Andrew Yang’s universal basic income proposal, explained

Andrew Yang says the next president needs to do almost the opposite of Donald Trump, and "the opposite of Donald Trump is an Asian man who likes math."

Yang, a 44-year-old entrepreneur running for the Democratic nomination, also has a big idea that has become the central element of his campaign: giving every American $1,000 a month.

"If you've heard anything about me and my campaign, you've heard that someone is running for president who wants to give every American $1,000 a month," Yang said at the second presidential debate in Detroit. "I know this may sound like a gimmick, but this is a deeply American idea, from Thomas Paine to Martin Luther King to today."

What are the details of Yang’s proposal? And what are the benefits and drawbacks? We checked in with economists and others who have looked into ideas like Yang’s.

The Freedom Dividend, as Yang calls it, is a variation of an idea that’s been around for decades, generally known as "universal basic income." Yang’s website includes favorable quotes about the idea from everyone from Martin Luther King Jr., to Richard Nixon, who weighed a similar proposal while president, as well as modern-day tech entrepreneurs Elon Musk and Mark Zuckerberg.

Under Yang’s proposal, every American over 18 would receive a payment from the government for $1,000 a month, or $12,000 a year.

Yang says the payments would be offset by a 10% value-added tax, VAT, and by replacing duplicative social-welfare spending. Current recipients could choose between their existing benefits and $1,000 in cash.

Universal basic income has gained traction on both sides of the ideological spectrum. On the left, supporters see the proposal as a way to reduce extreme poverty and remove the stigma from taking government support. On the right, some see it as a way to minimize welfare dependency and curb the reach of government. 

Here are some of the benefits, according to the Yang campaign:

• It can increase bargaining power for workers, "because a guaranteed, unconditional income gives them leverage to say no to exploitative wages and abusive working conditions."

• It can encourage entrepreneurial business efforts, "because it provides for basic needs in the early lean days of a company and acts as a safety net if the business fails."

• It can reduce stress, by easing concerns about financial insecurity.

• It can allow people to work fewer hours in order to volunteer in the community, attend to ailing relatives, help raise children, or simply pursue hobbies that make them feel happier.

• It can reduce administrative costs for the government, by shifting from traditional means-tested social-welfare programs to a one-size-fits-all payment.

A longstanding worry is that people would stop working once they get a guaranteed sum from the government.

It’s "common sense" that there would be "a large fall in work effort," said Bryan Caplan, an economist at George Mason University. "People may not immediately quit their jobs, but this provides a great relief from the need to find a job when you don’t have one."

However, supporters counter that recent research of small-scale, real-world pilot programs suggests that this is not as big a concern as it once seemed. The most recent research includes one study by Duke University researchers of members of the Eastern Band of the Cherokee Nation who received regular payments from a casino on tribal land, and another of Alaska residents, who receive a guaranteed annual "permanent fund" dividend that stems from oil and gas revenue.

"Overall, the programs analyzed suggest either no effect on labor market supply or a slight reduction in work and earnings," wrote Ioana Marinescu, an economist at the University of Pennsylvania’s School of Social Policy & Practice in an analysis of past studies. "The evidence does not suggest an average worker will drop out of the labor force when provided with unconditional cash, even when the transfer is large."

One criticism is that universal basic income systems are not means-tested, meaning that they end up spending a lot of money on people who don’t need the extra funds. Simply put, a single parent struggling to make ends meet would get the same $1,000 a month as software mogul Bill Gates.

"No sensible philanthropist would spend money so indiscriminately," Caplan said. 

A related concern is that $1,000 a month goes a lot further in some locations than it goes in others, which introduces inequities into the system. At an extreme, a four-person household in a low-cost region could pool their income to $48,000 annually, while a single person in a high-cost urban area would receive just $12,000.

Another criticism is the overall cost to the taxpayer. 

With roughly 210 million Americans over 18 today, "this program would distribute well over $2 trillion per year," said Steve Fazzari, an economist at Washington University in St. Louis. "Allowing for some modest growth before the program goes into effect, it would spend about 10% of gross domestic product. By itself, that would be a massive stimulus to the economy."

Adjusting for Yang’s proposed offsetting taxes and spending cuts — the new VAT tax and the reductions in means-tested welfare programs — reduces the net impact to about 3.3% of gross domestic product, Fazzari said. Additional tax revenues generated by the program’s economic stimulus could cut the effective cost further.

Still, none other than the Center on Budget and Policy Priorities — a leading liberal group focusing on how economic policy affects low-income Americans — has published a critique of a somewhat more modest proposal than Yang’s, zeroing in on its $30 trillion to $40 trillion cost over 10 years.

The annual cost of the program would equal "more than three-fourths of the entire yearly federal budget — and double the entire budget outside Social Security, Medicare, defense, and interest payments," the center wrote. "It’s also equal to close to 100 percent of all tax revenue the federal government collects."

For a program of that scale, taxes would have to "rise a lot" to foot the bill, Caplan said.

Income inequality needs urgent attention from policymakers, said Roger Noll, a Stanford University economist. But he added that it would be easier, and potentially more effective, to modify the existing earned income tax credit instead of moving to a system of universal basic income.

"That’s not because the earned income tax credit is so terrific, but because it is much more feasible politically — it’s the only hope for getting enough support from moderates and conservatives to make reform feasible," Noll said. 

Other observers worry about the signals sent by focusing on government-provided income rather than, say, a program that creates jobs. 

"The American Dream is more about earning a decent standard of living than receiving a government grant," Fazzari said. "The job program also stimulates the supply side directly, as well as the demand side, mitigating concerns about the stimulus being too large. There are lots of detailed issues in comparing these approaches, but perhaps the job guarantee is a better way to go."