Wealth of a country: We need to rethink GDP

Wealth of a country: We need to rethink GDP

About 80 years ago, academics and policymakers in the US wondered if the country’s wealth was improving every year or not. They decided that the “added value” that was created in a country was the appropriate measure for wealth creation.

These policymakers looked at the quantity and price of goods sold by agriculture, deducted the value of goods acquired, like chemicals, tractors and fuel, to define the added value of agriculture in the economy. They did the same for the manufacturing and building industries and for services provided by bankers, hair dressers, restaurants and shops.

True, the wealth provided by a restaurant is short-lived, but industrial products do not last forever either. What you pay for a product or service is probably the best possible practical measure of its value. It all made sense.

Then they wondered what to do with services consumers didn’t pay for, like police and public administration. Those services were added to the “wealth of the country” at cost, since they were definitely contributing to our welfare by avoiding chaos. In 1930, public employment in the US was only seven percent of the total work force. That has most definitely increased, with more and more people entering public administration through universities similar to Norwich University.

The Gross Domestic Product, GDP, became a faith of the “Labour Church”. That it is faith and not reason was illustrated the last years by the huge impact on financial markets by statistically irrelevant changes of China’s growing GDP, like 0.5 percent, while its measuring inaccuracy is around 2.5 percent (see publications of Harry Wu, economics professor at Hitotsubashi University in Tokyo).

Since 1970 machines, robots and computers have massively reduced the work force in agriculture and industry, considerably reducing the “added value” in those sectors.

I will now give examples of why GDP is not a good measure of wealth anymore.

  • During the seventies, many European countries tried to solve rising unemployment following productivity gains in industry by creating new jobs in public service. Whether the newly appointed public servant did useful things or not, it supposedly increased the wealth of the country, since its cost, not its value, was counted in the GDP,
  • Imagine that parents living in a village of the US have organised themselves to collectively watch their young kids and organise festivities for the community. That sort of work is not a part of the GDP. In Sweden, it is. Towns there enroll parents to take care of kids and organise parties and other events. This way, voluntary work is converted into paid work and thus GDP.
  • If a country, for example Greece, drastically increases the number of its public servants and increases their salaries, they boost their GDP and make the IMF, the EU and creditors happy until the deadline comes to pay the loans used to fund the fantasy-growth of their GDP.

The examples show the same root cause of the problem, being the belief that unpaid labour has no value and paid labour has value even if the work is useless.

The approximation to count public services at cost is a design error in the GDP. It induces some countries to implement wrong policies to get a “better” GDP, at least for a short time, the time to get re-elected.

A nation is wealthy if it takes care of its people. For example, Belgium distributes an average of €550 in cash and another €420 pay-in-kind (free education and health care) per month per citizen. Many countries are now distributing a lot of money to the population (see this Economist graph). All of them do that in an incredibly complex way because the system grew over decades without being re-engineered. It is very likely that most wealthy countries will streamline their social security systems to make them more efficient and fair, like Finland is currently doing. No doubt that version 2.0 of our social security systems will contain a “basic income” core.

Shortly, my friends, within a few decades, the purchasing power distributed by a country to its citizens will replace the GDP as the measure of their wealth.

The Labour Church

The Labour Church

Policy makers around the world adhere to the “labour Church”. Their dogma is that wealth is derived from labour. Nearly all economists in the world are priests of this Church, their Bible being Paul Samuelson’s textbook on economics.

In primitive economies “labour” was not a relevant concept. Villagers went fishing or hunting, taking care of their kids and preparing food without being aware that they were “working”. Later, the exchange of products and services in-kind became more important, leaving the boundaries of the villages. The use of coin money in 600 BC reinforced exchange of goods and services as the crucial building block of the economic system. However, paid labour was not a part of the economic system. Domestic services were largely remunerated by the provision of lodging, food, and clothes. The concept of paying for a day’s work emerged for services of soldiers when it was difficult to reward them in another way.

The number of people on “day pay” remained small until deep into the 19th century because “piece work” – being paid per unit produced – was the logical standard to pay workers. Measuring hours in factories did not happen until industrial production of clocks emerged in the middle of the 19th century. But the real trigger to pay workers by the hour and not by piece was the introduction of new production systems in some factories, such as in the assembly lines of Henry Ford. It became too difficult to evaluate the contribution of each worker to the value of the end-product.

An hourly rate makes sense because an hour is easy to measure. But it does not measure what you pay for: the added value of the service provided in that hour. The “paid hour ideology” has been built on this approximation and has now a massive “market share” of the way people get paid for their work. The labour Church does not mind the approximation regarding “added value”; a person with a useless job derives money and lifetime rights from his or her “work”, while parents working really hard to raise their kid to become a brilliant engineer do not get any financial reward, even if their kid is the creator of the next big invention helping propel humanity forward.

In fact, the “labour Church” defends a very new religion: if the time frame of the economic history of the world is scaled to a 24 hours day, hourly paid wages were introduced just 24 minutes ago.

Sharing food and helping each other, the values underlying the Basic Income ideology, are as old as humanity.

Selling the Basic Income

Selling the Basic Income

 

A Basic Income Guarantee (BIG) is an obvious policy solution as machines and computers replace labour to an extent that the “income through labour”- model is coming to an end.

The challenge is to “sell” BIG to all those who still believe full employment is possible and desirable.

We know we are dead right about BIG. The challenge is to convince a mass of people who are not interested because their minds are “blocked” by something they learned previously that is in contradiction with BIG. The door in their brains to think about the topic in a rational way is closed. We should not be angry – that is how nature works.

This is the case for most economists: they have been trained to accept the economic theory diffused by the textbooks of Paul Samuelson since the middle of the last century that labour and capital are essential “production factors” and pillars in the economy.

Now that many factories produce smartphones and cars in fully automated lines – without labour – and China showed the world that a country can develop an economy without capital, just by creating money. However, 99 percent of those economists persist in believing in the old model because they studied it so thoroughly to earn their degree. Later they repeated this old line of thinking so often to others that their minds are physically incapable of thinking anything else.

Their thinking is just as outdated as the gold standard. I intend to write short contributions highlighting the growing weakness of the current mainstream economic system.

 

US Budget under BIG

Introduction.

This budget assumes public finance all levels combined, and no change in overall tax income, which is currently 4131 billion $.

Today, no more than 8% of the population is required to produce all agricultural products, industrial products and buildings required. That is why the state needs to distribute purchasing power to 100% of the population. Jobs in the service sector will be triggered by the purchasing power (the current doctrine is that we should create jobs to generate purchasing power, but that is an instable system).

This increased efficiency has created a societal system with can create welfare and therefore has a huge common, “social”, capital. Every citizen should get a dividend from that capital. We call it the social dividend or “Basic Income Grant”; an income which we don’t need to work for, just like rich people live from their heritage. All citizens get this social dividend. Some part in cash, some part in kind. The amount in cash depends on their age (see table in the budget).

The amount in kind is given in education vouchers, healthcare vouchers and “coaching” vouchers. Citizens choose their education, healthcare and coaching service provider who gets money from the “social dividend in kind” fund, provided by the state budget.

Both education and healthcare will see drastic changes the coming years, due to the advent of Internet. The country will witness an unprecedented increase in education and healthcare – entrepreneurs.

Every citizen will have the right to be “coached”, which will help all citizens to address problems and opportunities in their lives. This coaching system will hugely reduce criminality and improve productivity.

Since working people will get a social dividend of 500 $ per month, somebody earning 1500 $ net now would have the same total income if he/she gets a net salary of 1000 $ net. In practice, the pay check will mention BIG: 500 $ and Work income: 1000 $ instead of 1500 $ work income now. That is why the in the budget figures, the cost for public servants, but also workers in education and healthcare seems low: a part of their salary is paid, so to speak, by the BIG.

BIG BIG
Age cash vouchers total number cash dividend coaching
$ pp pm $ pp pm $ pp pm million billion $ p year billion $ p y billion $
0-17 150 300 450 75 135.0 270.0
18-25 250 300 550 41 123.0 147.6
26-67 500 300 800 169 1014.0 608.4
67 + 1000 300 1300 35 420.0 126.0
320 1692.0 1152.0 2844.0 17.8% GDP

 

Other public expenses:

public service employees
Net $ per month $ cash total total employed billion $/y
extra salary social cash compen- million budget
dividend salary sation
national administration 2450 500 2950 3450 2.5 74
local admin 2150 500 2650 3150 5 129
Army 1650 500 2150 2650 0.6 12
police + 1750 500 2250 2300 3 63
Justice 1950 500 2450 2950 0.3 7
11.4 284.4 284.4
military excluding personnel 275
Interest payments 230
Public investments and current purchases 500
Total public expenditure except loan repayments 4133.4

 

Within the BIG, a value of 1152 billion $ is paid in kind, in the form of vouchers. These vouchers go to service providers who get cash for it from the government budget. The service providers use this money to pay the extra salary over the BIG to nearly 25 million people employed by those service providers in education, health care and coaching. The demand side of these services is completely subsidised. The offer side is market driven while the government needs to define the rules.

total total net employed billion $ p y
cash compensation million budget
education 2200 500 2700 3200 8 211
healthcare 2200 500 2700 3200 13 343
coaching 2200 500 2700 3200 3.7 98
24.7 652.08
products and services relating to healthcare, education and coaching 500
cost to be covered by BIG vouchers 1152.08

Greece budget proposal 2015

Introduction.

This budget does not take into account the debt problem. The author thinks that the only realistic way out of the crisis is to give a debt moratorium of 5 years and discuss that topic 3 years from now.

The depth of the Greek crisis is an opportunity to depart from the classical views regarding the organisation of a state, dating back to the 1950’s, to implement a system taking into account the two recent and biggest revolutions in mankind:

  1. the human brain aid (computers, pda ..) replacing in part the brain power of humans, like motors did replace the muscles of Man and horses 200 years ago.
  2. The word wide free and fast communication network.

Today, only 8% of the population is needed to produce everything: food, industrial products and buildings. The model of the fifties is “job-centric”. The model presented here is the model of 2015: it is based on distribution of purchasing power. Jobs will follow the purchasing power (the current doctrine is that we should create jobs to generate purchasing power), for those who are still thinking in terms of jobs.

Greece, like many other countries, has a long history leading to 2015, the age were machines largely replace man to produce goods. Any citizen has the right to benefit from the heritage of his country, which is now capable to produce all goods we need with just 8% of the population.

We have created a huge social capital. Every citizen should get a dividend from that capital. We call it the social dividend or “basic income”, an income where we don’t need to work for, just like rich people live from their heritage. All citizens get this social dividend. Some part in cash, some part in kind. The amount in cash depends on their age (see table in the budget).

The amount in kind is given in education checks, healthcare checks and “coaching” checks. Citizens choose their education, healthcare and coaching service provider who gets money from this “social dividend in kind” fund within the state budget.

Both education and healthcare will see drastic changes the coming years, due to aforementioned massive global revolutions. The country will witness an unprecedented increase in education and healthcare – entrepreneurs.

Those services may even attract customers from abroad.

Every citizen will have the right to be “coached”, which will help all citizens to address problems and opportunities in their lives. This coaching system will hugely reduce criminality and improve productivity.

Since working people will get a social dividend of 350 € per month, somebody earning 1100 € net now would have the same total income if he/she gets a net salary of 750 €. The basic income system makes labour less expensive for the employer, the employer being public or private.

That is why the in the budget figures, the cost for public servants, but also for education and healthcare looks so low: a part of their salary is paid, so to speak, by the social dividend.

social security social dividend : basic income
age cash cheques total number cash dividend coaching
€ pp pm € pp pm € pp pm billion €/year billion €/y billion €/y
0-17 75 50 125 2270000 2.0 1.4
18-25 250 50 300 1180000 3.5 0.7
26-60 350 50 400 5130000 21.5 3.1
61-67 400 50 450 1020000 4.9 0.6
68 + 500 50 550 1400000 8.4 0.8
11000000 40.4 6.6 47.0
sum
public service employees (remuneration on top of social dividend)
net € pp pm billion €/y
salary soc divid. total budget
national 1050 350 1400 100000 1.260
local 800 350 1150 100000 0.960
army 1050 350 1400 1000 0.013
police + 900 350 1250 100000 1.080
justice 1050 350 1400 10000 0.126 3.4
311000
Public investments and current purchases 16
Total public expenditure except loan repayments 66.5

 

Obviously, some assumptions have been made regarding numbers of people kept in public service and the reorganisation of public services relating to security (police, army, ..) which could be looked at in a different way. Education, healthcare and coaching are paid by the government through the social dividend in kind. The demand side remains “public” and fully subsidised. The “offer”–side becomes, to some extent, market driven. The cost is only 6.6 billion because a significant part of the cost of these salaries is paid through the basic income grant to the people working in those branches.

 

subsidised by social security cheques
education 800 500 1300 240000 2.304
healthcare 800 500 1300 240000 2.304
coaching 800 500 1300 200000 1.920 6.5

On the public income side, VAT is increased to 30% and collected better to move it from 14 to 24 billion €. Other consumption tax is increased from 10.7 to 15 billion € mainly by increasing prices for fuel and a new consumer tax on electricity of 10 eurocent per kwh should bring 4 billion €. Social security contributions are abolished. Payroll tax will be levied only above a net income -including basic income- of 1150 € per month . It is expected that the majority of the employees will not pay payroll taxes anymore. However, anything earned above that threshold will be taxed at 50%. We expect this tax to generate 14.4 billion €. Corporate income tax is replaced by corporate eco-tax. This is a tax on energy consumption mainly, but not exclusively. Taxes on property should generate more and a tax on financial transactions should bring another 1.5 billion €

TAXES PLAN NOW
Consumption billion €/y
   VAT 23 14
   Other 15 10.7
   tax on electricity 4
Labor
   sociial security levy 0 22
   personal income 14.4 13.5
Corporate/Wealth
   Corporate income 0 2.2
   Corporate ecotax 4
   Property 5 3.7
   Financial transaction taxes 1.5
Total 66.9 66.1