Some years ago I was asked to design a framework for the implementation of minimum wage system in South Africa as part of an ILO project my research group was involved. We were evaluating the first five years of the Expanded Public Works Programme in South Africa, which was a cut-down employment guarantee program (limited by supply-side constraints on public expenditure largely conditioned by the bullying of the South African government by the IMF). One of the issues I had to deal with was the belief among many economists that the existing cash transfer system introduced by the South African government after 1994 should be expanded into a full-blown Basic Income Guarantee and that any notion of employment guarantees should be rejected. Our work demonstrated quite clearly (in my view) the flawed logic in this argument. The cash transfer system was productive as it stood but was no reasonably extensible into a widespread income guarantee without significant negative consequences. The creation of an employment guarantee scheme to absorb the social transfers and leave them as supplemental to cope with varying family structures was a much better option. That conclusion holds for less developed nations and advanced nations alike.
The post-apartheid South African administration, unfortunately, adopted a neo-liberal economic understanding of the world and the policy apparatus that is concomitant with that understanding.
The most explicit example of this is seen the transition from the Reconstruction and Development Programme (RDP) to the Growth, Employment and Redistribution Programme (GEAR). The RDP was envisaged to be the cornerstone for building a better life of opportunity, freedom and prosperity.
In 1996 RDP was superseded by GEAR, which adopted explicit economic growth strategies that were oriented towards private sector investment and assumed the role of the public sector and government programmes to be minimal.
The GEAR strategy pursued fiscal discipline by minimising deficits and maintaining high real interest rates, which constrained economic and employment growth.
The failure of GEAR was never more evident than in the discrepancy between the economic modelling, which predicted that a 6 per cent growth rate would create an average of 270,000 additional jobs annually in the formal sector, and the outcomes, which saw formal sector employment, stagnate and fall.
The IMF had their hands all over GEAR.
It was no surprise to me when I started working in South Africa that the richness of real resources that the nation possesses were not being (and have not been) used to benefit the greater population.
The neo-liberal economists who had the ear of the government continually emphasised the primacy of the private market place and uses ‘private costs and benefits’ as the basis of resource allocations, largely ignoring the broader and more inclusive concept of ‘social costs and benefits’.
In the case of South Africa, this translated into the hard to understand combination of a government running fiscal surpluses and more than 60 per cent of the population without adequate housing or income.
The surpluses were justified by the erroneous claim that they are fiscally responsible management, a central misnomer of neo-liberal thinking which remains stuck in a time when fixed exchange rates and commodity money was the norm.
In a flexible exchange rate world and where the government maintains sovereignty over its currency, these notions are clearly inapplicable. The application of them results in dysfunctional outcomes which we see in the stark reality of the South African situation.
I attended meetings where various well-dressed and full-of-bling (expensive watches, rings etc) officials, reading from the IMF and World Bank bible, told me that the massive unemployment in South Africa is a complex and manifest problem.
A lot of head shaking was common – complex, manifest – too hard basket.
The mass unemployment was constructed by these officials as being ‘structural’ in nature, and that view dominated the political awareness and the sort of policies that might be brought to bear.
I argued that by any standards, the unemployment problem in South Africa was a demand deficiency situation rather than a structural problem. There was scant evidence that the South African economy was generating enough work in areas unsuited to the skills of those who are seeking work in those areas.
This means there is not sufficient demand for labour being generated overall.
The South African economy was clearly not producing enough jobs and, in those situations, the labour queue then reflects the distribution of skills with the least skilled in the most disadvantaged position in the face of job scarcity.
I also considered that there was not a shortage of meaningful job opportunities that could be pursued in South Africa if there was a willingness to fund the employment. The private sector was (and is) clearly unable to generate the level of employment commensurate with the willing labour supply.
This chronic state is a prima facie justification for a direct public sector job creation.
It is a state common to all countries without exception.
The EPWP is an on-going scheme in South Africa that aimed to reduce poverty and unemployment. It was an excellent idea, being effectively an employment guarantee.
However, the job targets have been too modest to do anything but put a small dent the dual problems of poverty and unemployment.
The work duration is too short and/or irregular, and while daily wages vary considerably, the low monthly/annual wages detract from programme impact.
The work opportunities are short and thus provide no continuity of income for EPWP participants.
One of my commissioned tasks as an outside consultant was to evaluate the role that EPWP played in reducing income insecurity and promoting employment, and how it interacted with the existing system of social grants (cash transfers), and to design the improvements or changes in programme design that would enhance the impact of the EPWP wage income on poverty alleviation.
In part, I was to come up with a framework for assessing the appropriate minimum wage for a minimum level of employment.
So I got to know a fair bit about how cash transfers play out in poor communities and the role they have to play in poverty reduction.
I concluded that while cash supplements could improve the fortunes of a poor citizen, they were not to be prioritised over the provision of meaningful work by the state.
In another context, this discussion plays out in the conflict between basic income and employment guarantee proponents.
Cash transfers and Basic Income Guarantees
Cash transfer programs have been a popular way for less developed nations to alleviate poverty and support economic development. However, they have always been resisted by policy makers in favour of in-kind transfer programs because of the fear that if an impoverished family is given cash they will (especially the male members) immediately squander the funds on non-essentials including booze, gambling, drugs etc.
These so-called ‘temptation goods’ (or ‘demerit goods’) are considered to be damaging, which is one reason why economists argue they should be regulated.
There was an interesting 2014 study by two World Bank economists (David Evans and Anna Popova) – Cash Transfers and Temptation Goods A Review of Global Evidence – published as Policy Research Working Paper 6886, May 2014, which received recent attention in the media.
The World Bank paper examined the role of cash transfers in Latin America, Africa, and Asia in the light of criticisms by economists and others who claimed that such public handouts only end up buying “alcohol, tobacco, or other ‘temptation goods'”.
They performed a meta analysis of 19 quantitative research studies “on the impact of cash transfers on temptation goods, as well as 11 studies that surveyed the number of respondents who reported they used transfers for temptation goods.”
Almost without exception, studies find either no significant impact or a significant negative impact of transfers on temptation goods … concerns about the use of cash transfers for alcohol and tobacco consumption are unfounded.
What does that mean?
That poor people use extra cash resources (whether provided conditionally or unconditionally) to improve their life’s chances by spending more on nutrition (where available), education and health care.
In fact, the research points to the conclusion that spending on demerit goods declines as people have more cash.
There was a recent Yahoo Finance article (December 10, 2016) – Here’s what happens when you give cash to the extremely poor – which drew on these findings.
The journalist (Ethan Wolff-Mann) argued that a major constraint limiting the use of cash transfers was the:
… visceral reactions in people, as it runs contrary to the values in society—that people should earn their money, and anything else is unfair.
This fetishization of self-reliance, however, is only one part of why people chafe at giving money directly to those in extreme poverty. A more common refrain: They’ll squander the money on booze, cigs, and drugs.
Clearly, the research evidence does not support the latter claim as discussed above.
The Yahoo Finance article believes these research findings, which come from studies of poor nations:
… could be vital for the new economy.
Where is that heading? Into the mire of Basic Income in all nations, that’s where!
The point is that the research does not support a case being made against cash transfers on the basis that the recipient will squander the funds.
But to then generalise those results to claim they justify a full-blown Basic Income is a step too far.
The Yahoo Finance author chooses to get on board the ‘second machine age’ wiping out all jobs bandwagon and chooses to quote the not to be relied on Lawrence Summers “by mid-century about a quarter of men between 25 and 54 will not be working at any moment.”
The answer is – why haven’t I seen it already! – “to provide a basic income for everyone to supplement income from low-paying jobs that have become the hallmark of a shrinking middle class.”
Apparently, there are now a US study (Economic Security Project where involves “a few dozen people getting $2,000 per month for a year” to see what they do.
Well, that is just $US24,000 per annum.
There was a Gallup Poll (July 1, 2013) – Most in U.S. Have Enough to Get by, but Many Lack Cushion – which concluded that:
About seven in 10 Americans, including a majority of those making more than $24,000 a year, say they have enough money to do what they need to do. However, it is not until Americans reach $48,000 a year in annual income that a majority say they can handle a substantial purchase or unexpected major expense.
Only 43 per cent said that they had enough to “buy things you need” if they earned less than $US24,000 and only 21 per cent claimed they would be able to make a major purchase.
The study concluded that “most Americans … do not have much cushion for financial emergencies”.
The amount is above the Federal minimum wage, which is hopelessly low in the US. So I don’t see an annual income of $US24,000 where a person cannot deal with a major expense as being anything to build a new progressive and prosperous society upon.
I have written a lot about Basic Income and employment guarantees in the past. I do not support a Basic Income. For past blogs go to the Job Guarantee category.
Back to South Africa, where this debate has been playing out for years now.
In the period after 2000, there was a dramatic increase in provision of social grants (cash transfers) in South Africa, which targeted the poor and disadvantaged have been effective in reducing the burden of poverty.
Many researchers and policy commentators seized on this type of data as the basis of their advocacy for the introduction of a Basic Income Guarantee (BIG) as the primary policy weapon against poverty.
They have highlighted the fact that there is a lack of employment alternatives available to most poor South Africans and that the social assistance grants system has demonstrated an ability to reduce poverty in that country.
These advocates note that the current social assistance schemes in South Africa provide no support to able-bodied people of working age who do not have children and who have never been able to build any unemployment insurance credits.
The myths propagated by the BIG proponents include:
1. Full employment is now unattainable – the ‘second-machine age, robots are taking over’ paranoia is just the latest iteration of this claim.
An earlier iteration was that the state can no longer afford to guarantee jobs.
A BIG is a palliative at best.
It is based on a failure both to construct the problem of income insecurity appropriately and to understand the options that a government which issues its own currency has available to maintain full employment.
There are no economic constraints in South Africa or elsewhere to achieving full employment. Only ideological and political constraints exist.
In fact, each policy response (BIG or Job Guarantee) requires that the same ideological and political barriers, relating to philosophical notions of citizenship and individual rights, be confronted and overcome.
But when compared to a full-scale public sector employment programme, the BIG is a second-rate option and is inherently inflationary.
BIG advocates construct the problem of income insecurity incorrectly – full employment can be achieved.
But, on top of that, the mainstream BIG literature advocates the introduction of a BIG within a ‘fiscal neutral’ environment, presumably to allay the criticism of the neo-liberals who eschew government deficits.
Another, probably more reasonable conclusion, is that the BIG advocates actually believe that governments that issue their own currency have financial constraints.
It is clear that much of the debate about the viability of the BIG is conducted on the false premise that a currency-issying government is financially constrained.
Once we recognise that there is no financial constraint on government spending, many of the problems created by BIG theorists can be avoided.
The payment of a BIG to all citizens would signify a further withdrawal by the State from its responsibility to manage economic affairs and care for its citizens.
It is a dire future where young people are seen as passive recipients of a social security benefit (BIG) rather than be encouraged to develop skills and engage in paid work.
The failure to engage in paid work cannot be narrowly construed as an inability to generate disposable income which can be addressed through a benefit, but entails a much broader form of exclusion from economic, social and cultural life, which has highly detrimental consequences.
BIG advocates fail to explain how its availability will promote meaningful engagement on the part of the disadvantaged, who have limited income earning opportunities.
The universal availability of the BIG, does not overcome the stigma associated with voluntary unemployment of the able-bodied, who do not have caring or other responsibilities.
Work remains central to identity and independence, and persistent unemployment remains the central cause of income insecurity.
While the introduction of an BIG has superficial appeal – by allowing individuals to subsist without work – the model fails to come to grips with the failure of macroeconomic policy to provide paid employment opportunities and secure incomes for all.
In short, a BIG:
1. Creates a dependency on passive welfare payments;
2. Creates a stigmatised cohort;
3. Does not provide any inflation buffer.
4. Does not provide any capacity building. A BIG treats people who are unable to find adequate market-based work as ‘consumption’ entities and attempts to meet their consumption needs.
However, the intrinsic social and capacity building role of participating in paid work is ignored and hence undervalued.
It is sometimes said that beyond all the benefits in terms of self-esteem, social inclusion, confidence-building, skill augmentation and the like, is a priceless benefit of creating full employment is that the “children see at least one parent going to work each morning”.
In other words, it creates an intergenerational stimulus that the BIG approach can never create.
So while social grants (cash transfers) have proven useful in alleviating the worst of poverty they should not be seen as being extensible into a full blown BIG.
Social grants should supplement employment guarantee income to allow for family structure – so that no individual, no matter what family structure they live in – faces poverty.
In general, a properly calibrated Job Guarantee wage will ensure that anyone who works is able to avoid poverty.
That wage would be made available to all those who are able and willing to work irrespective of whether the State is in a position to provide immediate work.
I have always recognised that the duration of planning processes, administrative inefficiencies or other factors may lead to there being difficulties in providing enough immediate employment opportunities across all regions to absorb the number of workers who would take up the offer.
This is particularly the case in the less developed nations (such as South Africa) that I have worked in. Less so in advanced nations with sophisticated infrastructure.
But where the work was not immediately available and consistent with the poverty alleviation objectives of the Job Guarantee, the minimum wage should still be paid upon the person signing in for work.
Cash transfers could then supplement the Job Guarantee income in addition to social wage supplements (public transport access, housing support, health care, child care etc) to cater for different family structures.
The World Bank research is important because it can be used to dispel myths about alleged vicarious spending habits of impoverished people who might enjoy extra income via state assistance.
The myths are really just one of many used to disabuse governments of running deficits and doing something about poverty.
But in finding that the poor do not go on drunken, gambling, smoking binges with extra cash they receive does nothing to support the introduction of a BIG.
The advantages of being involved in work in our current society are massive and we can be sure the income security that is generated by the introduction of a Job Guarantee would go to advancing personal and family capacities rather than advancing the profits of breweries or, worse, the proliferation of gambling products that are constantly being advertised these days.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.