by Matthew Downhour
Although he failed to garner any delegates and has suspended his campaign, Andrew Yang ran perhaps the most remarkable campaign of the primary. Despite having no political experience, and without a massive personal fortune to self-fund with, Yang managed to build a high enthusiasm campaign that qualified for most of the debates and performed better than many better-known candidates. His was also close to a single-issue campaign – the centerpiece of his platform was a guaranteed monthly payment to every citizen, called the ‘Freedom Dividend’.
The idea of an ‘unconditional basic income’ – a government payment to each individual made in cash with no strings attached – has been touted by a variety of thinkers for centuries, dating at least to Thomas Paine’s ‘Agrarian Justice’, a pamphlet published during the French Revolution, and has taken a variety of forms. Yang’s campaign, legions of online followers, and his debate appearances have brought new attention to the idea, and particularly his iteration of it.
This Dividend, the argument goes, could replace many current means-tested cash benefits – while that would mean distributing some cash to people who don’t really need it, it would also clear much of the paperwork and stigma that accompany means-tested programs, and eliminate the ‘welfare traps’ that form a strong disincentive to individuals receiving welfare benefits to increase their earned income.
There are numerous criticisms of such a proposal, from both right-wing and Marxist perspectives. Conservatives complain that the ‘free money’ amounts to a redistribution of earned income, while Marxists worry that it will actually diminish class consciousness and delay real structural change. Both sides have argued that it will lead to fewer people working if they have reliable non-work income.
The validity of these complaints depends on one’s perspective; however, one concern in particular touches very closely on an under discussed economic principle, but sadly misunderstands it. That is the fear that a $1000 UBI will lead immediately to a $1000 increase in rent. Two economists, David Ricardo and Henry George, are helpful in understanding why this at first seems like a valid concern, why this argument is overly simplistic, and what the actual shortcomings of a UBI would be with respect to land.
First, there is a certain level of sophistication in the argument, as applied directly to rent. Spending on rent is different than spending on other goods. Take spending on cars – if Ford decided to raise the price of all their cars to try to soak up the additional income from a UBI, very quickly Toyota would undercut their new prices to gain market share, so they are constrained in the short run.
These constraints also apply to the long run – if every consumer in the market were willing to spend more on cars, the market would respond by bringing new factories online or even whole new firms opening up, so that the price eventually settled into something close to it’s original equilibrium in the long run. Whether the price goes back down to its original equilibrium depends on the exact market, but what is clear is that the increase in prices will not completely negate the impact of the UBI, and indeed will probably have little impact on it.
Renting a building or a room is similar – as the rent rises, the rate of return on building construction rises and more firms will build apartments, counteracting the rise in rents. However, a renter is not merely paying to occupy a building, but also to occupy a plot, or a portion of a plot, of land where that building is located. And the quantity of land in a given market is fixed. In this way, increased income does tend to be eaten up by land values. David Ricardo described the situation in this way:
“The rent of land is determined by the excess of its product over that which the same application can secure from the least productive land in use.”
While Ricardo’s point was primarily in reference to agriculture, Henry George recognized that since all economic activity requires land, and different geographic areas open the possibility for much greater productivity (due to network effects, strategic location, and other reasons), the law of rent was just as powerful in urban areas.
For example, if a person can make $50,000 more per year with the same skills by moving from Fresno to San Francisco, they will end up paying most of that $50,000 more in rent to San Francisco landlords. Without paying the rent, they cannot access the higher wages available in San Francisco, and since the quantity of land is fixed, once the landlords start setting this price, no more land is going to enter the market to move rents back down. Importantly, this only applies to rent on land – the portion of rent that is paying for the actual building one occupies is not subject to this law, because more buildings can always be built.
Empirical evidence shows that this is largely the case. In San Francisco, the median income is indeed about $50,000 more than the median income in Fresno. Monthly rent for a 2 bedroom apartment in San Francisco is actuality about $2,600 more than Fresno ($3,700 vs $1,100) — roughly $32,000 more a year. The rent paid thus doesn’t line up exactly with the increased income (largely because, due to increased densities in San Francisco, a two bedroom apartment occupies less land than one in Fresno) but the rent does rise dramatically more than other costs: groceries are only slightly more expensive there than the rest of the country, while rents are triple or more the national average.
A universal income of $12,000 a year, however, would not have the same effect as a rise of wages in a particular place. Why? Because it will not change the difference in productivity between the cheapest land and the most expensive land. In places like Detroit, where land can be had nearly for free, incomes will rise by $12,000. In places where land is incredibly expensive, the exact same rise will take place. For this reason, there will be no increase in demand for land in San Francisco.
Indeed, if land location is a smaller factor in an individual’s overall income, the power of landlords to demand higher rents actually falls, so if anything, the highest rents should fall with them. While areas where low incomes currently depress rents may see some uptick, there will be no overall jump in rents across the board. Henry George clarifies Ricardo’s position this way:
“I may have very rich land, but it will yield no rent and have no value so long as there is other land as good to be had without cost.”
In terms of collecting the Freedom Dividend, one plot of land is as good as any other, and so the increase in income can’t be easily collected as rent.
However, in the long run, the Freedom Dividend’s most ambitious goals will end up supporting landowners more than anyone else if it’s not matched with a Land Value Tax. Yang’s campaign and supporters likes to point to the impact on economically marginalized communities, particularly in former manufacturing hubs. And they have a point – if the FD is funded by a Value Added Tax, it will move money from areas with more economic activity and thus higher VAT burdens to those with less, and provide an economic base to areas that have lost their manufacturing base due to shifting economic patterns.
If this occurs, there will naturally be more people in those communities looking to buy homes, more businesses setting up or expanding to offering goods and services there, and an expanded tax base that will allow for greater local government investment in services and infrastructure. All of these changes tend to raise land values. While investment in apartments and new homes would offset the potential rise in residential rents to a certain extent, rendering the immediate concerns about rent absorbing overly simplistic, the rise in the values would ultimately mean that those who owned the land in these newly revitalized communities would see the greatest benefits. As their land became more valuable, they would be able to demand higher rent or higher prices for home sales, such that eventually, once the economy had adjusted to this new income source, the returns on land would indeed eat up most of the increased prosperity.
However, if those localities adopted a robust land value tax, the prosperity would end up being more widely shared. Higher land values would lead to greater density, as landowners and developers sought to avoid land taxes while keeping the same revenue. The resulting increase in housing would slow the rise in rents. And as tax receipts grew, governments would have greater capacity to provide services to those in need, to invest in housing directly, or to eliminate regressive taxes. Any of these would allow the increased prosperity from the Freedom Dividend to be more broadly shared.
Ultimately, the accusation that the Freedom Dividend would immediately flow to landlords is overly facile and misunderstands the law of rent. However, if the Freedom Dividend does all it promises, and in fact stimulates the economy, it will run up against George’s warning:
“…improvements which advance rent are not only to be included the improvements which directly increase productive power, but also such improvements in government, manners, and morals as indirectly increase it. Considered as material forces, the effect of all these is to increase productive power, and, like improvements in the productive arts, their benefit is ultimately monopolized by the possessors of the land.”
A UBI like Yang has proposed would only make a substantive, long term difference in the distribution of wealth if it was accompanied by land value taxes, as those taxes are the best tool for governments to divert the benefits that would otherwise flow just to landowners and use them instead for the enrichment of whole communities.