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Posts Tagged ‘basic income grant

A radical solution to land ownership

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Farmland

What if I could offer you the following three outcomes – 1) an increase in government revenue to the extent that a Basic Income Grant (BIG) can be afforded, 2) a substantial decline in wealth inequality, and 3) a sustainable solution to the land crisis – with just one policy intervention? Fantastic, you’d say, but naïve and, frankly, absurd. There is no policy that we know of that can tackle these immense societal challenges, all in one go.

Wait, I’m not done yet, I’d answer. This policy would make it much easier to build infrastructure, get rid of derelict buildings, would ramp up GDP per capita significantly, and would foster social cohesion.

Seriously? Don’t be ridiculous, you’re dreaming, you’d respond. And to do this, I’d continue, we’d need to do two things that seem almost directly opposed to one another. We need to expand markets. You might nod in agreement, something sensible for the first time. Oh, and we must abolish private property altogether.

This, in short, is the recommendation by two economists, Erik Posner and Glen Weyl, in their new book Radical Markets. Critics seem to agree that this is something worth discussing; Kenneth Rogoff calls this ‘perhaps the most ambitious attempt to rethink democracy and markets since Milton Friedman’.

Although their ideas have huge implications for democracy and immigration too, I will focus here on their first chapter, and probably the one most relevant to South Africa currently: property. They propose a Common Ownership Self-Assessed Tax (COST) on wealth. Property, they argue (like many economists before them), are inevitably monopolistic, and monopolies create inefficiencies in the market. Their COST aims to remove these allocative and investment inefficiencies by introducing a live auction for every asset in society.

So, how does it work? Let’s take Khulekani. His young family has just expanded, and so he wants to buy a new house. He would go to a website – let’s call it UmhlabaWethu.co.za – and open a sort-of Google Maps that will allow him to see every property in South Africa, valued by the owner of the property. He can then decide to buy any property, by just clicking on the property, at the price the owner has listed. The ‘right to exclude’, one of the central tenets of private ownership, is therefore waived in this new system. Every property owned by a company or individual (or government!) must be valued and listed.

So, what prevents owners from just making excessively high valuations, making Khulekani’s attempt at buying a house impossible? Tax. In this system, each owner will pay an annual tax on the self-assessed value of their property, thereby waiving the ‘right to use’, the second central tenet of private ownership. The authors explain: ‘In the popular image of private property, all benefits from use accrue to the owner. Under a COST, on the other hand, a fraction of this use value is revealed and transferred to the public through the tax; the higher the tax, the greater the fraction of use value transferred.’

In other words, all property in South Africa would be on a permanent auction, where the current user of the property determines the price (but pay for that price in tax). It’s almost like Uber, for property.

Imagine a private investor wants to build a high-speed monorail in Cape Town. To do this at present would be almost impossible, as owners of properties on the intended route would hold out for a high price, knowing that they have monopoly bargaining power. A COST would allow an investor to go online and buy up all the properties at the listed price, combine them, and start building the monorail. (Of course, they must also value that property, and pay tax. If another investor believes they can build a more profitable monorail, they might just buy-out the original investor’s right of use.)

Or imagine that the property tax is returned to citizens as a Basic Income Grant. By the authors’ rough calculations, every US citizen from a similar system could receive $20000 annually, which for most would be far less than they would be paying in tax. By their estimates, it would only be the richest 1% property owners that would be paying more than they receive – and often a lot more. This not only reduces inequality (by 4 Gini points, according to their estimates), but it also acts as a subsidy for the poorest.

In South Africa, COST tied to a BIG could do far more to alleviate poverty and address inequality than a policy like expropriation. Unproductive land would be a direct cost to all society: higher property values paying more tax mean that more can be redistributed to everyone. As the authors note, ‘a world in which everyone benefits from the prosperity of others would likely foster higher social trust, a factor essential to the smooth operation of the market economy’.

‘The sharing of wealth would be in accord with many commonsense notions of justice. Wealth is rarely created solely by the actions of the people who are paid for it under capitalism. They normally benefit from the help of friends, colleagues, neighbours, teachers, and many other people who are not fully compensated for their contributions. A COST would better proportion the distribution of wealth o the labour that created it.’

This is a radical proposal. It might have unintended consequences that we cannot currently imagine. That’s why the authors propose a piecemeal adoption of these policies. That is a sensible approach. Experimentation will be needed, perhaps even within one municipality first.

But the radical economic transformation that COST can accomplish is a lesson in how creative thinking – and perhaps a willingness to put away our ideological differences – can help find solutions to a problem that we had thought to be insurmountable.

*An edited version of this article originally appeared in the 13 September edition of finweek.

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One policy to rule them all

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LotR

The holy grail for development economists is to identify an affordable policy intervention that will help the poorest escape poverty. We know that living a longer and better life is correlated with many things: higher income from having a job, living in a house with clean water and sanitation, and access to better schools and health facilities, to name a few. But the trouble comes when we try to write policy to improve these things: which investment, given limited resources and political constraints, will most benefit children from poor households? And why?

A new paper* published in the American Economic Review last month by a team of economists and psychologists offers an answer. It uses a longitudinal unconditional cash transfer programme – the Great Smoky Mountains Study in North Carolina – to examine how a cash boost for parents affected children’s outcomes. Children from 11 counties were interviewed annually from age 9 until the age of 16. Their parents were interviewed at the same time. One subsection of these children are American Indians. These American Indian families began to receive, five years after the first survey, direct cash transfers from the Eastern Band of Cherokee Indians tribal government as a result of a new casino that came into operation. The cash transfers were provided to all adult citizens of the tribe, regardless of their employment conditions, marital status, or the presence of young children. This is basically equivalent to a universal Basic Income Grant, a policy that is gaining popularity in academic circles.

Because the surveys were initially undertaken for the purpose of collecting information about behavioural and mental health, the authors have a lot of information about the children’s emotional and behavioural well-being at their disposal. Most importantly, the surveys began before the introduction of the unconditional cash transfer, so they can compare the mental health conditions of children in households who receive the transfer to those in households who never received it. This ‘natural experiment’ is the closest thing economists get to a laboratory experiment.

The results are remarkable. They show that the increase in unconditional household income improves child personality traits, emotional well-being and behavioural health. Because of the unique nature of their data, they can demonstrate that these improvements are for the same child using the same measures over time. The formation of positive personality traits, like conscientiousness (individuals who do your duties diligently and thoroughly) and agreeableness (individuals who are kind, sympathetic and cooperative), is ‘crucial in determining long-term socioeconomic standing and may also have strong effects on long-term health, educational attainment, and economic outcomes’. We know from earlier research that mental health conditions, such as attention deficit disorder, are more likely to affect poorer children. The authors concur: ‘We find that the children that start out with the most severe personality or behavioral deficits are the ones who exhibit the greatest improvements.’ A universal cash injection, like a Basic Income Grant, is likely to have the largest impact on children from the poorest households, improving personality traits and health outcomes even during their teenage years.

Such improvements in personality will have large repercussions in adulthood. A large literature now shows that such traits are strong predictors of finding a job, living in a good neighbourhood and living a longer and healthier life.

Most remarkably, because the surveys also included questions about parental health, the authors could discuss potential mechanisms through which additional household income affects child personality traits. They find that the unconditional cash transfers resulted in ‘an improvement in parental mental health, the relationship between parents, and the relationship between the parents and children in the treated households’. A Basic Income Grant may improve long-run child outcomes via the improvement in parental behaviors, stress-reduction, and improvements in decision making in the household.

A Big Income Grant is an expensive policy. A back of the envelope calculation reveals that, with 56 million South Africans, a Basic Income Grant of R758 per month – what is classified as the lower-bound poverty line by StatsSA – will require R509.4 billion annually. This is a lot of money, but not impossible to find. We already spend R193.4 million on social protection, and another R66 million on social security. We pay R180 million on debt servicing, which can be drastically reduced if we sell government-owned assets and repay our debt. A Basic Income Grant will also help reduce the reliance on free government services, such as fee-free schools, and increase VAT income as consumption increases.

A Basic Income Grant not only eliminates extreme poverty with the stroke of a pen, but as the Great Smoky Mountains Study show, it can drastically improve the emotional well-being and behavioural health of both children and parents in our poorest communities, with massive implications for their futures and that of South Africa. If we are serious about addressing the stark inequalities in our country, inequalities that ultimately help explain societal challenges like hopelessness, desperation, crime, violence, and even populism, then a Basic Income Grant is a policy we can no longer afford to ignore.

*Akee, Randall, William Copeland, E. Jane Costello, and Emilia Simeonova. 2018. “How Does Household Income Affect Child Personality Traits and Behaviors?” American Economic Review108 (3): 775-827.

**An edited version of this article originally appeared in the 10 May edition of finweek.

Written by Johan Fourie

June 19, 2018 at 08:15

The future is an unknown unknown

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Humans know how to adapt. We have populated the planet not because we found an agreeable environment everywhere, but because we were able to adapt to the diverse and often hostile environments we moved into. And so it is today. To survive and thrive, we need to adapt to the global forces of our times, from climate change to automation.

Those with the freedom and ability to adapt to these global forces will benefit most. Take automation. Artificial intelligence and robotics now allow most tasks that manual labourers perform to be done without human intervention. One of the most exciting technologies revealed at the end of 2016, from my perspective at least, is an automated washing and ironing machine. Dirty clothes go in on one side and the fully-ironed clothes, folded by tiny robotic hands inside the machine, come out on the other side. Finally those dreary Sunday afternoon ironing exercises will be a thing of the past! Collectively this technology will save millions of productive human hours, particularly for women who in almost every society are still responsible for most home labour.

And yet, this wonderful new technology won’t be welcomed by everyone. South Africans employ more than 1 million domestic workers (or more than 8% of the work force), most of whom are women from poor households. If the cost of this new machine falls considerably in the next decade (and minimum wages continue to rise), we might soon see a significant decline in demand for ironing services. Because poor South Africans do not have the freedom to adapt to these new technologies, unemployment and inequality will likely increase.

There are many other examples. Tesla and other car companies are working on self-driving cars (no need for taxi drivers) and, which is likely to have an even bigger effect, self-driving buses. Truck driving is America’s sixth most common occupation. Or consider McDonald’s most recent innovation: self-ordering counters. No need to employ more expensive and unreliable staff. How long until everything in a McDonald’s restaurant is automated, from food preparation to servicing and cleaning? Amazon has recently revealed its plan to open 2000 automated grocery stores across the US. And then there are the many disruptive digital technologies, which The Economist editor Ryan Avent writes about in his latest book The Wealth of Humans.

The political consequences of these supersonic changes are unknown. As Avent notes, we are the first generation to live through an industrial revolution. There is little in history that tells us how society will react to such rapid changes. He predicts social unrest, unless government or civil society can reform social welfare programs on a massive scale. We have already seen this in South Africa and elsewhere: the democratic process, for many, is too slow and cumbersome. Service delivery protests, the #MustFall-movement and the global shift towards a more nativist conservatism suggest that the voices of those at the bottom of the income distribution will be heard outside the ballot box.

More creative solutions to support those left behind by the benefits of technological innovation and globalisation must be found. One idea is to institute a basic income grant that would give every person in South Africa a monthly stipend. This is no novel idea – Thomas Paine proposed a similar idea in 1797 – but economists are increasingly willing to put the idea in practice: Utrecht, a beautiful Dutch city south of Amsterdam, will next year give several hundred of its inhabitants an annual monthly stipend of 960 euro.

The concern is that people opt out of productive labour if they receive money for free. The consensus, though, is that this is unlikely: the aspirational drive of humans to move up the income ladder will push them to work hard regardless. What a basic income grant does is to make sure the ladder is solidly grounded.

But even a basic income grant won’t do enough. The rapid change will bring about psychological and sociological consequences that are hard to predict. Which social policies to implement, from early-childhood development to adult retraining programmes, in order to combat the technological disruption will be important research questions in the next few years. Creative use of technology, ironically, might be one solution.

Donald Rumsfeld famously quipped that there are known knows (the things we know we know), unknown knows (the things we know we don’t know), and unknown unknowns (the things we don’t know we don’t know). The future used to be mostly unknown knows. With some degree of likelihood, we could analyse the past and make conjectures, following somewhat linear trends, about what the future might hold. Change was incremental; we had time to adapt.

The period of rapid change we have seen since the dawn of the Internet is only likely to accelerate. As a species, we have never been required to adapt this fast, and not everyone in society will have the freedom and ability to do so. This will lead to social conflict. To minimise the consequences of this social conflict, the greatest challenge of the next decade is to enable as many as possible to adapt to the inevitable unknown unknowns of our rapidly-changing world.

*An edited version of this first appeared in Finweek magazine of 29 December.

**As this is my first post of the year, I would like to wish all readers a productive and memorable 2017. Let’s hope this will be a good one.

Written by Johan Fourie

January 5, 2017 at 07:09