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Basic Income:
Providing an Adequate Income For All
Introduction It is a sad commentary on the lack of progress we have made as a society that the above quotation is as true today as it was when John Maynard Keynes wrote it. With over 35 million unemployed in the Organization for Economic Cooperation and Development (OECD) countries1, there are more workers unemployed today than there were in the 1930s.2 Furthermore, income inequality is rising in many countries (Atkinson, Rainwater and Smeeding, 1995) especially in the United States and England. In the United States, inequality has reached levels not seen since the great depression. Even with all the economic growth and development which has occurred in the post World War II (WWII) era, these two economic problems persist. The persistence of mass unemployment and high income inequality can be traced to the economic, social and political factors which determine both the level of employment and the distribution of income. For most of the post WWII era, economists have told us that if the economy is prosperous, it will create jobs. These jobs will have the dual effect of lowering the level of unemployment and, since more people are working, lower the level of inequality. This economic philosophy seemed to hold in the first two decades after WWII, yet the experience since 1970 has been quite different. Since 1970 the United States economy has grown considerably, both in real and per capita terms, yet the number of unemployed, the number of those below the poverty level and the level of inequality have all gotten worse, not better. The inability of capitalist economies to share the benefits of this expanded economy has caused the crisis in the "welfare state". As John Kenneth Galbraith has recently pointed out, the "welfare state" is an institutional response to a changing economy and society. Its origins can be found in the movement of history and not in "liberal" ideology. The government stepped in to fill needs which 100 years ago did not exist, and which the market would not, and in most cases could not, fill. The services and protection provided by the government in the "welfare state" are those which an industrial and post industrial economy require, and would not be necessary or possible in the rural/agricultural society of our great-grandparents. The Welfare State is based on the Beveridge-Keynes model of advanced capitalism. In such a world, the economy works for most of the people most of the time. The government need only intervene to provide temporary assistance for those suffering short term misfortune, long term assistance for the elderly and disabled, and macroeconomic stability to prevent prolonged economic slumps. The norm for the Beveridge-Keynes model is a one adult worker (husband) per family, with one adult (wife) providing the important and necessary household production duties. Wages, and thus standards of living, would rise along with productivity increases, thus assuring that the benefits of economic progress would be shared by all. This, all should quickly recognize, is not the world we currently live in. Productivity slowed down considerably in the 1970s, and when it picked up in the 1980s the fruits of these gains were not passed down to workers in the form of higher wages. Stagnant wages, as much as anything else, is what is at the heart of the rise in two wage earning families and the changes in the so called "traditional" families. The inability of economists to understand and explain these events stems from their deeply held belief that a free market economy will distribute incomes according to individual's contribution to output and that a flexible labor market will insure full employment. The fallacy of these views rests in the notion that incomes are determined by "free markets" and that wages serve a market clearing function, thus eliminating unemployment. Incomes are now, as they have always been, determined by a combination of economic, social and political factors, of which the most important is power, which in an advanced capitalist economy is the ability to increase one's income by exploiting and/or creating differential advantages, while shifting the costs onto another group or individual. Social factors, such as social attitudes (gender and racial discrimination) and political factors (government support or hostility for unions, minimum wage legislation) are as important for determining the distribution of income as are economic factors (the level of unemployment, monetary policy, skill differentials) (Clark, 1996). Furthermore, the "labor market" has never acted in a market clearing manner (Weeks 1992). As Keynes argued, and as the experience of the Great Depression showed, falling wages increase joblessness, not reduce it (Keynes, 1936). Moreover, the "labor market" world wide has become considerably more flexible in the 1980s and 1990s, yet the average unemployment rate is higher in these decades than in the preceding two. An Alternative Approach: Basic Income Policy It is the failure of capitalist economies to provide full employment and to fully share the benefits of economic growth and progress, coupled with the inability of the welfare state to eradicate poverty, that has led many European countries to consider an alternative approach to distributing incomes and defining jobs. This policy is called a Basic Income Policy (also known as a Citizen's Income and the Social Dividend). Countries such as Ireland, Belgium, Austria, Holland, to name just a few, are currently studying the implications such a dramatic policy change will have on their economies and societies. Simply put, a Basic Income is an income unconditionally paid to all on an individual basis, without means test or work requirement.3 It is a guaranteed income. A full Basic Income would set the guaranteed income above the poverty line and would replace all other forms of public assistance. A partial Basic Income policy is one in which the level is set below the poverty level and in which some form of public assistance is provided to increase the incomes of those who still have inadequate income. Basic Income proposals are often financed by a flat tax on all other personal incomes, with the elimination of all or most tax deductions in order to widen the tax base. However, a flat tax is not the only method of financing such a scheme. Both a progressive tax on income and alternative taxation regimes (such as an energy tax) are alternative methods. It should be readily apparent that a Basic Income would have certain benefits over and above those that exist in the current social welfare system in the United States. First, it would provide universal coverage so that no individual would fall through the cracks (which are rather large in our system) of the "social safety net." Second, it would eliminate the "dual welfare state" and its unfair and arbitrary approach to providing social assistance (Peterson and Peterson 1994).4 Third, as long as the Basic Income is set at an adequate level, it would bring everyone up to the poverty level, thus eliminating most, if not all, of the worst poverty in the United States. Increasing the income of the working poor is another objective of a Basic Income policy. A Basic Income plan guarantees low-income earners a minimum after-tax income. In this way, the policy provides income security to the working poor. Furthermore, a Basic Income plan eliminates, or at least greatly reduces, the "unemployment trap" and the "poverty trap" that are common features of many welfare systems. The unemployment trap occurs when relatively high unemployment benefits combined with high rates of income tax (or rates of lost benefits due to increased earned income) remove the incentive to accept a job because it results in a net loss in income. Poverty traps occur when net income actually falls as gross income rises, again due to high marginal tax and benefit loss rates. The objective of eliminating these traps is to stop penalizing welfare recipients who wish to increase their net earnings but are only able to find jobs whose wage package is worth less than the welfare package. A final objective of a Basic Income plan is to improve labor market flexibility. Not the wage flexibility sought after by most economists, but true flexibility in that workers would have the security to move from occupation to occupation in an effort to find which type of work they are best suited for and find most rewarding. Furthermore, the poor would have the security to attempt different strategies to rise out of poverty, including, but not limited to, further education and training, self employment and relocating. There are many arguments for and against a Basic Income, and support for such a policy comes from all over the political spectrum (as does opposition). Economists, such as the late James Meade, often advocate a Basic Income policy as a means to make labor markets more wage flexible, thus eliminating unemployment, while liberals often argue that a Basic Income will strengthen workers bargaining power, thus leading to less wage-flexible labor markets. Radical economists see a Basic Income as either the abandonment of the traditional commitment to full employment and a return to the "poor laws" or as a rewriting of the rules of capitalism. Environmentalists almost universally like a Basic Income since it takes away the argument that economic growth is needed to help the poor. The rising tide they are worried about is polluted.5 An Institutionalist Perspective in a Post Industrial Society The real benefits of a Basic Income policy can only be seen by moving away from the traditional left-right views of the economy. One can, I think, get a better appreciation of the value of a Basic Income policy by taking an institutionalist perspective on these problems. The standard explanations of unemployment and inequality center on markets; market imperfections (usually wage inflexibility) that result in the labor market not clearing at full employment; market failures (incomplete information) that result in inadequate aggregate demand; and shifts in the factor markets which change relative incomes that result in income inequality. From an institutionalist perspective, inequality (whether race, class, gender, or national) stems not from natural market forces, but instead from the way in which particular markets are instituted. Specifically, the issues of how rights, costs, and power are assigned in the economy will largely determine the distributional outcome of the economic process. Furthermore, unemployment is not seen as the inability of labor markets to clear, since there is no reason to expect them to clear. There are both instrumental and ceremonial aspects to the distribution of income.6 A Basic Income policy would explicitly redistribute income to counter the ceremonial aspects of inequality. In this case, it is an institutional adjustment in the mechanisms that operate in the process of social provisioning. On the instrumental side, a Basic Income would assist in the absorption of social output, something that is hindered by the current levels of inequality (Dugger, 1989). From an institutionalist perspective, the creation of the social product is entirely a social activity and is more than the result of the efforts of individuals involved in the production process. In fact, the greatest contribution to our affluence cannot be assigned to individuals at all. The stock of communal knowledge and the cultural institutions that have been developed over the centuries are the reasons our society is rich rather than poor. Those who are particularly rich in our society are so because they happen to fill specific positions in the social provisioning process that allows them to take a disproportionate share of social output. A Basic Income recognizes the social nature of income generation and the large share of output due to "society and history" and distributes it among all citizens. Basic Income policy would also be an important first step toward a post-industrial society. The realization that fewer and fewer workers are required in order to produce socially necessary levels of output, forces us to rethink the mechanisms by which we distribute the benefits of the social product. By linking income exclusively to those with paid employment, society excludes a growing proportion of the population from benefiting from society's increasing affluence. This also excludes their full participation as citizens. A Basic Income would encourage those forms of work that do not receive a paycheck but which are essential to a healthy society and which are currently inadequately supported (child care being the best example). A Basic Income policy would go a long way toward encouraging family values (much more so than censoring movies and art) for it recognizes the important role of everyone in the family and not just those who yield an income from market participation. Endnotes 1. Organization for Economic Cooperation and Development, which includes the 25 most developed nations. return to paragraph 2. The official unemployment rate in the US is an inadequate measure of the extent of labor market slack, for it fails to take into account disguised unemployment, which includes workers who are working well below their productivity potential. Thus, in 1990 the official unemployment rate was 6.2%, while the "true" unemployment rate (official plus disguised unemployment) was 11.1% (Eatwell, 1995). return to paragraph 3. This section is taken from Clark and Kavanagh, 1996. return to paragraph 4. The "dual welfare state" is the dramatic differences between benefits provided by social insurance programs and public assistance programs. return to paragraph 5. There are many social, political and religious justifications for a basic income. See Tony Walter's Basic Income: Freedom From Poverty, Freedom to Work and Sean Healy and Brigid Reynolds' Towards an Adequate Income for All. return to paragraph 6. An outline of an institutionalist theory of distribution based on the institutionalist dichotomy is given in Clark, 1996. return to paragraph References Atkinson, Anthony, Lee Rainwater and Tim Smeeding. Income Distribution in OECD Paris: OECD, 1995. Clark, Charles
M. A. "Inequality in the 1980's: An Institutionalist Perspective." Clark, Charles M. A. and Catherine Kavanagh. "Basic Income, Inequality, and Unemployment: Rethinking the Linkages Between Work and Welfare." Journal of Economic Issues. June Vol. 30 (1996): pp. 309-406. "Basic Income and the Irish Worker." An Adequate Income Guarantee for All: Desirability, Viability, Impact, edited by Brigid Reynolds and Sean Healy. Dublin: CORI, 1995, pp. 78-120. Dugger, William. "Instituted Process and Enabling Myth: The Two Faces of the Market." Journal of Economic Issues, Vol. 23, (June,1989): pp. 607-515. Eatwell, John. "Disguised Unemployment: The G7 Experience" UNCTAD Discussion Papers. 1995. Healy, Sean and Brigid Reynolds. Towards an Adequate Income For All, Dublin: Conference of Religious of Ireland. 1994. Keynes, John Maynard. The General Theory of Employment Interest and Money, London: MacMillan, 1936. Peterson, Carol and Janice Peterson. "Single Mother Families and the Dual Welfare State" Review of Social Economy, Vol. 52, (Fall, 1994): pp. 314-338. Walters,
Tony. Basic Income: Freedom From Poverty, Freedom to Work London: Weeks, John. "The Myth of Labour Market Clearing." Towards Social Adjustment? editedby GuyStanding and V. Tokman, ILO, Geneva, 1992. top
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Professor
Charles Clark argues that the failure of capitalist economies to provide
full employment and to fully share the benefits of economic growth and
progress coupled with the inability of the welfare state to eradicate
poverty forces us to consider an alternative approach to distributing
incomes and defining jobs. He proposes a "basic income policy" devised
in an institutionalist perspective of our post industrial society.
