...Archive for November 2016

The economic geography of a universal basic income

Adam Ozimek has been doing some great work lately on the importance of helping the smaller, struggling places left behind as America’s economic center of gravity has shifted toward a few prosperous metropolises.

This is extremely refreshing. For years, the economic conversation has been dominated by the “moving to productivity” story, the intriguing but flawed idea that the way to a better and more prosperous country was simply to encourage migration into the cities where, by the numbers, people seem to be unusually productive. The most widely discussed problem with “moving to productivity” is the rigidity of urban housing supply. Evacuating the hinterlands into existing, built-up cities would require more housing supply dynamism than stable, prosperous communities seem likely ever to tolerate. We are left with a continuing war between immigration enthusiasts and urban “incumbents” who see themselves as working to preserve their homes and communities. (I’ve weighed in on this controversy, here, here, and here.)

But there are many other problems as well. Measured production per hour worked is higher in leading cities for sure, but how much of that is a selection effect? Baumol’s cost disease ensures that, for an individual, immigration to high productivity cities will lead to higher wages even for lower productivity workers. But it’s a fallacy of composition to imagine that can scale. At an aggregate level, the productivity edge of prosperous metropolises may be caused by a “creaming” of those who might be productive elsewhere but are drawn by urban amenities and can afford the prices. Or perhaps cities do indeed enhance the productivity of their populations, but only because the residents who self-select and then pay up to live in them are unusually suited to take advantage of often industry-specific opportunities. In either case, less selective immigration would blunt cities’ productivity edge. Or, suppose that it is not selection, that the higher measured productivity of large, dense cities arises because dense copresence makes new forms of collaboration, specialization, and trade practical (“agglomeration effects”, in the lingo). Then how much of the apparent productivity effect is due to improved collaboration in production, and how much of it is due to improved collaboration in contesting for economic rents? High-powered cities include concentrations of highly paid lawyers, financiers, and other professionals who collaborate intensively at least in part to maximize on behalf of themselves and their clients the share of production they capture, rather than to increase the overall level of production. Businesspeople in cities may be unusually capable of coordinating to exercise monopoly power and restrict production. The dollar value of expensive professional services and artificially overpriced products then gets incorporated into “gross metropolitan product” and productivity statistics. If big, dense cities confer advantages in a zero- or negative-sum game to capture economic rents, by the numbers they would look like the most productive places in the country when in fact they might be among the least.

To be very clear, I don’t think cities are in fact “a zero- or negative-sum game”. I think cities excel at encouraging both good and bad sorts of collaboration, but their virtues far outweigh their costs. Even if you buy the rent extraction story, there is little reason to think there would be less rent extraction overall under a different geographic reality. Rents might just be distributed differently. In the zero-sum game of baseball standings, a city like New York can put together an unusually dominant team like the Yankees. But without New York, the game would still be played and there would still be winners and losers every year. Rents can be and long have been extracted by monopsony employers in smaller towns, for example. Regardless, the geographic distribution of rents may not match the geographic distribution of production, and empirically the two are difficult to disentangle.

Also, if part of the apparent productivity advantage of larger, denser cities is due to creaming, then we have to consider the flip side: a brain and talent drain out of smaller, less dense places. If certain kinds of talented people exhibit positive spillovers, that is, if they inspire and organize activity that creates value for other members of their communities that they cannot themselves capture, it may be individually rational for them to leave smaller communities for the big city, but socially very costly. The marginal contribution of one unusually talented person to the productivity a big city already chock full of talented people may be much smaller than the marginal cost to a community with many fewer talented people of losing that person.

Cities are great, but I think the claim that everybody moving to the very largest cities would yield a massive, otherwise unachievable, productivity boost is as implausible as it is impractical. Historically, economic activity was far less concentrated during the decades when America enjoyed its strongest growth. Perhaps technology has changed everything. But perhaps much of the apparent productivity advantage enjoyed by large, powerhouse cities over medium-sized cities is due to creaming, sorting, and particularly high-powered coalitions of rent-extractors, rather than hypothesized quadratic-returns-to-scale human connectivity effects.

Then, of course, there is all the stuff that economic analysis tends to overlook: Community, history, attachment to family, attachment to the land itself, the perhaps quaintly aesthetic notion that a civilized country should not be composed of gleaming islands in a sea of decay and poverty. And politics. Politics seems to be a thing now. Rightly or wrongly (and I think the question is more complicated than many of us acknowledge), the United States’ political system enfranchises geography as well population. (This is not unique to the United States and the compromises made over slavery in the drafting of our Constitution. In the EU, for example, many actions require unanimity among member states, giving citizens of tiny Malta rather disproportionate influence.) In the American system, piling people into a few, dense cities is a sure recipe for disenfranchising most of the humans. A nation of mid-sized cities distributed throughout the country would both spread the wealth geographically and yield a more balanced politics than the dream of hyperproductive megacities.

An underdiscussed virtue of a universal basic income is that it would counter geographic inequality even more powerfully than it blunts conventional income inequality. By a “universal basic income”, I mean the simple policy of having the Federal government cut periodic checks of identical dollar amounts to every adult citizen, wherever they may live. Importantly, a universal basic income would not be calibrated to the local cost of living. Residents of Manhattan would receive the same dollar amount as residents of Cleveland. But a dollar in Cleveland stretches much farther than the same dollar in Manhattan. The value of labor income covaries with place. Moving from Cleveland to Manhattan requires paying higher rent, but it may also yield higher pay. Real labor income may rise or to fall from such a move, depending on the individual. There is no such ambiguity with UBI checks. Migrants to high-cost of living cities would take a cut in real terms on the UBI portion of their income. Emigrants from high-cost-of-living cities would get a raise that might partially compensate for lower payscales. At the margin, for those willing to let economics guide their choice of home, UBI would shift demand from expensive capitals to cheaper mid-sized cities, and take some of the pressure off of powerhouse city housing markets. A UBI would tilt the residential playing field towards a country with lots of vibrant, geographically dispersed cities rather than a few “closed-access” capitals. (See also Conor Sen.)

Of course, not everyone is willing or able to treat their choice of home as an income maximization problem. Many people will remain, for better or for worse, in the communities where they were raised, rooted by place or family or church, by love, fear, stewardship, or poverty. For these people, a UBI would bring some measure of prosperity to where they are, rather than requiring them to succumb to the discipline of a dynamic national labor market. In a fascinating post, John Michael Greer writes:

What’s more, the working class people who point to a lack of jobs as the cause of middle America’s economic collapse are dead right. The reason why those tens of thousands of American communities are economically devastated is that too few people have enough income to support the small businesses and local economies that used to thrive there. The money that used to keep main streets bustling across the United States, the wages that used to be handed out on Friday afternoons to millions of Americans who’d spent the previous week putting in an honest day’s work for an honest day’s pay, have been siphoned off to inflate the profits of a handful of huge corporations to absurd levels and cater to the kleptocratic feeding frenzy that’s made multimillion-dollar bonuses a matter of course at the top of the corporate food chain. It really is as simple as that. The Trump voters in the neighborhood south of my home may not have a handle on all the details, but they know that their survival depends on getting some of that money flowing back into paychecks to be spent in their community.

Often people (foolishly, ridiculously) think of a universal basic income as a substitute for work, and imagine that UBI would lead to a world in which most people would sit around collecting government checks and masturbating all day. The same people often emphasize the importance of work to living a meaningful life, and argue that we ought not deprive people of this virtue by giving them money. But giving people money does not eliminate the social and spiritual benefits that come with being active, valued, and productive. In affluent communities, capital income seems to coexist just fine with a strong work ethic and perhaps too much ambition. Wealthier people sometimes do take advantage of their liberty to be productive in ways that don’t yield low-risk labor income, such as starting up uncertain businesses. In poorer communities, starting up businesses that aim to cater to a local clientele is particularly dicey, since many customers lack sufficient income to pay for all but the most basic goods and services. We can argue at a national level about fiscal policy and monetary offsets, but at a local level, in underemployed communities, crude Keynesian multipliers obviously obtain. Income begets economic activity and economic activity begets income. A UBI, unlike means-tested welfare programs, does not discourage work or create poverty traps. If financed with a progressive income tax, a UBI would not increase effective marginal tax rates until relatively high levels of income. A UBI does affect labor supply by increasing peoples’ reservation wage. People with no other income sources accept shitty work at low pay. People with a UBI might not. But since humans do in fact value productive activity, UBI recipients in poor communities are likely to accept decent work at modest pay, or go back to school, or care for children and aging parents, or try starting businesses. Income is the difference between communities that are slovenly and decaying and communities that are ordered and active. Income is precisely what a UBI provides, to communities, via individuals.

We are all learning, I think, just how dangerous to a national community, and to any hoped-for transnational community, inequality between localities can become. National community depends on the idea that “we”, all citizens, are in it together. Inequality at an individual level renders that not-necessarily-true, a rising tide may leave some boats sunk. But as long as those who are drowning are scattered and atomized, perhaps a polity can muddle through just ignoring them. Unfortunately (or fortunately), wealth and poverty are not uniformly distributed. They coalesce into geographies, and then into communities segregated by place and often by race, which organize and act politically. Sometimes prosperous communities can simply disrupt and suppress less fortunate communities — c.f. colonialism or Jim Crow or slavery. Hopefully readers will not find those attractive models for managing the political fault lines emerging within the United States and Europe. A better approach is to reduce the disparities between communities, to marry our fortunes together. We’ve all come to look for America. A UBI is one tool that might help us to find it.

Let us be lovers.

Acknowledgments: I first encountered the “moving to productivity” story in a talk Ryan Avent gave at an Kauffman Foundation economic bloggers’ conference. Avent has become a delightfully textured thinker on these issues, see e.g. here. You can also read his new book, which is excellent. (He sent me a free copy. If you think that’s why I’m recommending it, well, that’s what you think!) Much of my thinking about urban housing and our increasingly painful geographic stratification was inspired by Matt Yglesias’ work as well. The best excellences are the ones you disagree with, that inspire you to mull, then argue, then hopefully to talk.