Addressing uncertainty in basic income

Addressing uncertainty in basic income

Written by: Michael A Lewis

As someone interested in basic income (BI), I read a fair amount about the topic. I read pieces by supporters and opponents, as well as those who might be considered more neutral. I’m often struck by the degree of uncertainty concerning implementation of BI.

A popular argument for BI these days is based on concerns about the possibility of mass technological unemployment. Some in the “tech industry” contend that BI will become necessary as automation replaces more and more human laborers in the years to come. This has led to a debate among economists and others regarding whether automation will result in a net loss of jobs (for humans) big enough to warrant the need for something like BI. Both sides of this debate bring evidence to make their cases. But in the end, we simply don’t know for certain if and when automation will lead to a net loss of jobs for us human beings.

Assuming BI might be implemented in a society which would still require a fair amount of human labor power, we’d like to know what impact BI would have on people’s inclination to sell their labor or, more commonly, “work.” A BI could affect labor supply in at least two ways.

One is that people who received an income they didn’t have to work for may be inclined to work less. The second possible effect has to do with how BI would be financed. If it were financed by an increase in income taxes, this could also reduce labor supply. The reason is that a large proportion of many people’s incomes are earnings, meaning that an income tax is largely a wage tax. A higher wage tax has two possible effects on labor supply.

On the one hand, such an increase could cause people to work less because with the higher tax (and all else equal) their take home pay is smaller than it was before, creating an incentive to work less. On the other hand, a smaller take home pay means one would have to work more than before to maintain their standard of living. This would create an incentive for people to work more not less. If BI were implemented, we have no way of knowing which of these effects would dominate the other.

Leaving the labor market (but still related to it), another area of uncertainty has to do with how people would spend their time, assuming they did reduce their labor supply. Opponents of BI worry that people would use their time “unproductively”, while proponents tend to argue that individuals would engage in more care work or pursue “self-actualization” through pursuing education, writing poetry, starting a business, and the like. But if we’re being honest, regardless of which side of the debate we’re on, we must admit that we don’t have much of an idea what the relative proportion of unproductive to productive activities would be, assuming we could even agree on how to categorize activities as unproductive or productive.

A third area of uncertainty is related to personal relations and household composition. BI could have an effect on who lives with whom, who marries whom, who has kids or not (as well as how many to have), etc. As a society, we obviously differ when it comes to our values about such matters, meaning we might differ on the desirability of BI. But we don’t really know for sure how implementation of BI would affect “family life.”

Now I’m not saying we’re completely in the dark when it comes to questions of BI’s effect on labor supply, use of non-wage time, etc. Economists, sociologists, and others can draw on theory to help us think through these matters. And, by this point, there’ve been several experiments/studies (as well as more recent “startup” studies) which offer a lens on what might happen if BI were implemented. But we should be careful not to overestimate how much help we can receive from such experts, as well as the studies that have been (and are being) conducted.

Considering the many BI experiments (as well as proposed ones) around the world, we need to be cautious about what lessons might be learned. The philosopher Nancy Cartwright, well known for her work in the philosophy of science, has a phrase that’s quite relevant to this discussion: “it works somewhere.” Cartwright frequently utters this phrase within the context of discussing randomized controlled trials (RCTs), the so called gold standard of empirical research in the social sciences. Her point is that even if a well-designed RCT shows that a policy works in one context, that doesn’t necessarily mean it’ll work in another one. This is relevant to BI studies because they’re being conducted, or proposed, in a variety of different contexts. So if we find out that something works in India or Finland, that doesn’t mean it’ll work in Japan or the U.S. In the article cited above, Cartwright goes into great detail about why generalizing experimental findings from one context to another can be so difficult. For those interested in what we might learn from BI experiments, I think her work is quite instructive.

When engineers design systems, such as buildings, bridges, etc., they also must face uncertainties. They don’t know for sure what loads the systems will end up having to bear, they don’t know if there will be earthquakes, they don’t know how forceful the winds will be, etc. One of the things engineers do to deal with such uncertainties is include safety factors in their designs.

For example, suppose an engineer is designing a structure and wind, seismic, and other data indicate that it’ll have to bear a load of 1000 kg. Suppose also that the engineer wants a safety factor of five. Then the load which the structure should be able to bear isn’t 1000 kg but 5×1000 = 5000 kg. So a safety factor is a multiple used to increase the strength or robustness of a system beyond that which is thought to be required to account for uncertainty in what’s thought to be required.

Those of us designing policies don’t have the luxury of being able to use simple equations, which include safety factors, the way engineers do. But perhaps we should adopt a similar safety factor mentality. Implementation of BI would be a complicated undertaking, involving a great deal of uncertainty. Perhaps BI supporters should consider how to increase its robustness in response to labor supply reductions, as well as other unanticipated effects. I admit I’m not exactly sure how to do this. But I believe it’s something worth thinking about.

Michael Lewis

Raine Tiessalo, “Universal basic income ‘useless’, says Finland’s biggest union”

Raine Tiessalo, “Universal basic income ‘useless’, says Finland’s biggest union”

A test of UBI began this year in Finland in which a monthly stipend is paid to randomly-selected unemployed recipients even if they become employed. Ilkka Kaukoranta, chief economist of the Central Organization of Finnish Trade Unions (SAK), says it’s the wrong direction.

So writes Raine Tiessalo for online newspaper The Independent. Tiessalo quotes Kaukoranta describing a Finnish UBI as “impossibly expensive”, though SAK’s opposition may be related to potential loss of union membership and bargaining power if UBI made trade unions less relevant.

Raine Tiessalo, “Universal basic income ‘useless’, says Finland’s biggest union” (Februaury 9, 2017)

I see no plan: Basic income as purchasing power

I see no plan: Basic income as purchasing power

During the 20th century, the increase in purchasing power of the workers in Western Europe was negotiated by the labour unions and paid for by the spectacular increase in productivity of agriculture and industry: we made more and better products with less workers. This yielded generous increases of net salaries and on top of that it allowed governments to pay for schools and health care. This resulted in the general belief that the wealth of a nation is the result of labour, because it paid not only for salaries, but also for social security and other government spending. Since then, the world elite believes that labour participation is the basis of our social security system and our wealth.

There are a few problems with this belief, however.

The first problem is that with the collapse of communism in 1989, the size of the economy grew from 1 billion participants (Europe, the US, Japan and a few small countries) to 6 billion. Cheap labour supply became abundant while the world wide bargaining power of labour unions became irrelevant. Many manufacturing companies moved their production to low cost countries. The “low cost” of these countries was mainly due to the insignificant tax on labour there, compared to Western Europe, where the labour tax was between 100 and 200% of the (higher) net salaries. The saving of the high labour tax was a major cost reduction driver for companies which moved their production, much more than the net salaries of the highly qualified, well trained, loyal, productive local workers which lost their jobs. Political Europe was sleeping apparently, not realising that the corresponding financing of the social security was moving away with the factories.

The second problem is that increasingly machines, robots and computers used in production of goods and services decrease the need for human workers.

The third problem is that social security contributions from the rapidly increasing public and subsidised employment are not real, because the wallet which collects them is the same wallet which pays them: the state.

The fourth problem is that life expectancy is growing, affecting the cost for the state paid pensions. Since health care cost is much higher in old age, the cost of state paid health care increases as well.

The fifth problem is that income from savings is trending toward zero. Citizens owning property are mostly excluded from social aid provided by the state, since they are supposed to derive an income from their property. This induces a new type of poverty. Moreover, the decrease in income from capital affects overall consumer spending, also within the working class.

As a consequence, the purchasing power of the working class has stalled in Western Europe and the US since 2000. This is hidden in the national accounts because in those figures the “income” which households derive from labour is the “gross” income including social security contributions and income taxes. The latter have risen.

Some political parties start to plead the reduction of social security benefits, which would be the start of a negative spiral.

The labour tax based system is structurally unstable. When sales decrease due to economic slowdown and workers are laid off, their income decreases so they buy less leading to further sales decreases and job losses in other businesses. The “Labour Church” will tell you that the central bank then should decrease the interest rate to stimulate investment and spending. This is speculative and slow to start effect. In any case, the interest rate is now zero and hence cannot be reduced anymore. The “Labour Church” system is in deep trouble. They seem to hope for a miracle: I see no “Plan”.

There is however one stabilising factor, our social security, which makes people continue to spend money when they have no work. This hints to the fact that “Purchasing Power” could be the solution to our stalled economic system. When the economy weakens, we should inject additional purchasing power into the economy. When the economy gets overheated, we could reduce the purchasing power injection.

Purchasing Power injection, Basic Income, should replace “labour” as the motor and regulator of our economic system. The distributed purchasing power generates spending, entrepreneurship and work for those who want to earn more money. Tax on labour can only be an auxiliary source of funding if we want such a system to be stable.

Basic Income supporters are a minority still. But we have a Plan.


Social security and social inclusion

Social security and social inclusion

Social security emerged in Western Europe with voluntary solidarity contributions within labour unions in the late 19th century developing into a mandatory insurance contribution organised by the state in 1950. A mandatory insurance payable to the state is a tax, in this case a tax on labour. Because the employer pays all if it, it does not matter if legislation categorises it as employee’s contribution or employer’s contribution.

In addition, the 20th century saw the birth of a new type of tax: the income tax, designed to capture the total income of wealthy people. However, after 1950 the income tax started to hit the rising incomes of the working class. It became the second component of the tax on labour. Zero in 1930, insignificant in 1950, the total tax on labour is now by far the most important tax income for Western European states. It varies between 50 to 200 percent of the net labour income of the workers, making the cost of labour on average twice as high compared to what the worker gets.

The history of its creation explains why social security is linked to labour participation. The political class assimilates “job creation” to welfare: the more people work, and the longer they do, the more taxes are paid and the better for the state budget. This thinking induced many countries to increase the age of retirement. Obliging older people to work longer when there is a five-fold increase of unemployed young people waiting for a job, is absurd. It is an example of wrong collective thinking by people indoctrinated by the “Labour Church”, because they assume “full employment” is still possible.

In the cultural sector, the high tax on labour is a problem. We can watch fantastic artists for free on television. High taxes on labour increase the wage cost of artists. Most local performances cannot compete unless they get subsidies, which is now current practice in most Western European countries. Would it not be more straightforward to have no taxes and no subsidies in the cultural sector?

Education and healthcare are heavily subsidised in many countries to cover the cost of their employees including the tax on their labour and other expenses. Their net finances would be the same if taxes on labour would be set to zero and subsidies lowered with the same amount.

Same for services completely paid by our tax money like police, justice, the military, federal and local administration: the labour tax cost included into the payroll expenditure of the state is paid and collected by the state, the same wallet. Setting their labour tax to zero would not affect their net finances.

In Western Europe, 40 to 50 percent of employment is publicly funded which means the corresponding labour tax has no effect on net state receipts.

For a state, the real proceeds of labour tax come from the non-subsidised private sector. Hence, the proceeds are much lower than what policymakers are tempted to believe while looking at public accounts which provide gross rather than netted labour tax income figures.

Meanwhile, the high tax on labour effectively increases the cost of services for those who want their shoes, a washing machine or a bike to be repaired.  Mind that the “Labour Church” does not allow citizens to trade services.  Services should be acquired from service companies because allowing citizen’s to work for each other by exchanging services would be unfair competition to the firms selling such services.

These firms charge a labour cost at least twice as high as what their workers get, because of the tax on labour. This higher price obviously reduces the demand for repair services and many people try to paint their house themselves, maintain their garden themselves and their kids drive bikes without proper lights or brakes.  The tax on labour reduces exchange of services, hence it reduces the creation of wealth in the proximity economy.

In Western Europe, the labour Church created this barrier to social inclusion by segregating contractual labour from voluntary and informal work. Helping each other in an informal way, like our grandparents did, is not permitted anymore: the labour tax collectors are chasing offenders. However, poor people can get help from subsidised workers if they successfully find and convince the right state personnel that they are really poor. Clearly, the economic religion put in place by the “Labour Church” does not empower the population to help each other.

Would it not be more effective to convert the directive, complex, fraud-prone and costly social security allowance system into its basic income equivalent and allow the social economy to thrive again by allowing people to work for each other in an informal way, like our ancestors did until 50 years ago? 

Gary Herman, “The New Unionism—Part 1: Precarity, Work and the Basic Income”

Gary Herman, “The New Unionism—Part 1: Precarity, Work and the Basic Income”

Writing in Union Solidarity International, Gary Herman recommends that unions add universal basic income to their list of demands.

The basic income is a response to increasing job insecurity and the spread of various forms of on-demand employment, from conventional freelancing to zero-hours contracts. Its supporters argue that unions wishing to fight for a fairer economic settlement should adopt BI as a key demand, although there is certainly evidence of ambivalence towards it within the union movement.

In making the case for unions to promote a basic income, Herman draws from the work of economist (and BIEN cofounder) Guy Standing and sociologist Erik Olin Wright.

Read the article here:

Gary Herman, “The New Unionism—Part 1: Precarity, Work and the Basic Income,” Union Solidarity International, May 18, 2016.

Photo CC Raymond “Dmitri” Beljan (flickr)