The argument against GBI is that it encourages laziness, discourages productive work, is unaffordable by heavily indebted governments, and will produce inflation, which destroys savings and impedes capital formation.
But, what about hard evidence? Some countries around the world have already started GBI programs and the initial results are not favorable.
Finland has decided not to expand a pilot program of GBI. The program’s results in terms of job gains were disappointing. This tends to support the views of those who claim that GBI discourages work rather that encourages it through training. This is a small sample; there will be a lot more discovered about the effects of GBI in the years ahead.
Meanwhile, the political debate is going full-speed ahead. And it is not going away soon. The advocates for GBI see no problem with the budget deficit aspects of this. In their view, the Fed can monetize the debt forever; so there’s no problem finding the money.
The guaranteed jobs plan sounds better to politicians than GBI, but it still causes massive budget deficits without much in return.
In the end, the GBI and guaranteed jobs plans will fail as they always do. But that does not mean they won’t be tried. You should expect this to be a big political issue in the 2018 mid-term elections later this year and the 2020 presidential election. The deficits that go along with GBI will guarantee that America continues to go broke.
The combination of tax cuts and massively expanded government already guarantee ballooning deficits ahead. And this is when the economy is supposedly strong.
But the economy is long overdue for a recession. The typical post-WWII economic expansion lasted only 58 months or so. The current “expansion” — and I use the scare quotes because it’s been so week by historical standards — is 108 months.
What happens when the inevitable recession does strike?
Tax receipts will dry up and the government will almost certainly unleash a flood of deficit spending to stimulate the economy. And the Fed’s current policy of quantitative tightening (QT) will swing into reverse.
Debt, already at frightening levels, will spike. But the economy is in the condition it’s in today because of too much debt and not enough growth. More debt will only make things worse.
Central banks have little room to cut rates or print money in a future crisis, even with the Fed’s recent hikes. That’s why the Fed is so determined to raise rates, so it can cut them again when it needs to.
Meanwhile, taxpayers have no tolerance for more bailouts. And governments around the world are experiencing political polarization. It’s not just here in the U.S. There is simply no will and no ability to deal with the next panic or recession when it hits.
The systemic dangers are clear.
The next panic will be unstoppable without extreme measures — including IMF money printing, and lockdowns of banks and money market funds.
The calls for a guaranteed job or guaranteed basic income will soar. Unfortunately, the money won’t be there to support it.
- Source, James Rickards
