The thesis of Chris Hughes’s book Fair Shot: Rethinking Inequality and How We Earn is stated right up front: “Most Americans cannot find $400 in the case of an emergency like a car accident or a hospitalization, yet I was able to make half a billion dollars for three years of work. Something is profoundly wrong with our economy and in our country, and we have to fix it.” But is Hughes’s solution the answer?
Facebook
The critical event in Hughes’s short life (he is now 34) was that in 2003 at the age of 19 he chose to room in his sophomore year at Harvard with Mark Zuckerberg. During that sophomore year Zuckerberg, Hughes, and a third roommate Dustin Moskovitz developed Facebook, the now-legendary social media company. For his significant but relatively small role in Facebook’s creation Hughes was awarded a two percent share by Zuckerberg. It turned out to be worth $500 million when Facebook went public.
After working on the launch of Facebook Hughes went on to play a role in the social media apparatus of the Obama presidential campaign. Again he logged a major success in helping Obama win, as part of a successful venture. But he felt that his success was due much more to good fortune than to his own uniquely brilliant abilities.
Although he was no longer directly involved by that time, Hughes reveals a startling fact about Facebook. Facebook, he says, was “caught flat-footed when the surge in mobile users arrived in 2011. As late as that year, Facebook had only a handful of engineers focused on its mobile products, but it immediately pivoted to capture the emerging market, yielding enormous returns. Facebook went from zero mobile advertising revenue at the time of its initial public offering in 2012 to $22 billion a year by 2016.”
We need to be reminded how astonishingly recent this new mobile sharing economy is. The Apple iPhone appeared only 11 years ago and the now-ubiquitous mobile apps, such as Facebook, Uber, Twitter, Google, YouTube, etc. etc. caught hold only in the last few years.
Hughes also points out another interesting – and important – thing about Facebook:
In total, financial firms invested over $600 million in Facebook while it was still private. Because of outdated SEC regulations, most companies prefer to wait as long as possible to go public to avoid the regulations and public oversight that come with being traded on public markets. The effect of these policies is that no average American has any way to buy shares in the early days of the lives of valuable companies, but the networked ultra-wealthy are able to get a slice of them through these firms. In Facebook’s case, they were handsomely rewarded.
Startups have been waiting longer and longer to go public in recent years. Therefore, the early investments in the startups – the investments that they really need to become established and grow – can only be made by wealthy angel investors, venture capitalists, and private equity investors. That leaves the rest of investors, the smaller investors and most of institutional investment funds, to invest only in the secondary market where the flows of funds are not especially relevant to the companies themselves – and where a huge industry of investment advisors and managers compete with each other to lay claims to market-beating strategies that are of little importance to the overall economy. Perhaps Hughes could put his mind to how to remedy this situation.
Trying to do good
Many people who get rich feel that they have to “give back” in some socially-redeeming way. Hughes set out to use his new-found wealth, which he felt was largely due to unique circumstances and luck, to do something socially useful. He discovered that this isn’t so easy.
His first attempt was to get involved with a project of the Columbia economist Jeffrey Sachs, author of the book The End of Poverty, in conjunction with the United Nations, to create a series of so-called “Millennium Villages.” These Millennium Villages were to test the idea that if enough money were invested in poor countries to create infrastructure and skills, like water purification, agricultural training, and rural electrification, then economic development would be sparked and the countries would be embarked on the road out of poverty.
But when Hughes went to one of these Millennium Villages in Kenya with a group of visitors led by Sachs, he found it to be little more than a Potemkin Village. It was faked-up to look like there were thriving classrooms and clinics, but there was little sign of actual life and nothing seemed to be actually working. These Millennium Villages later became a source of controversy when studies showed that in spite of the marketing claims of the project, there was little evidence that it was producing any societal or economic gains.
Hughes went on to a new project, and that one ended badly too, but in this case particularly badly for him. In 2012 he bought the magazine The New Republic, a leftish-leaning publication of political commentary that had never been profitable in its almost 100 years of existence, and had a small circulation but was supported by donor funds.
Hughes imagined that by transforming the magazine he could make it profitable and get its word out to many more subscribers. But in this, he failed completely; not only failed but angered many of The New Republic’s employees and subscribers.
And yet, his zeal to achieve a social good had not abated.
The basic-income guarantee
The idea of a basic-income guarantee distributed by the government has been around for a long time. It was advocated by economic conservatives such as Friedrich Hayek and Milton Friedman. This may seem surprising since today’s conservatives would assume that anything that redistributes wealth would be anathema to conservatives. But Hayek and Friedman recognized that wealth redistribution will occur anyway because safety nets and welfare payments are necessary in modern societies to ensure, in a manner of speaking, that people do not die in the streets.
If redistribution of wealth is necessary, what would be the preferred mechanism for a conservative? It would be the one that requires least coerciveness, beyond the necessity of collecting the money to redistribute; that is, to simply give poor people the money and let them use it as they see fit.
One American president even delivered exactly the argument being used now for a basic guaranteed income in a televised address:
The wonder of the American character is that so many have the spark and the drive to fight their way up. But for millions of others, the burdens of poverty in early life snuff out that spark.
What I am proposing is that the Federal Government build a foundation under the income of every American family with dependent children that cannot care for itself--and wherever in America that family may live.
The name of that president? Richard M. Nixon.
Hughes has embraced that advocacy and has dedicated himself to lobbying for his version of it. He is the co-chair of an organization called the Economic Security Project, which pursues this goal. The “What You Can Do” afterword in his book explains that proceeds from the sale of the book go to fund this organization.
Hughes does a good job of presenting the facts that argue for such a solution. The economic security of many, even most Americans has declined precipitously since the 1950s. Hughes reports that a Princeton study found that of all the jobs created between 2005 and 2015, 94% of them were contract or temporary. As a consequence, not only is the job insecure but health benefits are either insecure or non-existent as well. Hughes says, with considerable justice, “Lots of people today have a job but do not have any semblance of financial security in their lives.”
His proposed solution is a specific variety of a basic-income guarantee. (There’s an excellent podcast on this topic on Stanford economist Russ Roberts’s outstanding interview program EconTalk.) But Hughes is quick to distinguish it from other forms of a basic-income guarantee that have been proposed. For example, he explains, it is not a “universal basic income,” which proposes to give every American $1,000 a month regardless of their wealth or work status.
In Hughes’s version, the government would provide an income of $500 a month to “every adult who lives in a household making less than $50,000 per year and who is working in some way.” “Working in some way” encompasses either working at a paid job, or occupation with unpaid caregiving such as caring for children or elderly in one’s family, or higher education. Hughes says that because Americans claim dependents, and report tuition on our tax forms, no new bureaucracy is needed to verify the claims because the Internal Revenue Service has the information.
Hughes does deal with a major issue with such an income guarantee, the “cliff” problem, but only in passing. If those earning less than $50,000 a year received an additional basic income of $6,000 a year ($500 a month) while those earning more than $50,000 received nothing, those in the vicinity of that income would do whatever they can to stay under the threshold in order to receive the benefit. In response to that problem, Hughes says, “some families at the top of the income distribution, making near the $50,000 level or more, would see a customized benefit size lower than the $500.”
Poor people already receive a benefit from the government in the form of the earned income tax credit, or EITC. But it is smaller and more complicated than what Hughes proposes. However, he suggests using the EITC as the vehicle for introducing his version of the basic income guarantee, and he suggests phasing in by starting with more modest benefits.
Will this work?
People are strapped for money at all levels of income. Even Wall Street financial executives who earn a million dollars a year feel financially strapped. This was documented in Tom Wolfe’s classic book The Bonfire of the Vanities – it is fiction, but well researched, and other research bears it out. The reasons were such social requirements as leasing amusement park ride equipment to provide rides for invited friends at the executives’ children’s birthday parties. For the poor people targeted by Hughes, the equivalent social requirement might be drinking beer at a bar with friends.
This observation raises the question, will this really make a difference? Providing a little extra money might just ramp up the social requirements a little and become absorbed rapidly. Hughes addresses this question indirectly in one passage:
I hear all the time, particularly from wealthy people, skepticism about starting with even more modest benefit sizes than the guaranteed income pilots of the 1970s provided. “How much is an extra $100 or $200 a month really going to help anybody struggling to get by?” people ask. When I channeled their skepticism to ask that question of one woman in Ohio, she locked eyes with me and answered bluntly, “Anyone asking that question has never had to choose between buying groceries and making rent.”
The point I think he is making – though he doesn’t make it explicitly – is that the purpose of the monthly benefit is not actually to raise the recipient’s income. It is to increase the security of that income. This is the obvious implication of Hughes’s passages highlighting how working people’s income security has waned in recent decades.
Will this work? Will it help people break out of the cycle of poverty, and not be wasteful? This is difficult to answer only on theoretical grounds. Like the guaranteed minimum wage, it is debated by economists on ideological grounds but the answers – tentative as they may be – can only begin to be found by surveying data from actual experience. The Economic Security Project is engaged in an experiment to test and demonstrate the feasibility of its proposed basic income guarantee in the city of Stockton, California, in cooperation with the mayor of that city. Perhaps this will provide some feedback to evaluate the idea. Perhaps like the Millennium Cities project, it will demonstrate that it doesn’t work at all, but it may demonstrate otherwise, assuming the results are evaluated honestly.
There is little question that financial insecurity is a serious problem in America. Practical proposals to remedy it may need to be tried.
Economist and mathematician Michael Edesess is adjunct associate professor and visiting faculty at the Hong Kong University of Science and Technology, chief investment strategist of Compendium Finance, adviser to mobile financial planning software company Plynty, and a research associate of the Edhec-Risk Institute. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri and George Peacock, was published by Berrett-Koehler in June 2014.
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