Basic Income Income for the United States of America:
Ensuring that the Benefits
of Economic Progress Are Equitably Shared
by Charles M. A. Clark, Ph.D., Department of Economics
College of Business Administration, St. John's University

Charles Michael Andres Clark is a Professor of Economics in the College of Business Administration. Past positions include Visiting Professor of Economics at University College, Cork, Ireland. He earned a B.A. from Fordham University and both a M.A. and Ph.D. from the New School for Social Research. He is the author of Economic Theory and Natural Philosophy (1992), and Pathways to a Basic Income (with John Healy)(1997) and the editor of History and Historians of Political Economy (1994), Institutional Economics and the Theory of Social Value (1995), and Unemployment in Ireland (with Catherine Kavanagh)(1998). Current projects include a grant from the Irish Government to do research on implementing a Basic Income policy. He has lectured widely in Ireland and Europe and throughout the United States.

In this article:

Economic growth and persistent poverty
Rising Inequality
Technological Change
A Basic Income Policy Proposal

Professor Clark develops a theory to resolve the increasing disparity of income between the richest and the poorest Americans. Two of the most economically pressing problems facing the United States (and the developed economies in general) are persistent poverty and rising levels of income inequality. The purpose of a Basic Income policy is to address these issues by directly supplying a guaranteed minimum income so that no one falls below the poverty line. This Basic Income is paid for through a tax on all incomes, having the effect of redistributing income significantly, eroding the rise in income inequality of the past 30 years and giving the United States a level of income inequality close to that of the northern European countries.

This paper was prepared for a Vincentian Center Research Colloquium and was discussed on September 23, 1997. Funding support for this paper was provided through the Vincentian Research Grant.

Economic growth and persistent poverty

It has been over 30 years since President Johnson declared an "unconditional war on poverty." The general feeling at the time was that government programs to help the poor, along with economic growth (the rising tide to lift all boats), would be enough to eliminate poverty in the richest of all countries. It seems clear that like its contemporary conflict, the Vietnam War, the war on poverty has been lost. As a matter of policy, it was replaced in the 1990s with a war on the poor. The underlying philosophy of this conflict is that the government programs designed to help the poor actually made them dependent on the government and sucked the will-power and self-drive needed to escape poverty. While it is debatable whether this is a correct assessment of why the "war on poverty" failed, there is certainly evidence that the welfare system created many disincentives to taking up employment. Yet it must also be noted that the type of employment which one could expect those on public assistance to take was increasingly fading from the economic scene, and that, in fact, more and more of those in poverty were working poor.

What should be questioned in both approaches, the liberal "war on poverty" approach and the conservative "war on the poor" approach, is the fundamental assumption that one can eliminate poverty without a major change in the distribution of income and an equal change in the "rules" of how society distributes incomes. Much poorer countries than the United States have eliminated material poverty, but they have only done this by first initiating a massive redistribution of income system. It should be noted that Germany has a much greater level of factor income inequality than the USA, yet their net income level of inequality is much lower.

A brief look at the statistics on economic growth and poverty will illustrate how immune poverty has become from economic growth.

The economic boom of the 1960s, coupled with the anti-poverty programs, helped to significantly reduce poverty in the USA, from just under 40 million falling below the poverty threshold in 1960 to 25.4 million in 1970. (The number in poverty hit a minimum level in 1969 at 24.1 million). Yet since then, both the total numbers, and as a percentage of the total population, the situation has gotten worse. Real per capita GNP has increased almost 25% from 1980 to 1995, yet at the same time the numbers in poverty have grown by over seven million. As we see below, economic growth is not enough to reduce poverty. This is for two reasons: 1) Rising income inequality allows for both rising per capita GNP and increasing numbers in poverty, and 2) much of the growth in GNP can be traced back to social decline and factors which reduce the quality of life. Increases in crime, pollution, divorce and the break up of the family all contribute significantly to GDP growth. They do not reduce poverty (in fact, many make it worse).¹

The biggest success story in America's effort to reduce poverty rates has been with the elderly, who before social security, had an incidence of poverty much higher than the national average. But by the 1970s seniors had poverty rates below the national average. I would argue that the universality (or almost universality) of this program is the key to its success. With all its hype as an insurance program, Social Security has always been a redistribution of income program, taking from those in current employment and giving to those out of employment. Its limitation is in its not covering everybody and limiting benefits to specific reasons why people are out of employment. top of section

Rising Inequality

In the previous section we looked at the persistence of poverty in the United States. In that section we also saw how immune poverty is from economic growth, especially the type of economic growth we have experienced since the 1980s. Much of this can be explained by the structural changes in the economy and the decline in blue collar unionized jobs that allow for social mobility among the working classes. The rise in inequality is also a cause, and an effect, of the existence of persistent poverty along side of a growing economy. Although the rise in income inequality is a familiar story it is worth briefly repeating this trend and its causes.

From the end of WWII until the late 1960s the trend in income distribution in the USA was towards greater equality. As we see in Table 2 below, this increasing equality was brought about by incomes at the lower levels growing at a faster rate than those at the top. Thus the economic boom of the 1960s was spread in such a way that the aggregate share going to the lower quintiles was increasing in this period. In the three other time periods in Table 2 we see that the real income of those in the bottom 40 percent is actually falling. Table 3 presents the rise in income inequality from 1968 to 1995 as measured by shares in aggregate income.

Part of this increase in income inequality can be explained by the rise in wage inequality, as workers with skills and higher education saw their incomes go up much faster than the inflation rate, while less skilled workers had their real wages shrink.

However, as we can see from Table 5 below, not only did labor income become more unequally divided, but the share of labor income in total income fell, while that of capital income rose.

Thus both increasing labor income inequality and the decline in labor income as a percentage of total income contributed to the rise in inequality. The two effects are summed up in Table 6 below.

Many factors have contributed to the rise in inequality in the United States, some of which are specific to the USA and some of which are affecting all the advanced capitalist economies. The two most important factors, it seems to me, are the rise in real interest rates, caused by the adoption of conservative macroeconomic policies, the internationalization of money and financial markets, and the privatization of risk; and the decline in the strength of organized labor. In fact, some of the turn around seen in 1995 can be seen as the result of the Clinton administration's commitment to increasing the minimum wage, the end (at least for now) of the anti-labor policies of the Reagan and Bush administrations and the low unemployment rate, all of which help to strengthen workers' bargaining power. Although the hostility of the federal government (under Reagan and Bush) to organized labor is an important element to the decline in strength of unions, more important is the replacing of union jobs with modern technology. Nothing has weakened unions more than technological unemployment, for it not only reduces their membership, it undercuts their bargaining power as it threatens future jobs as well. Thus there are limits as to what can be done to reverse the rise in income inequality through the traditional policies of minimum wage and support for unions, both of which played such an important role in the declining inequality of the 1950s and 1960s. Furthermore, the overall goal of full employment with productivity gains being passed on to workers in the form of higher real wages does not seem to be any closer to realization.² The essential problem of our economy is that it can produce much more in goods and services than it can consume given how it pays out incomes. Furthermore, even a more equal distribution of income would not lead to a sustainable improvement in this situation in the long run. Technological progress is such that we will continue to need less and less workers to produce the goods and services we need. The artificial inducements to consumption and investment of military expenditures, conspicuous consumption and invidious waste are also pretty much at their maximum, with increases here not being sustainable either. top of section

Technological change

The march of technological progress is one of the most powerful forces in the economy, if not the most powerful force. But we must remember that it is not a blind drift, merely the application of science to production. Technological progress is driven by the same motivation that is behind much economic activity: profits. The push to replace workers with machines is motivated by a desire to decrease costs and increase profits. This force has had significant effects on the patterns of employment in the capitalist economies. The first major shift was in the agricultural sector of the economy. In 1850, a single farm worker produced enough food to feed four people. Today, in the United States, a single farmer supplies enough to feed more than seventy-eight people. In 1850, 60% of the working population were employed in agriculture. Today, less than 2.7 % of the workforce is engaged directly in farming. Since World War II, more than 15 million men and women have left the farm in the United States (Rifkin 1995, p. 112). With the dramatic decline in numbers working in farming, agriculture has shown equally dramatic increases in output. "Output increased by 25% in the 1940s, 20% in the 1950s, and 17% in the 1960s. In the 1980s agricultural production grew by more than 28%" (Ibid.). These advances in agriculture were necessary for the development of the manufacturing sector, for they allowed workers to move from the fields and into the factories.

Yet the march of technological progress is as strong in manufacturing as it is in agriculture. To give just one example of the effects of technological progress in manufacturing, consider the example of U. S. Steel (now the USX Corporation). "The increasing automation of steel production has left thousands of blue collar workers jobless. In 1980 United States Steel, the largest integrated steel company in the United States, employed 120,000 workers. By 1990 it was producing roughly the same output using only 20,000. These numbers are projected to fall even further in the next ten to twenty years as new, even more advanced, computerized operations are introduced into the manufacturing process" (Ibid, p. 132).

In the post WWII era the rapidly expanding manufacturing sector absorbed the surplus agricultural labor force, thus preventing mass unemployment. Yet the growth in the demand for manufactured products has slowed down considerably. It is now being outstripped by technological progress, such that in many fields of manufacturing, employment levels have been falling, while output remains constant or is rising. It must be remembered that technological progress, and not foreign competition, is the primary cause of the loss of manufacturing jobs in the United States. Where did these displaced workers go? Mostly to the service sector, which has grown rapidly in the post WWII era. This structural shift in employment towards the service sector was frequently blamed for the fall in the growth in productivity in the 1970s and 1980s, yet this is no longer the case. The technological progress that so radically changed the agricultural sector and is radically changing the manufacturing sector is now starting to affect the service sector. The recent advances in computers and telecommunication is making it possible for machines to replace large classifications of service sector workers. This is seen most dramatically in such industries as Banking (the ATM machine), Retail (the scanner) and the Telecommunications (where the operator has virtually disappeared). The potential for technological unemployment here should rival manufacturing, if not agriculture, creating a world without work.³

If our economy and society are to function in this new, almost worker-less world, new methods of dividing up the existing work and income must be developed in order to insure that social participation is equitable. It is towards this end that a Basic Income policy is designed. top of section

A basic income policy proposal

A Basic Income policy is very simple.⁴ It is the provision of a guaranteed income to all citizens, regardless of their labor market participation. The basic income payment is tax free, that means that it does not change with any changes in the individual's income. It is also paid on an individual basis, regardless of the household's income level. A Basic Income policy is an adjustment in the mechanism that society uses to distribute incomes. Currently, in the USA, income is distributed based partly on the income one receives from the factor services one sells in the market place, with how much power one has in their specific market being an important determinant of the price of the factor service one receives, and partly from the role governments play in taxing and spending. Here, one's ability to avoid taxes and obtain government support is the key determinant in this portion of the income distribution system. Under a Basic Income policy, part of the overall income of the nation is distributed equally to all citizens, ensuring a minimum income floor. Most of society's income would still be distributed via the market mechanism, still leaving ample opportunity for individual members in society to obtain status through invidious distinctions derived from income differentials.

As it is a universal program, all the stigma usually associated with public assistance programs is removed. A Basic Income policy does not go along with the view that public assistance should be demeaning to act as a disincentive. As the basic income payment is always tax free, and is not reduced as income increases, there are no disincentives for taking up paid employment. All income outside of the basic income payment is taxed at an equal rate. Thus the marginal tax rate of those in poverty is the flat tax of the proposal. It does not have hidden taxes in the form of lost benefits. Under the current system, when lost benefits are included, those in poverty can face very high marginal tax rates (sometimes over 100%).

A full Basic Income policy would set the basic income payment at the poverty rate, thus insuring that all citizens are at or above the poverty rate. For this study I have used the official poverty rate, cognizant of the many limitations and problems with that measure. A Basic Income policy is designed to eliminate material poverty. It is also designed to promote labor market participation and other forms of social participation. Thus, it promotes other activities which help to alleviate the suffering and deprivations of poverty.

Specific Proposal

The following Basic Income proposal is based on 1995 figures, with population levels, the poverty rate, income distribution and payment rates set for 1995, the last year a consistent set of figures was available. I propose a Basic Income policy which pays the following payments:⁵

Funding for the basic income system, as well as for the federal government in general, will be through a flat tax on all incomes of 36%. Federal government expenditures on income security would be cut, with the exception of pensions and social security. The income tax rate of 36% would replace the current income tax system. All other taxes collected by the Federal Government would remain. There would be no income tax deductions. The State and Local government tax and benefits systems are left alone, with the exception of the elimination of Federal Government funding. All funding for health, veterans' programs, education, housing and other social welfare also remain (such as child nutrition). Federal Government expenditures would be, in 1995 dollars:

Under this proposal the Federal Government has a small surplus.

Distributional Impact

I have simulated the effects of the proposed Basic Income policy on the distribution of income. I have used the 1995 consumer expenditure survey as the basis to alter taxes and benefits. In Table 7 we see how our proposed Basic Income system would affect the distribution of income.

Table 8 gives the change in the average household income for each income quintile.

Introduction of a Basic Income policy, such as the one proposed here, would move US levels of income inequality more in line with European levels. The effects of the Basic Income proposal given here seem dramatic. In terms of their effect on income distribution, they not only wipe out the rise in income inequality since 1968, they give a level of equality never recorded in US history. Furthermore, by ensuring that the basic income payment is above the poverty level, for the first time material poverty is eliminated in the richest country in the world. But the extent of redistribution of income is less than that undertaken in Ireland and Germany, and it is not expected that it would hamper the efficiency of the US economy.

The instituting of a guaranteed minimum income above the poverty level would be an important step in realizing the economic provisions of the United Nations Universal Declaration of Human Rights. It would also go a long way towards supporting the social economy, those activities which are so important for the operation of a civilized society, but for which the market economy does not adequately provide. A Basic Income thus supports those who contribute to society but in a non-market setting (parents caring for children, children caring for elderly parents, volunteers etc.).

In his essay, "Economic Possibilities of our Grandchildren," John Maynard Keynes argues that once the affluent stage of development is reached, society should and will rearrange its economic institutions to promote more laudable goals and aspirations than those that dominate in a society where poverty is the norm.

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to the money-motive at its true value. The love of money as a possession --as distinguished from the love of money as a means to the enjoyments and realities of life-- will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental illness. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.

We have certainly reached the level of affluence Keynes was referring to. It is time we started the process of developing a socially and spiritually rich society, and not merely a materially rich society. Ending poverty and ensuring that all can participate in society will move us appreciably in this direction. top of section

ENDNOTES

1. On the relationship between economic growth and progress see Clark and Kavanagh, 1996a. return to paragraph

2. The current low official rate of unemployment masks the real extent of "labor slack." If you add the part-time workers who want to work full time, but can not find a full-time job, plus the discouraged workers, then the unemployment rate goes from 4.9% to over 8%. Furthermore, if you add workers who are working in jobs well below their potential, then the rate goes up to around 20%. See Clark, 1998 for a discusssion on these issues. return to paragraph

3. An overview and history of the theoretical issues in the technological unemployment debate can be found in Woirol (1996). Also not to be missed is Aronowitz and DiFazio's The Jobless Future (1994). return to paragraph

4. For an overview of the economic issues surrounding Basic Income policies see Clark and Kavanagh (1996b). return to paragraph

5.The level of payment is set just above the Federal Government's poverty thresholds. Most analysts recognize that these levels are inadequate. I have used the government standard, as it is the most widely used benchmark. return to paragraph

6. I am assuming that the change in the tax and benefit system has no impact on the level of GDP. Arguments could easily be presented that it will either decrease or increase the level of economic activity. return to paragraph

REFERENCES

Aronowitz, Stanley and William DiFazio. 1994. The Jobless Future. (Minneapolis: University of Minnesota Press).

Clark, Charles M. A. 1998. "Unemployment in Ireland: A Post Keynesian Perspective" in Unemployment in Ireland. Edited by Charles M. A. Clark and Catherine Kavanagh, (Aldershot, UK: Avebury Publishing Limited).

-----. 1996."Inequality in the 1980's: An Institutionalist Perspective" in Inequality: Radical Institutionalist Perspective on Race, Gender, Class and Nation, edited by William Dugger, (Westport, CT: Greenwood Press).

Clark, Charles M. A. and Catherine Kavanagh. 1996a. "Progress, Values and Economic Indicators" in Progress, Values and Public Policy, edited by Brigid Reynolds and Sean Healy, (Dublin: CORI) pp. 60- 92.

-----. 1996b. "Basic Income, Inequality, and Unemployment: Rethinking the Linkages Between Work and Welfare" (with Catherine Kavanagh) Journal of Economic Issues, June, Vol. 30,
pp. 399-406.

Mishel, Lawrence and Jarel Bernstein, 1994. The State of Working America 1994-94. (Armonk, NY: M.E. Sharpe).

Rifkin, Jeremy. 1995. The End of Work. (New York: Putman).

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