UBI: For individuals or households?

This post is about a point which has come up here and there in the discussion about Universal Basic Income, but which I’ve never worked through properly.  


A preliminary observation is that it’s necessary to consider tax and welfare together as an integrated system. What matters most is the effective marginal tax rates (the sum of marginal income tax and benefit reduction rates). 


Then, starting with the current Australian tax-welfare system, and considering possible paths towards UBI, the key problem is that the tax system is organised (mostly) on an individual basis while the welfare system is organised (almost entirely) on a household or family basis. 

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Transmission too

In my article arguing that electricity from solar PV (and wind) could soon be too cheap to meter, I didn’t mention transmission networks. That was for space reasons.

The case for public investment is actually stronger for transmission than for generation. Electricity transmission lines have the same cost structure as renewables (low operational cost and long lives), if anything more so, meaning that the cost of transmission depends primarily on the need to secure a return to the capital invested.

More than this, the electricity grid as a whole is a complex network in which valuing the services of any individual component is just about impossible. That in turn means that relying on markets to make optimal investment decisions is untenable.

For these reasons, the electricity transmission network should never have been privatised. I’ve been arguing for renationalisation for years.

Amazingly, in the new low interest environment, this idea seems to be gaining traction, at least as regards new investment. Labor has proposed a $20 billion public investment. The government hasn’t gone that far, but is seeking to use its own borrowing capacity to provide low cost finance for transmission investment ( a half-baked compromise, but better than nothing).

Too cheap to meter

That’s the headline for my latest piece in Inside Story, looking at the implications of zero interest rates for renewable energy sources like solar and wind. Key para

Once a solar module has been installed, a zero rate of interest means that the electricity it generates is virtually free. Spread over the lifetime of the module, the cost is around 2c/kWh (assuming $1/watt cost, 2000 operating hours per year and a twenty-five-year lifetime). That cost would be indexed to the rate of inflation, but would probably never exceed 3c/kWh.

The prospect of electricity this cheap might seem counterintuitive to anyone whose model of investment analysis is based on concepts like “present value” and payback periods. But in the world of zero real interest rates that now appears to be upon us, such concepts are no longer relevant. Governments can, and should, invest in projects whenever the total benefits exceed the costs, regardless of how those benefits are spread over time.

The arithmetic of retirement income: the case of zero interest rates

Back in 2009, I looked at the implications of the GFC for retirement income, working on the assumption that retirees could safely aim for a 2 per cent real rate of return. The bottom line was that current workers need

double contributions, to 20 per cent of income and shift the work-retirement balance, so that you work from 25 to 65 to finance an expected 20 years of retirement income.

Since then, the real rate of return on safe investments like government bonds has fallen to zero (maybe below). That means that you can treat your net worth at retirement as being equal to the amount you have to live on for the rest of your life. In particular, if you work from 25 to 65 and want finance 20 years of retirement income holding your consumption constant, you need to save one-third of your income.

When I wrote in 2009, the general view was that we were saving too little, so the increase in required savings seemed like a good thing for the economy in general. Now, the reverse is probably true.

Sandpit

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

To be clear, the sandpit is for regular commenters to pursue points that distract from regular discussion, including conspiracy-theoretic takes on the issues at hand. It’s not meant as a forum for visiting conspiracy theorists, or trolls posing as such.

Some facts, and claims, about the 21st Century Economy

In the process of working on my book-in-progress, The Economic Consequences of the Pandemic, I’ve been trying to integrate a number of facts about the economy of which I’ve been more or less aware for a while, along with claims I want to make, and put them together into a coherent account of the economic system prevailing (in advanced/developed economies( in the 21st century and how it differs from the industrial goods economy of the 20th century.

As a step towards this, I’ve put together a list of factual claims which I think can be established reasonably firmly, along with claims I want to make that will be more contentious. My plan is to put this together into a coherent analysis, including supporting evidence. So, I’m keen to get good supporting links for any of these points (I have quite a bit, but more would be helfpul). I also want to be sure I’m not missing contrary evidence, and to adjust the claims if necessary, so please point this out also.

Facts (I think)

  • Most economic activity in the 20th century, including services such as wholesale and retail trade, was fairly directly related to the production and distribution of goods
  • This is no longer true: most economic activity is now related to human services, information services and finance, and these are at most indirectly related to goods production
  • Real interest rates for government debt and high-grade corporate debt have been below zero since the GFC and seem likely to remain there permanently under current conditions
  • Massive issues of government debt during the pandemic crisis haven’t changed this
  • Net private business investment (non-residential) has been declining relative to GDP/national income since at least 2000
  • Service industries less capital intensive than goods industries
  • Information economy firms (Facebook, Google etc) invest very little even counting R&R
  • Government investment in traditional infrastructure has been falling since 1970s, at most partially offset by private infrastructure
  • Corporate profits high, mostly derived either from financial sector or from “intangible” assets in IT.

My claims

  • Finance sector profits even higher if payments to managerial level in finance sector are treated as part of profit
  • Intangibles = monopoly
  • Revenue and profits in finance and Internet do not arise from sales to final consumers, and bear no obvious relationship to consumer welfare
  • Implies similar regarding wages for market work
  • Incentives don’t work in in this kind of economy (if they ever did)
  • Unmet needs for public investment in human services: health, education, aged care, early childhood, social work
  • Capacity to meet these through short term increase in public debt, long term increase in taxation

Budget reax

I have a couple of articles responding to the most momentous budget in Australian history. For those who’ve forgotten, it was introduced on Tuesday.

Here’s one in The Conversation on environment and energy policy (heavily edited and done in a hurry, so there are a few points I would have written differently).

And here’s one in Independent Australia, headlined Budget like its 2019, on the government’s failure to learn from the catastrophes of the last year.

Inequality and the Pandemic, Part IV: Possibilities

Another in my series of extracts from my book-in-progress, Economic Consequences of the Pandemic. So far I’ve looked at luck the limited relationship between returns and social value and the fact that risk-taking is mostly done (involuntarily) by the poor, not the rich. Now I’m going to consider possibilities for reform

The biggest lesson of the pandemic, and indeed of the decade since the Global Financial Crisis is that (just about) anything is possible. The decades in which the ‘Washington Consensus’ held sway narrowed the range of thinkable policy options to the marginal differences between hard (think Newt Gingrich and Margaret Thatcher) and soft (Bill Clinton and Tony Blair) versions of neoliberalism.

Economic policies that had prevailed during the decades of widely shared prosperity in the decades after 1945 were simply ruled out as the kind of thing governments don’t do any more. This was particularly true in relation to income distribution.

Let’s start with the minimum wage. When the Federal minimum wage of $0.25 cents an hour was introduced in 1938, national income [more precisely, Gross Domestic Product] per person was $674 per year. Over the next thirty years, the minimum wage grew roughly in line with GDP, reaching its maximum purchasing in 1968. Since then, the minimum wage has failed to keep pace with inflation, let alone income per person, which reached $65000 in 2019. If the minimum wage had risen at the same rate, it would now be just under $25/hour. In fact, the Federal minimum wage is $7.25/hour. Many states have higher rates, but the average is still only $11/hour.

Minimum wages set a floor, but for most workers, what matters is the bargain they can strike with their employers. In the mid-20th century, labour’s side of this bargaining process was mostly undertaken by unions – even non-union workers benefitted from this process. Unions have vanished from most of the US private sector today, a development paralleled to a greater or lesser extent in much of the developed world.

In the neoliberal framing of the issue, the decline in unionism is the inevitable consequence of a modern flexible economy. In reality, the primary cause of declining union density is the passage of anti-union laws, beginning with the Taft-Hartley Act in 1948 (outside the US, the process began later and is less complete, but the sequence of events is generally the same). As the International Monetary Fund (long a guardian of economic orthodoxy) has observed, the weakening of unions may be responsible for as much as half the decline in the labor share of national income.

Similar points may be made about income tax rates. Work by economists such as Diamond and Saez suggests that income tax revenue would be maximized with a top marginal rate of 70 per cent. And, on almost any plausible assumptions about the relative value of additional income to the rich and the poor, the socially optimal marginal rate would be only marginally above this.

It’s true that there were plenty of loopholes (though perhaps fewer than today). Still it seems clear that a good many high income earners faced an effective marginal tax rate equal to or greater than the 70 per cent rate recommended by economists like Diamond and Saez. They may have reduced their work effort as a result, but any impact on the economy as a whole was undetectable.

High minimum wages, strong unions and progressive taxes worked well in the past. But in considering the possibilities for a post-pandemic world, we need not think in terms of turning back the clock, even if doing so would be an improvement on the disasters wrought by decades of neoliberalism. Rather, we can imagine new paths that combine the best of the past with innovations made possible by the advance of technology.

Some of these new possibilities, such as Universal Basic Income and guaranteed free access to college, have already been raised, notably in the context of the Democratic Party primary campaign. Others, such as the need to redress growing inequality between potentially home based information workers and in person service providers, are emerging from the pandemic. Much remains to be worked out but one thing is certain: a return to the pre-pandemic economy, neither possible nor desirable.

(links to come when I get some more time).