Guaranteed Income and Living Wages

Chris Dillow lays out the basic problem with living wages mandates. While having more money makes people happier, being unemployed is pretty awful. So whether mandating living wages can make sense will depend on how many people are forced out of work and how unhappy they are relative to the comparably small gains among the greater number of winners.

We can roughly quantify this. A paper by Nattavudh Powdthavee suggests that, in terms of wellbeing, we need a 30% rise in income to offset being unemployed. This means that if the average winner from a living wage gains 3%, we need at least 10 winners for every unemployed*.

You might think this condition is fulfilled. It is, if we consider only the wellbeing of those earning less than the living wage. But their higher wages come at the expense of profits. How much you're troubled by this depends on how you regard those employers. Are they exploitative tax-fiddling mega corporations, or are they small businesses struggling to get by?

And then there's the standard question about utilitarianism: is it legitimate to impose (largeish) costs upon a minority so that the majority enjoy other benefits?

He suggests that a guaranteed annual income - a variant on negative income taxes - may be the better option. When workers' non-work option improves, their bargaining position changes and wages have to go up.

This is true to a point, but it does require that voluntary unemployment (I don't want to work at going wages) makes you a lot less unhappy than involuntary unemployment (I want to work at the mandated minimum living wage, but nobody wants to hire me). And while that's almost certainly the case, if you put any weight on behavioural economics stories around myopia, hyperbolic discounting, or habituation, then you might be worried about schemes that make people indifferent to working.

Dillow writes:

Which raises the question: why is the campaign for a living wage so much more popular than that for a basic income? I suspect the answer has less to do with technocratic or high-brow ethical considerations than an appeal to reciprocity: the living wage demands that hard workers get a "fair" deal. But I wonder whether such appeals - powerful as they are - are a sufficient basis for policy.

I don't expect that Dillow is wrong about this - reciprocity norms are strong, and intuitions about the deserving and undeserving poor go back an awfully long way. But we can give a technocratic objection to guaranteed basic income schemes: if the guaranteed wage is high enough to make it an attractive alternative to working, which it has to do to give workers the kind of bargaining power that Dillow is looking for, then it also risks enticing those who should be entering the job market at low wages and working their way up to instead lock themselves into a permanently lower path.

I'm not opposed to moves to shift from the current welfare framework to a GAI via a negative income tax, combined with lump-sum transfers for specific hardships like severe disability. But I worry about the kinds of things that Senior and Mill worried about rather a while ago.

Here's Andrew Farrant on those debates:

Poor relief and slavery: Senior's conjecture?

As noted earlier, Nassau Senior argued that slavery and socialism had much in common. Similarly, Senior, in an 1841 article appearing in the Edinburgh Review, had scathingly argued that the perverse incentives allegedly inherent to the English Poor Laws (e.g., the provision of outdoor relief to ostensibly indigent but able-bodied laborers) had done much to reduce "able-bodied paupers" to de facto slavery (Senior 1865 [1841]: 45-115); as Senior puts it, the poor laws had supposedly attempted to provide the able-bodied laborer with:

[A] security incompatible with his freedom; to oprovide for him and his family a comfortable subsistence at his own home [outdoor relief], whatever were his conduct, and whatever were the value of his labour ... [This] attempt succeeded in what have been called the pauperized districts, and placed the labourer in the condition, physically and morally, of a slave; - confined to his parish, maintained according to his wants, not to the value of his services, restrained from misconduct by no fear of loss, and therefore stimulated to action and industry by no hope of reward.
(Senior 1865 [1841]: 115, emphasis added)²⁸

Accordingly, outdoor relief had supposedly occasioned various incentive-incompatibilities - supposedly "fatally relaxing the springs of industry and the restraints of prudence" (Mill 1965: 360) - prior to 1834.²⁸ Accordingly, while the desirability of poor law reform was supposedly apparent to all and sundry, the "Commissioners of Inquiry had reported that it was not expedient, or even practicable ... [to [exclude from relief the able-bodied labourer who professed to be unable to earn wages adequate to the support of his family" (Senior 1865 [1841]:91; emphasis added).³⁰ Consequently, an incentive-compatible poor law would supposedly guarantee that only the truly indigent received able-bodied relief. As Senior notes, incentive-compatible poor relief would automatically "test .. the truth of ... [the able-bodied applicant's] representations" (ibid.; emphasis added). The test favored by Senior was relatively simple: make the receipt of poor relief markedly "less eligible than independent labour" per se (ibid.); as Senior explains, this was easily done by conjoining the receipt of poor relief to a "condition which no man not in real want would accept, or would submit to when that want had ceased" (ibid.: 91; emphasis added). Consequently, the 1834 New Poor Law stipulated that any applicant for able-bodied relief

enter a workhouse ... supported there by a diet ample indeed in quantity, but from which the stimulants which habit had endeared to him were excluded - should be subjected to habits of cleanliness and order - should be separated from his former associates, and should be debarred from his former amusements.
(ibid.: 93)³¹

Accordingly, indoor relief - the workhouse test per se - was allegedly incentive-compatible: only the truly indigent would voluntarily accept workhouse discipline. As Senior explained, whenever any able-bodied, and self-professedly, indigent laborer readily "accepted these terms, that acceptance [automatically] tested the reality of his wants (ibid.: 91; emphasis added).

As Mill, readily subscribing to Senior's logic, later explained, the wholly "pauperized districts ... have been dispauperized by adopting strict rules of poor law administration" (Mill 1965: 961; emphasis added.)

Read Farrant's whole treatment of the debates around incentives and the old British poor laws.

I don't think we can or should return to the poor laws mandating indoor relief. But the incentive problems laid out by Senior and Mill sure have not changed in the last couple of centuries. At the margin, consideration of these issues should move more welfare transfers from cash for poor people to subsidies for early childhood care, and suggests that any GAI that approaches a living wage would not achieve the appropriate separating equilibrium.

Previously:

• Welfare Reform
• Coercion everywhere: welfare edition

Rot at the centre of New Zealand economic commentary

Matt Nolan over at TVHE takes issue with Gareth Morgan's latest NZ Herald column.

Matt hits some of the problems in that piece. But he's probably pulling his punches out of professional courtesy. As I'm in the academic world instead of the consultancy world, mostly, I don't have to. And so I'm going to smack Morgan around a bit on his history of economic thought.

In particular, Morgan name-drops J.S. Mill in favour of redistributive spending. Morgan writes:

It was during the industrial revolution that grotesque disparities in wealth and intensified impoverishment of the workhouse poor led the economist philosophers of the "enlightenment period" to conclude the purpose of taxation was, as John Stuart Mill put it, to "favour the diffusion rather than the concentration of wealth".

Ok, let's go back and have a look at what Mill advocated then. Mill definitely supported redistribution for the alleviation of absolute poverty and starvation. But he also worried that if the provision of relief made relief more attractive than work, "the system strikes at the root of all individual industry and self-government." Let's go back to source:

In so far as the subject admits of any general doctrine or maxim, it would appear to be this—that if assistance is given in such a manner that the condition of the person helped is as desirable as that of the person who succeeds in doing the same thing without help, the assistance, if capable of being previously calculated on, is mischievous: but if, while available to everybody, it leaves to every one a strong motive to do without it if he can, it is then for the most part beneficial. This principle, applied to a system of public charity, is that of the Poor Law of 1834. If the condition of a person receiving relief is made as eligible as that of the labourer who supports himself by his own exertions, the system strikes at the root of all individual industry and self-government; and, if fully acted up to, would require as its supplement an organized system of compulsion, for governing and setting to work like cattle, those who had been removed from the influence of the motives that act on human beings. But if, consistently with guaranteeing all persons against absolute want, the condition of those who are supported by legal charity can be kept considerably less desirable than the condition of those who find support for themselves, none but beneficial consequences can arise from a law which renders it impossible for any person, except by his own choice, to die from insufficiency of food.

What did Mill favour? Indoor relief in workhouses that was always less desirable than working for wages but preferable to starvation. So far from favouring heavily redistributive income taxation to alleviate the problems of the workhouse poor, Mill favoured the workhouse.

So it isn't just the modern amoral mathematization of economics that leads to opposition to Morgan's preferred policies.

Further, as West points out, Mill opposed progressive taxation. Here's West:

The fact moreover that Mill made it quite clear to the Select Committee on income Tax that he was not in favor of a progressive income tax, separates him from most modern advocates of a negative income tax plan. Mill's objection to the progressive income tax was based partly on his demand for "social justice," and partly upon his concern for incentive effects, not at the lower end of the income scale but, again, at the upper. He objected that "to tax the larger incomes at a higher percentage than the smaller is to lay a tax on industry and economy; to impose a penalty on people for having worked harder than their neighbours."

And what do we find when we go back to source? The line immediately prior to the one West quotes reads:

Both in England and on the Continent a graduated property tax (l'impôt progressif) has been advocated, on the avowed ground that the state should use the instrument of taxation as a means of mitigating the inequalities of wealth. I am as desirous as any one that means should be taken to diminish those inequalities, but not so as to relieve the prodigal at the expense of the prudent.

So Mill favoured using taxes to mitigate inequality but not if it punished the prudent in favour of the prodigal. So all of this hints that maybe, just maybe, Morgan does violence to the Mill quote he initially presented. Let's check. Here's the source, in a fuller context. The initial italicized portion forms the question posed Mill in his testimony before Parliament:

I quite understand the force of your argument as between one portion of the upper classes, and the other portion, that is to say, the distinction that you have so clearly and admirably stated between the owners of permanent and terminable incomes, and the owners of precarious and certain incomes; but then I wish to draw your attention to quite another division, the next division of society, not according to the source of income, nor according to the tenure of income, but according to the quantity of income relatively to the wants of human nature for subsistence and for comfort, and to ask whether it did not appear, that upon the whole, the adoption of this principle, that savings are not to be taxed (setting aside the degree in which you may be able to give it a precise application), and the attempt to frame a law upon that principle, would not be a change in our law favourable to the condition of the poorer classes of society as compared with the wealthier? 

I think it would be favourable to the saving classes, whether poor or rich, compared with the spending classes; and that consideration I think is even paramount to the other. If the rich are to be subject to a greater proportionate amount of taxation than the poor, I think it ought to be done in some other way. A succession duty is the most unobjectionable mode of doing it, because in that way it is confined to hereditary wealth. I think you must allow people to retain the full advantage for their lives of what they have acquired; but the State may deal with it on the occasion of succession. I certainly do think it fair and reasonable that the general policy of the State should favour the diffusion rather than the concentration of wealth, but not, I think, by taxing people twice on the same portion of their income, or by taxing people for the fact of their saving. Taxing people on what they save, and not taxing them on what they spend, or taxing people on a larger proportion of their income, because they are better off, does not hold the balance fairly between saving and spending; it is contrary to the canon of equity, and contrary to it in the worst way, because it makes that mode of employing income which it is public policy to encourage, a subject of discouragement. [emphasis added]

So the line after the one Morgan cites specifically cuts against capital gains taxes and progressive income taxes in favour of progressive estate taxes. In other work, Mill argues in favour of a proportional tax on expenditure above a minimal threshold. Sure, this generates average progressivity, but it's hardly a progressive marginal tax schedule. Morgan can go read Kurer in HOPE.

I'm not a history of thought scholar. But I took enough history of thought in grad school to know that Mill favoured indoor relief. In other words, he worried like hell about "welfare bludging". The debates we're having today over welfare aren't all that different from the ones had a century and a half ago over the British Poor Laws. We can read arguments today about whether women have an incentive to have kids out of wedlock so as to get on the DBP. A hundred and fifty years ago, Mill advocated that the poor in workhouses observe strict separation of the sexes to avoid the Malthusian problem. There is nothing new in current welfare debates. And yet Morgan calls today's debates about incentives facing the poor in the face of relief "dumbed-down".

Like Matt, I'm really frustrated by the article. I'm really sympathetic towards arguments for a guaranteed minimum income in place of the current welfare system. But I sure would know better than to cite Mill as support.