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Gennaro Zezza — Modeling The Macroeconomic Effects Of A Universal Basic Income

In August, Gennaro Zezza and his co-authors Michalis Nikiforos and Marshall Steinbaum had a paper for the Roosevelt Institute, studying the effects of a Universal Basic Income. The model uses the Levy Institute‘s model.

The idea is simple. If a basic income is provided for everyone, it raises domestic demand because of higher consumption and hence leads to higher output. This is easy to see if there’s no rise in tax rates. If tax rates are increased so that the income provided matches the taxes raised, it’s still a stimulus to the economy, since the propensity to consume for people with lower incomes (or no income otherwise) is higher.

From the introduction;

We examine three versions of unconditional cash transfers: $1,000 a month to all adults, $500 a month to all adults, and a $250 a month child allowance. For each of the three versions, we model the macroeconomic effects of these transfers using two different financing plans – increasing the federal debt, or fully funding the increased spending with increased taxes on households – and compare the effects to the Levy model’s baseline growth rate forecast. Our findings include the following:

  • For all three designs, enacting a UBI and paying for it by increasing the federal debt would grow the economy. Under the smallest spending scenario, $250 per month for each child, GDP is 0.79% larger than under the baseline forecast after eight years. According to the Levy Model, the largest cash program – $1,000 for all adults annually – expands the economy by 12.56% over the baseline after eight years. After eight years of enactment, the stimulative effects of the program dissipate and GDP growth returns to the baseline forecast, but the level of output remains permanently higher.
  • When paying for the policy by increasing taxes on households, the Levy model forecasts no effect on the economy. In effect, it gives to households with one hand what it is takes away with the other.
  • However, when the model is adapted to include distributional effects, the economy grows, even in the tax-financed scenarios. This occurs because the distributional model incorporates the idea that an extra dollar in the hands of lower income households leads to higher spending. In other words, the households that pay more in taxes than they receive in cash assistance have a low propensity to consume, and those that receive more in assistance than they pay in taxes have a high propensity to consume. Thus, even when the policy is tax- rather than debt-financed, there is an increase in output, employment, prices, and wages.

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