The price of freedom. Can we afford an unconditonal basic income?

This blog has previously scrutinised the case for a universal basic income and how it might play out in practice. But in a sense these are subsidiary to a more fundamental issue– namely how could a basic income be financed? An unconditional income for everyone might be theoretically desirable, a sympathetic sceptic would object, but what’s the point in speculating about how it could work when the astronomical costs of implementing it render such speculations idle fantasy? In any event, through austerity, society is furiously paddling in the opposite direction.

Firstly, it should be remembered that a basic income would likely save lots of money in certain areas. It would mean the abolition of many social security benefits and the end of the current obsession with checking up on people’s work seeking activities. No job diaries, no Work Programme, no Work Capability Assessment. There wouldn’t be any ‘benefit cheats’ under a basic income, because if the money comes without conditions, it’s impossible to cheat.

In addition, there would be less direct savings, too. I think a basic income would quickly produce a healthier society, both physically and mentally. The space, choices and ‘de-pressurisation’ it would afford, would lead to a smaller financial burden on public health services and fewer drug prescriptions. If the current neo-liberal capitalist society is, in essence, a social problem generating machine (and one which rudely lumbers society with endless disturbances to deal with), basic income is a problem reducer. Fewer problems, less expense.

But, even if all this is borne in mind, a universal basic income would seem, on the surface, to be monumentally expensive. In 2009, the economist Harry Shutt estimated, based on figures from the UK Citizen’s Income Trust, that the cost of a basic income in Britain was equivalent to an income tax rate of 57% or “around double the current basic rate of tax and national insurance”. The economics editor of the UK’s Channel 4 News, Paul Mason, believes, on a rudimentary calculation, that a subsistence level basic income of £6,000 a year would cost £290 billion. This contrasts with a current UK ‘welfare bill’ of £167 billion or 23% of government spending (memo to the British public: nearly half this amount goes on pensions). Mason factors in the benefits of a basic income: no tax relief needed for those on low or moderate incomes and lower health spending, but concedes that a “fiscal gap would be closed through raising tax – so this is not a cheap or easy solution”.

And while there are other kinds of taxes that can be utilised – a land value tax or a financial transactions tax for example – closing this fiscal gap invariably centres on one suspect, income tax.

And in the Mason case, we are talking about an income floor type of basic income. Wouldn’t the more generous kind of basic income, US$30,000 or £20,000 per person, be decisively beyond the bounds of affordability?

But it’s interesting that if you put the question of financing the basic income to the people that have thought most deeply about it, the Swiss group, Generation Basic Income, they come up with a very different solution. And Generation Basic Income aren’t proponents of a half-hearted basic income either. They advocate what might be called, ‘basic income max’ –  an annual rate of around £21,000 for every adult and half that amount for children. They will be taking that proposal into a referendum on the issue in Switzerland in 2016.

One of Generation Basic Income’s spokesmen, Enno Schmidt, is adamant that a universal basic income should not be funded out of income tax. “Whoever wants to fund basic income with income tax, has not understood it,” he says.*

Schmidt’s argument is that a basic income funded from increased income tax would be passed on in prices of goods, thus producing an endless demand for a greater basic income and generating spiralling inflation. Moreover, funding a basic income through income tax will reinforce the impression of those with well-paying jobs subsidising those without this income. “The people who earn money with their work will say: we work and pay our labouriously earned money to others who are lazy,” Schmidt argues.

His answer is that a basic income should be granted through an annual tax-free allowance and funded through a consumption tax, the equivalent, I guess, of VAT in the UK or the sales tax in the US. A consumption tax, incorporating the financing of the basic income, would, Schmidt estimates, need to be set at around 50% of prices. This is obviously much higher than it is at present – VAT is currently 20%, in the UK, for example.

Schmidt believes that, with the introduction of a ‘basic income max’ for everybody of £20k annually, prices, including wages, would fall dramatically. But with the introduction of the basic income consumption tax, prices would rise again to their original level. “Prices remain with this tax as high as they were for the consumer,” he says.

His argument is that consumption tax is a fair way of funding the basic income because how much a person contributes is determined by how much they ‘take’ in consumption. “The consumption tax is not unjust,” he says. “Whoever buys a lot, pays a lot for basic income elsewhere,” he says. Whoever takes a lot of performance from others for their benefit, contributes greatly to the basic income.”

I can certainly see the immense problems that ensue from trying to fund basic income from income tax. Over and above everything, this method involves paying for basic income in mammoth tax rises, before the benefits of unconditional income can be seen. They have to be taken on faith.

The consumption tax method of funding basic income is new and, I confess, I don’t understand all its ramifications. Two issues do immediately spring to mind, however. One is that consumption taxes are, nowadays, regressive – everyone, the billionaire and the homeless person, pays them at the same rate. In the past, (in the UK in pre-EU days for example), luxury items had a larger tax rate attached to them. Should a consumption tax for a basic income have graduated rates for more expensive goods?

The other question that arises is whether this kind of arrangement would lead to an enforced frugality? Because many people would deny themselves consumption, and thus paying the accompanying tax, if that’s where it would mostly be applied. Would a basic income, ironically, put basic goods out of the reach of most people? It’s important to remember that basic income would not, automatically, redistribute income. There would still be immensely rich people on the basis of their wage income and ownership of assets. Huge inequality could remain.

Ultimately, I’m not convinced that a universal basic income is possible without tapping the immense wealth that exists at the summit of society, held by corporations and a tiny minority of individuals. The charity Oxfam has famously estimated that a mere 85 people control as much wealth as half the population of the world. And the situation is rapidly getting worse. Oxfam says that the wealthy have captured opportunities from the poor and middle classes, skewing the political and economic system in their favour.

Real progress will not arise through tax redistribution, through increasing tax on the wealthy, as the clamour for a basic income tacitly acknowledges. It has to go deeper than that. "If change is ever to occur," asserts Gar Alperovitz in his 2002 book, America Beyond Capitalism, "an assault must ultimately be made on the underlying relationships that have produced the inequality in the first place - especially those involving control and ownership of the nation's wealth."

One of the earliest advocates of a basic income, the French thinker, Andre Gorz, thought an unconditional income would enable people to refuse work because it would bring about "the pooling of socially produced wealth". I still think we need to concentrate on the difficult part, the socialist part, which is how to produce the pooling.

*From correspondence with the author

Here is Part One

And Part Two

  

We are not the 99%

‘We are the 99%”, the Occupy movement famously proclaimed. Society is now run for the benefit of the top 1%, Occupy said. The rest of us, the 99%, are frozen out, paying for the mistakes of a small elite, in whose clutches wealth was obscenely concentrated.

I’ve written before about how, paradoxically, this depiction of society is both an underestimate (the ones really making out like bandits are the 0.1%), but also brushes over fundamentally conservative impulses among a large segment of the 99%.

But in light of the Conservative party’s victory in the UK general election, I think the second part of that argument needs firming up. We are witnessing, it seems, not just a coincidence of interest between the 1% and, roughly, the top half of society. But an active alliance to the exclusion and detriment of the rest of society. “We” are definitely not the 99%. Some animals are more equal than others.

This is not just based on a common or garden assumption that the fortunes of the rest of us depend on the 1% or 0.1% prospering. That argument is always there.  Just last week, we learnt that in 2011 nearly a fifth of UK pension fund money was “intricately linked” to the profits of BP and Shell.

No, what I’m talking about is a division between asset rich and asset poor. And a de facto alliance between the finance industry and around half of society in the UK. One based around near zero interest rates.

Despite the assumption that this is the new normal, interest rates, the level of interest charged by government central banks to commercial banks, are astoundingly low. They have been stuck at 0.5% in the UK since 2009. By way of comparison, the Bank of England base rate (interest rate) was 5.75% in July 2007, 6% in January 1999, 7% in August 1997, nearly 14% at the end of 1990, 12% in 1986 and 11.25% at the start of 1975.

And the official interest rate has profound impact on the wider economy, since the interest charged by commercial banks will reflect the so-called ‘base rate’. Back in 2007, the now deceased former Bank of England governor, Eddie George confessed to a Parliamentary committee that he had paved the way for the financial crisis, by slashing interest rates from 6% in 2001 to 3.5% two years later. This had the effect, he said, of pushing house price inflation above 25% and stimulating consumer spending in a way not seen since the late ‘80s boom. Note, that when the late ‘80s boom turned into recession, the response was to raise interest rates mercilessly. Now, post-crash, they been cut even further. Is that not a prima facie example of a reckless economic strategy?

What are the effects of ultra-low interest rates? One is to make is much easier for banks and the government to handle their huge debts. With the base rate so low, bank debts, 210% of UK GDP in 2011, are much lower than they otherwise would be. So, taken together with Quantitative Easing, government intervention which reduces the effective interest rate, insolvent financial institutions are made solvent. So the banks, especially overleveraged ones, love low interest rates.

The other main effect is to make it much cheaper to hold or take out a mortgage. Mortgages either track the base rate or follow it closely. The number of people with a mortgage, compared to renting, has certainly dropped, to around 65% of the adult population in the UK, but it is still a clear majority. Government subsidies in the ‘market’ through the £80bn Funding for Lending scheme and Help to Buy, has also had the effect of reducing the cost of mortgages.  The result for many people has been a massive compensation for the fact that wages have endured their greatest contraction since the 19^th century. “Many landlords who bought property before the financial crisis are on interest rates tracking the Bank of England base rate and have seen their costs plummet since it dropped to 0.5%,” observed an article on how Buy to Let landlords have earned 1,400% returns since the mid-90s. “They are coining it in – they’ve benefited from unprecedented property price rises and their rates are rock bottom,” said one mortgage broker. So mortgage-holders love low interest rates, too.

But others, those without assets, are definitely not coining it in. Private renters have endured rent rises of, on average, 15% since 2010, and they are accelerating. Evictions stand at a six year high. Benefit claimants, invariably without assets, have endured a torrent of hostility ranging from sanctions, the denial of help to sick and disabled people, the Bedroom Tax, and the benefit cap. There are roughly 1,000 food banks in Britain now, and just one provider, the Trussell Trust, distributed enough food last year to feed 1.1 million people. These people are paying for the sins of others.

Ultra-low interest rates, together with the deliberate restriction of the supply of newly built houses, also work to bolster perpetually rising house prices. This is clearly an advantage if you already have a mortgage or own a house outright. But not if you don’t. It’s no accident that support for the Conservatives in the recent election increased with age. In the way the British economy has been skewed in the last few decades, older and middle aged people, by and large, have housing assets. Younger people don’t.

But what is most interesting is that, to many economists, ultra-low interest rates, or to give its technical name, financial repression, means economic stagnation. This is because it discourages new investment. Investment largely takes place through borrowing and investors know, in the context of near zero interest rates, they won’t get much of a return (if interest rates are below inflation, a negative return), so they don’t bother. The game isn’t worth the candle. The dominant, supply-side philosophy, which says that if you reduce taxes on business, investment will increase simply doesn’t work. Still, a rise in government interest rates, though perennially predicted as being just around the corner, never actually happens.

All this chimes remarkably with Thomas Piketty’s assertion that, in an era of low growth, returns from capital (income from the ownership of assets, such as houses) will outpace returns from labour (income from work). It’s also why, I would suggest, society is so culturally conservative in comparison to the 1960s or ‘70s, but that’s a matter for another article.

The question is, can this alliance around low interest rates, last? Japan, the country of two ‘lost decades’, has kept interest rates below 1% since the mid-nineties (sometimes they have even been negative) and resorted to recurrent bouts of quantitative easing. The wealth and home owners have benefitted, savers and wage earners haven’t. But Japanese politics has remained staunchly conservative, with the only departure being that so-called ‘Abenomics’ isn’t implementing austerity.  

What would explode this compact between finance and a significant segment of the UK population? Undoubtedly, a large and unintended rise in interest rates. Default or write down of debt in the Eurozone may provide the spark, with debt being sold, the value going down and interest rates rises the inevitable result. The financial crisis, part two, in other words. But in its absence, the mantra, ‘we are the 99%’ simply doesn’t get to the heart of the matter.

Re-post: What is wealth creation?

The idea of celebrating ‘wealth creators’ is a constant background hum in our culture. But the noise has been turned up a notch with the UK Labour party’s election defeat and the consequent explanation that the party was too hostile to creators of wealth and entrepreneurs and didn’t understand their motivations (the condensed version is make Richard Branson feel loved)

So I thought it would be a good time to re-post an article about wealth creation from 2012, which was, specifically, a review of David Schweickart’s book, After Capitalism.

In a nutshell, our societies are intent on confusing those who create wealth with those who merely receive it. The point about capitalists, as opposed to entrepreneurs, is that they have an entirely passive role. However, if you make the leap that wealth is created by a combination of labour, ideas (entrepreneurs if you like, another form of labour), backed by investment, private or public, that doesn’t exhaust the problem. Because some economists feel that demand for private capital investment is in terminal decline; that big, capital-intense, labour employing projects don’t generate sufficient returns anymore, so capital is now funnelled in making money from rent (the ownership of assets) or finance. Nothing is created and there is immense potential, as 2008 showed, to destroy wealth in other parts of the economy …

What exactly is capitalism? That might appear a strange question to ask, fifty-plus posts into a blog about, erm, capitalism. But if you’ll forgive the tardiness, this is an inquiry that needs to be pressed.

While capitalism is a noun that attracts adjectives in abundance (crony capitalism, free-market capitalism, and now the oxymoronic humane capitalism), the noun itself remains largely uninterrogated, an unexamined presence. Everyone is supposed to understand what capitalism is – it’s all around them after all – but it’s remarkable that something so taken for granted is seldom defined. I’m convinced that many people who define themselves as anti-capitalist have only an intuitive sense of what they are against.

Perhaps you can be too close up to something to fully grasp it. Maybe you don’t really know the people you’re closest to.

David Schweickart is an American mathematician and philosopher who published a book in 2002 called After Capitalism. Aside from elucidating an alternative to capitalism, he attempted to define it and describe its consequences. After Capitalism isn’t a howl of outrage against “the system” but a rational effort to go beyond TINA (‘there is no alternative’)

Reviewing Schweickart’s book is therefore a good way to look at capitalism in the cold light of day: To examine what it is (which may be very different from how it is commonly perceived) to look at its faults, to say what’s good about it and what the alternatives to it are. There is, I believe, an unconscious and very prevalent fear, that interfering too deeply in the workings of the mysterious capitalist machine will lead either to the government controlling everything, with lethal consequences for freedom, or, alternatively, plunge us into a technological dark age and anarchistic chaos. Refusing to be awed or intimidated by what is, after all, an economic system that humanity has rejected for the vast majority of its history is a path to confronting those fears. The review will be in three parts.

Here is Schweickart speaking (with others):

Say cheese! The C-word in focus

Schweickart gives a three part definition of capitalism. Firstly, he says, the bulk of the means of production (offices, factories that produce goods and services) must be privately owned, either by corporations or individuals. This was traditionally called by the Left ‘private property’ which is unfortunate, Schweickart says, because it implies that homes, cars and toothbrushes will all be confiscated and “communalised” in any revolutionary change (think of John Lennon’s Imagine). These things were, to someone like Karl Marx, not ‘private property’ but ‘personal property’ and would not be seized by anyone.

Secondly, products are exchanged in a market. “Individual enterprises compete with one another in providing goods and services to consumers, each enterprise trying to make a profit,” says Schweickart. “This competition is the primary determinant of prices.” The state owning all enterprises and deciding that to produce by means of a plan, as in the old Soviet Union, is not capitalism. Neither is it capitalism when the local community owns most of the economy, as with social ecology.

But, says Schweickart, it is an “ideological distortion” to use “market economy” as a synonym for capitalism. They are not the same thing. Enterprises within a market economy can be organised differently. They can be controlled by their workforce. This is significant because, when it comes to imagining a “post-capitalist economy”, Schweickart says it will be populated by worker-controlled firms operating in a “decentralized market economy,” a system he calls “economic democracy”. This is contentious on several levels and I will critically examine Schweickart’s proposals in Part Three.

Lastly, he says, capitalism, to be capitalism, has to be based on wage labour. This means that most people, of working age, have to rent themselves out to others, who own the “means of production”, in order to gain the resources to survive and consume. “It is a crucial characteristic of the institution of wage labour that the goods or services produced do not belong to the workers who produce them,” says Schweickart, “but to those who supply the workers with the means of production.”

It is this reliance on wage labour, says Schweickart, that gives capitalism its susceptibility to crisis, its downturns and booms. Economic health, under capitalism, is based on what Keynes called “effective demand”: the purchasing power of the millions of wage labourers. But this demand is formed from wages or salaries, the consequence of what is negotiated from employers for whom wages are just another cost. If that happens, private investors can lose confidence and companies do not spend the profits they have amassed.

This, says Schweikart, is one of the “central contradictions” of capitalism. An in-built conflict, you might say. “Wages are both a cost of production and an essential source of effective demand,” says. “Capitalist firms are always interested in cutting costs, expanding markets and developing new products. But to the extent that the first of these goals, namely cost cutting, grows in importance relative to the other two, effective consumer demand will tend to be depressed – and hence also those “animal spirits” of investors. This can mean a stagnating economy and rising unemployment, perhaps on a global scale.”

So, if most assets are privately owned, economic exchange takes place in a market, and most people are wage labourers, a society is capitalist.

But, within these parameters there are different kinds of capitalism. The twentieth century had quite a varied palette of capitalisms. Post-war Japan and later, South Korea, were examples of one version where the state directed investment to certain favoured parts of the economy and had a bias towards exports (a type of capitalism the economist Ha-Joon Chang is enamoured by). After the Second World War, Western Europe and the US had for many years a form of managed capitalism, based on collective bargaining and the state ownership of some parts of the economy. West Germany went in less for state ownership and instead practiced ‘co-determination’ – workers were elected to company boards. After 1980, this changed, especially in the US and Britain, in that trade unions were “zapped” and much of what the state did was privatised.

This has morphed into a strange economic constellation where the rich and corporations are subsidised by the taxpayer while the rest of the population is subject to the discipline of free enterprise.

Perhaps this is just an extreme manifestation of a state of affairs that was there all along. “I watched with incredulity as businessmen ran to the government in every crisis, whining for handouts or protection from the very competition that has made this system productive,” wrote one William Sutton, Treasury secretary under US President Richard Nixon in the 1970s.

The point is that real-world capitalism can, and invariably does, radically depart from the textbook “free market” model, but it’s still capitalism.

Love me, I’m a wealth creator

We can see from this definition there is one conspicuous absentee – the “entrepreneur”. In conventional justifications of capitalism, the entrepreneur looms very large indeed, especially during economically tough times. In fact, in conventional explanations, the entrepreneur is capitalism. In the UK, Conservative business minister, Michael Fallon, says we should salute entrepreneurs as “Olympic Champions” who deserve adulation for creating wealth and jobs.

But conservatives are not alone in celebrating the entrepreneur. The left-wing economist Stewart Lansley, author of The Cost of Inequality, differentiates between the deserving and undeserving rich. One of his favourite examples is the industrial designer, James Dyson, who merits his wealth, says Lansley, in contrast to someone like Philip Green who makes money from taking over existing businesses. Dyson creates wealth, says Lansley, but Green merely transfers it to himself.

But Schweickart says both these understandings are ideological distortions. He does not deny that entrepreneurs exist or they merit a reward for their contribution, although frequently they merely copy what has gone before (new coffee shop anyone?) Any society needs people who invent new products or technologies. But what Schweickart does deny is that entrepreneurs are capitalists.

From Marx, Schweickart gets the insight that all wealth derives from labour. “As any economist will confirm,” he says, “unless labour costs are less than the value added by labour, there will be no profit.” So entrepreneurs create something and ethically are entitled to a reward. Workers literally produce goods and services. Managers supervise production. They all contribute something.

But what do capitalists do? The answer, says Schweickart, is very little. They have an entirely passive role. They watch their wealth compound by virtue of the fact that they have quite a lot in the first place. “In a capitalist society, enormous sums are paid to people who do not engage in any entrepreneurial activity or take any significant risk with their capital,” he writes.

As an example consider the National Express Group, which operates buses and trains in the UK. The major shareholders in, and therefore owners of, National Express are the Cosmen family, a Spanish family who “first entered the transport industry, in a horse-and-carriage operation, in 1728”, a hedge fund called Elliot Partners who very persistently pursue very high returns for the immensely rich people who invest in the hedge fund and an investment company called M&G. None of these investors are entrepreneurs.

We are now in the ideological belly of the beast. An entire economic system is justified by virtue of its vital role in creating wealth when it is primarily about the receiving of wealth by a small minority that other people create.

To be a capitalist, says Schweickart, you must own enough productive assets to be able to live comfortably on the income they generate. In the US, he says, and he wrote this in 2002, this comprises about one per cent of the population. Sound familiar?

The investment game

So why does putting money in the capitalist investment game, in normal times, yield results? Why do stock markets, bond markets, investment banks and currency markets produce positive returns? Most pensions are invested on the stock market and charitable foundations derive their income for grants from endowments in shares. “One gets something for nothing because someone else gets nothing for something,” explains Schweickart. “Investment income, the reward to those who have “risked” their money by channeling into financial institutions … is possible only because those who produce the goods and services of society are paid less than their productive contribution. If capitalist distribution were really in accord with the principle of contribution (as is often claimed), the investor would get nothing.”

Two things follow from this. One is that share dividends are, in Schweickart’s words, “a tax on enterprise” and should be abolished and replaced with a capital assets tax. The second is that the real problem is not the stupendous consumption of the very rich but what they do with the money they don’t consume, the money they invest. Control of investment should pass from the capitalist class to society as a whole. He calls it “social control of investment”. I will look at this in detail in part 3.

In the next part, I will examine Schweickart’s take on how far the problems of society, such as environmental degradation, a hollow democracy and poverty, can be laid at capitalism’s door. But I also want to look at the appeal of capitalism and why people are so scared of moving beyond it.

“Most workers, especially those in rich countries, have far more to lose now than just their chains.”