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(This review, by Samuel Brittan, was first published under the title In Praise of Free Lunches in the Times Literary Supplement of the 24th August 2001. It is reprinted by permission of Samuel Brittan and the Times Literary Supplement)
One of the myths of New Labour is that paid work is the answer to most social problems. There is no need to argue about the miseries that arise when people able and willing to work are not able to find a job that makes them better off than being on the dole. Nor need anyone deny that people have become disheartened and in the fashionable jargon felt socially excluded through lack of work other than dead end jobs. Some of these have had their self respect and whole outlook on life transformed by appropriate job opportunities.
But it is a fatal logical slide to move from here to insisting that as many people as possible should work for cash, even if that is not what they want to do or that is not the best way of using their enthusiasms and skills. The obvious vulnerability of current policies is in the pressure placed on unmarried mothers to take up paid employment when in many cases the most useful thing they can do would be to look after their children.
The issue is wider. The mistake of Karl Marx was to thunder against private capital and investment income. The problem with them is not that they exist but that too few of us have them. One of the great advantages of the old professional classes is that they had some personal funds on which to fall back and were not completely dependent on wages and salaries. This gave them a degree of independence in dealing with employers or clients as well as a nest egg on which to fall back in difficult times. Last but by no means least, it was possible for younger or more unconventional people to take time off before or during their careers to travel round the world, follow an artistic bent on a modest income, give their time and energy to good causes, or engage in a little riotous living.
Unfortunately most defenders of market capitalism have chosen to ignore the existence of unearned income and shut their eyes to the ample evidence of its existence among affluent Americans as well as in the European upper middle class. Yet this easy way out was not taken by F.A. Hayek, Lady Thatcher’s favourite economic philosopher. Hayek went out of his way to praise the existence of the person of independent means, who was responsible for much of the innovation of the last few centuries — whether in high culture, in the launch of good causes such as the anti-slavery campaign or the more mundane development of the art of living including a great variety of hobbies and sports which were afterwards taken up by the mass of the population. Without the support of modest independent wealth we would not have had Private Eye; and without the Rowntree Fund British Opposition parties would have very meagre research support.
Indeed Hayek went so far as to say that if there were no other way it would be better to grant an independent income to one householder in a hundred chosen by lot than not to have it at all. In the 40 years and more since his Constitution of Liberty was published, productivity in the developed world has made great strides. Are we not now approaching a position where some non-wage income could be available not to one in a hundred but to all citizens?
There is also a very modern reason for advocating some form of non-work or property income for all. In recent times there has been a greater dispersion of market rewards for different types of work — usually labelled growing inequality. This could well be a passing phase in economic development; but even passing phases can last several decades. It is surely better that those without the skills required in the modern economy – including among the skills a street-wise instinct for market opportunities – should be able to do some low-paid work, supplemented by other sources of income, and not be forced into relying solely on the dole. Many elements of such an approach exist already in Labour’s New Deal and social security reforms, which could be taken in gradual steps towards a universal minimum income and away from the present puritanical obsessions.
Indeed there is today an organised movement towards what is known as Basic Income. In Europe its support tends to come from left-Liberal and Green groups. It is especially strong in Ireland and Finland; but it also has a certain amount of support among the US Democrats. But it is not only among the unorthodox Left that we find such ideas. They were inherent, even if he did not realise it, in the old slogan of Anthony Eden about a property-owning democracy. Milton Friedman was one of the pioneers of a negative income tax which would be received by those whose income fell below a certain threshold, instead of the present mass of conditional social security payments for pensions, unemployment and other contingencies. As one would expect, John Stuart Mill was sympathetic. Before World War II a thoughtful Liberal politician, Lady Rhys Williams, put forward the idea of a social dividend for all as an alternative to the Beveridge proposals.
There is now enough interest to warrant the publication of two series of essays on a proposal for a Universal Basic Income (UBI) as defined by Philippe van Parijs, who holds the Hoover Chair of Economic and Social Ethics at the Catholic University of Louvain, and who is at the intellectual centre of the contemporary movement. Much the most concise and clearest exposition is in the Beacon Press book.
Van Parijs bases his advocacy on a specific theory of real freedom for all which he has outlined in earlier works. Of course any kind of support for basic income must be based on a value judgment. But such a judgment is surely more persuasive if it can fasten on to a social form which has existed for many years, such as investment income, but which growing affluence provides us an opportunity of extending.
It has to be said too that such proposals have also attracted support for bad reasons from economic Luddites who believe that there is only a certain amount of work to go round, which needs to be rationed and shared. Such advocates see them as a sort of bribe for people to accept a compulsory shortening of the working week, work-sharing and other wealth-destroying ideas. Opposition comes from mainline social democrats whose trade unions backers have traditionally thought in terms of paid work and statutory minimum wages as a principal weapon against poverty. In the US opposition comes not only from instinctive conservatives, but also from radicals such as Prof Edmund Phelps who is outraged by the idea of abandoning the work ethic and providing benefits to those who prefer to surf off Malibu in the afternoon and smoke pot all night.
Some of the Amsterdam contributors do their cause no favour by linking it up with the development of the European Social Charter and their assumption that a basic income scheme would require harmonisation over the whole EU area. Presumably what they have in mind is that workers would otherwise move as free riders to countries which had such a scheme in operation. So far however the problem in the European Union has been inadequate rather than excessive mobility of labour. If worries of this kind are serious in an enlarged EU it would be possible to restrict the scheme to long-time residents and extend it if and when the fears turn out to prove unfounded.
The most persuasive way of putting the matter is in terms of what Winston Churchill once called a ladder and a floor. He espoused a minimum below which no-one could fall irrespective of abilities, luck, training, effort or anything else; but above that there is a ladder on which anyone could rise to whatever level their ability, luck and energy could take them. A minimum income in this sense needs to be sharply distinguished from a compulsory minimum wage which contributes to unemployment and is a breach of the human right to make a contract for services from which both sides benefit.
Persuasion is made more difficult because of the bewildering variety in which such proposals come. Some of the complexity is inherent in the subject. But it is aggravated by the confusion among many advocates between administrative forms and economic substance, and by the variety of labels for this set of ideas.
The conventional response is that if people can survive without working many will do just this, that the national income will collapse and the scheme therefore prove self-destructive. This was indeed the objection to the Speenhamland system introduced in the UK by some magistrates at the beginning of the 19th century under which labouring wages were made up to some conventional minimum. The political economists at the time rightly pointed to its disincentive effects, although that did not justify the harsher aspects of the New Poor Law which succeeded it in 1834.
There has been progress since the early 19th century. The reason why Speenhamland could not work was that the prevailing level of normal wages was hardly above subsistence. Therefore it really did not pay unskilled agricultural workers to take a job unless they were physically forced to do so. The hope today is that productivity and the general standard of living have reached a level well above even conventional subsistence. In other words it should pay people to take a job. There is however no hope of reaching the goal of capitalism without the puritan ethic unless it is recognised that poverty is not just a relative concept. So long as we accept some compromise whereby there is both an absolute and a relative element, the gap between Churchill’s floor and average pay levels can rise with national productivity.
The majority of adults would want to do paid work as well. The Malibu surfers are not typical. Most of the old upper bourgeoisie also worked and regarded their own independent means as either a nest egg to fall back upon or as a supplement to their professional or business incomes. The late Nobel prize winning economist, James Meade, looked forward to a time when the typical citizen would have three sources of income: a wage or salary, an unconditional basic income from the state and some assets other than their own homes.
Of course there are many distinctions to be made. One is between conditional and unconditional payments. In the UK Keith Joseph, in his early incarnation in the 1970s as Secretary of State for Social Services, introduced the idea of an income top-up for workers. This has been much extended by subsequent governments and especially the present UK Labour administration to a fully fledged Working Families Tax Credit. At present this is only available for families with children, but should be available to all adults in 2003 assuming that the government goes ahead with its proposed integrated Employment Credit. This kind of scheme has its parallel in the US Earned Income Tax Credit. It is in fact a negative income tax conditional on carrying out paid work.
A yet further distinction is whether the payments should be made on a household or individual basis. The household basis has the advantage of being less expensive and is used for present-day social security payments. The individual basis, however, is not dependent on probing into marital relationships and is more in keeping with the shift to independent taxation.
Yet a further distinction lies in the cut-off rate at which payments tail off as cash income from other sources rise. In their most moderate form, which was probably what Friedman had in mind, there would be a 100 per cent cut-off. This would mean accepting a high poverty surtax which citizens could rise above once they had secured reasonably-paid employment. In the most radical form the cut-off rate would be no different to the normal rate of income tax. This would end the very high implicit surtax rates at the bottom of the income scale but at the cost of a higher marginal tax rate for all who paid positive tax.
Finally, minimum income schemes differ enormously according to which elements of the present welfare state they would supplement or replace. At one extreme they would simply plug gaps not covered by existing state pensions, unemployment pay and so on. At the other extreme (and this is what attracted the Friedmanites) they would replace not only all existing cash payments but also services in kind such as health and education.
Van Parijs’ proposal is for a universal basic income (UBI) paid at a uniform level to each adult. The grant is paid, and its level is fixed, irrespective of whether the person is rich or poor, lives alone or with others, is willing to work or not. It is something on which a person can safely count. Any other income can be lawfully added to it. It need not however start by covering all basic needs. He argues that the easiest way forward is likely to consist of enacting a UBI first at a level below subsistence and then increasing it over time. Alaska already has a partial basic income payment for all residents based on that state’s well known oil revenues.
Some BI supporters make a great deal of the fact that it would be paid to everyone over the counter or through the post. This would make it seem enormously expensive in conventional terms. It would seem much less so if it were given as a tax credit, ie a negative income tax. In that case most wage earners would simply experience it as a deduction from their tax bill. The best solution would probably be to let the recipients themselves choose as in the case of the WFTC.
If the payment is made in a tax credit form it is much easier to explode exaggerated ideas of what such a scheme would cost. Let us take a householder or a principal breadwinner who earns £500 a week and pays tax (including what are now called National Insurance contributions) of £100. If the minimum income is £100 he makes no payment and receives none. The perceived cost is zero. The net cost of the scheme will then be the transfers to those who will be receiving net payments; and it is only this element which could lead to an increase in the tax burden. As a rough order of magnitude a full basic income paid on an individual basis at the conventional subsistence rates laid down in social security provisions would add 10 to 15 per cent to marginal tax rates – now running at 32 per cent in the UK, including employee national insurance contributions.
A compromise, known as a Citizen’s Participation Income, has been put forward by Tony Atkinson, the Warden of Nuffield College. It would not be unconditional but would be available for those engaged, for instance, in full-time education or training, intensive care work and approved forms of voluntary work. As Brian Barry notes, this opens up nightmarish prospects of bureaucratic probing to decide who is eligible. A former cabinet minister recently spent the best part of a day helping a caretaker to fill in his application for WTFC. One can imagine how the complexities would increase with a Participation Income. A participation income might be a politically necessary initial move. But in the end we would see either a true Basic Income or the abandonment of the whole experiment.
A final issue concerns the pros and cons of a regular Basic Income versus a capital endowment. In some kinds of rational and far-sighted world they amount to the same thing. Lifetime basic income payments discounted at the appropriate interest rate are equivalent to a capital sum. And someone who receives this capital sum on achieving adult status would be able either to live on his or her capital at a steady rate or borrow on the strength of it. So on libertarian grounds the capital stake is to be preferred.
But obviously not everyone has access to credit markets at prime rates. Moreover, what do we propose to do about the prodigal son who spends his endowment at an early age and is not subsequently able to earn a market wage above the poverty level? It is most unlikely that a civilised society would let him starve; and as soon as this is conceded, the asset endowment looks the more expensive option. But an offsetting advantage of asset distribution is that it is politically easier to make it either universal, or general to those below a certain income, without the work test that is still insisted upon for income distribution schemes.
The British Labour Government has in fact taken up the asset idea in proposals for a Child Trust Fund or so-called baby bonds. The details have still to be decided. The illustrative examples suggest something small. Some £500 might be allocated at birth – richer households would get half this amount. Modest additions would be made at the ages of, say, five, 11 and 16. Assuming that the income would all be reinvested at a real yield of 5 per cent, the stake might be worth 1640 by the time the beneficiary was 18. In addition family and friends would be given incentives to make further contributions. The Institute for Fiscal Studies estimates the cost at just over 300m per annum. On this scale it could be financed from normal government revenue.
If the scheme is to make a more sizeable contribution to a wider distribution of wealth, some source of funds other than tax revenues will have to be found. An opportunity was missed when the revenue from mobile telephone auctions was devoted just to reducing the National Debt. But there may well be similar windfalls for the government in future and we now have a ready place in which to put them. It is so difficult to convince a still puritanical public opinion of the advantages of either kind of reform that we should make progress wherever we can.
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