How Basic Income Will Save Capitalism
After all, supply isn’t the issue. Today, despite our never-ending economic travails, the world economy has more capacity, is more productive than it was during the halcyon days of the boom. We can make more goods and services with fewer inputs than we could in 2006. And yet, British and World GDP remain lower today than they were 6 years ago. George Osborne, with his odd fetish for austerity, doesn’t get it but I’m sure readers of Pieria understand what is going on.
Our problem is one of demand. We can make more goods and services than we can afford to buy. The solution, which Keynes figured out 80 years ago, and undergraduate economics students have been taught for generations, is the stimulation of demand by government fiscal policy. That policymakers have forgotten what they learned in their first economics class one of the mysteries of the age. Basic income solves the problem of demand.
Even Republicans understand the simulative effect of tax cuts. By putting more money in consumers’ pockets, their spending increases. As consumer spending rises, firms find a reason to hire and invest. Tax cuts and government spending inevitably stimulate the animal spirits of the private sector and so spark recovery. Unfortunately, tax cuts, though politically popular, are the worst way to stimulate spending. Generally they favour the richer citizens of a society who are more likely to save their windfall rather than spend it, as the economy requires. A basic income that goes to all citizens has more equitable distribution, which means almost all of it gets spent.
Lack of demand, or its corollary, overproduction, is not just a problem today. Ever since the Great Depression, demand has been the Achilles heel of capitalism. For the past eighty years, we have solved this problem in three ways. From 1939 to 1945, it was war. Everyone knows it was World War II that ended the Great Depression but It is worth remembering that is wasn’t the destruction of cities, factories, and people that regenerated the world economy, it was the putting of money into workers’ pockets. Then, like today, our productive capacity exceeded our effective aggregate demand. Basic income allows us to create demand without the added bother of destroying Dresden.
In 1945, most policymakers assumed that without the stimulus of war, the world economy would again collapse. It didn’t and the post war period until 1973 saw the greatest (and most equitable) growth the world has ever seen. The secret of golden age prosperity was the rapid transmission of productivity gains into median wage gains. Advertising, combined with rapidly rising wages ensured that demand grew as fast as supply.
Since Reagan and Thatcher the share of income going to labour has precipitously declined. The benefits of productivity gains have gone almost exclusively to corporations, their shareholders and consumers. The dilemma of the post 1982 era was how to keep demand growing while wages were stagnant. The answer, of course, debt fuelled consumption financed by rising asset prices. Easy money stimulated asset prices. Higher asset prices encouraged more lending. And that lending allowed consumers to spend more even as wages stagnated.
The Reagan Thatcher era, beloved of the right, has been a disappointment to the rest of us. GDP grew faster in the universally lambasted 1970s than it has ever since. More to the point, since the financial crisis, the asset price inflation/debt fuelled consumption paradigm has stopped functioning. Our economic policy makers are hoping that ultra low interest rates, combined with massive central bank purchases of previously dubious debt will bring on another bubble, allowing us to party like it is 2005 but so far the results have been disappointing.
Imagine a widget factory. In 1900 100 men working all day made one widget. By 1950 100 men could produce 10. Today, 20 men can make 100. Obviously society is better off when we can produce more with less. The problem is for the 80 men who lost their jobs. Wages have stagnated since 1973 in large part because we need fewer workers and that is the result of inexorable productivity increases. With the rise of robots, even fewer workers will be needed.
Karl Marx got one thing right. Capitalism is the most productive economic system the world has ever seen. By rewarding microinovations, we are each year able to produce more goods and services with less labour and capital. Scarcity, the bane of our species since time immemorial, has largely been banished. For some time now the problems of supply have been behind us. We have stimulated demand with war, with advertising and unionization, with asset price inflation that has created a new gilded age. We can do better.
A basic income guarantee, a policy
advocated by such socialist radicals as Richard Nixon will create a kinder
gentler society while allowing our economy to grow. During the 1930s, to many
capitalism seemed doomed. Keynes and
Franklin Delano Roosevelt saved it by bringing its benefits to more citizens. Basic income can do the same today. It is the wave of the future. If you
disagree, please come up with a better idea.
How else do you suggest we stimulate demand in a world that every year needs fewer and fewer workers?