Rethinking the Social Contract

By Mathieu Wener

Four years before his assassination in 1968, civil rights leader Martin Luther King Jr. was awarded the Nobel Peace Prize. Little known to the general public, King’s thinking had evolved much beyond the scope of civil rights in the final months of his life. His last book, "Where Do We Go From Here: Chaos or Community?" demonstrates that his thoughts were now focused on an economic vision: more specifically, on the eradication of poverty. He writes that “the curse of poverty has no justification in our age. It is socially as cruel and blind as the practice of cannibalism at the dawn of civilization, when men ate each other because they had not yet learned to take food from the soil or to consume the abundant animal life around them. The time has come for us to civilize ourselves by the total, direct and immediate abolition of poverty. I am now convinced that the simplest approach will prove to be the most effective – the solution to poverty is to abolish it directly by a now widely discussed matter: the guaranteed income.” (King, 1967)

For the most part, mainstream discussion of the subject of guaranteed income (GI) was laid to rest with King. Nearly half a century later, the subject of GI has resurfaced. Not on the lips of thinkers, activists or even economists, but out of the mouths of politicians. This year, Finland will finalize details on a GI proposal, which aims to have a pilot program running in 2017. Although the specifics are not yet set in stone, a figure of 800 euros a month has been circulating amongst various media outlets. Olli Kangas, designer of the experiment and Research Director at the Finnish Social Insurance Institution, informed Ben Schiller of Fast Company magazine that the goal of the pilot program is to provide around 100,000 Finns with up to 1,000 euros a month as a replacement for other social benefits. Schiller also spoke of three reasons of interest that are central for the Finnish government:

  1. Labour market changes, marked by an increase in the prevalence of part time work with no benefits, has led to the rise of a new form of poverty where people neither work full-time nor collect government unemployment payouts.

  2. The government must find ways to remove disincentives to work. It turns out that unemployed Finns may not be seeking out work because the unemployment benefit pays better. The disincentive to work brought about by unemployment benefits can be decomposed into two factors: firstly the value of the payments themselves, and secondly the stoppage of payments when employment is found. Since GI would not depend on employment status, the second disincentive should no longer be an issue.

  3. It is also necessary to reduce bureaucracy, as affirmed by Kangas;"When you have income-tested benefits, like housing allowances, it takes time for our employees to check all the applications and see that the client's income is this-and-that, and that their rent is this-and-that. Then, if a person's income changes, they have to repeat the process again. If the government can pay benefits without that kind of testing, it avoids bureaucratic hassle".

The idea of GI implementation has also reached our own provincial government. François Blais was given the position of Minister of Employment and Social Solidarity upon the reshuffling of Premier Couillard's cabinet in late January. Seeing as Blais wrote a book on the subject of GI, it is no coincidence to now see the provincial government treat the subject with the respect it deserves. In his manuscript, Blais asserts that "Those who lead us, and a large part of those we elect are strangers to the realities of poverty and exclusion. I firmly believe that universal allocation will find itself at the heart of the propositions by which social policy will be reformed in the 21st century. We must prepare ourselves for this eventuality without further delay". Much to his satisfaction, Blais was mandated to draft a GI proposal to be scrutinized on the National Assembly floor, which he is currently in the process of drafting. Similarly, Ontario has budgeted to plan for a basic income pilot project, although it is still in its early phases.

On a national scale, one of the most curious aspects of guaranteed income is how it has received support from both sides of the political spectrum. Fiscal conservatives see it as a better alternative than the current social safety net "riddled with complicated means-testing which distorts incentives and is a headache to run." By streamlining government transfers, expenses could be cut. As a proportion of GDP, Quebec is the province with the highest government expenditures (47% versus the Canadian average of 39%). Taxpayer funds could thus be used more effectively while at the same time promoting overall social solidarity. In an opinion piece recently published by the Toronto Star, Sheila Regehr and Roderick Benns, leaders of two organisations that support GI, state that "guaranteed income would reduce inequities in the communities, reduce crime, improve health outcomes, and strengthen social cohesion." Proponents of GI believe the time has come to rethink how our social programs are meant to deal with poverty: "Raising the minimum wage is a good idea, for example, but it doesn’t help those who are jobless, or the millions of Canadians who find themselves in precarious work, such as contracts and part-time jobs without benefits. And their numbers are growing every day. Adding to a stigmatizing and overly complex social assistance system is not a good idea. A guaranteed income works to address both of these angles."All in all, advocates of GI assert that it would fulfill the social-democratic goal of assisting those in need while avoiding excess bureaucracy that eats up a large portion of taxpayer funds. This sounds almost too good to be true. How can we know if GI is all that it is made up to be?

Professor Ivan Tchinkov of the Economics Department at Concordia University brings forward that it is currently very difficult to evaluate what the macroeconomic impact of GI would be since no such plan has ever been brought about on a large scale. As such, no academic research exists to validate hopes or concerns of the effects of GI implementation on a national scale. However, in the 1970s, during Pierre Elliot Trudeau's stint as Prime Minister, the Manitoban town of Dauphin was the subject of a four-year experiment with basic income entitled Mincome. The findings of the study were that employment was not reduced in a meaningful matter except among one key demographic: young people, who were able to forgo joining the job market in order to pursue further education.Another perhaps more surprising finding was brought forward in 2011 by Evelyn Forget, one of the only researchers to have had full access to the data of the Dauphin experiment. In her paper, Forget notes that hospitalization rates decreased among participants for the duration of the experiment, before returning to the norm after Mincome was halted. This, she claims, is consistent with other research suggesting that poverty is a major determinant of health outcomes.While the results of this study do bear outcomes that appear to favour GI as an effective policy, we cannot necessarily extrapolate the effects of this experiment on a nationwide scale based on such small-scale results.

Concerns about basic income include a disincentive to work and the overall costliness of the project. According to a recent Globe and Mail article, providing every Canadian citizen over the age of 18 with 20,000$ and every child with 6,000$ would cost an additional 40 billion dollars. According to this year's federal budget, this would correspond to a 13% increase in overall government expenditures. Furthermore, the budget released on March 22nd has a deficit of 29.4 billion dollars, or 1.5% of GDP. This makes it the largest budget deficit since 2010, Canada's recession recovery.

Figure 1: Federal deficits from 1966 to 2014. Data source: Federal Fiscal Reference Tables.

This is significant because budget deficits and growing debt can have certain economic impacts. It is actually a topic of much debate in academic economics: some researchers see budget deficits as a slight nuisance while others warn that they will inevitably lead to economic decay and a very sudden and harsh recession. Essentially, since macroeconomics involves so many variables, it is hard to distinguish what causes lead to which effects; the debates are then mostly about the size of the effects rather than their actual existence. Some of the other potential effects of budget deficits relevant to the discussion of GI include a dampening of wage growth due to lowered investment and the worsening of income inequality as a result of stagnating wages.  Figure 2, seems to support the theory that budget deficits do have an effect on wage growth.

Figure 2: Average and median hourly wages between 1981 and 2011. Source: Statistics Canada.

The one fact that cannot be argued with regards to budget deficits is that the interest payments that ensue keep the government from investing in other sectors where the funds would be welcomed, such as infrastructure and healthcare. Another concern is that if GI allows consumers to have greater disposal income, prices will rise in response and consumers will find their buying power has increased by less than anticipated. This appears especially likely considering that the industrial structure of some large Canadian business sectors is uncompetitive; the commercial banking, telecommunications, media and oil & gas industries are considered to be oligopolies, meaning that a handful of firms control the large majority of the market. Under such a market structure, prices are not determined by productions costs as in competitive markets. Rather, price discrimination occurs: consumers are charged based on their willingness to pay, or, in other words, their buying power. Thus, it is possible that GI would lead to unnecessary price inflation in several sectors of Canadian business. In short, the concerns pertaining to GI are that it would be counterproductive based on its own goals, and that it is too costly for Canada to prioritize over other projects. While GI is a policy that is gaining popularity, only time will tell if its implementation will become widespread, and whether the economic effects of this policy will be positive or negative. If Canada adopts a GI Project, it would consist of a major overhaul of the social contract. Government transfers would thus be much less paternalistic: rather than having child benefits, unemployment benefits and food stamps, there would simply be a lump sum paid out to everybody. In the bigger picture, to think about granting all citizens an unconditional allowance consists in thinking of the role of government in today's globalized capitalist world. Is the aim of capitalism to provide full employment, or is it to create so much wealth that it is no longer necessary to work? Does capitalism even have a goal at all, or is it simply an application of the laws of the market? Perhaps these are questions to be answered before considering the implementation of guaranteed income.

Illustration: Florence Yee, John Molson Business Review. 

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