Free Money: Paradigm Shift in a Market Economy

"Every night before I rest my head...See those dollar bills go swirling 'round my bed." — "Free Money" as performed by Patti Smith

First in a two-part series

Free money is an attractive proposition. Whether or not it is a healthy economic policy for our nation is a fascinating question.

One of our Presidential hopefuls has made a $1,000 monthly cash gift to all Americans part of his campaign platform. Others have proposed lesser “Freedom Dividends.” The controversial initiative raises both the question of whether we should pay these supplements and how such payments would be financed.

The idea of a universal basic income (UBI) has long been floated by economists. Essentially, citizens are gifted sums of money, usually monthly, and use the cash at their own discretion.

Now, in a pilot program called the Stockton Economic Empowerment Demonstration, the city of Stockton, California, is gifting some 125 citizens with $500 a month for 18 months. The Stockton stipends are privately donated, so there are no tax dollars involved. The cost mirrors the math: a little over a million dollars. All 125 participating residents are breadwinners in families that exist on less than the city's median household income of $46,033. The money is transferred to the recipient's debit card on the 15th of each month.

The participants’ cash usage is being monitored by program administrators, and so far the evidence indicates that the work ethic of the recipients remains intact. Most are using the cash to pay bills, or buy amenities for their children that they previously could not afford, or cut back on the hours they were working in a second job. 

But what if UBI becomes politicized, as it has in Alaska? In 1982, former Governor Jay Hammond created the Alaska Permanent Fund Corporation. Some 25% of all state mineral royalties (oil and gas and mining) were invested in the fund, and for decades citizens received an annual stipend of between $1,000 and $2,000, from funds generated by the investment earnings.

Then, in the last gubernatorial race, a candidate promised a $6,700 annual giveaway…and won in a landslide. Voters were naturally enamored of the siren song of more free money. Now, though, Alaska is embroiled in a financial quandary, as the state cannot perform the promised giveaway without significant cutbacks in other areas. 

The essential economic issues in any government program are “How will the program be funded?” and “What other government services or programs must be downgraded or curtailed to pay for it?” Or, do we simply pay for the new program by adding another trillion dollars to our growing national debt? 

That our middle class is struggling financially is well documented. So the Stockton Initiative and Alaska political promise are the types of programs that we're going to hear more about in the coming years, and on a national level. Whether we like it or not. 

Next week: How do we feel about UBI programs, and can they be effective in bolstering our floundering middle class?

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a fiduciary, “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.