A few days ago in a commencement address at Harvard, Mark Zuckerberg came out in favor of UBI. In response, Forbes has a piece by Professor Robert Seamans arguing that UBI could actually hurt innovation. Seamans’ first argument, that if UBI could be implemented by cutting other programs or policies that support innovation, is true but not that convincing; just because UBI could be poorly designed doesn’t mean it will be. The second argument, however, is just bizarre:
If a UBI (or any other policy that shields borrowers from downside risk) increases the propensity for entrepreneurs to take risks because their downside is limited in the case of failure, this means that the capital provided by the financier is at greater risk. Thus, the financier may cut back on the amount of lending provided, or may continue to lend, but at a higher rate than before. Or, if the financier has trouble distinguishing between high- and low-quality risky projects, the financier may stop funding altogether.
One of the main barriers to getting started is keeping your head above water when you don’t have any income you can count on. If financiers knew that each team member of every potential investment had this eat-ramen-and-crash-with-someone level of safety net, this would make financiers less likely to invest? Or that’d they’d invest less because teams that failed would have a ramen-eating safety net to count on till they got a job? If that was the case, then middle class and upper middle class folks like Zuckerberg should have a harder time than working class or poor folks do getting start up financing, because they’re more likely to have parents, credit cards, etc as a cushion. Anybody think that’s the case?
What’s Seamans’ evidence for this strange claim?
The negative response to higher levels of borrower protection by financiers has been documented in a number of settings. For example, Michelle White, a professor at UC San Diego, and coauthors find that higher levels of bankruptcy exemptions (the amount of money that an individual can retain when declaring bankruptcy) are correlated with more loan denials and higher interest rates….
A recent paper with my coauthors Geraldo Cerqueiro, Deepak Hegde and Fabiana Penas shows that higher levels of bankruptcy exemptions lead to less innovation—in terms of lower number of patents and lower overall patent quality—by small firms.
It looks to me like the results of his study are statistically signicant but aren’t meaningful: the vast majority of small firms weren’t filing many patents before or after the change in bankruptcy laws. But let’s put that aside.
Bankruptcy exemptions are how much property/assets you can walk away with, aka resources your creditors don’t get if you fail. They only matter if you have creditors, and a lot of the would-be entrepreneurs who will most benefit from UBI are likely to be people who either wouldn’t or can’t get small business loans. In fact, UBI might make getting a small business loan slightly easier because it means the business starts off with the equivalent of some cash to pay their employees. In any case, why would anyone assume financiers would treat having less initial pressure to generate employee pay as equivalent to small business owners being to walk away with more assets if their business fails?
As readers of this blog know, I have real problems with a UBI-only strategy for tackling the threat of a robot/AI-based unemployment crisis. But Seamans’ attacks on UBI as an innovation driver just don’t cut it.