Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

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Saturday, March 11, 2017

The basic income

Although expanding free trade has been good for the world as a whole and for developing countries like China, India, Brazil, Mexico and so on, it has been bad for the working class in developed countries.  Real incomes for the already rich in rich countries have risen.  Real incomes in poor countries have risen too, by as much in percentage terms.  But the bottom half of the income pyramid in developed countries has had virtually no growth.  And these calcs were made before the GFC.  Since then, the real incomes of the bottom 2/3rds of the population in developed countries have stagnated, even as real GDP has risen, and the incomes of the top 3rd/quarter/one tenth have risen, extending the 1988 to 2008 trend.

You can see all this in the graphic  below.


It is these people who voted for Trump, for Brexit, for Pauline Hanson's One Nation Party and will probably vote for right-wing populists in Europe's upcoming elections this year.

Opening up world trade has undoubtedly been good for world growth.  Higher growth in China, India, Brazil, Mexico etc., has lifted billions of people out of abject poverty, and that's a good thing.  But there have been losers, and they are angry.

So how do we make incomes more equal in developed countries, without tearing up trade agreements and without reducing growth rates?

One answer is the social wage or basic income.  I did my thesis on the negative income tax, which is pretty similar to the social wage.  How it works is simple.  The state pays everybody a monthly or fortnightly income.  This replaces the dole (unemployment benefit), the old age pension, disability pensions and family income supplements.  Everybody pays income tax, and income tax starts cutting in at zero income instead of having some tax-free minimum, so that for every dollar/pound/euro earned, the net payment (social wage less tax) declines.  Now in some developed countries, if you are receiving the dole (unemployment benefit)  this "clawback rate" is 100%.  In Australia it is 50%. In some cases, the cumulative loss of benefits can exceed 100% of earned income, and that's before you account for the cost of clothes to work in and transport fares to get to and from work.  This is a massive disincentive to work, especially when a lot of the work available these days is part-time.

Plus you need a whole department to administer the dole, the old age pension, disability benefits and family income support.  The rules of the negative income tax are simple, and most of the complex bureaucracy that is required to determine who is entitled to get support and how much they are entitled to can be eliminated.

How much would it cost?  In the analysis I did in my thesis 40 years ago, to lift all South Africans above the poverty line it would have cost 7% of GDP.  But in developed economies it would cost much less, because they already have a whole panoply of welfare measures, which it would replace.  And most of the analysts who have looked at the social wage reckon that its effect of incentives would actually increase output and incomes so that it paid for itself.

A basic income would be only one tool in the toolbox to reduce developed country inequality.  Others might be: a higher minimum wage, a wealth tax, greater educational equality, and in the USA, a decent public health system.  But a basic income would be a big first step on that road.

Some further reading (and watching)

Why we should give everybody a basic income:

Finland trials plans of basic income for the unemployed.

The basic income

Could Trump support a basic income?

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