This is Part 1 in my mini-series on my version of the debate between employment guarantees and income guarantees. An earlier post rightfully belongs in the series as Part 0 – Work is important for human well-being. This discussion will form part of the Part 3 of my next book (with co-author, Italian journalist Thomas Fazi) which traces the way the Left fell prey to what we call the globalisation myth and started to believe that the state had withered and was powerless in the face of the transnational movements of goods and services and capital flows. Accordingly, social democratic politicians frequently opine that national economic policy must be acceptable to the global financial markets and compromise the well-being of their citizens as a result. In Part 3 of the book, which we are now completing, we aim to present a ‘Progressive Manifesto’ to guide policy design and policy choices for progressive governments. We also hope that the ‘Manifesto’ will empower community groups by demonstrating that the TINA mantra, where these alleged goals of the amorphous global financial markets are prioritised over real goals like full employment, renewable energy and revitalised manufacturing sectors is bereft and a range of policy options, now taboo in this neo-liberal world, are available. Wherever one turns these days, a so-called progressive pops up with a megaphone (conceptual) shouting that a basic income guarantee is the panacea for all manner of evil – starting back some years ago with unemployment and moving more recently, as that rationale was exposed, to the need to counter the expected ravages of the second machine age. As regular readers will know I am a leading advocate for employment guarantees. I consider basic income proposals to represent a surrender to the neo-liberal forces – an acceptance of the inevitability of mass unemployment. Further, the robot argument doesn’t cut it. Anyway, in Part 1 – Work is important for human well-being – I considered the need to broaden the definition of productive work. I also emphasised the importance of an on-going availability of work for human well-being. In Part 2, we sketch the arguments that have been advanced to justify the basic income proposal and find them inconsistent, illogical and deficient.
The Basic Income Guarantee (BIG) – uncertain motivation, error-prone macroeconomics
The Basic Income Guarantee (BIG) proposal has been advocated by a diversity of interests on the right and left of the political spectrum.
Tracing the origins of the BIG proposal reveals that the motivations of the proponents at different periods of history have varied from those who desire to cut government spending overall and push the responsibility of maintaining ‘welfare’ onto individuals, to those who were believed that unemployment was a violation of justice but was outside of the capacity of governments to solve it, to, more recently, those who invoke trepidation about the so-called second machine age and claim that robots are going to wipe out jobs on a massive scale (the ‘robot’ justification).
Voices from the left and the right weave various aspects of these motivations, often in overlapping ways, to justify their demands for a basic income to be paid by the state to all individuals (although even then, the unit that would receive the benefit is also a topic of disagreement).
British socialite and conservative activist, Juliet Rhys-Williams was a member of the Beveridge Committee, which sought to reform the system of income support in the early 1940s. Its final report – the Social Insurance and Allied Services (aka the Beveridge Report) provided the design that would become the post World War II Welfare State in Britain.
The idea advanced by the Committee was that a system of flat-rate social insurance contribution would underpin a flat-rate benefit scheme. Critics opposed to a large government arm claimed that these systems were complex, costly and promoted category bias (where a person would nurture characteristics that allowed them to ‘fit’ into one benefit category or another to ensure they gained the income support).
Rhys-Williams was a dissenting voice on the Beveridge Committee and opposed the proposed solution to income support. Instead, she put forward a negative income tax scheme, which would eliminate the Welfare State by providing a guaranteed minimum income with tax incentives to earn further income (Rhys-Williams, 1953).[Reference: Rhys-Williams, J.E. (1953) Taxation and Incentive, New York, Oxford University Press.]
Her motivation was to reduce the size and footprint of government but at the same time providing a means for reducing poverty, a major concern of conservatives of her era, which has been lost in the neo-liberal era.
The same motivation underpinned Milton Friedman’s later proposal for a negative income tax, where an individual would receive a refund of any unused tax deductions/allowances up to some small maximum amount (the guaranteed income component) and then face a declining subsidy up to the threshold where they would pay full taxes on earned income (Friedman, 1962).[Reference: Friedman, M. (1962) Capitalism and Freedom,Chicago, University of Chicago Press.]
Friedman’s deliberately considered the guaranteed component for a person who earned no income should be small because his motivation was for individuals to gain employment and if the subsidy component was too generous the incentives would work again his motivation.
Importantly, the negative income tax would replace the existing body of income support measures rather than be implemented as an additional layer of welfare.
His proposal was motivated by the notion that a free market, with only private welfare provision, would be superior and that government had a minimal role to play.
It was hardly the basis for a progressive vision of a society tightly linked by collective responsibilities and a view that systemic failure often impacted negatively and disproportionately on the more disadvantaged citizens.
The libertarian case was re-asserted by Charles Murray in his Wall Street Journal article (June 3, 2016) – A Guaranteed Income for Every American – which was a reprise of his 2006 idea (Murray, 2006).[Reference: Murray, C. (2006) In Our Hands : A Plan To Replace The Welfare State, Washington, Aei Press.]
Murray works at the American Enterprise Institute, which was established in 1938 and is a leading voice of the neo-conservative movement in the US. It was established by New York business interests in 1938 as a vehicle to advance their interests and oppose the New Deal.
Its luminaries over the years have included Irving Kristol and Milton Friedman. The roots of Murray’s approach are consistent with that legacy.
The American Enterprise Institue were joined by a collection of strategic and highly influential right-wing think tanks set up by the capital in the 1970s (after the publication of the Powell Manifesto) to grab power back for corporate interests after the full employment era had forced a more equitable sharing of national income growth between labour and capital.
Murray is not an economist yet writes about economic policy.
Like Friedman, Murray sees the basic income guarantee as being desirable “only if it replaces all other transfer payments and the bureaucracies that oversee them”. It is a small government philosophy consistent with its ‘free market’ libertarian roots.
In 2016 prices, Murray proposes that:
… every American citizen age 21 and older would get a $13,000 annual grant deposited electronically into a bank account in monthly installments. Three thousand dollars must be used for health insurance … leaving every adult with $10,000 in disposable annual income for the rest of their lives.
Apart from the implicit public subsidy for the greedy and ineffective private US health insurance providers, the proposal provides a guaranteed income that would place an individual below the poverty line. The estimation threshold for a single adult according to the US Federal Poverty Guidelines was $US11,880.
Like any negative income tax proposal, the individual can then earn an additional $US20,000 without entering the positive tax segment. After that point, dollars are subtracted from the basic income as the individual earns more income in the labour market.
Murray also is motivated by his preference for a lower federal spending level, claiming that once the system adjusts (by 2020), the US government would be spending “nearly a trillion dollars” less.
The question that obviously arises is if these reductions in the government net injection into the economy are realised what non-government spending component will increase to fill the spending gap and maintain economic growth.
The reduced net public spending would come, in part, from reducing the non-labour costs involved in public administration, but would also come at the expense of reduced income support payments to individuals.
While Murray’s overwhelming motivation is to reduce the size of government and push the responsibility for maintaining living standards back onto individuals, he has also recently invoked the ‘robot’ justification.
He wrote that while many would “surely drop out of the labor force” if a basic income guarantee was introduced this supply shrinkage would pale into insignificance relative to the impacts of robots.
We are approaching a labor market in which entire trades and professions will be mere shadows of what they once were.
He also rejected the ‘luddite’ defence against the ‘robot’ fear because he claims “this time is different” where millions of jobs will be wiped out.
He claims that the provision of a basic income in these circumstances would revitalise “civic society” through the aegis of the mushrooming of “voluntary organizations” which would deal “with local problems”.
Government welfare agencies and “the entire bureaucratic apparatus of government social workers” would disappear but individuals would “pool their grants” to ensure nobody starved.
Murray’s proposal, like most of the basic income proposals, is disingenuous in the extreme. First, if one individual is below the poverty line under his scheme, pooling two below the poverty line incomes just means that two individuals remain below the poverty line unless there are systematic cost economies of scale that can be realised.
Often, when confronted with situations like this, individuals on deficient income support find savings by crowding into public housing. While they solve the homeless problem their amenity declines significantly. Hardly liberation.
But moreover, if robots are really going to wipe out all the jobs, they will begin to wipe out jobs that the likely recipients of the BIG would rely on.
So all the ‘incentive’ structures designed to encourage individuals to gain extra jobs if they want to make a decent living, which are used to justify the below-poverty guaranteed basic income, are just an elaborate lie to hide the fact that this scheme would create income poverty and abandon the responsibility of the currency-issuing government to provide jobs at a sufficient income to maintain reasonable material living standards.
That feature is common to most basic income schemes, although few proposals are as specific as Murray in specifying the exact basic income level that would be guaranteed. For example, the recently rejected Swiss proposal to provide a basic income which would allow a “a humane existence and participation in public life for the whole population”.
Similarly, the proposed Finnish basic income initiative has become so watered down that it would provide no relief from poverty for a currently unemployed worker.
It motivation has clearly been to cut government welfare outlays so the problem is that it is likely that unemployment would increase further and a vicious circle of poverty would ensue.
The ‘robot’ justification has also been used by the IMF recently to justify a basic income guarantee.
The earlier proposals from the likes of Belgian academic economist Philippe Van Parijs were motivated by a desire to solve an unemployment crisis that basic income proponents had transcended the capacity of governments to address (Van Parijs, 1995).[Reference: Van Parijs, P. (1995) Real Freedom for All, What (if anything) can justify capitalism, Oxford, Clarendon Press.]
We turn to that argument first, which unlike the free market libertarian motivation, which is dominated by a desire to cut government spending overall and push more responsibility onto individuals, are supported by those on the left as well as some on the right.
Later in this chapter we will demonstrate that the ‘robot’ justification also falls short.
The ‘progressive’ case for income guarantees
Many progressive commentators advocate the introduction of a Basic Income Guarantee (BIG) as the primary policy weapon against poverty and consider employment guarantees to be coercive.
They highlight the fact that if there is a lack of employment alternatives available to citizens then the provision of an unconditional BIG, set at some ‘liveable’ level and payable to all citizens, is the most direct means of addressing income security.
Mitchell and Watts (2004) present a detailed critique of the basic income guarantees proposal and concluded that the BIG conception of income insecurity and unemployment is highly problematic.[Reference: Mitchell, W.F. and Watts, M.J. (2004) ‘Comparison of the Macroeconomic Consequences of Basic Income and Job Guarantee Schemes’, Rutgers Journal of Law and Urban Policy, 2 1-24.]
Key BIG advocates (for example, Belgian Phillipe Van Parijs) typically claim that unemployment (a scarcity of jobs) is caused by some workers enjoying excessive wages relative to the free market outcome.
Trade unions and government minimum wage legislation are blamed for creating this scarcity of jobs. There is no recognition that mass unemployment is always the result of a deficiency of total spending in the economy.
That is, mass unemployment is a systemic rather than an individual failure.
Further, the BIG proponents adopt the neo-liberal assumption that governments are financially constrained and thus propose to fund the income guarantees in various ways.
Van Parihs, for example, proposes taxing those who enjoy employment because their excessive wages deny the unemploymed a chance to work.
The unemployed are thus considered to be ‘allowing’ those in employment to enjoy being employed and as a result should be rewarded for their sacrifice.
The implied concept of full employment is equally bizarre. The BIG advocates solve the problem of mass unemployment by engineering an artificial withdrawal of the available labour supply, so that some of the unemployed are reclassified as not in the labour force and in receipt of their basic income allotment.
Whether the BIG is to be modest or not, profound macroeconomic problems would still accompany its introduction.
The mainstream BIG literature advocates the introduction of a BIG within a ‘fiscally neutral’ environment. This is presumably to allay the criticism of the neo-liberals who eschew government deficits.
One of the sensitive issues for BIG proponents is thus its perceived ‘cost’.
Under budget neutrality, the maximum sustainable BIG would be modest. Aggregate demand and employment impacts would be small, and even with some redistribution of working hours; high levels of labour underutilisation are likely to persist.
Overall this strategy does not enhance the rights of the most disadvantaged, nor does it provide work for those who desire it.
It is obvious that persistent unemployment could easily be avoided by the introduction of the BIG if it was accompanied by a net government stimulus (deficit).
This recognises that at all times, given the spending and saving decisions of the non-government sector, the existing unemployment level is the choice of the currency-issuing government – in other words, mass unemployment means that the deficit is too small relative to non-government saving desires.
But without an appropriate fiscal stimulus, the basic income proposal would achieve full employment by persuading the unemployed to drop out of the labour force upon receipt of an income guarantee.
But the value of the currency would then fall given that nothing is provided in return for the government spending.
The resulting inflationary bias would invoke interest rate adjustments (given the current inflation-first approach adopted by central banks) that would constrain the economy from achieving sufficient growth to offer real employment options to all aspiring workers.
But then what would be the impact on labour supply?
If the level of BIG is increased, total labour supply is likely to decrease as both the unemployed and employed workers drop out of the labour force.
The economy would move towards full employment by stealth – pushing workers out of the labour force rather than providing work for them.
But then a further quandary emerges. The more generous BIG, would probably stimulate total spending such that there would be a shortage of labour at ‘full employment’, resulting from the artificial reduction of the full employment level of employment, which then compounds the inflationary pressure.
The alternative is that the excess demand for goods would be increasingly met via imports with consequential effects for the exchange rate and the domestic price level, which would accentuate the inflationary pressure.
Mitchell and Watts (2004) explored these and other destructive dynamics in detail. The conclusion is that the introduction of a BIG policy is likely to be highly problematic with respect its capacity to deliver both sustained full employment and price stability.
A sound policy also has to be viable if the extremes of that policy are encountered. It is obvious that the basic income proposal does not satisfy that requirement.
As more an more individuals opted for the basic income without work, output would drop dramatically and material prosperity would be violated. Leisure and consumption are closely related.
Further, given the logic employed by the basic income proponents that the government providing the basic income is financially constrained, the logic means that as increasing numbers of workers ‘liberated’ themselves by taking the basic income, the capacity of the government to sustain it would diminish.
In other words, on its own grounds, the basic income proposal is limited in scope.
MORE TO COME HERE.
In Part 2, we will analyse the ‘robot’ justification.
The series so far
This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.
The series so far:
The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.