Economist Brian Easton says we have to design a system which provides income support for the unemployed while encouraging employment transition

Economist Brian Easton says we have to design a system which provides income support for the unemployed while encouraging employment transition

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.


Oliver Twist, famously asked for ‘more’. He did not challenge the system of workhouses – Dickens did – nor the authority of Beadle Bumble. He was only nine.

I am often struck how critics of the current income maintenance system are like Oliver Twist. They ask for more, but they rarely try to think through how we can actually change the system other than by paying more.

The exception is the proposal for a Universal Minimum Income (UMI) in which everyone gets a minimum benefit from the state to sustain their standard of living. But advocates rarely do the sums to calculate the tax rate to fund it.

I confess that in my salad days – I was older than nine – I proposed such a UMI to the Royal Commission on Social Security. My interest had arisen from a 1950's discussion on various related proposals such as a social dividend and a negative income tax. The royal commission was not interested.

When I did the calculations for the taxes necessary to fund my proposal, I kept getting very high average tax rates – 60% was typical. Eventually I found a nice little mathematical theorem which says that the average tax rate to fund a UMI of X percent of the average income (which is lower than the average wage) is also X percent.

I am not alone in this discovery. There are at least two New Zealand economists who have proposed a UMI, and then quietly withdrawn from the fray when they realised the high tax rates it required.

Instructively, The Opportunities Party (TOP) advocates a Universal Basic Income (UBI) but at the low rate of $250 a week so it is not really a UMI to sustain people of a minimum adequate standard of wellbeing. It is below what most beneficiaries and superannuitants receive who, under the TOP scheme, would continue to receive higher benefits; the current hodgepodge would continue. So the TOP proposal is not so much about guaranteeing a decent minimum income to everyone, but a negative income tax. I am not uncomfortable with that – I explored that too in my salad days – but it was not what I was proposing to the RCSS.

I have hunted around for years to find a practical way around the mathematical theorem – that is, how to provide a decent standard of living to everyone without very high tax rates which would discourage work and savings efforts (and encourage evasion). Here is one way of doing it.

Suppose we split the community up into two groups. The first group is expected to obtain their income from the earnings from a job. The second group are those who cannot reasonably be employed; they receive the UMI but their tax rate is higher – after all they do not need a disincentive to work. It would include those above a certain age (as applies already to New Zealand Superannuitants), permanent invalids, children and their full-time carers.

This dramatically reduces the necessary average tax rate – about halves it. Thus I have got around the theorem! However, you never get something for nothing – not in serious economics anyway. (Paul Samuelson once pointed out that the foundations of economics rest upon the laws of thermodynamics.)

This becomes evident when one tries to classify everyone because they do not all fit easily into the two categories. I illustrate it with one example. What to do with the unemployed?

Clearly the approach depends upon maintaining a high level of employment and adequate wages. But, inevitably, in a dynamic economy there are going to be workers in transition between jobs. There is no point putting them temporarily in the second category because the tax rate facing them is high and will discourage them from searching.

That means we have to design a system which provides income support for the unemployed while encouraging the employment transition. My guess is that the best way to do this is to develop an earnings-based redundancy (and sickness) system based on worker contributions. We have the beginnings of this in the accident compensation scheme.

In fact we have the glimmerings of the system already. New Zealand Superannuitants already belong to a category two. The next step would be a universal child benefit. (It would be at a lower rate than NZ Super of course, but still enough to sustain wellbeing – say 70 percent of NZS.) That would sweep away the shambles of complex taxes on families. NZS could then be extended to permanent invalids. We could extend ACC to cover those made redundant or who are sick. Step by step we can evolve the income support system towards a simpler, cleaner, less-bureaucratic system than we have today (with lower marginal tax rates on many people). Done properly it would also reduce income inequality.

It would take some skill to design it, considerably more than the team that designed the clumsy Working For Families system appeared to have. And yes it would involve some tricky anomalies.

More likely there will be resistance from those who will stress the problems of the anomalies. Lacking imagination and technical competence they would relapse to fiddling around the edges with solutions of just asking for more but keeping the current system with its brutal tax rates on the poor in place. They are the Oliver Twists of this world. They leave Mr Bumble in charge.


Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

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40 Comments

I certainly see the benefits of providing a universal child benefit. It would help address inequality and provide more equal opportunities for all children to shape their future.
However i can't help but see this becoming an incentive for people to breed and live off their children.

Question for our Social welfare age - what kind of ethics/morals do children learn when born into a non-working family?

As economist Stephanie Kelton likes to tell us, "the government should balance the economy and not its budget" The private sector will never have the capacity to provide jobs for all, it is then up to the government to use its own fiscal powers to provide full employment through such means as a job guarantee. An article about it here on RNZ.
https://www.rnz.co.nz/news/on-the-inside/415421/cat-maclennan-post-covid...

I think you'd find as wide a spread as raised in any family. Some will learn to cynically game the system (just like some of the high-earners of the world), some will be lazy or expect to forever reap more than they sow (compare rentier capitalism). I'd hope that many would learn to be kind, thrifty, and recognise the import of society & the social contract.

Anecdotally, from work I've done with both underprivileged & very privileged young people, morality & ethics don't seem to be correlated to what the parents do or don't do for a living.

Oh, the welfare queens myth rears its ugly head again. Have you not learned anything since 1970's Reaganism?

I wonder why we can't just give companies a tax break for setting up in the regions, another based on the median wage they pay and the number of employees. "More" doesn't necessarily money up front (although many hold their hands out wanting money for nothing and probably their kicks for free!), but will ultimately result in it. Try just more opportunity.

Definitely a lot to gain from encouraging a pivot to the regions, including increasing resiliency, and I bet decentralisation's lower economy of scale would allow for a lot of job creation. Population dispersal could be encouraged with a land tax, easier & cheaper ability to subdivide rural land, and deregulating low-risk, eco-friendly builds (e.g. off grid tiny houses - these would also help check the need for a lot of infrastructure investment). The growing number of people working from home could help the trend, even before the regional jobs exist.

What BE is suggesting, even to the explicit equation (as to general principles) with ACC, is fairly much in line with what Michael Reddell has urged throughout many articles.

The main flaw in this article is in believing that taxation funds the government. The government is not the same as a household and it doesn't require income before it can spend, it issues the NZ Dollar. All government spending is made by creating new currency, taxation and borrowing then follow later, neither of which pays for spending, they are both only a means to control the money supply.
An explanation here by economist Stephanie Kelton. https://www.youtube.com/watch?v=WS9nP-BKa3M&t=2687s

what about imports? government can print as much NZD as it wants and forces all NZ to accept it. But it cannot force anyone outside NZ to accept it (and they wont). So, by printing money (deficit spending) at faster pace than the reserve currency (USD and to a much lesser extent Euro and JPY), the local currency will be devalued at a greater pace than government can print money. Soon, you will be Venezuela, Zimbabwe, Argentina, Iran ...
Other than USA, no other country is in a position to go fully berserk on MMT as they will be soundly punished via exchange rate mechanism.

This could be true if done in excess - but look at the situation right now- huge fiscal deficits right now offset by QE and we see NZ/AUS dollars appreciating. There is too much exchange rate scaremongering over MMT's advocacy of functional appropriate deficit spending to offset demand leakages that keep an economy running too cold and never reaching real full employment. It is not a fait accompli that if the government ran ongoing deficits to reach full employment you would see a huge depreciation of the currency. A growing economy is a good place to invest.

Well as i said, the pace of money printing is important, if your pace is greater than the reserve currency, you may be in trouble, specially if your exports are expected to decline faster than other countries too. For now, US is printing money like there is no tomorrow so it seems that their money printing is outpacing NZs. But if NZ starts to seriously out-print US, it is logical to expect their exchange rate to drop. What would be your expectation in that scenario?
Also, what MMT advocates (which is Kensiyan economy thoughts repackaged) is true in private sector too. If you return on your borrowing is greater than the cost to service it, then great, borrow and spend. But if you borrow to fuel immediate consumption with no return prospects, then no.
Government deficit, if funding economic development, it will be good, I do not think many people will disagree with that. But, what government expenditure, how and when will achieve this?

Exchange rate depreciation has winners and losers. The overall effect depends on the propensity to import, the level of imported inflation, elasticities etc. It's complex. But it is not a fait accompli that sensible fiscal deficits= always and everywhere a currency crisis. A floating currency means that domestic economy does not need to be sacrificed to maintain the exchange rate. Judicious careful deficits spent in the places that have the highest multipliers and benefit those worst off is the way forward. By sustaining demand you encourage investment and productivity improvements. At the end of the day what gets businesses investing.... increased sales. We run our economy so cold that we never experience the capacity pressures that encourage investment.

A two part article here by economist Bill Mitchell on why governments borrow and it isn't to fund their spending.
Part one. http://bilbo.economicoutlook.net/blog/?p=45106
Part two. http://bilbo.economicoutlook.net/blog/?p=45108

Thanks. I have already read those. They are good but they have nothing to do with money printing. His argument that if you print money do not do it via the secondary bond market makes sense. Substance over form.

Debt does not need to be issued at all, a support rate could be paid on bank reserve accounts. Government debt is nothing more than private savings. An explanation here by Warren Mosler. https://www.youtube.com/watch?v=F9zEEsgjxto

Where did I say debt? money printing is not debt is increasing your money base (which is what the reserve thing will do). And Government debt is private saving is true. But it also true that government debt does not translate equally to savings for all private citizens. The money will have to end up with those who do not need it (the very wealthy) who either inflate asset prices (as they buy everything that interests them with money that is coming their way in greater abundance) or park it in banks. Thus they end up owning everything, while everything is also worthless as there is no connection between their income earning prospect and their price (look at house prices, share prices anything). This only reminds serfdom. We are gladly rushing to create the system we seemingly want to avoid: we want to help the society and reduce inequality but what we do achieves the opposite.

Those issues can be tackled through changes to the tax system and not by inflicting austerity on the poor which is how it is done around the world at present. Increase taxes on the wealthy rather than reducing spending is how it should be done. Tax back the money from those that accumulate the most of it. Give money to those that will spent it and thereby creating jobs and prosperity in the economy and not to the hoarders of money. One persons spending is always anothers income. We have tried the neo-liberal way for thirty five years and we have seen the results, increasing levels of poverty, homelessness and record levels of household debt. Our misdirected beliefs that the government should be running budget surpluses does us no good whatsoever.

From my observations over many years the poor inflict austerity on themselves. It is not cruel taxes that keep them poor, it is their state of mind. I am a totally crap businessperson, but because I knew that doing business, building stuff, selling stuff was the only way I had a show of getting away from my upbringing, I still persevered. I have had a whole heap of fun, done lots of dumb stuff, but still done financially better than I would have on the sort of wages I could command. I hope to carry it on for many years yet. I listened to the National program interview this afternoon with a woman who organises school lunches. Why? Because people in charge of a whole lot of kids in New Zealand refuse to feed them. It is not an accident, it is deliberate. Decision after decision after decision is deliberately made which makes people poor and lets them away with refusing to be responsible for their actions.

The NZ currency is one of the ten most traded and we have been running current account deficits for decades. The countries that you mention all had problems other than money creation that caused their issues. As sectoral balances show the only way to fund our current account deficits is by creating more currency. Taxation is used to control the money supply, taxation cancels money and what isn't taxed away will become our savings and end up in government bonds of which the foreign bond holders cannot get enough of. In normal times commercial banks are creating far more money through their lending than the government does through its spending, the majority of money is created by banks. A Bank of England bulletin here that explains how banks create money. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creatio...

NZ government is not "overspending" faster than other countries. The reverse is true. and it may be part of its appeal as a traded currency. Other problems and money printing usually go hand in hand. The deeper the problem, the faster the money printing. That is the whole Keynesian idea to keep the aggregated demand going by deficit spending in hard times. And as history has shown, when trouble comes, governments will do this anyway. In a global trade-based economy, a country's position is always relative to others: so if everyone is falling, but you are falling at a slower pace, then you will go higher in the ranking. Pace of money printing is therefore very important.

Depending on who you lend the money from.

The germans have requested all sorts of asset sales and cut back measures from the greeks. I accept they have the same currency, and not a floating exchange ratek; but if you borrow in our peoples currency they become your masters.

The main flaw in this argument is that it is written by an economist.

The access to resources and energy - which is all that wealth is, despite people like BE avoiding (not understanding, via imbibed mantra?) or not addressing same - is dependent on their being resources and energy available. Per-head (not mentioned here - comparative yes, total no) then means the pmore people, the less each is wealthy.

Pundit decided, a long time ago, to duck the discussion. Challenged, it ducked having to face the challenge. I find it sad that it is given traction elsewhere. We need robust, non-belief-based discussion, now more than ever.

Brian Easton is simply not bold enough. Set a flat tax rate of 50 per cent of income and you can easily afford a universal minimum income, UBI, or citizen's dividend, that would "provide income support for the unemployed while encouraging employment transition". A flat rate of 50 per cent is only a little higher than the top income tax rates in both Britain and Australia. It would allow a UBI of untaxable $22,000 a year for everyone over 18. This would effectively make the 50% tax rate steeply progressive: everyone earning less than $76,000 a year would be better off than they are now, and the less their earned income the better off they would be. Everyone earning more than $76,000 would pay more tax. But add a universal child benefit for everyone under 18 of half that, say $11,000 a year, and most families would be better off, at the expense of childless high earners. Such a high-rate UBI would allow the near-abolition of NZ Super, Working for Families, all welfare benefits except accommodation allowances, and with them MSD/WINZ. Fiscal shortfall? Wealth taxes, of course!

So you tax the accumulated income you've already taxed at 50% again in the form of wealth tax? The country is already extremely reliant on a very small group of tax payers when it comes to income tax, it wouldn't take many of them to render this plan even more unworkable than it already is.

Yeah, doesn't seem to make sense to tax more of income from productive enterprise when most wealth flows untaxed to land anyway, and we need to encourage not discourage productive enterprise.

The access to wealth and resources is one thing. How you use them is another. If a person is born into wealth or seizes someone else's wealth then they still need to be able to grow the wealth or at least hold onto it. Wealth is not a static thing as many of the commenters here understand. If a person has access to few resources but has the ability to make the most of those resources then that is often better for the individual and for the nation.

Zimbabwe and Venezula are the examples of politically astute elites that have seized power and resources then have managed those resources very badly. Their currencies have fallen not because they have resorted to printing money but because they have taken the key industries of those countries, (farming, oil production) looted the assets, laid off qualified employees, replaced them with their relatives and stopped maintenance of equipment, thereby destroying the asset they have seized. Then they have resorted to debasing the currency because there is no value left in the productive assets of the country. For an individual or a nation, choosing short term gain over long term gratification is what makes poverty inevitable in the end.

Even in the largest and wealthiest countries the predators who roam around seizing assets will eventually run out of assets to seize. Financial speculators have had the run of Western economies for the last 40 years and it is starting to show. Productive assets are less and less in the hands of productive people as a result. While people complain about welfare, in actual terms govts have increased support for the existing wealthiest individuals in western societies and decreased support for new ventures, new thinking and new R & D. The West is falling back in relation to Asia as a result.

The West is akin to Zimbabwe not because it is printing money but because it is misusing it's resources, because it is wasting the talents of an increasing percentage of it's population.

Great comment.

People don't like the politics of something for nothing. As socialist as I am, I don't either. Rights and responsbilities. People support a decent day's pay for a decent day's labour. That is why a Government Job Guarantee at the minimum living wage is the best solution to unemployment and the most politically palatable. Work is not just about productivity but about social cohesion and personal dignity. If the private sector doesn't want a certain amount of labour for a while then the government should step in a provide people with transitional work that suits them and gives them basic structure in their lives. Avoid the hysteresis and inflationary effects of consigning people to the long term unemployed scrapheap. Get some work done that provides public goods - tree planting, river clean ups, shopping for the elderly, community arts projects....money is not enough - people need social connection, routine, something useful to do that makes a contribution...

IF this worked, we would have no one on benefit. How are you going to do it? some will say that it is bellow their "dignity" to do the things you are suggesting. Others will complain that the arrangements are not flexible, they have to go from place A to place B and they cant (or dont want to). Some cannot go to riverbeds or clean public toilets.
What quality standard you are going to use to measure if they have done a hard day of labour? is it going to be a detention camp? what will happen to those who under-deliver? how are you rewarding those who plant trees better than others?

I know that some people will react positively to what you suggest. But some will not, and if the scheme is not "compulsory", how compelling it will be for these people to join?

The job guarantee would be purely voluntary, no one would be forced to do anything if they did not want to do it. I do not believe that there are many in society that would not rather be doing something constructive with their time rather than nothing when given the opportunity and they would be financially better off on the minimum wage rather than a benefit. They can be given training and motivation and with a work record ready to move into the private sector when an opportunity arises. Private employers are hesitant to take on people who have been unemployed as they are an unknown quantity.

Exactly. JG is not compulsory. If you are an unemployed professional with redundancy payout you may well prefer to just do job search than a JG job. That is your choice. But JG jobs will definitely help those at the bottom of the labour market made redundant from tourism jobs for example who would be more than up for JG jobs to tide them over until things pick up. JG jobs can be centrally funded but locally run so that local communities decide what of value needs to be done. These are transitional jobs. Not jobs designed to replace the private sector or jobs that should be higher paid in the public sector. I have a friend right now made redundant from a tourism job. He is planting trees and enjoying being outside and working in the sunshine. That's not for all. But there are many things of use that can be done that can be designed to suit workers. Use your imagination. The JG is about sustaining demand as an auto stabiliser and basic human capital as well as being a price floor for the labour market (wages and conditions). The public goods are very important but secondary to the macroeconomic role.

If it's below your dignity to do a JG job, then fine get the dole. I personally don't have a lot of time for middle class people who think community work for a living wage is below their dignity. Or who want to be paid a UBI to write their poetry while working class people collect their rubbish and wipe their parents' bums. JG jobs could be designed to help people who are disabled or who have caring responsibilities. Think of the empowerment to women stuck in bad marriages if they knew they were guaranteed a job at a living wage if they wanted it. The beauty of the JG jobs is that marginal productivity etc is not as important as the social and macroeconomic value of the jobs. That said, the marginal productivity of truly unemployed labour is zero. So anything is better surely.

For those that don't do a decent day's labour - well, just like in the private sector you have a series of warnings and then some time back on the dole rather than a JG job. There will always be some who rort the system. Any system. But I believe most working NZers are not shirkers and take pride in doing their job well. Training opportunities could well run alongside JG jobs. Designed well, I believe a JG is by far the superior system to a UBI or employment insurance model. Money is not enough.

Er, but what about productivity? Didn't someone, once upon a time, long ago, mention something about the difference between wealth creation and wealth transfer? Yes, I know, since then, "wealth creation" has been used as a justification for wealth transfer towards those in power (be they billionaires or bureaucrats). If we had productivity growth we could fund a better safety net.

Do we tax and regulate business excessively? Of course not, I hear you say, but, bear with me a moment:
1 There is Value Creation Tax (aka GST), which directly taxes the most productive on their productivity. Surely with the intent of discouraging it?
2 We have Employment Tax (aka Income Tax), presumably to discourage employment.
3 We have Employment Law, which seeks to further discourage employment.
4 We have Business Property Ownership Tax (business rates, usually at 3 to 4 times domestic rates) which seeks to discourage business property ownership.
5 We have Home Ownership tax, (rates) which seeks to discourage home ownership.
6 We have the Resource Management Act and Planning Regulations, which seek to discourage better use of resources and create barriers to change, (as well as funding a Council Employee Bribery Scheme aka Council Fees, whereby you must pay the fees/wages/bribe before your proposal is even considered).
7 We have Business Income Tax, whereby retained profits are taxed as income in order to prevent business expansion and job creation.

There must be a better way? Surely? Each major tax discourages behaviour that creates a better society. Can we not find a way forward, perhaps by refunding past contributions in times of hardship: or by channelling some sort of compensating benefit to these activities?

[I note that certain sectors of society have exemptions from these major taxes, eg GST is not levied on banking, presumably because there is little or no productivity to discourage. Similarly, employees of international organisations like the United Nations pay no income tax, because, well, they are special, aren't they? No wonder the bureaucrats and pollies suck up to these anti-democratic bodies.]

This is all partly tongue in cheek of course, but there must be a better way. How can we invert the disincentive system?

An interesting idea. Wouldn't have to be implemented all at once. You could expand the pool getting universal super to include the permanently disabled and up the top tax rate for that pool as step 1. I think the retirement policy centre advocates as higher top tax rate for the over 65s - effectively meaning that if you're earning over 100k (say) then you're paying back more than you're getting in super. You could have people choose. Either stick with the "unretired" tax brackets and not get UMI, or get UMI and have the "retired" tax bracket - would only affect high earners. Not sure it's politically feasible though.

Er, um, how about reducing monopolistic, non-value-added speculative housing behavior so housing was more affordable at 3 x median income, that would leave more money in peoples hands every week, so they won't need a Govt. subsidy, to begin with, have more savings, for education, health, etc. and yes even more money to pay a little bit extra in tax if it was needed.

Why is the automatic solution to fixing a problem with cost, is to add more cost.

How about reducing non-value-added cost, which means something is more affordable without needing to reduce its amenity value.

This is not an economic theory but many jurisdictions do it in real life.

Good point Dale

Great point Dale. I've said many times on this site that the biggest cost to families is either rent or mortgage. If that is substantially reduced, as you say, to 3 or 4 times income, well then most of the issues we face, in my view, are reduced. I know lots of people on here probably won't agree. But anyhow, we need to some how sort this issue and then a lot of other issues will take care of themselves as you have mentioned.

The ones that don't agree usually have a vested interest in keeping the non-value added costs in the system. To us, these costs are waste, to them it's revenue.

It's follows the same advice the Govt. is giving about stimulating the economy. They are giving people support and then telling them to go spend it.

Not spend it wisely, but just spend it. Piss it up against a wall for all they care. Drive your car pointlessly from one end of NZ to the other. But not save it for a rainy day, in spite of the fact that you needing a subsidy means it is raining already.

And the other thing we are going to waste is a good recession.

Your reasoning is flawed ..............we get so much for free we dont need a UBI

If you were an immigrant from somewhere like the Phillipines , or South Africa , you would understand we Kiwis all get our basics for free from the state , and its worth more than $250/week .

Those Filipinos and South Africans with living similar standards to us have to pay for ALL their education , ALL their Health Care (by Medical aid or Insurance ) , and ALL their security , ( armed response and panic alarms) they pay for private security because the Police forces are dysfunctional .

Basically all we have to pay for is Food , shelter , clothing, power , petrol and the rest is discretionary .

And if you are struggling there is always help from WFF and wage supplements

Most of us dont give the costs of Education , Healthcare or policing a second though ...........we are very very lucky indeed .

P dealers and university accommodation providers have at least one thing in common. As soon as their clients get their hands on a bit more money, the price of their product goes up. Does no one else here think that the rich will still get rich, and the poor will still stay poor unless both are literally forced to do the right thing.