I'm a graduate student in economics, writing my dissertation on economic issues and policies related to the poor. I've read through the book, and while I find the idea compelling, there are some problems I can't get past.
Critiques of the finances
1. Murray is fairly careful to outline who the winners and the losers are in this plan. But in doing so, he ignores the transition, especially with older people. As I understand it, if we implemented "the Plan" tomorrow, retirees who had previously had Medicare and Social Security benefits would now get $10,000 and be forced to buy into the health insurance plan, leaving them with at most $7,000 per year. This new benefit level would represent a severe decrease for a significant fraction of the elderly, and for single retirees, it would not be sufficient to allow them to live above poverty. It is certainly true that a 21 year old might be able to save more over his lifetime and do better under "the Plan" than under the current social security system, but we wouldn't realize those benefits for 40 years. The pain of newly impoverished retirees would be immediate. In fact, it seems to me that the reason "the Plan" becomes more affordable than the current system in a few years is that baby boomers (to whom we currently owe Medicare and social security) would start receiving incredibly reduced benefit levels. If I understand the proposal correctly, this seems like a glaring omission from Murray's analysis of winners and losers. I found a little discussion of this buried in Appendix D, but there's never a direct comparison of someone already now retired under the current system and under "the Plan".
2. Another somewhat misleading piece of analysis is when Murray discusses how a 21-year old making $20,000 each year will save for his retirement. Murray suggests that by putting $2,000 of his grant into a retirement plan, he can end up with an annuity that is far better than what he would have earned through social security. While this is likely true, it ignores another hidden detail. In order to make "the Plan" financially feasible, Murray has held government revenues constant, including taxes entering the system through the payroll tax. If we assume for the sake of argument that all government revenues are being collected from the same people in the same amounts, then this 21 year old worker is simply robbing Peter to pay Paul. He sends the government $2000 in payroll taxes, which they then send back to him to put away for his retirement. His only gain is that his private account can do better than social security. While this is potentially a meaningful gain, the discussion in the book makes it sound as if he gets out of paying payroll taxes and also gets money to put into retirement. Again, this is a significant omission from the discussion.
3. Another smaller critique is with his elimination of the student loans program. First, the direct student loan program actually represents a net positive flow of income into the government. This happens because the interest rates on the loans are higher than the discount rate used to discount future income. Eliminating the program, therefore, should be a net decrease if the accounting is properly done. Second, it's exceptionally misleading to say that we'll stop lending out money, but then to assume that government revenue will continue to follow current projections. If no one is able to borrow, then no one will pay the money back. Here, the relevant amount of money to add to the pot to pay for the plan is outlays minus the present value of expected future repayment, which is negative.
Other Comments
1. The basic structure seems sound to me. I like that the benefits are not taxed away until $25,000, and it seems that under this setup work disincentives will indeed be less than under the NIT experiments. In particular, I like that there is no (additional) distortion to labor supply at the extensive margin (choosing whether to work at all). The Plan would eliminate the EITC, however, which in theory provides an incentive to earn an initial amount of money. The evidence, though, suggests that it mainly acts as a one-time subsidy payment to workers who don't really understand how it works; so this isn't that big of a concern to me.
2. I like that child support payments are easily enforceable. Now the financial burden of childbearing is equally shared between father and mother whether or not they continue in a relationship, at least up to $7000 each year per father. What I don't understand then, is how Murray can claim that "the Plan" eliminates any financial gain to a young woman considering bearing a child. Certainly for mothers less than 21, they have lost the ability to get food stamps and TANF monies, but for women over 21, having a child and proving paternity is now worth a big chunk of the father's grant. If she's concerned that he's not pulling his weight, she can have a child, and ensure that he will continue to support her and the baby regardless of whether the relationship continues.
3. Everyone gets a bank account. This is good news as bank accounts lower transaction costs and can provide a good deal of financial security, except that now bank accounts are worth $800/month to everyone, and demand for them becomes relatively inelastic, allowing banks to lower interest rates on savings accounts and to increase fees and surcharges for account holders.
4. Immigrants. There is no provision for immigrants, legal or illegal, to receive any benefits until they become citizens. While I understand that we can't simply let people come to the country to get a free $10,000 each year, this seems particularly harsh and opposed the vision of this country. I'd like to see some sort of graduated benefit level based on length of residence or amount of income taxes paid, etc.
