Confronting inequality: basic income and the right to work

The idea of a citizen’s income has enjoyed a resurgence of interest lately. Its roots go back centuries. Thomas More first suggested it in Utopia in 1516 as a way of redistributing wealth when common lands were privatised. More recently, former Greek finance minister, Yanis Varoufakis, proposed a form of basic income as the solution to a thoroughly modern problem: the potential unemployment arising from advances in robotization and machine learning. For the same reason, the suggestion has become popular amongst the Silicon Valley elite. And just last week, Finland’s basic income trial (the first of its kind in Europe) came under the spotlight, with claims that the scheme was to be abandoned as a failure – a claim the Finnish government took pains to deny.

Money for nothing clearly has its attractions, as Dire Straits once pointed out. But the idea that a universal basic income can inoculate society against pernicious inequality needs a careful examination. Is it more effective in sharing wealth than a tried and tested income tax, for example, where higher income earners are taxed at higher rates? Or than a tax on capital assets, as the French economist Thomas Piketty has proposed? Can any of these measures prevent the systemic inequality that has haunted advanced economies in recent decades?

These questions lay behind our most recent CUSP working paper on confronting inequality in a post-growth world, in which we used our macroeconomic SIGMA model to explore the dynamics of inequality as the growth rate declines.

It was Piketty who famously pointed out that a declining growth rate can have a damaging effect on the distribution of income. In fact, he insisted not only that rising inequality in the US was a direct result of a slowing economy, but also that declining growth rates must inevitably have such an impact. His magnum opus Capitalism in the 21^st Century was described as a wake-up call for capitalism. It was also a profound challenge to anyone interested in the prospects of prosperity without growth. A post-growth world with an ‘explosive’ rise in inequality is not a happy prospect.

As it turns out, Piketty made a couple of assumptions in his workings which are critical to the outcome of the analysis.  The first of these concerns the behaviour of the savings rate as the growth rate declines – Piketty implicitly assumed it would stay constant. The second key assumption concerns the ease with which it is possible to substitute capital for labour. With constant savings rate and high substitutability of capital for labour, it’s straightforward to show that Piketty was right. Inequality rises explosively.

It’s also possible to see that these conditions look a lot like the world we’re being told to welcome: a small minority of high-tech companies driving an increasingly automated world with a rising capital intensity in which there is less and less need for wage labour. Demand may well stagnate, but as long as the owners of capital have sufficient sway over government to protect their returns, the show can go on. The he outcome is about as dystopian as its possible to imagine.

Worse still, in these circumstances there’s no real consolation in the basic income. In fact, our simulations showed that you could use all three measures (basic income, income tax and capital tax) in combination at rather high rates and you’d still end up fighting a losing battle against rising inequality.  Perhaps more worryingly for the advocates of the basic income, it turns out to be the least effective of the three measures we tested, unless it could be introduced at rates considerably higher than those being tested in Finland (and elsewhere).

Fortunately, however, the outlook is not unambiguously bleak. We wanted to know what would happen if we varied Piketty’s assumptions and it transpired immediately that other worlds are possible. One such world is a future where the net savings rate declines alongside the growth rate. (In fact, this world may be more likely than one in which the savings rate remains constant: with declining growth and constant savings it’s increasingly difficult to protect the rate of return on capital. A decline in returns is likely to disincentivise investment and lower the savings rate.) At any rate, allowing the savings rate to decline alongside growth immediately allows for inequality to be contained between more reasonable bounds.

There’s more good news. With a modest protection of the right to work and fewer incentives to accumulate capital (modelled through a low substitutability between capital and labour) we found that inequality declines ‘naturally’ in our model, even without the impact of measures like the basic income. Taken together with redistributive policies measures, it’s possible to eliminate inequality almost entirely, even as the growth rate declines towards zero.

In other words, there are post-growth worlds in which social progress remains entirely possible. It’s a comforting outcome in a week when the UK’s quarterly growth rate slumped to a five-year low. It’s also a vital finding for those who are less than convinced by the growth-obsessed, hyper-capitalism that haunts us today.

Image CC.0: Kaique Rocha / pexels.com (This blog first appeared on the CUSP website, 30 April 2018.)