Not Just a Basic Income

On the 9th December, 2016, the Green Institute published the paper Can Less Work be More Fair: a discussion paper on Universal Basic Income and Shorter Working Week. As part of this release Green Agenda will be republishing a number of essay from the paper.

The second paper we are publishing is from Ben Spies-Butcher, “Not Just a Basic Income“.

One of the great attractions of Universal Basic Income (UBI) is the breadth of its support. Not only are progressives like Martin Luther King and Eric Olin-Wright strong supporters, but so too are free market advocates like Milton Friedman and tech-savvy entrepreneurs. The libertarian impulse behind a basic income—allowing people to spend money as they see fit and without judgment—creates interesting alliances, but it also potentially conceals important points of difference. Depending on both the level of payment, and the other policies it complements or replaces, a UBI can have radically different implications. A basic income can potentially help break down the stigma and conditionality of many government payments, and improve work incentives and equity. However, where it is used to replace other components of social policy—whether through ‘buying out’ public services or reducing the ‘need’ for fair labour laws and job creation, it may instead serve to entrench the inequalities of a neoliberal world.

Friedman is one of the most influential advocates of UBI. His version of the policy involves a negative income tax—a mechanism where low income earners are rebated extra income from the government rather than paying tax to the government. This would replace most government payments, and in Friedman’s view, potentially many public services. Free markets would thus predominate, but poverty would be ameliorated by ensuring everyone had at least some cash to purchase the goods and services they needed. More recently, futurists have argued that technology will see robots replacing workers. UBI is here seen as a way of ensuring people have income in a world with too few jobs. Both the futurist and libertarian approaches focus most of their attention on access to money. If we ensure people have money then they can buy the things they need through markets. In this sense a UBI is entirely consistent with support for free markets. Alternatively, much progressive social change has come by regulating or replacing markets—ensuring fair wages and conditions, industry policy to ensure good jobs, and public services to ensure people get the services they need. A UBI that complements these initiatives is quite different to one that replaces them.

‘Buying out’ the Welfare State

Australia, like most developed economies, spends considerable public money on payments and social services. This potentially creates a pool of funds for a UBI. Of course, our current payments system is far from universal. So simply redistributing this pool of funds across more people will leave some current recipients with less, while extending new payments to those in less need. Some of this might be clawed back through changing the tax scales, but is easy to see why proposals that include other government spending might offer the possibility of a higher payment and allow people more ‘choice’ in areas like health and education. However, the evidence suggests any such move would prove a false economy.

The most dramatic example comes from the United States, where public provision has been least extensive. Much has been made of the stagnation of US wages. Since the 1970s, real wages have barely moved, despite considerable economic growth. All of the gains of the economy have instead been transferred to the very top of the distribution, massively increasing inequality. However, it is not just wage levels that have been driving this divide. The changing nature of the economy has made the kinds of services governments often provide—like health, education and care—much more important to people’s standard of living. And left to the market, the rising costs of these services have made life much harder for ordinary workers.

[… in the US] … since the 1970s, real wages have barely moved, despite considerable economic growth. All of the gains of the economy have instead been transferred to the very top of the distribution, massively increasing inequality.

Elizabeth Warren (now a Senator for Massachusetts) reveals how traditional measures of living standards have concealed a real decline for average workers. ((Warren, E., ‘The new economics of the middle class: Why making ends meet has gotten harder’, Testimony before United States Senate Finance Committee, May 10, 2007.)) Interestingly, Warren was initially responding to a very different (pre-GFC) debate about consumerism and debt. Some claimed that growing household debt in the US showed workers were profligate, racking up credit card debt on widescreen TVs, clothes and entertainment. The same themes were reflected by some environmentalists critical of the ecological impacts of consumerism and materialism. If consumerism was driving growing debt, Warren reasoned, then we might expect to find evidence of rising discretionary spending on the types of things we typically associate with consumerism— electronics, clothing, eating out and appliances. Yet in every one of these categories, the typical middle income family was spending less in real terms (and as a proportion of their income) than did the equivalent family back in the early 1970s. How could families have less discretionary spending and still be going further into debt?

The shift to the market during the 1980s and 1990s not only flattened wages and increased inequality, it transformed social services to make them both less equal and much more expensive. Between the early 1970s and mid-2000s American families were forced to spend significantly more of their income on essentials, like healthcare, childcare, college fees and mortgages. Taxes were going up too, as the public sector struggled to keep up with expensive private markets in health and education. In 2007, before the introduction of Obamacare, public spending on healthcare in the US was already near the top of the international ladder. Per capita public health spending in the US was the same or even higher than much more generous systems in France and Sweden. ((Organisation for Economic Cooperation and Development (OECD), Health at a Glance 2009: OECD Indicators, OECD: Paris, 2009, p161.)) And just as the government struggled to keep up with expensive private systems, so too did average families. Household debt, Warren argued, was fueled by privatisation, not consumerism.

Australia’s private Welfare State

Australia has avoided the worst aspects of the US experience. Real wages have increased—although slower than GDP growth. Importantly, Australians have been protected from the crippling costs of health and education in the US. It is rare for Australians to go bankrupt because they are sick or from university debts. However, similar trends have begun to emerge. Rising costs are particularly pronounced in areas where provision has become more privatised. Increased public funding of private schools means the level of public funding per student is now similar in public and private schools, ((Bonnor, C. and B. Shepherd, Uneven Playing Field: The state of Australia’s schools, Centre for Policy Development: Sydney, 2016, p10.)) yet school fees continue to rise.

The 2010 Intergenerational Report identified the cost of the public subsidy of private health insurance as the fastest growing component of the entire public health budget. ((Australian Department of Treasury, Intergenerational Report 2010, Treasury, Canberra, 2010, p53.)) And a similar dynamic can be seen in childcare, where governments subsidise private provision rather than providing care directly for children. But are these comparisons fair? After all, government subsidies for private services are different to giving citizens money to spend as they see fit.

Perhaps the best Australian example of converting public services into cash payments comes from Commonwealth Rent Assistance (CRA), which has grown rapidly while spending on public housing has stagnated. CRA is not strictly a UBI. To receive the payment you need to be paying rent, and the payment is income tested. But in practice it acts in a similar way to UBI. The rental test is now so out of line with private rents that three quarters of recipients receive the highest level of payment, ((Archer, T., ‘Fixing rent assistance’ in Insight: Gimme Shelter—housing affordability in Australia, 6, 2012, p38.)) meaning it acts more like a uniform rate. And for younger people in particular, renting is also becoming ubiquitous. The operation of the means test mimics the structure of a negative income tax, with those on low income getting cash back from the government.

The results are far from heartening. Between 2008/9 and 2012/3 the total cost of CRA rose 17% in real terms, yet over 40% of those receiving rent assistance remain in housing stress, the same as four years earlier, because rents are so high. ((Australian Institute for Health and Welfare (AIHW ), Housing assistance in Australia 2014, AIHW: Canberra, Cat. No. HOU 275, pp64–69.)) Greg Jericho recently showed that just like in the US, people are now spending more of their income on housing because a private market is failing to deliver. Of course, simply abolishing CRA now would leave thousands much worse off. But the failure of a large increase in spending based on a similar model to a UBI to ensure its recipients receive a ‘basic’ standard of living points to the structural challenge in using UBI as a replacement for direct social provision.

The failure of CRA to solve housing affordability points to a challenge for progressive UBI advocates. If the reason income assistance is falling behind social need is because the basics of life cost too much, then campaigns to expand free public provision might be more effective than campaigns for basic income. Australia has some of the highest out of pocket costs for health in the OECD, very high private spending on education and one of the most expensive housing markets in the world. Childcare and aged care are not only expensive, but often inadequate. And campaigns for public services tend to be more popular than those for higher payments. So strategically it may be more useful to focus our energy on free universal public services, rather than universal payments.

Australia’s system of social support has become more conditional, punitive and subject to surveillance.

Money isn’t everything, but it sure does matter

While we should be sceptical of proposals that focus only on money as a measure of inequality or social inclusion, in monetary economies cash matters. Even with free public services, even a modest level of ordinary social engagement requires some cash. Australia has a particularly stingy system of social payments, at least for those of workforce age. Newstart, the unemployment benefit, has failed to keep pace with rising costs. While it is indexed to inflation, it has fallen behind wage growth and behind the costs of essential services that make up a much larger proportion of the spending of low-income households. ((South Australian Council of Social Service (SACOSS), ‘SACOSS Cost of Living Update December Quarter 2015’, No.25, SACOSS: Unley, 2016, p5.)) Indeed, that failure itself reflects the dynamics of private housing and utilities markets, discussed above.

Australia’s system of social support has become more conditional, punitive and subject to surveillance. The inadequacy of payments is reinforced by greater obligations and a meanness of spirit. The unemployed are forced to engage in job search and preparation that often has little prospect of success. Programs like Work for the Dole do little to help people get a job. ((Borland, J. & T. Tseng, ‘Does ‘Work for the Dole’ work?: an Australian perspective on work experience programmes’, Applied Economics, 43, 2011, 4353–4368.)) Greater restrictions have been placed on parenting and disability support payments, involving greater surveillance, higher costs for government to administer and often lower payments. Compulsory income management is now being extended over a larger section of the community, while there remain live proposals to cut off young unemployed people from all assistance for significant periods.

Given this dire situation, the UBI offers some hope. Indeed, the two payments that look most like a UBI— the age pension and family benefits—have also been most resistant to these trends. Of course, neither the pension nor family benefits is strictly a UBI. Both payments have a means test. However, the design of the means test is broadly consistent with the UBI philosophy and reflects what scholars generally call ‘affluence testing’ rather than the more stingy tradition of ‘means testing’. Affluence testing ensures relatively easy access to most of the target population; it is mainly designed to prevent higher income earners from gaining assistance. For example, about 80% of people aged over 65 receive some age pension. ((National Council of Audit (NCoA), Towards Responsible Government, Commonwealth of Australia: Canberra, 2014, p81.)) Similarly about two-thirds of families with children receive some family benefit. The main difference between affluence testing and a negative income tax is that middle income earners end up paying higher effective marginal tax rates under affluence testing because they lose payments as they earn more. So here a UBI could improve work incentives and remove poverty traps.

Universalism can pay

Inclusive payments have significant economic, social and political benefits. For example, New Zealand has a universal public age pension (confusingly called superannuation). Everyone over 65 is eligible and there is no means test. The New Zealand system has lower administrative costs, less hassle for its recipients, and importantly, has seen a higher rate of older New Zealanders in paid work. Transitioning to such a model would need attention to detail to prevent large gains to the highest income retirees. But there is ample room to do this. The problems of the Australian system have led to new schemes to reduce the tax paid by older Australians—who now pay lower tax rates than younger workers. Replacing these deductions with a universal pension would likely be fairer and more efficient.

A universal age pension would eliminate one of the biggest distortions in Australia’s housing market. The means test for the pension excludes the family home, which is also excluded from the capital gains tax. Those exclusions make some sense in a world where the vast majority of workers will own a home, and where that home is primarily a place to live, not an investment vehicle. Neither condition now holds. Younger generations face a far less equal housing future. And governments now actively encourage retirees to ‘draw down’ the equity in their home, turning homes into financialised credit cards. Including the family home in the pension means test would face fierce political resistance and have unintended consequences (potentially forcing some poor retirees to move away from family and friends). But abolishing the means test entirely has the same impact on incentives, without those potential downsides.

A universal age pension would eliminate one of the biggest distortions in Australia’s housing market.

Removing means tests works precisely because it reflects the universality of a basic income. Likewise, if the pension were universal, then the justification for the very expensive and unequal tax concessions for superannuation would be far weaker. Notably, New Zealand’s universal pension is coupled with more effective and fairer taxation of voluntary retirement savings. Indeed, closing the super loop holes would more than pay to universalise the pension, and even to lower the eligibility age, edging us closer to a general UBI. ((Ingles, D. and R. Denniss, Sustaining us all in Retirement, Australia Institute: Canberra, 2014.)) In a world of growing wealth inequalities, a more universal approach to taxation and pensions can deal with the real issues of inequality facing young people, without playing to a false ‘generational war’ that will likely leave vulnerable older people (mainly women) worse off.

Universality has political advantages too. It is no coincidence that campaigns to increase the rate of the age pension were successful under both Coalition and Labor Governments at precisely the same time other welfare payments were under attack. New Zealand’s universal pension survived the 1990s, when other payments were slashed. Universality creates a much larger constituency of supporters. It also focuses attention on needs and common interests, rather than focusing attention on the ‘undeserving poor’. Even though universal payments look like they benefit those on higher incomes more than means-tested payments, they often act to protect the poor from more serious political threats.

Campaigns for a basic income therefore have the potential to re-frame the toxic debate around welfare. While ever welfare reform is focused on the most marginalised it will be difficult to ensure Newstart is adequate or to abolish expensive and demoralising forms of conditionality and surveillance. A basic income would do those things—but through a debate which focuses on collective problems, collective needs and the nature of life and work. And we know from other evidence it would likely be more effective at supporting paid work than our current policies.

Australians, however, have traditionally been sceptical of universalism. Means tested payments are the norm, and affluence testing does save money. There is an important political choice here about tactics. Means tests can be a way of clawing back some money to spend on other social programs. However, the current trend to freeze eligibility for family payments risk shrinking the constituency for these programs so much that they become vulnerable to more aggressive political attacks. Changes to increase the phase out rate for the age pension potentially make the exclusion of the family home worse—reducing housing affordability.

We still need jobs

Ensuring everyone has some income is crucial to maintaining dignity and reducing poverty. But advocating a UBI as an alternative to good quality jobs is a dangerous strategy. Nor can it be said that technology has meant the end of work (as it has consistently been predicted to do). Over the past 30 years the proportion of people working has increased (as women entered paid work and as the number of adults increased relative to children), from about 60% to 65% of all those over 15. The long trend of falling working hours has also reversed. ((Bregman, R., Utopia for Realists: The case for a universal basic income, open borders and a 15-hour workweek, The Correspondent, 2014,Trans. E. Manton, 2016, p40.)) At the same time, we are constantly told that we cannot afford to fund the jobs that make our lives better—in health, care and public works. Even with robots, we are a long way from running out of socially useful work.

Australia has a strong tradition of regulating work—and using that regulation to make life fairer. Creating jobs and ensuring those jobs are paid a just wage is politically popular, and so should be at the heart of any progressive strategy. In part this is also the flip side of providing needed public services. Rather than taking the dividend of higher productivity as cash, we should explicitly argue that productivity gains be used to fund more and better public services. That not only reduces the cost of living, it also creates real and meaningful work. The health and education sectors have been the main source of new employment since 2000, and have proven much more reliable (and less ecologically harmful) than mining. And while a UBI can help us to value unpaid labour, and give us choices about how we work, we should still insist that care work be properly paid and its skills recognised.

If productivity means less paid work, then that too should be shared. Reducing working hours can create new permanent jobs, at least where unions are strong enough to ensure more people are employed to take up reduced hours. That is currently happening in Sweden, where trials of a four day week (or six hour day) have led directly to higher employment in trial sites. We already know that shorter hours increase productivity; the countries with the shortest working hours have the highest productivity. In many jobs focus and attention fall significantly after six hours a day.

Working hours did not fall naturally. And it is no surprise that working hours stopped falling just as neoliberalism took hold; and it is no surprise this coincides with the privatisation and marketisation of social services, and increasingly punitive forms of public assistance. All three reflect the balance of economic and political power. Winning one goal should make the others easier. But winning any will require sustained campaigning and solidarity.

Looking to a UBI as a short cut, to create consensus and avoid opposition, or to substitute for other struggles, will not deliver the kind of reform we want. A UBI capable of doing everything would likely face even more political resistance than campaigns for public services or shorter hours. UBI is part of the answer, but only if it builds on a broader project for social change.