification of a statistical model that captures the essence of the theory the economist is testing. The model proposes a specific mathematical relationship between the dependent variable and the explanatory variables—on which, unfortunately, economic theory is usually silent. By far the most common approach is to assume linearity—meaning that any change in an explanatory variable will always produce the same change in the dependent variable (that is, a straight-line relationship).
Yeah that seemed to be what was being implied with the whole "middle and upper income people would work less" model. It assumed that for every percentage point increase in marginal tax, it would decrease work incentive, and that for every dollar in UBI, people would also decrease work incentive. And then it ran a linear model, implying that the labor market was far more sensitive to fluctuations in tax rates and UBI than I would assume. Basically for low income people more people would work because the current system and its welfare traps are so discouraging, but that for higher income people, the increases in tax rates and free money would make them less likely. Again, this makes intuitive sense, and I understand why an econometric model would imply that, but again, it seems kind of....thin. Perhaps work incentive, especially at the higher level, is a lot more static and less sensitive to changes in work effort than you would think. While I do think, at some point, yes, people would decide to work less or flee the country or whatever, the laffer curve surrounding such a model seems relatively generous, and it does not really seem that negative effects would appear until you hit the 70% mark or so. That's what I concluded when I looked into laffer curves last year. Generally speaking, based on my own research, an actual laffer curve model would look something like this, where you don't really see significant reductions in revenue, and thus, work effort, until marginal tax rates start approaching 100%. Then as you get closer and closer to 100%, the bottom falls out and you start seeing massive responses to the increased taxation. But assuming you're under the laffer curve of 70%, the relationship should probably be smaller.
But again, if econometrics is going to assume a LINEAR relationship, it's going to be like, "every single percentage point increase in taxation will have the same labor response", and if higher taxes DO in fact decrease work effort, then ANY tax increases anticipated would lead to some significant amount to work reduction. Even if in reality the relationship is far more complicated and it would take a truly oppressive tax rate before people quit en masse.
I would argue the same is true of basic income itself. I would guess that not many people would quit their jobs for $1 a month. If you go up to $100 a month, you probably won't see much either. At $500 a month you might see a few, but not much. At $1000 a month, you might see a bit more. At $2000 a month or higher the labor response likely gets more severe. Smaller amounts of UBI dont yield much, or maybe even ANY impact, but after a certain point, it might start triggering a large response.
My own understanding of UBI, and why I kind of downplay the idea of work disincentives with it (despite also arguing for real freedom for all or the freedom to say no), is that as long as UBI is on the right side of the curves, work incentive should be a minor issue. If a certain point in the curve is passed, however, you might start seeing much larger effects. I advocate for putting a UBI right at the point in the curve where we can maximize freedom while maintaining economic viability. Where a higher UBI starts causing problems, but the UBI at the level implemented doesn't really. Basically, I view the UBI work incentive curve as mirroring the laffer curve posted above, and that UBI should be implemented at or near the peak of the curve. This is not to say that there will not be ANY work disincentive if UBI is at that point in the curve, just that the amount is not a major deal and does not threaten the sustainability of the economic system. Some work disincentive is going to happen with UBI, especially a UBI that gives people real freedom for all, yes. The goal is to give people the maximal amount of freedom without threatening the sustainability of the system. If too many people quit too fast, and it causes supply shortages of essential goods and services and inflation, that's bad. If the effects are much more minor, well, I do view freedom as more important than MAXIMIZING economic well being within an economic model. Keep in mind, economics has a labor bias. It has a bias toward incentivizing work and productivity to maximize economic output, without thinking about what that means for human life in general. it enslaves us to a system, when the system exists to work for us in the first place, you know? If the work disincentive is so large it sends the system into a death spiral, that's bad, but if the effects are relatively minor compared to that, I'm willing to accept people working less. As a matter of fact, to some extent that's the point.
The fourth step is by far the most important: administering the smell test. Does the estimated model make economic sense—that is, yield meaningful economic predictions? For example, are the signs of the estimated parameters that connect the dependent variable to the explanatory variables consistent with the predictions of the underlying economic theory? (In the household consumption example, for instance, the validity of the statistical model would be in question if it predicted a decline in consumer spending when income increased). If the estimated parameters do not make sense, how should the econometrician change the statistical model to yield sensible estimates? And does a more sensible estimate imply an economically significant effect? This step, in particular, calls on and tests the applied econometrician’s skill and experience.
...
The main tool of the fourth stage is hypothesis testing, a formal statistical procedure during which the researcher makes a specific statement about the true value of an economic parameter, and a statistical test determines whether the estimated parameter is consistent with that hypothesis. If it is not, the researcher must either reject the hypothesis or make new specifications in the statistical model and start over.
YES! And this is the issue with econometrics in general. It's not necessarily connected to reality. It needs to be validated with external testing. It;'s fine to have this model that predicts certain variables and how they interact, but econometrics is still a matter of, as a part of the article I did not quote pointed out, "garbage in garbage out". It's only as good as the assumptions that it relies upon. And social science means, at some point, going out there and testing your hypotheses. Which means we need UBI trials, and we do have some data from trials. but because trials themselves are imperfect, to some extent, we just need to try to implement it already. We need a real world test scenario. Like on a large scale. With all of the macro economics involved. We need to actually test it full scale in a city, or a state, or a country, and measure the effects of it. And then we need to isolate those effects from other crap going on to make sure that UBI actually caused those problems (for example, if we tested it in 2020, people would NOW be blaming it for inflation despite the fact that inflation happened anyway).
I'm not trying to discount econometrics altogether. I know I kind of had people act like I was the last time this topic came up in this context. Rather, I'm trying to point out that you can't just way "well this economic model says this" and treat it with some authority I cant dispute. I CAN dispute it. Because I'm, myself, trained in social sciences. I understand social sciences. I may not be an economics EXPERT, but I understand the field enough to grasp the basics of how these things work, and also understand the weaknesses behind such things.
I know that UBI has never fully been tried. And as a result, until it is, critics have the upper hand of being able to predict doomsday scenarios while discounting any data I present in its favor because it does not cover every variable possible. I am aware of that weakness of my position, but it does not necessarily make my position weak. If that makes any sense at all. It just means mine isn't foolproof. But, critics are, essentially just pointing out a lack of data in some areas and then exploiting that to imply that the worst case scenario would happen within the gaps of my knowledge. In a sense, the dreaded work disincentive exists in the gaps in my knowledge in a similar way of the "god of the gaps" in religious discussions. You know, the whole argument that god somehow could exist in the gaps of knowledge within an atheists worldview, and therefore god exists. Regardless of whether god exists or not (I would say they do in some form at this point but I can't prove it universally), you can't just use the possibility of them existing in a gap in our knowledge to say they don't. A lack of 100% certainty on our part does not mean that the opposing position is true, especially without any actual evidence presented. The people who argue for catastrophic work disincentives within a UBI program are basically arguing that the fact that there are gaps in my knowledge implies that their position is somehow correct. It COULD be correct, don't get me wrong, but they would actually need to put forward a strong case demonstrating that. Which at this point, we can only do, if we try to implement a UBI.
That said, I'm not really convinced by the use of econometrics to argue for a work disincentive for higher income earners under UBI. I understand what the model is trying to get at, but these econometrics come from a place of using simplistic models with linear relationships when in reality I view those relationships to be a lot less linear. Much like the laffer curve (and in a sense, this really is just a matter of the idea of a laffer curve applied to UBI), I really don't think that the negative effects of UBI would really manifest themselves unless people are taxed at very high rates, and/or the UBI offered is excessive. If the UBI is near the poverty line, and the marginal tax rates are under, say, 70%, I don't really expect there to be problems. And we already discussed THOSE aspects of my plan to death in the past.
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