When and How Unconditional Cash Can Grow the Economy

Given the high stakes of the presidential primary and Mr. Yang’s repeated citation of Roosevelt’s report, including on Mr. Yang’s campaign website, we believe it is essential to clarify how our study was designed and what it does and does not claim. Most notably: Our research is not a study of Mr. Yang’s “freedom dividend” proposal, and it should not be read as such.

The Roosevelt report, based on the Levy Institute macroeconomic model, tested various levels of cash payments in addition to existing public benefits paid for a) by public debt financing or b) through progressive taxation.

Our report was nuanced. But there are two key takeaways:

1. Our report was designed to answer a question about how public spending programs—in this case, a “universal basic income” (UBI), meaning up to $12,000 annually for adults—would affect the economy. The report found that public spending—whether financed by government deficits or through progressive taxation—has a lot of potential to grow the economy. This finding helps counter the conventional wisdom that government spending inherently stifles growth.

While an economic growth argument can be made for the cash payments we tested, a similar argument can also be made for other public spending priorities, including decarbonizing the economy, investing in children, and canceling student debt. Our 2017 analysis does not indicate which program might have the largest growth effects or the greatest social benefits.

2. The way public spending is financed is one essential driver of the growth effects found in the 2017 report. Specifically, our findings apply only to scenarios where spending is financed by progressive taxation or debt. Our report did not test Yang’s specific proposal, which includes paying for the program with some regressive forms of financing, such as replacing the existing social safety net with cash and implementing a value-added tax. 

Below, we further elaborate on these takeaways, clarifying the premise of the report, the assumptions baked into our model, and the findings.

We should begin with an important note about models: The report explores the macroeconomic effects of a UBI using the Levy Institute’s macroeconomic model. It’s important to note that economic models are simply stylized approximations of how our economy works, and we should be careful not to conflate what the model says with reality. The Levy model was developed over the course of years by comparing the model’s predictions to what actually happened in the real world. Through this iterative process, each round honing in on a “truer” picture of the economy, the team at Levy developed a baseline forecast—or a prediction of what would happen to important components of the macroeconomy (e.g., household wealth and income and the government’s net debt) if nothing else changed and the Congressional Budget Office’s (CBO) overall GDP forecasts came true. By comparing the effects of differently sized UBIs to the Levy baseline, we can roughly predict how huge amounts of federal spending would affect inflation and other macroeconomic outcomes.

On the most basic level, the 2017 study argued that cash payments to all Americans, financed either by debt or by progressive taxation, would increase economic growth.

In the report, we examine three versions of cash payments: $1,000 per month for all adults, $500 per month for all adults, and a $250 per month child allowance. We tested two different financing mechanisms (as previously stated, one financed by public debt and one funded through progressive taxation). The headline result is that the model predicts that if we funded cash payments through debt, GDP would grow—an eye-catching 12.56 percent in the case of the full $1,000 per month payment financed by deficit spending.

There are several important points baked into the model and our study about how the economy works.

First, we dispute claims from some economists that unconditional cash hurts growth because recipients stop working. Rather, our model deployed recent research by Ioana Marinescu that demonstrated a number of real-world examples where cash payments have had no effect on labor market participation. Her findings—and those of others—show that when people get cash they don’t stop working, and they see significant improvements in other social indicators. This supports the argument that we do not need to use social policy to discipline low-income people into working harder.

Second, the idea that we can increase growth significantly through public programs like cash payments is founded on the idea that nearly 10 years into a recovery, we still have a lot of room to grow the economy. Focusing on the “room to grow” argument, Dylan Matthews wrote an excellent summary of the study when the report was released in 2017. Back then, the idea that we were still operating below potential was controversial. Headline unemployment was at 4.4 percent, and experts argued that it couldn’t go any lower. Since then, it has gone lower, and experts now argue that this is the lowest it can go. We at Roosevelt believe that we can still do better and that we can use public spending to further improve output, increase labor force participation, and increase wages.

To be clear: The assumption in our 2017 analysis was that cash payments would augment current social safety net spending. We did not consider the scenario proposed by Mr. Yang in which existing social benefits to individuals are cut in exchange for cash. 

Third, because the model we used assumes we are currently operating under potential, deficit-financed public spending yields positive economic benefits. Debt-financed cash payments, in fact, provide the biggest stimulus in our analysis. An unarticulated assumption in the model is that deficit spending will not hurt growth. This idea has gotten a big boost in the past year from Jason Furman, Larry Summers, and Olivier Blanchard (to name a few), all of whom have suggested that in the current environment of low interest rates we need not fear the debt.

Relatedly, the our report also finds that redistributive tax policy—taxing the top and providing a cash infusion to everyone else—is growth-enhancing. These findings are based on the assumption that when the government takes away an additional dollar of a rich household’s income through taxes, the household doesn’t respond by dropping out of the labor force. Instead, we believe that each marginal dollar taxed away reduces rich households’ incentives to bargain for a larger share of the economic pie. Our belief about this “bargaining elasticity” derives from important work by Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, who show that the bargaining effect trumps the labor supply effect—and it’s not even close. This means that high progressive tax rates could have a very positive effect on reducing inequality, without harming growth.

The takeaways from our 2017 report have a lot to offer policymakers. But they should be deployed with proper attention to where and how they are relevant. And the growth effects that the model suggests are not related to any presumed benefits from a “freedom dividend” plan that uses different forms of taxation and offers cash in lieu of other benefits. Our 2017 report should not be read as a commentary on—or an endorsement of—a very different basic income proposal.