In 1978, during my postgraduate studies at the University of Melbourne I came up with…
Poverty arises for a number of reasons but a lack of income has to be a central characteristic of someone who is poor. And notwithstanding the increasing tendency for people who work full-time to be found earning wages that place them below the poverty line, the major reason for people having a lack of income is unemployment. That typically makes poverty a systemic event rather than an individual failure because mass unemployment is easy to understand – it occurs when the system fails to produce enough jobs to meet the desires for work by the available labour force. Then, to understand why the system fails in that way, we know that once the spending and saving decisions of the non-government sector are made, if there is still a spending shortfall in the economy, which generates the mass unemployment, then it has to be because the net spending position of the national government is short. That is, either the fiscal surplus is too large or (usually) the deficit is too small. In that sense, the introduction of a Job Guarantee would eliminate poverty arising from unemployment and the working poor because the Government could condition the minimum wage by where it set the Job Guarantee wage. If it truly desired to end poverty among those in employment then it would set the Job Guarantee accordingly. Others argue that a more direct way of dealing with poverty and lack of income is to just provide the income via a Basic Income Guarantee (BIG). The BIG idea has captured the progressive side of politics and many on the Right. It is another one of those sneaky neo-liberal ideas that look good on the surface but are rotten not far below. Supporters of BIG are really absolving currency-issuing governments of their responsibility to use their fiscal capacities to ensure there are sufficient jobs created – whether in the non-government or government sector. They are thus going along with the neo-liberal attack on the right to work. Moreover, closer analysis reveals that the introduction of the BIG would not, under current institutional arrangements reduce poverty at all.
Note, I prefer it if commentators did not to consider this to be my only blog on the foibles of Basic Income Guarantees. Accordingly, I request that if your commenting finger is twitching to please refrain from claiming I have missed this or that.
I have written many articles and blogs about this topic. If you want to trace through the sequence of arguments please go to the Job Guarantee Category and read the blogs in order.
Then if you think I have missed something, by all means, let me have it.
The OECD has just released a technical briefing paper (May 2017) – Basic Income as a Policy Option: Technical Background Note Illustrating Costs and Distributional Implications for Selected Countries – which, as the title suggests, explores the consequences of an “unconditional transfer paid to each individual” (BIG).
It is a supporting document to a OECD policy brief (May 2017) – Basic Income as a Policy Option: Can it add up? .
The OECD now has a research program it is calling – Future of Work. It turns out that my next book (written with Joan Muysken and to be published in 2018) will examine this topic. I will have more to say about the research we are engaged in for that project in the coming weeks.
As before, you will be able to trace the notes I produce that will form the basis of this book via my blogs as the research process unfolds.
The Technical Background paper provides “a more detailed description of … [the] … analysis, and shows more comprehensive results …”
The OECD assumes that:
1. “a BI that would replace most cash benefits for working age households”.
2. “the provision of public services, such as health, education, care, or other in-kind supports is assumed to continue unchanged”.
They note that if a government was “to take existing cash benefits paid to those of working age and to spread total expenditure on these benefits equally across all those aged below normal retirement age” the “resulting BI amount would be very much lower than the poverty line for a single individual”.
Thus a “budget-neutral BI will be very far from eradicating poverty, whereas a BI set at the poverty line would be very expensive”.
They demonstrate this using their Figure 1 (which I reproduce). So to aid interpretation, you can see that for Spain, for example, a BIG based on per-capita benefit spending would come up to around 35 per cent of the poverty line only, whereas the current social assistance benefit level is closer to 60 per cent of the poverty line (For a single-person household).
In part, this arises as a result of the universality of the BIG. A targetted BIG is typically rejected by proponents. They add moral arguments to their narrative and claiming that a guaranteed minimum income is a right that all enjoy rather than only the poor.
The OECD conclude that:
… a BI at socially and politically meaningful levels would likely require additional benefit expenditures, and thus higher tax revenues to finance them. By taxing the BI alongside other incomes, its net value would fall for those in higher tax brackets, reducing its cost and making it more targeted to lower-income groups, who pay lower tax rates.
Assuming, of course, fiscal neutrality.
My reference to “current institutional arrangements” in the Introduction relates to this point. Most proponents of BIG adopt neo-liberal macroeconomic conceptions of the fiscal capacity of the government and thus fall into believing that there are financial constraints on government spending that can only be relieved with higher taxation or increased debt issuance.
Of course, those who understand Modern Monetary Theory (MMT) know, intrinsically, that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.
In that case, it could simple increase its net spending (fiscal deficit) to facilitate the introduction of a BIG. But, in that situation, there are new problems as I will explain.
Staying within the OECD’s neo-liberal frame, it notes that benefit systems and tax-free thresholds vary across countries, which means that a simple statement of who would win and who would lose by replacing benefits with a BIG is difficult to make.
In terms of their “revenue-neutral BI, adjusted amount” model, they note that (setting the BI = existing GMI levels in the income support systems for Finland, Italy, France and the UK):
1. “In each of the four countries considered here, the largest average gains from a BI would occur among the lowest-income households … This arises as those who are not covered by social protection in existing systems for whatever reason (not having sufficient past contributions to qualify or non-take-up of benefits) and who hence have the lowest incomes would gain from the introduction of a universal BI.”
2. “The richest income group would lose overall in each country too” for various reasons pertaining to each country.
3. “in many cases those in work would see the amount they receive from the BI offset by higher income taxes as tax-free amounts were abolished. This is the case in Finland, the UK and the USA for example”.
4. “In France, those on higher incomes would actually lose between 5% and 10% of their income as the value of the zero- tax band is greater than the BI amount at these income levels, but those with lower earnings would gain.”
5. “In many other countries, however, a single person without children would see (often quite substantial) gains at all income levels … In these countries, gains generally increase with earnings for lower earnings ranges: the BI would not be means tested away, and peak at the point where entitlement to existing means-tested support expires.”
6. “Gains remain substantial in Japan and the Netherlands, however, as the BI amount still exceed additional tax payments made even at relatively high earnings levels.”
7. In Italy, “introducing a BI would involve very large percentage changes in incomes at low earnings levels, but … changes are small for those with higher income levels.”
8. “In Finland, France and Italy, large losses would occur among those who receive unemployment insurance benefits or early retirement pensions … The pattern in the UK is different: as the revenue-neutral BI amount is lower than the value of GMI benefits, lower-income groups often lose.”
8. “The extent of gains … suggests that replacing existing social protection systems with a BI along the lines described here would not be budget-neutral.”
They provided Figure 4 to show the distributional consequences of a BIG (winners and losers by decile). The explanation for the patterns is complex and arises from the differences in the structure of tax and welfare systems in each country.
I will leave it to you to examine each nation’s results if you are interested in more detail.
The other approach they analysed was a “revenue-neutral BI, adjusted tax rates” – in other words, a higher BIG matched with revenue from varying taxes (up or down – depending on the current situation).
They note that setting the BI = existing GMI levels in the income support systems:
1. “In Finland and France, this is little different from the previous variant” given the nature of the existing support structures.
2. “In Italy, this variant involves a big reduction in income taxes, which significantly benefits richer households but does little to increase the incomes of many poorer households”.
3. “The opposite is the case in the UK.” The poor and the middle income groups see no change but the highest income groups “would lose significantly”.
The OECD Figure 7 (reproduced next) shows the winners and losers in detail across the income distribution.
The columns show the shifts (up and down) from BIG, tax rises and benefit losses. The diamonds show the net result in absolute terms.
The loss of benefits and increased tax burdens typically offset (or nearly) the benefits of the BIG for many cohorts.
In both models, the OECD provide more detailed results of the winners and losers by family size and structure and age breakdowns.
But the aim of the exercise was to establish the impact of the BIG on poverty?
The OECD conclude that:
1. “Although there would be more winners than losers among low-income groups under a BI … it would not prove to be an effective tool for reducing poverty”.
2. “In Finland and France, relatively good benefit coverage among poorer households means that poverty would be higher under both BI variants considered here as, despite benefit spending being much higher with a BI, it would be much less well targeted.”
3. “Even in Italy, where existing benefit spending is not well targeted on poorer households, poverty would be roughly the same in the case where existing spending was used to give everyone a BI rather than targeted on specific groups.”
4. “In the UK, the revenue-neutral BI amount is significantly below the level of existing GMI benefits, so it is perhaps unsurprising that this leads to much higher levels of poverty. However, even in the case where taxes are raised significantly to pay for a BI at the level of GMI benefits, the BI does not significantly reduce poverty.”
5. “Rather than reducing the overall headcount of those in poverty, a BI would change the composition of the income-poor population … In all countries, a reduction in poverty among those currently not covered by social protection systems would be offset by some of those who are covered by existing social protection systems and who lose out from the introduction of a BI moving into poverty.”
So there you have it. A BIG as is typically proposed is not a magic cure for poverty.
Under fiscal 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 would 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.
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.
The economy would move towards full employment by stealth – pushing workers out of the labour force rather than providing work for them.
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 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.
Thus 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.
What about an MMT-style BIG? That is, one that recognises that the government would have no need to increase taxes to facilitate the introduction of the BIG.
If there is mass unemployment, then the solution is for the government to expand its net fiscal impact (spending over taxation) and allow the deficit to rise.
So shifting from a state of mass unemployment to the introduction of a basic income guarantee would require a net government stimulus (that is, an increasing fiscal deficit).
In this regard, the basic income guarantee (funded by an increasing fiscal deficit) constitutes an indiscriminate Keynesian expansion and as it lacks any inbuilt price stabilisation mechanisms, inflationary pressures would result.
Workers who draw income from the production cycle have also added output (via their labour) to that cycle. For a given level of productivity (output per unit of input), the more people that have access to income, spend that income at market prices, but do not add to output (that is, are supported in real terms by the production of others), the greater the inflation risk.
Further, the greater the share of income generated in any period that is received by people who offer nothing in return, the higher the inflation risk.
Under these circumstances, the more people pursue the ‘freedom’ on non-work under the basic income guarantee, the worse the situation becomes because for given productivity, this would mean the supply side of the economy keeps shrinking, while the demand side remains stable (depending on the level of the stipend).
So we come back to the point that to minimise the inflation risk, the basic income stipend has to be small, which then, in turn, means the scheme hardly addresses the dignity of an independent existence. People have income security but are in poverty.
We can explore this vulnerability further.
If the government increases net spending (its deficit) to fund a generous basic income stipend then the demand for labour rises in response to the higher aggregate spending in the economy. Clearly, labour demand would higher than under a fiscally-neutral introduction of a basic income guarantee.
The real issue is what happens to labour supply.
If the stimulus was wrought via the payment of a generous basic income stipend, then it is reasonable to surmise that total labour supply would decrease.
In other words, the level of employment that coincides with ‘full employment’ where everybody who wants a job can find one is artificially reduced in the presence of the basic income guarantee (if sufficiently generous).
The real resource space available for the stimulus is thus reduced. The more people who took the stipend and withdrew from the labour force, the less real capacity there would be in the economy to respond to nominal spending growth.
With less productive workers available, the stimulus would cause what economists call ‘demand-pull’ inflation. The inflation rate is pulled up by an incompatibility of nominal spending relative to productive capacity.
Firms would compete for increasingly fewer workers and drive up wages, which would have the consequence of making the basic income stipend less attractive at the margin.
Some ‘Malibu surfers’ might decide to resume work again. The government might respond by raising taxes and/or reducing government expenditure, which would tend to raise unemployment.
The central bank, under the current regime that governs monetary policy, would also respond by raising interest rates.
The combination of these policy responses would reduce the demand pressure, but to the extent that the inflationary process had assumed a cost-push form (distributional struggle over available real income), wage and price inflation may only decline slowly.
It is thus possible that an unsustainable dynamic could be generated in which there are periodic phases of demand-pull inflation and induced cost-push inflation at low rates of unemployment, followed by contractionary policy and high rates of unemployment.
These economic outcomes are consistent with indiscriminate (generalised) Keynesian policy expansions of the past.
Our conclusion is that the introduction of a basic income guarantee which is designed to also sustain full employment (that is, to give all those who want to work the opportunity) is likely to be highly problematic given the likely inflationary consequences.
The guaranteed path to poverty reduction is to just make a job available to anyone who wanted to work but who could not currently find work at a wage that was socially inclusive and above the poverty line.
Then, if a person was fit to work and chose not to take the job under the Job Guarantee, they either had alternative income or would be poor by choice.
Poverty by choice is not a problem in my world.
British Tories looking to the future …
I thought these captures were excellent.
Its either a bitter future under the Tories or …
You are required to submit to torture.
Sydney event – August 24, 2017
For Sydney readers, here is some advance notice of an event I will be speaking at on behalf of the Unemployment Workers’ Union and the NSW Trades Hall Council.
It will be a debate between myself (proposing the superiority of employment guarantees) and Eva Cox (a long-time supporter of BIG).
It will be a free event and open to all. It will run from 14:00 to 16:00 at the Auditorium, Trades Hall, Sussex Street, Sydney.
I increased the font size on the main pages of my blog today by 1px. It seems to read better.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.