Citizens Income: Three narratives

This was an introduction to a Friday Room discussion Oct 2017

There is widespread support for a basic income of some sort but it is not clear how it could come about. The debate seems to have got hung up with a narrative of reforms to the benefits system. I suggest that there are two alternative narratives which should be considered alongside this one.

Narrative One: Universal benefit

The current benefits system is notoriously complex and there is universal recognition that it works badly, is expensive to run and is frequently unfair.

A universal benefit would be a substitute for a lot of payments already being made, dole, sickness benefits, state pension etc. but the details are complex. Two serious models have been made, one by the Citizen’s Income Trust in the “70s, the other recently by Compass.

Both use models to work out the details. They both predict that most of the money for the basic income replaces the existing payments and the difference coming from raised income tax, would not be excessive.

Both studies propose a range of schemes. Both include minimal schemes where the Basic income would be about £60 per week or £3,000 per year. (As a reality check, the national living wage for a 40 hour week is £300 or £15600 per year. The NHS costs a bit more than £2000 per person per year.) These schemes would be implemented by DWP.

There are problems:

There would inevitably be a transition period as work patterns and pay levels adjust to the new regime. This has two important implications, first is that there would winners and losers and extra provision would be needed to support those who lose out during the transition. The total cost of introduction over and above the tax burden when fully up and running, is likely to be considerable.

There will be vocal opposition to any suggestion of funding the scheme from income tax, however irrational.

There is uncertainty about it working. A possible outcome is that it would reduce the incentive to work and result a large number of people will choose to live in idleness. There are a number of trials around the world which suggest a positive outcome, but these have been on a small scale and cannot demonstrate what would happen in the long term when society adapts to a radical new regime.

When the question is asked “why do so many working class people vote Conservative?” high up in the answers is a low regard for the welfare state. There seems to be a general feeling that, in its present form, the welfare system is bad solution the (admittedly difficult) problem.

People need occupations and incentives to pursue them. Increasing ones income is a strong incentive. The welfare system has a “claw-back” mechanism, so coming off benefits into employment means that most of the increased income from wages is cancelled out by loss of benefit. The incentive offered by greater income is removed. There can be situations where people are worse off when they get a job. (The poverty trap. Bad.)

With a basic income, entering employment means the wages are a total gain and represent the strongest incentive.

Narrative Two: Citizens’ dividend

(This needs a soap box.)

Fellow citizens. Our country has grown rich. The onward march of automation has brought us  to a state where we could all live in reasonable comfort.

We got to this state only because of the toil and intellectual efforts of our ancestors.

Our ancestors made this investment. We should all now be reaping dividends on our inheritance, distributed most fairly as a citizens’ dividend.

A Citizens’ dividend is ours by right!

Narrative Three: Economic compensation

This narrative is about economics. It has two sides. The first starts support for the idea of a basic income voiced by some economically significant people; Richard Branson, Mark Zuckerberg, founder of facebook and a top venture capitalist in silicon valley (Interviewed on BBC TV prog.). We need to take these people’s views seriously because their particularly insight into the potential disruptive effects of automation and artificial intelligence.

Up to now the economy works something like the game of Monopoly. In the game all the players collect £300 when they pass go. I guess that if they didn’t, the game would not work.

In real life everyone is a player. The economic system depends them having an income when they “pass go”. With the continuing development of automation/AI, there is a looming situation where the demand for labour declines and an increasing number of players will not be able to play the game.

A basic income would be the equivalent of “£300 on passing go”. It would be a compensation for the decline of the historical income and essential keep the game going and to prevent the economy from seizing up.

The other side of this narrative is about resources. Over the last few decades non-renewable resources have become scarcer, pollution greater and the economic consequences increase. This fits well into the model from of the report “Limits to Growth”. We can be confident that trend will continue over the next few decades and is set to become a major determinant of the economy.

To tax is to discourage. It seems to me a no-brainer that, with meaningful work becoming scarcer, income tax, which discourages work, should be replaced by resources taxes, that discourages the consumption of resource.

The big problem with this is that income tax is progressive and resource taxes are regressive.

The result of resource taxes will be to make goods more expensive which hurts everyone. Distributing the tax take as an economic compensation in the form of a basic income solves this.

This has already been done. In Alaska the Economic Security Project was set up in 1976. Revenues from Alaska’s oil and mineral leases went into a fund, and every October  a dividend check is sent of up $2072 per person. This year 71% of Alaskans voted to continue the scheme rather than reduce taxes.  They are not closet lefties.

What next?

The universal benefit narrative of making significant step changes by the DWP is problematical. The combination of sheer complexity, an understandable uncertainty of the consequences combined with necessary government caution makes it unlikely to get off the ground.

The trend to less resources and more automation maybe remorseless, but it is gradual, with a time scale of a few decades. The wistful dream of returning to full waged employment gradually becomes less plausible. Profound changes to the economic landscape are happening but there is no cliff edge.

A step change is not a good idea anyway. The introduction of a basic income will have profound knock-on effects for industry, society and culture. Raw materials become more expensive and labour becomes cheaper. The business world has always adjusted to change, but does not like sudden change. Although the indications from all the trials is that people react positively, it is impossible to tell how society will change in the long term.

Another argument for a gradual introduction is that we have no clear idea of the level at which a basic income should be set. This has been a big concern in the first narrative, with some arguing that anything less than a living wage is not worth consideration, others argue that is too much and would enable people to live comfortably in idleness. The truth is that we simply don’t know.

A gradual introduction means that we watch what happens and decide later.

Conclusion

There is a strong case for introducing a Citizens’ Dividend paid for by levies on resources, pollution (eg a CO2 tax) and maybe dividends.

It should be introduced gradually over a period of at least 10 years.

The role of DWP would be merely reactive. Benefits would be reduced in response to the increasing Citizens’ Dividend resulting in a reduction of the burden on ordinary taxes.

A starting point might be to allocate the entire fuel duty to the Citizens’ Dividend. The amount would be modest, about £430. It should be revenue neutral, with the loss to the treasury cancelled by a reductions in benefits and state pensions.

From then on increases to fuel duty would lead to a general increase in prices but for the poorest this would be more than compensated for by an increase in the Citizens’ Dividend. Richer people can easily compensate by using more efficient cars. Win all round.

Next would be a gradual increasing carbon levy, again general increase prices for most goods but for the individual compensated by the Citizens’ Dividend and by choosing goods that are more carbon efficient.