Reformation or Revolution: Is Basic Income the Solution?

I came across an interesting quote, while doing research for this article, that seemed like an interesting way to frame the concepts I want to explore:

I’m a capitalist, and I believe that universal basic income is necessary for capitalism to continue.

Andrew Yang – Should the Government Give Everyone $1,000 a Month? (2019)

The reason this quote is so interesting is that it begs the question. Why? Why would UBI be necessary for capitalism to continue?

Buckle up; there’s a lot to unpack.

 

Table of Contents

• Chapter 1: Inequality Rising
• Chapter 2: The Problem is Neo-liberalism
• Chapter 3: The Answer is …Socialism?
• Conclusion: Something has got to give

 

Chapter 1: Inequality Rising

Inequality has been getting worse for decades. The “real” (i.e. inflation-adjusted) wages of workers have largely been stagnant. If you don’t get a raise every year that exceeds inflation (see: consumer price index), you are– in reality– taking a pay cut, even though you may not realize it. This means that every year, workers who make minimum wage feel the pinch.

The Brookings Institution has an interesting economic overview in their article “Thirteen Facts About Wage Growth“. The first two facts in their list are the main ones to consider:

“Fact 1: The share of economic output workers receive has generally fallen over the past few decades.”

This graph shows productivity and compensation rising steadily over the years. As you can see, for the first few decades shown, productivity and compensation rose in lockstep. However, around the early 1970s they began to drift apart. Productivity kept rising, but compensation started to lag behind. You can also see that around 2008 productivity climbed significantly while compensation stagnated utterly.

“Fact 2: Wages have risen for those in the top of the distribution [of wage earners] but stagnated for those in the bottom and middle.”

If this second graph, which shows inflation-adjusted wage growth, looks like it’s not that bad, keep in mind that the “Top” category is a quintile (i.e. the top 20% of earners). For a truly jaw-dropping revelation, let’s look at CEO compensation:

You could argue that CEOs are essentially the new Robber Barons. Alternatively, Martin Wolf, chief economics commentator at the Financial Times says:

We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits. What we increasingly seem to have instead is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.

Martin Wolf – Martin Wolf: why rigged capitalism is damaging liberal democracy (2019)

The distribution of wealth has also been following a similarly worrying trend. Inequality.org has a comprehensive article on Wealth Inequality. I’d like to focus on one particularly telling chart:

That red line represents the top 1%, but this is actually somewhat misleading, as there are significant differences between the top 0.01% and the rest of the 1%. In the chart below, an effect can be observed starting around 1980; the relative distribution of wealth starts rocketing, with the top 0.01% benefiting the most (climbing from less than 3% of the total wealth around 1980 to over 10% of the total wealth by the mid-2010s).

Between the first computation in 1982 and today, the wealth of the [Forbes] 400 increased 29-fold–from $93 billion to $2.7 trillion–while many millions of hardworking citizens remained stuck on an economic treadmill. During this period, the tsunami of wealth didn’t trickle down. It surged upward.

Warren Buffet – Warren Buffett Shares the Secrets to Wealth in America (2018)

So much for trickle-down economics…

Another disturbing revelation of the 1980s was the death of Bowley’s Law. Until 1980, economists had taken it as a matter of fact that the ratio of income between wages and capital (a.k.a. the wage share) was roughly constant. An OECD report on the topic tells us why this important:

Labour shares have long been considered stable and therefore attracted little attention from research and policy discussions. Yet, in recent years, a growing body of evidence suggests that labour shares have seen a secular downward trend with important negative consequences. For instance, with declining labour shares, improvements in macroeconomic performance may not translate into commensurate improvements in personal incomes of households (Atkinson 2009). And data shows that over time and across many countries, a higher capital share is associated with higher inequality in the personal distribution of income (Piketty 2013). A declining labour share can also have political consequences if it erodes support for market-oriented economic policies or for globalization more broadly. Importantly, trends in labour shares negatively affect the main macroeconomic aggregates, namely household consumption, private sector investment, net exports and government consumption (ILO 2012; Wolf 2014).

OECD – The Labour Share in G20 Economies (mirror) (2015)

Finally, recall the 2008 Financial Crisis (a.k.a. the “Great Recession”) which was a perfect example of “socialism for the rich, and capitalism for the poor“. Note how most of these already-worrisome trends began to worsen around 2008.

So what’s to blame? Where did it all go wrong? What happened in the 1980s that kick-started these aggressive, negative trends?

(Note that while all these sources are based on U.S. data, Canada followed a similar trend, just a little later to the “party”. See: Income Inequality in Canada)

 

Chapter 2: The Problem is Neo-liberalism

The most popular economic philosophy you’ve never heard of: neo-liberalism. Back in the early 1950s, Milton Friedman, a titan of macroeconomics and early proponent of the ideology, wrote:

The major fault of the collectivist philosophy that has dominated the western world is not in its objectives—collectivists have wanted to do good, to maintain and extend freedom and democracy, and at the same time to improve the material welfare of the great masses of the people. The fault has rather been in the means. Failure to recognize the difficulty of the economic problem of efficiently coordinating the activities of millions of people led to a readiness to discard the price system without an adequate substitute and to a belief that it would be easy to do much better by a central plan. Together with an overestimate of the extent of agreement on detailed objectives, it led to a belief that one could achieve widespread agreement on a “plan” couched in precise terms and hence avoid those conflicts of interest that could be resolved only by coercion. The means collectivists seek to employ are fundamentally inconsistent with the ends they seek to attain. A state with power to do good by the same token is in a position to do harm; and there is much reason to believe that the power will sooner or later get into the hands of those who will use it for evil purposes.
 
The collectivist belief in the ability of direct action by the state to remedy all evils is itself, however, an understandable reaction to a basic error in 19th century individualist philosophy. This philosophy assigned almost no role to the state other than the maintenance of order and the enforcement of contracts. It was a negative philosophy. The state could do only harm. Laissez-faire must be the rule. In taking this position, it underestimated the danger that private individuals could through agreement and combination usurp power and effectively limit the freedom of other individuals; it failed to see that there were some functions the price system could not perform and that unless these other functions were somehow provided for, the price system could not discharge effectively the tasks for which it is admirably fitted.
 
A new faith must avoid both errors. It must give high place to a severe limitation on the power of the state to interfere in the detailed activities of individuals; at the same time, it must explicitly recognize that there are important positive functions that must be performed by the state. The doctrine sometimes called neo-liberalism which has been developing more or less simultaneously in many parts of the world and which in America is associated particularly with the name of Henry Simons is such a faith. No one can say that this doctrine will triumph. One can only say that it is many ways ideally suited to fill the vacuum that seems to me to be developing in the beliefs of intellectual classes the world over.
 
Neo-liberalism would accept the nineteenth century liberal emphasis on the fundamental importance of the individual, but it would substitute for the nineteenth century goal of laissez-faire as a means to this end, the goal of the competitive order. It would seek to use competition among producers to protect consumers from exploitation, competition among employers to protect workers and owners of property, and competition among consumers to protect the enterprises themselves. The state would police the system, establish conditions favorable to competition and prevent monopoly, provide a stable monetary framework, and relieve acute misery and distress. The citizens would be protected against the state by the existence of a free private market; and against one another by the preservation of competition.

Milton Friedman – Neo-Liberalism and its Prospects (1951) (mirror)

His hope for this “new faith” rested upon the belief that competition in the market would protect citizens from each other. In hindsight, it’s easy to see just how naive this was. Neo-liberalism was introduced into mainstream politics in the 1980s by Ronald Reagan in the U.S. and Margaret Thatcher in the U.K., but what is it exactly? And how is it to blame?

Well, like any ideology that has “post-” or “neo-” in the name, it’s a little vague. Let’s look at a few retrospective impressions of it from a journalist, an economist, and a philosopher:

1. An investigative journalist, describing neo-liberalism:

…the role of the state is not only not to intervene in the affairs of business, but to intervene for business to further the economic prospects of those who have capital.

Bruce Livesey – Is neoliberalism destroying the world? (2018)

2. An economist bemoaning the rise of “rentier capitalism”:

…the neo-liberal phase of globalisation has evolved into ‘rentier capitalism’, in which more and more income is going to those possessing physical, financial, or so-called intellectual property.

Guy Standing – The Precariat under Rentier Capitalism (2017) (mirror)

3. A philospher’s take (from a series on Liberalism):

…neo-liberalism is like the twisted lovechild of [liberalism and capitalism]. It likes finance, it likes low government spending, and it like low taxes. It does not like regulation, it does not like welfare, it does not like trade unions. Neo-liberalism is a capitalist ideoglogy, so it likes free markets, but it doesn’t just step back and let markets get on with it. Neo-liberals actually use the state to create new markets– sometimes by privatising public services or just creating them where previously there weren’t any, like carbon trading which allows countries to purchase the “right” to pollute the atmosphere.

Oliver Thorn – What Was Liberalism? #3 Neoliberalism | Philosophy Tube (2017)

That basically covers “what it is”, but why is it to blame for the economic trends we saw in Chapter 1?

The neo-liberal logic goes: If the more free the market is the better, and since any government intervention (i.e. taxation and spending alike) interferes with the free market, then less spending equals less intervention equals better economy. So cut, baby, cut!

By this reasoning, anything that shrinks the welfare state or reduces government taxation or expenditure is good.

Arthur Laffer, an economic advisor to the Reagan administration, even went so far as to claim that cutting taxes would actually increase tax revenue. He said that the tax cut would encourage the economy to grow, which would result in more income to be taxed. This is known as the Laffer curve. As a result of this thinking, very large tax cuts were passed in the 1980s that saw top tax rates shrink significantly. In 2012 the Congressional Research Service conducted a study on the effect of tax rates on economic growth.

Lowering the tax rates on the wealthy and top earners in America do not appear to have any impact on the nation’s economic growth.

This paragraph from the report says it all—
“The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”

These three sentences do nothing less than blow apart the central tenet of modern conservative economic theory, confirming that lowering tax rates on the wealthy does nothing to grow the economy while doing a great deal to concentrate more wealth in the pockets of those at the very top of the income chain.

Rick Ungar – Non-Partisan Congressional Tax Report Debunks Core Conservative Economic Theory-GOP Suppresses Study (2012)

Let’s look at austerity, another neo-liberal favourite. These sorts of service-cutting measures (usually in order to help reduce deficits) came into prominence in the wake of the 2008 financial crisis, despite Keynes famously saying “The boom, not the slump, is the right time for austerity at the Treasury.” Not only do austerity measures sometimes make recessions worse and actually cause deficits to rise, but as Mark Blyth points out, they aren’t even fair:

Who are the people who actually rely on government services? They’re the people at the bottom end of the income distribution, not the people at the top, and the people at the top are the ones who frankly have made out like bandits over the past 30 years of the financialization of the economy. They’re the ones, the creditors, who the low inflation regime has benefited. They produced the debt that masked the maldistritubion of income right across all those OECD countries. And now, after bailing out the assets of the very people who created the debt, we’re now going to say to the people who didn’t benefit: you’re the ones who need to pay. Well, that produces a very toxic and very dangerous politics; you have a kind of creditor-debtor stand-off where those who can pay don’t want to, and those who can’t pay are being asked to.

Mark Blyth – Mark Blyth: Is Austerity a Dangerous Idea? (2013)

And all this is to say nothing of regulatory capture. One timely example is the role of the FAA in the recent Boeing 737 MAX debacle. Essentially, the FAA did not order the planes grounded after the crash. Instead, it claimed that according to Boeing there were no systemic problems with the planes. Soon after, however, Boeing came out and recommended that the FAA gound the affected planes worldwide. It looks like the FAA was just the lackey of the industry it was responsible for regulating.

Now that we’ve seen how things such as tax cuts, spending cuts, and deregulation fit with neo-liberal doctrine and have caused material harm and exacerbated inequality. How can one reflect on such trends in the political economic landscape under neo-liberal capitalism and not feel grief?

Since the 1980s, neo-liberalism had progressively abandoned the notion that humans beings could guide their future, transferring society’s collective ambition to “market forces” that came to determine the nature, value and outcome of the world in which we live. Having given up on ourselves as reliable mediators of our existence, many of us awaited the new apps that would surely perceive and negotiate reality for us, allowing our brains to wither in the narcosis of self-abandonment.

By 2008 the sheer pace, intensity and mass of capitalist ventures had outstripped the ability of international finance to control the beast it had created; a beast that now runs most of the world according to a psychology remarkably consistent with Freud’s view of the id. The theory of the id and ego is, in part, a formulation of how selves regulate their primitive drives, and we can turn to this theory in order to differentiate between unregulated and regulated capitalism.

Christopher Bollas – Meaning and Melancholia: Life in the Age of Bewilderment (2018)

As Bollas, a psychoanalyst, points out, markets under neo-liberalism behave much like mindless, id-driven beasts, seeking profit as their pleasure; leaving people trapped in a consumerist nihilist nightmare.

Marx believed that capitalism alienated the worker from their humanity, and doesn’t neo-liberalism similarly alienate the citizen from their society? Just as the worker is “directed towards goals and diverted towards activities by the bourgeois”, are citizens not similarly coerced by “market forces” beyond their ken? Isn’t this equally upsetting? Look at all the disillusioned young adults today who were told to do what they love and to follow their passions and their dreams, only to end up in minimum wage jobs with a “useless” degree and a pile of student debt; I guess “the market” didn’t need their dreams.

Neo-liberalism has been summed up as: “the freer the market, the freer the people”. While reductionist, and disturbingly Orwellian, is that even true?

In the 2010s, three libertarian think tanks (the Cato Institute in the U.S., the Fraser Institute in Canada, and the Liberales Institut at the Friedrich Naumann Foundation for Freedom in Germany) began co-publishing an index called the “Human Freedom Index” (2018 mirror).

On the topic of this report, Will Wilkinson of the Niskanen Center (a libertarian think tank) says:

But when a freedom index, built from libertarian assumptions, shows that freedom thrives in many places with huge welfare states, it should lead us to downgrade our estimate of the probability that liberty and redistribution are antithetical, and upgrade our estimate of the probability that they are consistent, and possibly complementary.

Will Wilkinson – Public Policy After Utopia (2017)
(Note: That whole article is highly worth reading, by the way.)

This leads us to conclude that Friedman’s promise of protection through competition was naive at best. Neo-liberalism puts the power in the hands of capital, enabling the rapid concentration of wealth, while not living up to its end of the bargain.

Thomas Piketty, a French economist who studies wealth and income inequality, wrote a seminal book on the topic, in which he makes two conclusions:

The first is that one should be wary of any economic determinism in regard to inequalities of wealth and income. The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms. In particular, the reduction of inequality that took place in more developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war. Similarly, the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regards to taxation and finance. The history of inequality is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result. It is the joint product of all relevant actors combined.

The second conclusion, which is the heart of the book, is that the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence. Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.

Thomas Piketty – Capital in the Twenty-First Century (2013)

The first conclusion addresses the question of why I’m writing this in the first place; the second conclusion adds an element of urgency.

 

Chapter 3: The Answer is …Socialism?

So is the goal to return to some “pure” pre-neo-liberal version of capitalism? Well, no:

Look, capitalism is what you got, and if you don’t like the way it’s evolved, that’s very nice, but imagining you can go back to something pure that won’t then repeat the same evolution to what we have? That kind of begs the question: how come?

Marxism 101: How Capitalism is Killing Itself with Dr. Richard Wolff (2016)
(Note: The whole interview is highly worth watching, by the way.)

I don’t think neo-liberalism represented an “impure” trend in capitalism. There really is no “pure” form of capitalism, no Platonic ideal of what capitalism should be, that we have simply perverted. Instead, it was simply a “political shift”, as Piketty would say.

I think we simply need to decide that inequality at current levels is unjust, and make a collective choice to enact a new political shift to address that.

Now, I’m not advocating for a full-blown revolution; I think Friedman was right about the dangers and immense difficulty of central planning. A market economy of some form appears to be necessary, and without profits there would be little incentive to actually run things efficiently.

In this sense, profit can be justified as compensation not only for the risk assumed by capital, but also as compensation for playing a vital role in the distributed planning and improving of the broader economy. This is true even if it results in some amount of inequality.

But the problem isn’t that we have inequality. Some inequality is intrinsic to any high-functioning capitalist economy. The problem is that inequality is at historically high levels and getting worse every day. Our country is rapidly becoming less a capitalist society and more a feudal society. Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France. Before the revolution.

Nick Hanauer – The Pitchforks Are Coming… For Us Plutocrats (2014)

Perhaps some redistribution is in order; after all, the working poor are essentially wage slaves to an exploitative system. The state may simply have to play Robin Hood to provide them amelioration. This is where something such as a universal basic income could come into play.

Who will defend the credo, “the market is always right,” when fewer and fewer people can even meaningfully participate in it? An additional benefit of a program such as UBI would be that it also empowers people to participate more fully in the market economy. If more people have enough money that they can actually afford to choose then they will help the market economy function more efficiently.

Regarding redistribution, studies have repeatedly shown that money buys happiness, but only to an extent. One such study shows the following (note the log-scaled x-axis):

Basically the only thing that keeps going up (beyond $80,000) is peoples’ view of their “life evaluation”, which the charts labels as the “ladder,” but could as well have labeled “rat race.”

Other studies have found similar things, at varying cut-off points. This 2018 study claims there are similarly two thresholds: $95,000 for life-evaluation, but only $75,000 for emotional well-being.

The takeaway is that more money does not linearly equate to more happiness; there are certain thresholds of income where the positive effects start to taper off logarithmically (i.e. the income-to-happiness ratio has diminishing returns).

Knowing that the value of money is perceived subjectively, utlitarianism provides a quasi-objective moral argument for a redistribution of wealth. Once you’re in the six-figure income bracket you really don’t need those extra dollars nearly as much as someone lower down the scale does. This is, of course, why we have marginal tax brackets, so I’m not exactly breaking new ground here. However, I think they could be more aggressive at the high end.

What’s worse, though, is that if we accept that the concentration of wealth is an inevitable outcome of unfettered capitalism, then we realize the system is unconscionably broken. What sort of marginal happiness does someone with billions of dollars even get from a couple million more? Do they even notice? One plutocrat’s rounding error could be deliverance for thousands of people.

From each according to his ability, to each according to his needs!

Karl Marx*

Regarding government intervention, John Maynard Keynes, father of modern macroeconomics, wrote:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

Keynes – The General Theory of Employment, Interest and Money (1936) – Book III, Ch.10, §6

In his book, “Bullshit Jobs“, David Graeber argues that many jobs today are, in his words: bullshit. No offense to Keynes, but digging up buried bottles of money sounds like a pretty bullshit job.

So… why not just have direct unconditional cash transfers, or a universal basic income?

We know from studies that such programs do result in a significant improvement in subjective wellbeing for the participants. One such study in Zambia showed great results. Even though it was a limited-term program, the improvment in subjective wellbeing persisted past the program’s end.

Researchers have increasingly sought to understand the effects of public policies on [subjective wellbeing], recognizing the importance of going beyond monetary or economic dimensions of human wellbeing. Thanks to the experimental design, our results provide causal evidence that a bi-monthly, poverty-targeted [unconditional cash transfer] program improved the happiness of rural women living in remote areas of Zambia. Impacts are large at 7.5 and 10 percentage points, corresponding to a 0.19 to 0.25 SD increase in happiness at 36 and 48 months, respectively. The increase in magnitude of impact at 48-months is particularly notable, since according to official documentation, a portion of the beneficiary households should have ‘graduated’ from the program. Thus, at the same time that a sub-set of the treatment sample reports no longer receiving regular transfers, the magnitude of the overall impact increased, rather than faded out.

Does money buy happiness? Evidence from an unconditional cash transfer in Zambia (2018)

UBI-type programs also give their beneficiaries something beyond simple money. They can give people hope for a future. When people know they have an unconditional safety net, they can actually take a breathe and start thinking about their long-term plans.

It seems obvious: when you aren’t sure where your next meal is going to come from, how can you possibly plan your next career move? It’s simply Maslow’s Hierarchy of Needs in action.

Also, knowing that poverty impedes cognitive function, UBI could actually help improve the strength of our democracy by reducing poverty, and thereby removing that impediment from a significant percentage of the citzenry.

 

Conclusion: Something has got to give

If the labor market is no longer going to cut it in terms of distribution, it might be time for more radical solutions.

Richard V. Reeves – Time to Take Basic Income Seriously (2016)

Perhaps we should cap CEO compensation relative to worker salaries (i.e. no CEO can be compensated more than 50x of the average salary of their workers).

Perhaps we need mandatory profit-sharing programs which would force companies to not just pay wages, but to include their workers in the realization of the fruits of their labour and reduce the alienation they feel.

Perhaps a wealth tax could work, at least in the U.S., as it has a citizenship-based tax system. Whereas if Canada tried the same we would likely see a lot of capital flight due to our residence-based system (See: International Taxation).

Perhaps we need a global trade deal that helps prevent tax evasion, brain drain, capital flight, etc.

Perhaps we should build a guillotine, gather the tumbrils of Revolution, and just eat the rich already. (See: Jean-Jacque Rousseau, Note: I’m pretty sure that in this scenario my head ends up on the block too, so…)

Perhaps you should simply write this article off as bourgeois, virtue-signalling drivel by some milquetoast communist and just get on with your life. (Definitely the easiest option!)

Or, perhaps we should just implement some sort of a Universal Basic Income program (which Canada tried to pilot briefly… twice).

(Note that UBI is not without its problems. If the program was not unconditional then this would create a new vehicle for oppressing racialized communities. See: *cough* disfranchisement *cough*)

In closing, I’ll leave with you with this Mexie video on the topic of UBI: