The Federal Reserve Board has resolved to hold interest rates artificially low—as opposed to letting them float with market demand—at least until the economy’s overall inflation rate reaches the Fed’s target rate of 2%.

There are questions concerning whether such a move reduces the Fed’s ability to deal with asset bubbles (whether the Fed should deal with bubbles at all is a separate question) and whether artificially suppressed rates encourage non-market driven levels of risk-taking.

There is, though, a reason why such suppression is simply wrong.

The Fed is (correctly) switching its policy to one of maintaining an inflation band centered on 2%, rather than holding out for a hard 2%.

Interest rates are intrinsically inflationary, though; if the Fed wants to put the economy into that band, it needs to set its benchmark rates at levels that have been historically consistent with a roughly 2% level.

Keeping rates artificially suppressed only removes that intrinsic upward pressure and makes it harder for the economy to reach its target range and stay in it.

The headline and subhead accurately summarize the article in The Wall Street Journal, which tries to segue into universal basic incomes.

Cities Experiment With Remedy for Poverty: Cash, No Strings Attached
Guaranteed income comes without work requirements; some worry about work disincentive, high cost

This, in the article’s closing paragraph, though, shows the utter irrelevance of such experiments:

[M]ost of the experiments are relatively small, temporary, and reliant on philanthropy.

In other words, they’re wholly irrelevant to the concept of a UBI. Being small, temporary, and reliant on philanthropy, they have no effect on the recipients’ long-term behavior, they have no effect on even the local economy, and they have no effect on government behavior—particularly funding the payments or handling ancillary effects of population-wide payments.

Guaranteed incomes—universal basic income, provided by Government—however, cannot accomplish anything useful, however implemented.

Price level is set by demand level relative to supply. Demand level is set by the amount of money available (not by how much people want of that supply).

Increasing demand level by increasing the amount of money available relative to supply is the definition of inflation.

All a UBI will do—and giving money to a tiny subset of the population is not a UBI—is inflate the price level to a new baseline. All that will do is depreciate the value of the UBI money along with all the other money in the economy. All that will do is return the [UBI + original money supply] buying power to the pre-UBI level, leaving no net benefit for UBI recipients.

A UBI will have, though, a strong negative effect. The money for UBI outlays must come from the private economy, either as taxes or as debt (which is either future taxes or depreciated currency). Withdrawing money from the private economy reduces R&D, reduces production, reduces money available for wages, reduces job availability—reduces economic output.

That leaves all of us worse off.