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Basic Income and the Atavistic Appeal of Austerity

Basic Income and the Atavistic Appeal of Austerity

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Today, Basic Income, the proposal that the government provide each and every citizen an income sufficient to meet his or her minimal needs, sounds utopian, maybe even ridiculous. Soon it will merely seem impractical and a little later, it will be recognised as obvious, inevitable and necessary, not because it will provide a safety net for our poorest citizens or even reduce inequality, worthy as those goals are, but rather because it creates demand, the only thing our economy currently lacks. Basic income may well prove to be the best tool to preserve our capitalist system. 

These days capitalism and technology have made us so efficient that creating goods and services requires ever less labour.  A dozen workers can make steel it used to take hundreds to produce.  Three men and a tractor can pick as much cotton as 1000 sharecroppers. White-collar workers are not immune to productivity gains.  The personal computer is doing to office workers what the internal combustion engine did to the horse 100 years ago, making them obsolete.  On the micro level, of course, this is wonderful.  Productivity increases mean you can make more stuff with fewer inputs.  If I need fewer workers, I can keep more profit.

On a macro level, however, it is problematical.  Since my workers are your customers, if I hire fewer workers (or am able to pay them less) they spend less in your shop, which means you buy less inventory and fire some of your workers and this demand deficit ripples through the economy, creating a gap between potential and actual output. A guaranteed basic income, giving citizens money they will spend straight away creates demand and ultimately stimulates the animal spirits of the private sector.  If you think about it a bit, it is a no brainer.

But the functioning and advantages of basic income is not the point of this essay.  I want to look instead at why it still seems utopian and ridiculous. Lets think about George Osborne and his economically illiterate advocacy of austerity.  Even the IMF tells us British GDP has suffered because of this misguided policy.  Why then, does the Chancellor continue to claim that reducing government spending is vital to economic recovery?

I suggest there are two reasons.  The first is that austerity does serve the interests of what used to be called the hard money crowd.  Back in 1896, William Jennings Bryant, speaking on behalf of debt-burdened farmers, demanded that we not  “crucify mankind on a cross of gold”.  He lost his campaign for the US presidency to McKinley, who represented the big business Wall Street interests.  Debtors wanted easy money, so that their debts would be less burdensome but creditors, who then and today are politically more powerful, feared being repaid in cheap money.

Creditors hate inflation above all else.  Even economic growth is anathema to them, if it might spark inflation. The nightmare of the creditor class is being repaid in depreciated currency. They are quite happy to let the economy stagnate and unemployment rise just as long as their bond coupons are paid in hard money.  The financial system as a whole is a net creditor so it makes sense that bankers (and the politicians they own) fulminate against increased government spending, even though today deflation is a bigger threat than inflation.

But most of us are not bankers. Most of us are net debtors, not net creditors.  Why then do the rest of us fear government spending and feel that austerity is the prudent and sober minded policy?

If you know nothing about economics, austerity makes all the sense in the world.

In difficult times, when the economy is shrinking and most of us are trying to pay down our debts, it seems intuitively obvious that government not spend more than it can afford.  Being profligate is dangerous.  Austerity seems the safe, sensible option.  Readers of Pieria, who do know something about economics, recognize the flaw in this reasoning.

Keynes saw it 80 years ago.  If you are saving, you are not spending in my store.  If you are not spending, if my inventory is pilling up, I won’t be purchasing from my suppliers and I will be firing, not hiring workers.  The treasury view that Keynes battled against (what we call austerity today), said that unemployment would force wages to fall, at which point, employers would start hiring again.  But of course, since workers are also consumers, cutting their wages will only cut their spending as well. Yes, we will arrive at an equilibrium but it certainly won’t be a full employment equilibrium. The answer, Keynes told us, is deficit spending.  The government puts money in consumers’ pockets, which they will spend, allowing the animal spirits of entrepreneurs to return.  We all learned this years ago, when we studied Economics 101.

It strikes me that our affection for austerity is an atavistic throwback, in much the same way our passion for sugar and processed foods is a remnant of our history on the savannahs of East Africa, when hominoids who enjoyed the sweetness of fruit had a better chance of survival than those that didn’t. Back then, a taste for sugar brought us vital nutrients. Today it just makes us fat. Likewise austerity.

For most of our time on the planet, scarcity was the bane of our existence. Lent comes in February because by that point in winter, our peasant ancestors had run out of anything tasty to eat. Religions that required lavish feasts in January probably had parishioners starve to death before spring. In hard times, we are hardwired to tighten our belts. Splashing out and spending seems wrong. Once upon a time, the wolf at the door wasn’t just a metaphor.

No longer. Today, obesity, not hunger, is the sign of poverty. Thomas Malthus had the bad luck to proclaim his theory just at the moment it ceased to be true. From the time Homo sapiens learned language until the early 19th century, we did indeed live on the knife-edge of starvation. We live in a very different world today but our instincts remain the same.   The fairy tales we learned as children tell us the spendthrift grasshopper dies while the penurious ant prospers.  Austerity touches on this atavistic fear.  The notion, both here and in America, that we are threatened by rising government deficits is a reflection of that fear.

We need to recognize that today, demand, not supply is the problem. President Obama’s biggest mistake was to try and placate the deficit scolds rather than use his bully pulpit to teach the American people that an increasing deficit in times of economic stagnation is nothing to fear. Keynesian economics may not be intuitive but it is pretty straightforward.  Progressive politicians need to educate the public that austerity is the problem, not the solution.  That would be the first step towards enacting a basic income policy that ultimately will benefit us all.

Image by Andrew Parsons


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It makes no sense to provide a basic income to people who already have a basic income. The simple way to ensure everyone has a basic income is by providing generous financial support to the unemployed. This will ensure that people do not fall into poverty if they lose their job. It will also make the unemployed less desperate for work, which will force employers to pay at least a living wage to all of their employees.

Tom’s first reason for thinking Osborne & Co want austerity is that that favours the rich and/or creditors. Problem there is that austerity does not benefit creditors any more nowadays than it did ten or fifty or seventy years ago. So that effect does not explain the current obsession with austerity.

In contrast, I agree with Tom’s second reason: roughly speaking that austerity is a nasty medecine, so everyone thinks it must be doing good.

Re Tom’s claim that “Progressive politicians need to educate the public that austerity is the problem, not the solution.” that’s a nice idea. I wish that would work. Problem is, what if people say to politicians, “Ah, but Keynsian stimulus involves increasing the national debt”, I suggest 99% of politicians have no idea how to argue their way out of that one.

In fact there are economics Nobel prize winners who are clueless on Keynes. See:

http://ralphanomics.blogspot.co.uk/2013/10/fama-idiot-nobel-prize-winner.html

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