How Can We Reduce The Wealth Gap Without Wrecking The Economy?

Four possible solutions to tackle poverty

While I personally tend to think of policies based on Middle-out principles as being the most effective way to improve the economy and lift people out of poverty, other people tend to disagree. Per my illustration, Universal Basic Income is the most popular alternative and is trotted out (now with added with automation FUD!) at every opportunity. But they're not the only ideas up for discussion. Let's take a look at the most popular ones.

Socialism

The kindest thing I can say about socialism is that they mean well. Indeed, they only want to help. The trouble is, they tend to be the most appalling authoritarians and often scare the life out of me. I like Dan Kervick well enough but look at this tweet.

pic.twitter.com/OpYFKqeeO7

— Dan Kervick (@DanMKervick) March 29, 2016

That, dear friends, is the kind of jack-booted, kick-your-door-down-in-the-middle-of-the-night totalitarian authoritarianism that scares the hell out of me.

Ideal or practical?

Imagine what it'd take to make #6 through #9 happen. In case you can't see the image, they are:

#6 Progressive tax and income equality policies
#7 Redistribute wealth and income
#8 Expansion of social security
#9 Empower labour, disempower corporations

Progressive taxation is reasonable but how would you enact income equality policies? Equality with whom? How would you redistribute wealth and income unless you used the power of the state to seize it by force? Social security is a drain on resources. Shouldn't we be encouraging and enabling people to get into jobs that pay well and therefore contribute to the tax take instead of parking them on welfare? Finally, entrepreneurship would be discouraged if people were afraid that if their business grew to a certain size it would be pretty much taken off them and divvied up among the workers. You could only implement these policies by force; people wouldn't simply accept them.

The likely outcome:

@DanMKervick So you'd move on to the lower hanging fruit, amirite?

— Wendy Cockcroft (@wendycockcroft) March 29, 2016

If you can't see the tweet, I argued that the rich would liquidate their assets and flee, taking their wealth with them. This would leave a revenue shortfall that the rest of us would have to compensate for, hence the crack about kicking your door down in the middle of the night to confiscate items of wealth beyond your quota, kind of thing. Because I can totally see that happening. This is why we should shut up about class (when train drivers earn more than I do what class are they in?) as it's not a valid descriptor of status or measure of wealth; in an ideologically correct regime people would be designated targets for "redistribution" based on which class they're considered a member of while their wealthier "working class" comrades were left in peace.

My socialist Twitter buddies love to wibble on and on and on about class as if an arbitrary label based on archaic social construct still applies today.** This is the main reason I fear socialism. It may have a few good ideas but I'll never be able to fully subscribe to it. Not until it accurately describes the world I live in and offers solutions that would actually work in practice. And doesn't threaten to discriminate against people who fall into an arbitrarily defined group based on their adherence (or not) to political orthodoxy.

Negative wages

I got involved in this discussion over how to fight poverty. The negative wages idea is best expressed by commenter Mal in The Atlantic:

Negative wages will eliminate unemployment overnight as what any business wants is capital, and employees bring their own capital during hiring, hiring people will be better than firing them to preserve capital ratios. This will also eliminate the need to run to Wall Street every time you need capital.

...Workers would get jobs and equity stakes in companies. This is a total opposite of slavery - you would become part company owner. See how law partnerships operate.

..."Internships, apprenticeships, part-subsidized training schemes, vocational training schemes... "

All of that is exactly what I'm proposing with my negative wages scheme. :) Normally though, this is funneled through educational establishment, and i propose it to be given as a block grant to people to use not only in academia, but for equity stake purchase as well. Face it - not everybody is a good fit for a four year degree, but that doesn't make them bad people. With negative wages, instead of wasting tons of money on worthless degree, they could take a block grant and open their own auto repair shop or whatever.

It's basically a student grant, but for workers

What he actually means is that block grants would be made to people to spend on either buying an equity stake in a company that they could then work for and get a share of the profits, or use to start their own business. It's not a new idea.

Okay, so it's used on a large scale in the EU to fund job creation schemes.

If a welfare-to-work program is successful and a person leaves social assistance, then the gain for the municipality is that it does not have to pay a benefit to this person any more.  The national government finances expenditures of municipalities  on  social assistance  benefits via an unconditional block grant, so the municipality can use the money it saves in any way it wishes.

What Mal is suggesting here is a block grant just like this, but for individuals to use for themselves, the idea being that they invest it in training and employment schemes of their own choosing.

He calls it "negative wages" because...

As he admits it has its downsides: foolish people might squander the money, unlucky people might invest in schemes that don't work out, and others might use it to clear debts, etc. In a nutshell, it's a large one-off handout for poor people to use to sort themselves out. Dickens's David Copperfield sums it up best in chapter 23-26:

'Why, I want to ask, aunt, as this seems, from what I understand, to be a limited profession, whether my entrance into it would not be very expensive?'

'It will cost,' returned my aunt, 'to article you, just a thousand pounds.'

...In the meantime, days and weeks slipped away. I was articled to Spenlow and Jorkins. I had ninety pounds a year (exclusive of my house-rent and sundry collateral matters) from my aunt.

Basically, Copperfield pays Spenlow and Jorkins for an internship that may last for at least seven years*** before he is qualified and finally earns a salary. He gets a stipend from his aunt and takes other work to make ends meet. However, family responsibilities force him to cut this short and to embark on an alternative career as a journalist and writer. This is a cousin of Basic Income and since it's predicated on a best case scenario it should be treated with the same amount of cock-eyed suspicion.

Basic Income

Everyone who knows me knows how much I hate this idea. I loathe it with every fibre of my being. Why? My Twitter buddy Andrew Reitemeyer explains it neatly here:

The 'gig-economy' is going to need #UBI if it is going to survive https://t.co/GuD1qUFSpj via @Salon

— Ⓐndrew Reitemeyer (@Tanewha) March 28, 2016

UBI's basic function is to subsidize business, not people. Think about it; if every worker receives UBI, where's the rationale for giving him a pay rise? That extra money is already there for the worker, depending on the earnings so there's no pressure to raise wages — and tax revenues thereby.

UBI is not about meeting people's needs

UBI supporters insist that the main benefit is that people will then spend that money in the economy but as I've told them over and over again, if it's all you've got to live on and it doesn't cover your expenses, you're stuffed. And since the idea is to supplant the welfare state there's the possibility of top-ups for the needy but don't get too excited: giving anyone any more than anyone else violates the principle of the thing so they'll probably have to rely on charity to meet their needs. Good luck with that.

UBI and the economy

I've been told that some people may receive enough to give up work altogether (depending on the amount provided). This means they're not producing for a business and not paying taxes into the economy except for sales taxes on the goods they buy. If your tax burden exceeds your UBI + income, you're stuffed. This is likely to happen to people in the upper-middle income bracket, who already bear the brunt of the tax burden as it is. Less disposable income means they'll only spend enough to cover their needs which means less money circulating in the economy.

If you're planning to fund UBI via income tax and VAT* you've got to get the income tax off the people with the income and the sales tax off the retailers, etc., who add it to their goods and services. Good luck with getting it off the very rich, they have ways of squirelling it away. This leaves the lower-hanging fruit who will soon discover they're worse off under this scheme because they will be hit hardest as a total proportion of their total wealth. Meanwhile, people on lower wages will find them stagnating since UBI effectively subsidizes their earnings. This means less revenues headed to the tax coffers. As the cost of running the program spirals out of control, cuts will be imposed, but where will they fall? On the very rich, who don't need it? On the upper-middle income group who pay the most taxes but won't even get their UBI? Or would austerity be imposed on every program to keep UBI in place? If it's not self-sustaining it will ultimately fail.

Middle-out

My favoured option bails out people by meeting their actual needs. Merely giving them money doesn't take rising prices into account. Social housing, single-payer healthcare, infrastructure, free education, and subsidized public transport provides a framework on which private enterprise can grow and thrive. Educated, healthy workers within easy reach of their jobs means wages don't have to keep spiralling upwards to keep pace with the cost of living. Raising wages to a level at which people have disposable income results in more spending in the consumer economy, which results in healthy tax revenues to keep the machinery of state-provided services running; it's self-sustaining. More spending also means hiring more people to serve the people who are spending all that money.

Promoting private enterprise

Private enterprise and the state have always worked hand in hand, but usually for the good of private enterprise in what is known as crony capitalism. What if it worked for the good of the people? This would ultimately benefit the state as contented people would desire to maintain the status quo. The key to making this work is to provide the services with the funds from the increased tax revenues; merely raising wages would cause liquidity problems for small businesses, which many people find is a major stumbling block. It goes without saying that government would not have a monopoly on essential services; private enterprise would be able to compete on service.

Everyone pays their fair share of tax

Taxes on the very rich would also have to rise; the whole point of "trickle-down" theory is that if we give them tax breaks they will create jobs or engage in profitable activities that benefit the rest of us due to having all that extra money, or something. The tax breaks aren't tied to actual job creation, but to the hope of it. That doesn't actually happen, though; the rich tend to find it more profitable to invest in the stock market. This is not some kind of wealth redistribution or confiscation scheme, nor are we punishing success; we've been made to pay for what amounts to socialism for the wealthy while having essential services for the public cut to the bone. Raising taxes on their income simply means they pay their fair share from now on. They'd still be rich and it's doubtful that their spending power would decrease at all.

Welfare and workfare

The only people who should ever be dependent on social security or welfare should be too old or too ill to work. Anyone who can work should work and the aim of welfare programs for the able-bodied ought to be to make them job-ready by providing them with the skills they need to take a full and active part in the job market. There will never be enough jobs for everyone in the private sector but as the population ages carers will be required to assist with day-to-day needs for the ill and the elderly in their own homes. Community care workers should be obliged to work only to the value of their benefits; if they need to work more they should be paid more.

All workfare schemes should leave participants with transferable skills they can bring to the job market; they should not be used to provide low-skilled workers to subsidize businesses, as some of them currently are. The government should not be picking winners and losers and by lowering the cost of operation of some enterprises, they are enabling unfair competition with others.

Conclusion

As far as I'm concerned the only economic solutions that are proven to work are based on Middle-out policies. There is something fundamentally immoral about requiring some people to be poor that others may benefit. While it can be said that this is often but a temporary state of affairs and the market should be the final decider, that game is rigged so don't even bother to argue that one with me. When a free market has actually been discovered, let me know. Until then the best I can suggest is a form of tame capitalism that gives entrepreneurs enough room to set up and get going, but not permitting them to become incumbent monopolists claiming property rights over intellectual output and even their employees' labour, as many of them do. When capitalism works with a government by the people, of the people, for the benefit of the people, it works best for all of us.

What do you think?

*Value Added Tax (Anglo-Irish sales tax)
**Okay, fine. Which class is Sir Alan Sugar in? Give at least two reasons for your answers. Now shut up and give it a rest.
***See page 26