Is there a case for a basic income guarantee – Part 2

This is Part 2 in the mini-series discussing the relative merits of the basic income guarantee proposal and the Job Guarantee proposal. The topic of a basic income guarantee seems to evoke a lot of passion and in all the discussions I rarely read anyone going carefully through the macroeconomic implications of bringing in a scheme. I get lots of E-mails accusing me in varying degrees of politeness of being on a moral crusade in my opposition to basic income proposals. I wonder how much of my work over the years such correspondents have read. Not much is my conclusion. Whatever you think of the morality of having a system where some people work while others are supported in one way or another without having to work, even though they could (so I exclude the aged, sick, severely disabled here), the fact remains that a policy proposal won’t get much traction from me if it has a deep inflation bias and adopts neo-liberal explanations for economic outcomes like unemployment. I will also never support a proposal that absolves the national government from taking responsibility for providing enough work via its currency capacities and treats individuals expediently as ‘consumption units’ – to be maintained at minimum material levels. Anyway, we explore a few of those issues in this blog.

What is the problem that needs to be addressed?

How we construct the problem conditions the way we attempt to solve it. Mitchell and Watts (2004: 3) say that “It is easy to pose a ‘false problem’ and then develop rhetoric to ‘solve it’.” We sketch their argument in what follows (page references are to their article).

In a public policy setting, it is crucial to construct the initial problem in a meaningful way to ensure the solutions are effective. So in advancing the debate between basic income proponents and Job Guarantee proponents what exactly is the nature of the problem that they are seeking to address?

In the first instance, and the debate in fact goes well beyond this, both proposals clearly aim to address the problem of income insecurity.

There is no doubt that poverty rates have risen in many countries as a result of the GFC and the auterity policies that have been pursued by misguided governments in its aftermath.

Many researchers and policy commentators seize 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 highlight the fact that there is a lack of employment alternatives available to citizens in poor nations and that the introduction of a BIG would seem to be an easy way to eliminate poverty.

The provision of an unconditional BIG, set at a ‘liveable’ level and payable to all citizens, is advocated by a number of public policy theorists as a means of addressing income security.

But an effective solution requires that we understand “the underlying rather than proximate causes of income insecurity” (p.3).

But it goes further than this. To assemble an array of possible solutions, we also have to understand the power that a currency-issuing state has in terms of solving the underlying causes. If we have an ill-informed understanding of those capacities we are prone to define the possible policy set too narrowly and thus exclude preferred solutions.

We argue that this failing is endemic to the basic income proposal.

It is obvious that the basic income advocates attempt to solve the income insecurity directly but, in so doing, fail to address its underlying causes – namely unemployment.

But even more telling is that basic income proponents, in general, categorically fail to understand the realities of modern money in fiat currency economies. Accordingly, they operate within the false belief that such governments are financially constrained.

This, in turn, exposes the basic income approach to the criticism that it would be prone to an inflationary bias relative to a scheme that guarantees employment and that the inflation tendency would increase as the generosity of the guarantee increased.

The problem of income insecurity

While basic income proponents concentrate on income security as an end in itself, those who promote the Job Guarantee consider that income insecurity to be a manifestation of a broader problem in capitalism – a deliberately engineered lack of employment growth, which results from policy makers over-zealously pursuing inflation targets with little regard to the persistent unemployment that arises as a consequence.

The basic income approach to income insecurity is based on what Mitchell and Watts (2004) called a “false premise and a curious inconsistency”.

The false premise relates to the failure to understand that a fiat currency-issuing government is never revenue constrained.

The inconsistency arises because the competing policy responses (BIG or Job Guarantee) both require the ideological and political barriers, relating to philosophical notions of citizenship and individual rights, be confronted and overcome.

In this sense, when basic income proponents such as Standing (2002: 272) claim that full employment is now unattainable “by any reasonable means”, they are, in fact, denying the possibility of political shifts that would also be required to implement a viable basic income (in terms of level of income support).

[Reference: Standing, G. (2002) Beyond the New Paternalism: Basic Security as Equality, Verso: London.]

And if those shifts can be achieved and society, once again, promotes a sense of collective will by replacing the current neo-liberal emphasis on individualism, the basic income approach would still be inferior because it is in denial of the capacities that currency-issuing governments possess.

In this context, Mitchell and Watts (2004: 4) suggest:

The debate should really be about whether the BI can be consider a superior option in a monetary economy where the fiat-currency issuer is a monopoly and the private markets are constrained by inflationary-biases.

Our conclusion is that the pursuit of full employment should be the basis of a progressive attack on income insecurity rather than adopting a defeatist position that such an end is now unattainable.

In this context, the basic income proposal is an unnecessary and ill-informed concession to the neo-liberal NAIRU mythology.

For progressives to absolve governments of their primary responsibility to ensure there is enough spending in the economy to generate full employment only perpetuates the neo-liberal dominance.

Advocacy of the basic income guarantee in a progressive agenda fails to provide a viable alternative to mainstream fiscal austerity and ‘free market’ approaches.

This failure is based, in turn, 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.

In fact, there are no economic constraints on nations to achieving full employment. Only ideological and political constraints exist.

A currency-issuing government always chooses the unemployment rate once the spending and saving decisions of the non-government sector are taken.

But when compared to a full-scale public sector employment program, the basic income guarantee is a second-rate option, which is inherently inflationary.

The essential cause of income insecurity

The existence and persistence of mass unemployment and the link to income insecurity is generally recognised by basic income advocates but the former is rarely explained.

An exception, is leading BIG advocate Phillipe Van Parijs who presents both an explanation of unemployment and a related model for funding the basic income guarantee.

The question that arises is how the decoupling of income from work, leads to full employment – that is, where those who choose to work rather than take the basic income guarantee can access sufficient work? The answer to this question lies in how we explain unemployment and define full employment.

It is here that the neo-liberal tendencies in the basic income literature come to the fore, however, progressive the proponents think they might be.

Drawing from mainstream neoclassical economic theory, Van Parijs (1991) considers that unemployment arises because wage rigidities impede free market forces which would allow wages to be reduced when there was an excess supply of labour (unemployment) (see also Cowling et al., 2003; Mitchell and Watts, 2004).

[Reference: Cowling, S. and Mitchell, W.F.and Watts, M.J. (2003) The right to income versus the Right to Work’ CofFEE Working Paper 03-08, The University of Newcastle.]

[Reference: Van Parijs, P. (1991) ‘Why Surfers Should be Fed: The Liberal Case for an Unconditional Basic Income’, Philosophy and Public Affairs, 20, 101-131.]

In his conception, the going wage is too high relative to the productivity level and firms are unwilling to offer jobs to all those who seek to work at that wage. The result is unemployment.

And because wages cannot be easily cut the unemployment persists and becomes endemic.

Various explanations for the wage rigidities include trade union power, minimum wage legislation, and bargaining processes, which generate premiums to ‘insiders’ (those already employed) and exclude outsiders from job opportunities.

As a result, Van Parijs considers unemployment is caused by the departure from competitive equilibrium rather than any macroeconomic failure (that is, an aggregate spending deficiency).

This contest between those who think unemployment is the result of excessive wages and those who consider it to be a systemic failure to provide enough jobs to satisfy the desires of workers as a result of deficient spending was played out in the 1930s.

John Maynard Keynes demonstrated categorically that mass unemployment arose when total spending in the economy was deficient rather than the result of excessive wages.

That message has become obscured in the neo-liberal era as mainstream economists have returned to the defunct and flawed pre-Keynesian notions because they are more consistent with their anti-government leanings.

Basic income proponents move in lockstep with these neo-liberal narratives in this regard.

The question that Van Parijs then considers is how to render such a situation fair.

He proposes a rather bizarre, and very neo-liberal solution in terms of a redistribution of the “property right” (Van Parijs, 1995: 12) represented by the alleged existence of “employment rents” associated with scarce jobs (Van Parijs, 1995, Chapter 4).

Applying these concepts to scarce jobs, Van Parijs (1991: 124) said:

…let us give each member of the society concerned a tradable entitlement to an equal share of those jobs.

This conceptualisation then leads to his solution on how to pay for a basic income scheme (Van Parijs, 1991: 124):

… these rents are given by the difference between the income (and other advantages) the employed derive from their jobs, and the (lower) income they would need to get if the market were to clear. In a situation of persistent massive unemployment, there is no doubt that the sum total of these rents would greatly swell the amount available for financing the grant.

So, given Van Parijs adopts the neo-liberal assumption that all governments are financially constrained, he thinks a basic income guarantee can be “financed” by taxing workers who enjoy “employment rents” to allow citizens to live a decent, if modest, life without paid employment.

In this conception, no one is conceived to be ‘living off the work’ of others, rather they are living off “their share, or less than their share, of rents which would otherwise be monopolized by those who hold a rich society’s productive jobs” (Van Parijs, 1991: 130-31).

But the concept of ‘rents’ being available in the first place can be expressed more simply. It just arises from a shortage of jobs. There is nothing ‘natural’ about the fact that some people have jobs and others do not.

Basic income proponents adopt a ‘scarcity’ of jobs as a starting point without understanding what is driving the jobs shortage. The fact that there is a departure from full employment arises not as an inevitability but, rather, from defective macroeconomic policy, which reflects, among other things, the austerity mindset that has dominated the recent era.

Basic income proponents thus are trapped into adopting the belief that governments are financially constrained and can do nothing to increase the available jobs. Point, set and match to the neo-liberals.

There are insurmountable problems with this representation of income insecurity and the BIG financing model (see Cowling et al., 2003).

First, there is no recognition that mass unemployment is always the result of a deficiency of total spending in the economy chosen, ultimately, by the currency-issuing government.

This deficiency in aggregate spending is understood in relation to the level of spending required to ensure the demand for labour is sufficient to meet the desires for working hours by workers.

As we explain below, mass unemployment is always the result of a fiscal deficit that is always too low (or surplus that is too high, depending on the circumstances in the non-government sector).

Franco Modigliani (2000: 3) wrote in 2000:

Unemployment is primarily due to lack of aggregate demand. This is mainly the outcome of erroneous macroeconomic policies … [the decisions of central banks] … inspired by an obsessive fear of inflation … coupled with a benign neglect for unemployment … have resulted in systematically over tight monetary policy decisions, apparently based on an objectionable use of the so-called NAIRU approach. The contractive effects of these policies have been reinforced by common, very tight fiscal policies (emphasis in original).

[Reference: Modigliani, F. (2000) ‘Europe’s Economic Problems’, Carpe Oeconomiam Papers in Economics, 3rd Monetary and Finance Lecture, Freiburg, April 6.]

Mitchell and Muysken (2008: 6) argued that “(o)ne of the outcomes of governments adopting the ‘ideology’ of inflation … has been the failure to use fiscal policy in appropriate ways to ensure there are enough jobs created in their economies”.

[Reference: Mitchell, W.F. and Muysken, J. (2008) Full Employment Abandoned: Shifting Sands and Policy Failures, Aldershot, Edward Elgar.]

In other words, trying to implicate wage settlements, which reflect freedom of association and maximising decisions for both parties to the contract, as ‘market imperfections’ impeding full employment, ignores the fact that unemployment results from deficient spending.

Indeed, as Keynes and others showed, cutting wages to generate higher employment levels is likely to worsen the unemployment situation because workers would cut their spending as their incomes fell.

BIG theory and Modern Monetary Theory

In addition to constructing the problem of income insecurity incorrectly, the mainstream BIG literature advocates the introduction of a BIG within a so-called ‘fiscal neutral’ environment.

In other words, they tend to advocate solutions that have no net impact on the fiscal outcome recorded by the national government implementing the scheme.

This is presumably to allay the criticism of the neo-liberals who eschew government deficits.

Another way of thinking about this is that one of the sensitive issues for BIG proponents relates to the perceived ‘cost’ (in monetary terms) of the program.

But it is here that we appreciate the basic income proposals are typically based on an erroneous understanding of the capacity of the currency-issuing government.

An understanding of Modern Monetary Theory (MMT) allows us to appreciate that much of the debate about the viability of the BIG is conducted on the false premise that the government is financially constrained.

Mitchell and Watts (2004: 8) argue that:

It is convenient for neo-liberals to cloak their contempt for government spending (unless it is specifically assistance that advances the interests of their own lobby group) in the authoritative sounding concept borrowed from orthodox economics known as the ‘government budget constraint’ (GBC).

But any sovereign government has a monopoly over the issue of fiat-currency and, as such, its spending choices are never intrinsically revenue constrained.

The neo-liberal myth that governments can ‘run out of money’ starts with a false analogy between household and government budgets.

The analogy misunderstands that a household, the user of the currency, must finance its spending, ex ante, whereas the government, the issuer of the currency, spends first and never has to worry about financing (Mitchell and Mosler, 2002).

[Reference: Mitchell, W.F. and Mosler, W (2002) ‘The imperative of fiscal policy for full employment’, Australian Journal of Labour Economics, 5(2), 243-259.]

All the constraints such a government faces are either voluntary (political and ideological) or induced by a lack of real resources available for purchase.

At times of mass unemployment it is hard to argue that there are significant real resource constraints on government spending.

The currency-issuing government has an obligation to ensure that its net spending (government spending in excess of tax revenue or fiscal deficit) is sufficient to maintain full employment.

It is clear that mass unemployment can arise when the non-government sector, in aggregate, desires to earn income but doesn’t desire to spend all it earns.

The gap between income earned and income spent by the non-government sector has to be filled by a government deficit (spending greater than taxation revenue) for firms to be happy supply that level of output (which generates an equivalent level of income).

In that situation, if there is no intervention from government, firms will reduce hiring because they cannot sell the output that they had produced.

As a result, the non-government sector is dependent on the government to provide funds for both its desired net savings and payment of taxes to the government. To obtain these funds, non-government agents offer real goods and services for sale in exchange for the needed units of the currency.

This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that mass unemployment occurs when net
government spending (the deficit) is too low to accommodate the need to pay taxes and the desire to net save.

Any policy proposal that justifies its position on the basis of perceived government financial constraints is thus based on erroneous foundations.

Once we recognise that there is no financial constraint on government spending, many of the problems that would arise if a modest basic income was introduced can be avoided.

First, if the fiscal impact was neutralised, then there would be little impact on aggregate spending resulting from the introduction of a modest BIG scheme.

Given that mass unemployment is the result of inadequate aggregate spending, this means that the basic income proposal solidifies or locks the nation into entrenched states of capacity wastage and merely replaces the income support for unemployment with the basic income.

It is also highly unlikely that labour participation rates would fall significantly with the introduction of a modest BIG, given the rising participation by women in part-time work (desiring higher family incomes) and the strong commitment to find work among the unemployed (see Widerquist and Lewis, 1997).

So the suppression of net government spending that would accompany the introduction of a basic income would likely increase not reduce unemployment.

[Reference: Widerquist, K. and Lewis, M. (1997) ‘An Efficiency Argument for the Guaranteed Income’, Working Paper No. 212, The Jerome Levy Economics Institute.]

But there could be an increase in the supply of part-time labour via full-timers reducing work hours and combining BIG with earned income.

In that context, employers in the secondary (casualised, part-time) labour market will probably utilise this increase in part-time labour supply to exploit the large implicit BIG subsidy by reducing the already low wages and insecure working conditions.

Even basic income advocates have acknowledged this probability (for example, Van der Veen, 1998).

[Reference: Van der Veen, R. (1998) ‘Real Freedom versus Reciprocity: Competing Views on the Justice of Unconditional Basic Income’, Political Studies, 46(1), 140-63.]

Thus, the introduction of a basic income guarantee is likely to exacerbate the trend away from full-time work towards low-wage, low productivity part-time jobs, de-skilling, and, ultimately, falling average material living standards.

Third, to ‘fund’ a more generous BIG but keep the fiscal impact modest, higher taxes would be necessary which could actually lead to a reduction in labour supply if workers judged that it was not worth the effort of working additional hours given the marginal tax rate hike.

So even with a modest basic income guarantee, aggregate spending and employment impacts are likely to be small, and even with some redistribution of working hours; high levels of labour underutilisation are likely to persist.

Mitchell and Watts (2004: 11) conclude that:

Overall this strategy does not enhance the rights of the most disadvantaged, nor does it provide work for those who desire it.

In this vein, Little (1998: 131) points out that while the BI might enable individuals to exist without work:

… it does not provide any firm promises of paid work for those who don’t have a job but who want to contribute their labour to the generation of social wealth.

[Reference: Little, A. (1998) Post-Industrial Socialism -Towards a New Politics of Welfare, Routledge, London..]

However, whether the BIG is to be modest or not, profound macroeconomic problems would still accompany its introduction.

Conclusion

In Part 3 we will consider arguments relating to inflation, coercion and social transformation.

You guessed it – the basic income proposal doesn’t do well on any of these relative to the introduction of an employment guarantee.

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:

1. Friday lay day – The Stability Pact didn’t mean much anyway, did it?

2. European Left face a Dystopia of their own making

3. The Eurozone Groupthink and Denial continues …

4. Mitterrand’s turn to austerity was an ideological choice not an inevitability

5. The origins of the ‘leftist’ failure to oppose austerity

6. The European Project is dead

7. The Italian left should hang their heads in shame

8. On the trail of inflation and the fears of the same ….

9. Globalisation and currency arrangements

10. The co-option of government by transnational organisations

11. The Modigliani controversy – the break with Keynesian thinking

12. The capacity of the state and the open economy – Part 1

13. Is exchange rate depreciation inflationary?

14. Balance of payments constraints

15. Ultimately, real resource availability constrains prosperity

16. The impossibility theorem that beguiles the Left.

17. The British Monetarist infestation.

18. The Monetarism Trap snares the second Wilson Labour Government.

19. The Heath government was not Monetarist – that was left to the Labour Party.

20. Britain and the 1970s oil shocks – the failure of Monetarism.

21. The right-wing counter attack – 1971.

22. British trade unions in the early 1970s.

23. Distributional conflict and inflation – Britain in the early 1970s.

24. Rising urban inequality and segregation and the role of the state.

25. The British Labour Party path to Monetarism.

26. Britain approaches the 1976 currency crisis.

27. The 1976 currency crisis.

28. The Left confuses globalisation with neo-liberalism and gets lost.

29. The metamorphosis of the IMF as a neo-liberal attack dog.

30. The Wall Street-US Treasury Complex.

31. The Bacon-Eltis intervention – Britain 1976.

32. British Left reject fiscal strategy – speculation mounts, March 1976.

33. The US government view of the 1976 sterling crisis.

34. Iceland proves the nation state is alive and well.

35. The British Cabinet divides over the IMF negotiations in 1976.

36. The conspiracy to bring British Labour to heel 1976.

37. The 1976 British austerity shift – a triumph of perception over reality.

38. The British Left is usurped and IMF austerity begins 1976.

39. Why capital controls should be part of a progressive policy.

40. Brexit signals that a new policy paradigm is required including re-nationalisation.

41. Towards a progressive concept of efficiency – Part 1.

42. Towards a progressive concept of efficiency – Part 2.

43. The case for re-nationalisation – Part 2.

44. Brainbelts – only a part of a progressive future.

45. Reforming the international institutional framework – Part 1.

46. Reforming the international institutional framework – Part 2.

47. Reducing income inequality.

48. The struggle to establish a coherent progressive position continues.

49. Work is important for human well-being.

50. Is there a case for a basic income guarantee – Part 1.

51. Is there a case for a basic income guarantee – Part 2.

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.