Thursday, July 18, 2013

Euvoluntary Exchange and its Outcomes: An Inquiry into Basic Minimum Income Level Determination

Being poor is no picnic. Or maybe it is a picnic, but one where the potato salad has gone bad and you get swarmed by fire ants and furious wasps and it starts raining and you locked your keys in the car and your phone's batteries are dead so you have to walk 5 miles back to town only to find that the towing company is closed for the long weekend.

But maybe you don't mind the bugs so much and you don't like potato salad anyway, and the rain feels refreshing. Maybe you enjoy the exercise and maybe this little town is charmingly rustic in just the way you love and maybe it turns out that when you spend the weekend at the local inn, you find the love of your life working as a clerk in the town courthouse.

Experience is subjective. So is poverty. Take it from a guy who lived for no short time well below the official government-determined poverty line.

The above graph is a simulated earnings profile I made up in a spreadsheet. HHS maintains guidelines for the poverty line (in red), which moves around by family size and changes by calendar year. But here's a curious question: what does the blue line represent? Individual earnings? Family earnings? Household earnings? These aren't trivial, gotcha questions. The composition of that blue line is empirically salient.

Economists are quick to point out the difference between absolute and relative poverty. Haitians who are still homeless to this day after an earthquake devastated Port au Prince three years ago and who felt they had to sell their children to avoid starvation and death are immiserated in an absolute sense. A single white male, aged 19 making $10k a year working part time washing dishes in Flagstaff is poor relative to the software developers who stop by round noon to enjoy grilled chicken wraps on the plates he so lovingly scrubbed clean.

But are economists quick enough to point out that poverty is also subjective? Sure, when they're not being meretricious. It's appealing to want to solve the "problem" of poverty, treating people as uniform automata whose goals can be identified and arrayed nicely upon a blackboard buffet, a feast for chalk-smeared fingers and tinkers' brains eager to find partial derivatives and DSGE parameters. Appealing, yes, but also maladroit. Human beings are not chessmen. People are clever, canny, economistic, and will avail themselves of those opportunities that best suit them.

Second-guessing the choices people make presumes a lot. As a simple example, the decision to seek (and obtain) a bachelor's degree is widely agreed to be more or less euvoluntary, though grumbles about student debt might hint at some ex post regret. Does this imply that the decision not to go to college is not euvoluntary? How about decisions to live with roommates? How about sharing other expenses? Is marriage euvoluntary? We know that married people (men especially) make more than their single counterparts. Does that contribute to BATNA disparity in a way that should engage the moral lights of policy-slingers?

Not only is the blue line determined by the choices people make, it expressly misses a lot of explicit tradeoffs. Leisure is valuable. Maintaining a home, developing a hobby, building a relationship, these things do diddly-squat to boost money income, but they're each very important components to living a worthwhile, fulfilling life. I spent a year putzing around the world depleting a modest savings not because I thought it would pad my 401(k), but because I thought I'd be a better person for the experience. Ditto for when I moved to East Europe towards the end of 2000.

That's just my story though. I'm not much of a template for who we normally imagine to be "needy". The single mom trying to raise three kids while their father is in jail and she can't afford formula even working three jobs isn't some left-wing myth. Those are real people in real situations facing really hard constraints. You don't have to be a mushy bedwetter to feel a sense of injustice knowing that children, through no fault of their own get tucked in at night with empty bellies.

Actions and outcomes. All relevant information goes into the decision calculus. Airbags encourage people to drive ever so slightly less cautiously, and a social safety net encourages people ever so slightly to skip school and risk unwanted pregnancy. Ever so slightly. The reason it's [edit: the social safety net] there is that life is risky, radically uncertain, and heaven forfend, even outright non-ergodic. Bad things happen to good people and even an unbroken string of perfectly euvoluntary exchanges can still end up miserable thanks to the fickle winds of fate. Prudence is a fine virtue, but it won't save you from what bowtied economists call "random negative exogenous shocks", or as the pious say, the Hand of God.

The tradeoff then: social safety nets should provide some security so people can weather misfortune without subsidizing sloth and indolence. That was the intent (and to a pretty good extent the outcome) of the 1996 overhaul. And when heavy hitters like Milton Friedman, Charles Murray, Herbert Simon, Friedrich Hayek, Bob Solow, and our very own Michael C. Munger advocate for a basic income guarantee, it's because they understand good and well the unpredictability of life's vagaries and have well-defined senses of justice. They also grasp that heavily managed transfer payment systems are massively wasteful in the minor sense of waste, fraud and abuse; and in the major sense of diverting a sizable chunk of labor talent away from productive activity towards bureaucratic management of other people's money.

But even if we want it to, that tradeoff never vanishes. What's the correct transfer amount? Five grand? Ten grand? Fifteen? Does it vary geographically? By family size? Age of recipient? What are the implicit subsidies? Importantly, how does a basic income policy interact with other policy? Since the rise of the suburb at the close of WWII, housing has been a curiously large chunk of policy. Local zoning ordinances often prevent what folks elsewhere in the world have no trouble with: high density living. Affluent elites might be aghast at a score of people cramming into a 3 bedroom apartment, but despite its nominal non-euvoluntarity, it's still better than the alternatives. What happens to pushes for home ownership when everyone in the country is guaranteed an annual stipend from the tax coffers?

Don't get me wrong. I too support basic minimum income, but it's for directional and positive reasons, not for destinational or normative reasons. I have strong priors that any political process that allows for redistribution of resources will do exactly that and under this constraint, it's a) better to redistribute from rich to poor and b) to do so as economically efficiently as possible. I do not believe that basic minimum income will do much to curb latent paternalistic or parentalistic (see Buchanan's Afraid to Be Free: Dependency as Desideratum for a clear definition of these terms) sentiments in the voting public. Neither do I believe that the US system scores as well as it might on either (a) or (b) under the current system, though I will again tip my hat to Clinton's '96 reforms as a very nice improvement in (b).

Because poverty is subjective, personal, open to individual interpretation, does that make it easier or harder for basic income advocates to implement their (our) preferred policy? Or are the efficiency gains sufficient to overcome technical details like this?

1 comment:

  1. What's the correct transfer amount? $150/week for each adult USA citizen
    Does it vary geographically? No people will be encouraged to move (for example to Detroit).

    By family size? No
    Age of recipient? All adults

    What are the implicit subsidies? One would be that people would be subsidized to work much more outside the taxed economy but IMHO that is not so bad. Living off the land plus $150/week would not be so bad.


Do you have suggestions on where we could find more examples of this phenomenon?