Universal Social Services Make Economic Sense

How cash benefits distort the monetary system, increase our deficits and discourage investment.

 

When we pay cash benefits we distort calculations of cost, wealth and money supply. If we provide basic social services universally, free at the point of need, we would reduce costs across the private and public sectors, improve the flexibility of businesses and enable more accurate money supply management.

The premise of this argument is that the activities that satisfy the basic human necessities of life are not wealth generating; and that paying cash benefits leads to the inclusion of their purchase price, instead of their output cost, in economic calculations, which distorts the results.

Services delivered between citizens in support of the basic welfare of society are not wealth generating transactions in a monetary sense. To understand this, we must evaluate the content of services such subsistence shelter, sustenance and healthcare. There are three distinct contents for each service: generic labor, value adding labor and capital. Generic labor is that portion of the service that requires no special skills to deliver, and can generally be categorized as ‘manual labor’. Value adding labor is the portion of the labor necessary to deliver the service that commands a premium in the market place, on account of special skills or experience. Finally, the capital portion refers to the content of the service which has to be manufactured or purchased from a external agency. In reality, nearly all labor has some value adding element; but it is important to recognize that in the lowest skilled activities command a very small premium over subsistence wages, and therefore the value added is often less than 20% of the total labor cost. The value added labor and capital portions of the service are truly wealth creating, but the generic labor portion is not. The generic labor used to deliver subsistence services does not generate a return; its value is consumed at the point of expenditure.

This is already recognized in current economic models by separating out the charity and nonprofit sectors. In these cases, it is recognized that the services delivered are not generating wealth; and therefore they are only counted on the basis of the contributions made to the sectors, not the output generated by them. This implicitly recognizes that housing the homeless, clothing the freezing and feeding the starving are not wealth generating transactions that should be included in measures used to measure economic wealth. They are services that undoubtedly contribute to the value of our societies, and they have very similar characteristics to infrastructure investments, in that they establish the basis and groundwork for the development of future wealth, but they are not themselves wealth generating transactions. This is represented in the discussion about the value to the economy of homemakers; the consensus of economists is that including the value of the output of homemakers in economic calculations would fundamentally corrupt calculations of GDP and economic wealth.

If we were to provide universal access to basic social services, free at the point of need, it would have a transforming impact on public finances and the enterprise economy. In an economy where the fundamental social services that make up the bare necessities of life are delivered free of monetary value to everyone, the immediate impact is that the “cost” of labor is dramatically reduced. When everyone in the society has shelter, sustenance and the other basics of life guaranteed to them, they are freed to work in whatever manner they can, for whatever wage that someone else is willing to pay. It is in the nature of humans that they will have desires beyond those satisfied by the subsistence services, and so will be keen to earn some discretionary income that they can use to satisfy their other needs. Because all of the resources in the labor market are guaranteed comprehensive social services, the labor market is freed to price labor using accurate demand and supply criteria, negating the need for a minimum wage.

The minimum wage becomes unnecessary because the basic survival of individuals is not dependant on the market for labor. The primary purpose of minimum wage regulation is to ensure that workers are not exploited in their desire for basic subsistence by ensuring that they are at least paid a living wage. In effect minimum wage regulations are an abstention of social responsibility, and they distort labor markets with clumsy attempts to compensate for that lack of responsibility. Society is infinitely better off simply providing the services that ensure all workers are guaranteed subsistence, and then freeing the market to define labor rates. Workers are freed to take the jobs they want, to work as hard or as little as they want, and employers are similarly liberated – all without damaging the fabric of society. If employers do not offer sufficient reward to attract the labor they need, or if they provide unacceptable working conditions, they will not be able to hire the labor they need.

Universal social services and liberated labor markets allow labor to be accurately priced according to the actually wealth-generating portion of their output, measured as the delta between the subsistence value and the market value. The net result is lower labor rates across the entire economy; proportionally more significant, the lower the skill level or less value added.

Reducing the cost of labor, in cash terms, has obvious effects in the enterprise business market by not only the reduction in cost basis, but also in the improvement of flexibility in the workforce. A workforce that is not dependent for its basic sustenance on specific employment, can react much more rapidly and flexibly to changes in the marketplace. Employers are able to react much more quickly to changes in their markets because they can easily change work patterns without being encumbered with mountains of regulation. This flexibility enables all participants in the economy to be less risk averse and more inventive.

The lower cost of labor also has a significant impact on public finances. Principally the impact is felt in the reduced tax burden of providing the social services themselves, but also in the reduced price assigned to infrastructure investments. Both of these reductions stem from the removal of the subsistence portion of labor cost from labor pricing. The subsistence portion of labor costs is removed from the economic calculations and absorbed by the social fabric, in the form of citizen-to-citizen support services delivered free of monetary value in exchange for the same. The labor is still provided, but the subsistence portion of its value is not monetized.

The monetary cost of providing social services is reduced; because the labor rates for the people who are delivering the services is lowered. This cyclical reinforcement reduces the overall tax burden, and increases the capital proportion of the cost that remains. Because the labor required to deliver the bulk of subsistence social services is low skilled work, the value added portion of the labor cost is a small fraction of today’s total labor charge. Only the value added portion of the labor needs to be paid for from tax receipts and that reduces the tax burden. The labor content of services such as education and healthcare includes a higher percentage of value added, and so the reduction in the costs for those social services is less. Nevertheless, removing the subsistence portion of labor from the overall cost of delivering basic social services will reduce both total cost and the percentage of cost assigned to labor. The result is that a higher percentage of taxes spent on providing social services will be spent on capital investments. Given a stable population, the increased capital allocation will result in a substantial long-term reduction in the cost of social service provision.

Taxes and wealth are expressed in monetary terms; and, in a progressive tax regime, more taxes are levied from the highest wealth generators. So transferring the subsistence portion of social services costs on to the social fabric of the society, reduces the tax burden most significantly for the wealth generating members of the society. In other words, providing free basic social services is in the best interests of the wealthiest members of the society.

If labor rates are substantially reduced, this will also impact the ability of the society to raise tax revenues from income taxes. Income taxes will only apply to the value adding portion of labor, because that is what is expressed in monetary terms. There are two modifying effects that mollify the apparently negative consequences for tax receipts. First, the majority of income taxes are raised from the highest earners, so removing the subsistence portion of income from tax calculations will have a relatively minor impact on overall receipts. In fact, so long as the reduction of total social service provisioning costs contributed by lower labor rates, is greater than the effective income tax rate on subsistence wages, the net result will be a reduction in the tax burden compared to current systems.  Secondly, tax revenues could be raised by a comprehensive income tax that is levied on all income, without personal allowances. This will be more politically acceptable because all subsistence needs have already been taken care of by the social services provided.

The impact on the public financing of infrastructure investment is to bring the “cost” of those investments down and, at the same time, more closely match the interest burden on any such investments funded from budget deficits. Because budget deficits are necessarily funded with borrowing, it is important that those funds are spent on performing assets that can deliver a return, to support the interest burden on the debt. By removing the subsistence portion of the labor costs from the price tag of the infrastructure, the amount of borrowing can be reduced. The rate of return on the investment is improved, so repayment schedules can be shorter, and the return rate of the infrastructure investment can be more easily supported without unnecessary expansions of the money supply.

Finally, a beneficial side effect of using input cost pricing for basic social services is that their recognition within GDP calculations at their cost, makes GDP a more accurate measure by which to gage wealth, and therefore manage the money supply. The trouble with a benefits system is that it prices the value of the services at their acquisition cost, because the recipient uses cash to buy services. We pay unemployment benefits as cash, we pay pensions as cash; but what we are really trying to do is deliver services such as housing, sustenance, shelter and healthcare. Instead of actually delivering the services, we find it easier to send cash. This substitution of services with cash is the basis for miscalculating wealth and GDP, because the purchase price of social services is used instead of the provisioning cost.

Changing from cash benefits to universal services reduces labor costs, lowers taxes, makes infrastructure investment more affordable, increases business flexibility and improves money supply management. What more reasons do we need to start owning up to our responsibilities and living up to the social contract we implicitly rely on for a peaceful life?

G20: coordinate, stimulate, regulate?

Leaders of 20 nations meet this weekend in Washington, united in their discomfort with their position in the world, their victim status and their common sense that something else is possible.

Together they represent:

  • 100% of the responsibility
  • 90% of world industry
  • 80% of world economic output
  • 70% of the world’s population
  • 60% of the world’s land mass
  • 50% of the world’s resources
  • 40% of the world’s ethno-bio-diversity
  • 30% of the world’s AIDS population
  • 20% of the world’s good intentions
  • 10% of the world’s good ideas

Together, they will produce 0% of the answers and actions capable of leading us all to a sustainable, peaceful prosperity.

On the surface their desires are simple, they want to live long and prosper. They understand in their guts that it would be fair if they could just chop wood and carry water to make ends meet, and have a decent chance at pursuing happiness. Underneath, their goals and ambitions are complicated by a vision tinted by separateness, hearing muffled by unholistic understanding and feeling anesthetized by their knowledge of their own unrepresentativeness.

The features of a group that could deliver solutions would be

  • wholesome representation (integration)
  • common purpose, process and practice (intention)
  • holistic world view (inspiration)

This is a good test run because it represents exactly the kind of coordinated decision-making and action planning that is going to be necessary if we are going to change course from the fate looming over the world in the coming decades, towards our destiny of sustainable peace and prosperity. Achieving the challenging changes that will be required to avert environmental and social degradation, will require inspiration integrated with intention, that stimulates action across the world.

What the G20 leaders could do to start in the right direction:

  • agree to form trans territorial alliances that will allow representatives at the next meeting to represent 100% of the worlds population
  • recognize that national currencies are no longer useful in a globalized economy and yet we are not ready to adopt a global currency, so there must be consolidation towards trans territorial currency units, each managed by an independent central bank
  • define the role of a central bank as an apolitical organization charged with responsibility for management of the money supply, and therefore banking regulation, interest rates and value stability
  • resolve to prioritize their own humanitarian support systems so that coordinated action in the future is about moving forward, not rescuing from past miss steps
  • stimulate microeconomic activity by reforming their tax systems, establishing micro marketplaces, deploying information access networks and implementing basic social security systems
  • advance the Doha round of trade talks by focusing on these two factors:
    • establish the right to food sovereignty
      • remove international recognition of biogenetic patents
      • promote sustainable self-sufficiency
      • ban the export of subsidized agricultural products to stop rich subsidizing blocks contorting the real market for food; if the need is humantarian then give it away
    • establish a carbon tax framework
      • establish unified rates of taxation
      • agree standards governing the use of funds raised from carbon taxes

If Barack Obama was a LIFE Supporter, his agenda would look like this…

The broad agenda is no different that that adopted by the Obama team: stabilize the economy, restore the rule of law and the balance of justice to the people.
To see how the policies and strategies below align with these goals, go to the bottom of this post.

The first thing he would do would be to establish five commissions, each tasked with the development of detailed implementation plans for major policy areas:

  • energy
  • BASE
  • taxes
  • democracy
  • digital identity

The Energy commission
This commission is tasked with the introduction of initial carbon loading taxes starting in January 2010. Commissioners with expertise in the mechanisms of fuel markets, efficiency and environmental impact will have only a few months to determine the initial fuels that will attract a carbon tax and the mechanism by which carbon load will be calculated.
However rudimentary the initial implementation is, it is important that this is started as soon as possible.
All revenues from the carbon tax will be dedicated to the development of renewable energy industries.

The BASE commission
Charged with the assessment costs for the provisioning of all BASE services to all citizens, starting on 1 January 2011. The first task for this commission will be to assess a Shelter Equivalent value that can be used in the housing acquisition program (see below). Mechanisms for the distribution of funds to cover the costs of BASE services are also part of this commission’s responsibilities.

The Tax commission
This commission is responsible for reforming the IRS to allow it to effectively provide income tax collection services on behalf of all constituencies starting on January 1, 2011. Part of this work will be assessing the costs associated with those elements of government that do not fall under the purview of BASE, and will therefore have to be funded from corporate or sales taxes. Using these assessments and the results of assessments by the BASE commission, they will be able to determine the required rates of taxation necessary to cover the existing government budget.

This commission will also be responsible for the establishment of processes by which the tax revenues allocated to BASE services are distributed to the lowest layer constituency appropriate for the delivery of the service.  In many, if not most, cases this will mean distribution to the States until lower layer constituencies are established in 2011 and later.

The Democracy commission
This commission is tasked with reform of the electoral process for federal assemblies (Senate & House) effective 2013, and developing the processes and frameworks that will allow for the development of multilayer representation starting at the community level. Included in the remit for this commission will be the establishment of boundary commission standards and the development of a framework for the election of a world assembly.

The xID commission
Responsible for developing the standards for a xID digital identity system that will be introduced at the beginning of 2012.  Experts in technology infrastructure, digital security and constitutional matters will develop technical, operational and legal standards for the system in compliance with the standards for distributed storage and privacy defined in the xID specification.
 

2009

  • In addition to the establishment of these commissions, during the first 90 days an independent central bank will be created charged with responsibility for the management of the currency and the regulation of banking system.
  • Also in the first three months, the Guantánamo prison and all CIA black sites will be closed and any prisoners deemed to be an ongoing threat to the country brought back to the USA to be tried in courts.
  • Military deployments in Iraq and Afghanistan will start a rapid draw down with the target of returning to a small number of defensible bases within 12 months.
  • Last but not least, draft a constitutional amendment protecting personal freedom of choice in personal space, targeted for ratification in 2011.

Housing acquisition program
As soon as the independent central bank is established and the BASE commission has derived a Shelter Equivalent value (effectively a replacement value for a standardized housing unit), it will be possible for any citizen to sell their primary residence to the public for a payment equal to the Shelter Equivalent. The citizen will retain a 20 year, inheritable, occupancy right to the property but ownership will belong to the community/public. Until BASE services are fully introduced, the tenant will be responsible for the payment of utilities and the costs of maintenance, failure to pay these costs can result in termination of occupancy.
Any mortgage lender will have to surrender their interest in the property in return for the Shelter Equivalent payment.
This program will be in effect until 2011, or the start of BASE services.

Federal legal review
The Justice Department will review all federal laws and rescind any laws on the books that contravene the proposed amendment regarding personal freedom.
The Justice Department will establish a review process for the case-by-case review of the sentencing of all people currently held in custody, or subject to parole restrictions, based solely on convictions under laws that are now to be rescinded.

2010

  • BASE services will be started early for all veterans. Meaning that veterans will have free access to all public services, including housing, sustenance, healthcare, transport, education, information and legal services.
  • Carbon taxes start.
  • Cessation of all non-defensive missions by military personnel in Iraq and Afghanistan. Future military activity will only be engaged in the support of efforts initiated and led by domestic governments that have been democratically elected by their people.
  • Establish regional healthcare authorities tasked with the funding of regional healthcare facilities and practitioners starting 2011 

2011

  • New tax regime starts along with the implementation of BASE services for all residents.
  • Draft constitutional amendments, resulting from the work of the Democracy Commission, presented for the establishment of multilayer representation, variable law, proportional representation elections and the new standards for suffrage, targeted for ratification in 2013.

2012

  • First xID systems online.
  • First world assembly election campaign starts.

At the end of 2012 there will be another presidential election which will provide the people an opportunity for a referendum on the changes made to-date, as well as the proposed constitutional amendments to change the representation and election systems in 2013.
By the beginning of 2013 there will have been elections for all federally elected positions since the announcement of the agenda. This provides for representation that expresses the people’s desires regarding the enactment of the chnages proposed.


Policy Alignment

Economic stablity

  1. Containing the collapse of the housing bubble using the housing acquisition program will stabilize communities by keeping people in their homes and liberating income from debt service that will then be redirected into spending that will stimulate the economy.
  2. Establishing a clear path to a balanced budget, through BASE and tax reform that tackles the social security debts and ties expenditure to revenues, as well as the formation of an independent central bank will restore domestic and global confidence in the economy and our currency, allowing us to borrow credibly should the need arise.
  3. Removing the burdens for pensions and healthcare from industry, by introducing BASE services, will allow for a restructuring of primary manufacturing instead of widespread bankruptcies.
  4. Proper pricing of fuels, through the inclusion of carbon loading, will allow the market to move into the appropriate alternative energy options and will create a fund that can be used for transport infrastructure improvements and the retooling of manufacturing to produce “green” products.

Restoring the rule of law

  1. The introduction of an constitutional amendment to protect personal freedom will do much to restore the public confidence in the rule of law and liberate the judiciary from being confused with the moral police.
    1. Repeal of laws that intrude on personal freedom will free up resources in the judicial, enforcement and detention systems
  2. Restoration of the principles of human dignity and the pursuit of peace will allow us to again champion the rule of law at home and abroad
  3. The establishment of a path to Variable Law will add credibility to the rule of law in our large and complex society

Restoring social justice

  1. Placing the most basic welfare of all citizens at the heart of government endeavor restores the rightful balance that will allow our great economy to flourish once more
  2. Creating the infrastructures for healthcare, education, transport and information will create the opportunity for many to succeed using their own talents, ingenuity and drive
  3. Bringing democratic power back to the communities through reform of our democracy will restore the natural balance between us at the same time that it gives us the ability to take responsibility for ourselves

True capitalism requires social security

True capitalism actually requires a proper system of social support to avoid the unhelpful intervention of governments in the form of corporate welfare.

The trouble with capitalism as a political philosophy, is that it isn’t one. Capitalism is an economic principle and mechanism, but it is not politic. That is that it does not concern itself with the many, nor does it have any interest in the well being of people. In capitalism people are resources, in politics people are people.

One of the lessons of the recent financial turmoil is the recurring reminder that, in the end, governments, on behalf of the people, bear the final responsibility for the welfare of people, and thus must act as the ‘backer of last resort’ for the economy. Without social support this inevitably leads to corporate welfare. There is no other choice: if one believes that the welfare of the people is dependent on the merchants of capitalism, it follows that maintaining the welfare of the people requires the support of the merchants.

The trouble with this is that the merchants are not innately directed by the welfare of the people, and they make very ineffective distributors of social security. It is not in their DNA, and nor should it be. Give a bank a billion and they will use it to make money, what else would you expect from a bank?

If you really want to let capitalism have free reign then you have to make sure that social security is there first. That way corporations can rise and fall according to the laws of the market without having to be rescued by the tax payer, this is the ideal that market fundamentalists espouse. The mechanism of capitalism is dependant for its long term health on the death of unsuccessful ventures, and so society must isolate itself from such deaths, as much as it can.

By providing the social infrastructure detailed in the Standards of LIFE, one can let the market go. When the fates of corporations are not a threat to the basic fabric of the society they thrive in, then they are liberated to pursue their raison d’etre. Furthermore, the micro economic enablement at the core of the Standards of LIFE further isolates the welfare of the public from the failure of any particular enterprise and from the natural cycles of specific industries.

True capitalism, it turns out, actually requires that there is a proper system of social support in place, in order to avoid the unhelpful intervention of governments in the form of corporate welfare.

Labor unions fighting the wrong battles

Since the dawn of the industrial age, the organizations representing the workers have been locked in two battles with the enterprise owners: one for a safe working environment and the other for a share of the wealth created.

The first battle is the one that unions can fight and need to win. The people who know the hazards of their workplace are the workers who work in them and, quite rightly, they have the full support of their fellow citizens in demanding the remediation of any deficiencies. The hollowing out of regulatory agencies that support the workers’ right to a safe workplace has resulted in the aggregious exploitation of unorganized and organized labor alike.

The second battle is unnecessary, and the result of a misunderstanding about the power of democracy. To the extent that there is widespread support for a “living wage”, it reflects a natural inclination in all of us that the contribution of one’s labor should, at least, deliver the bare necessities of a peaceful life. Beyond the satisfaction of basic needs, the support for a principle of sharing the wealth created by some becomes distinctly frayed and disfused. This is also a natural impulse and reflects our personal experiences of achievement and the pursuit of our interests.

When unions demand a share of the wealth created by the organizations they work for they are treading the narrow path between natural fairness and natural enterprise. They have the support of the populace for the former and are fighting against common instincts when they stray into the latter. The answer to this conundrum is to be found in the politics of their society, it is in the hands of the very people they represent. A taxation system that assures everyone of the basic essentials of life is there for the asking when the majority of people are workers living in a democracy.

As proposed in the Standards of LIFE, a simple tax system that dedicates income tax revenues to meeting the basic needs of all, satisfies the fair demand for a fair share of the combined wealth of the society. The battle should be to help the workers see that the ballot box, not the picket line, is the way to achieve their aspirations for a livable life. It is completely unnecessary to fight, against the grain, trying to force enterprise owners to meet the need for basic services.  The owners are focussed on competing and innovating and that means keeping costs as low as possible and their focus on their markets, not the social needs of their workers. Successful enterprises are those that make the most of the knowledge, ingenuity and insights of their workers, but this is not the same as ownership, risk taking and entrepreneurship.

Legislation, that supports safe workplaces, and a taxation system, that meets society’s basic needs, are both the domain of government; and governments are elected by the people. So stop asking corporations for what they are disinclined to provide and start asking yourself why you’re not giving yourself what you need. Unions should mobilize their members, to mobilize the majority, to elect a government, that will deliver the standards of life to all.

Unions might find themselves allied with the owners in an endeavor that delivers fairness while freeing corporations from responsibility for the fabric of their society. Adoption of the principles and policies of the Standards of LIFE has the potential to create just such an alliance, around a common purpose that satisfies different interests, because the Standards of LIFE delivers social justice without blunting the driving force of enterpise.

What’s more, if the workers have their basic needs met then the employers have to work harder to attract employees and that means better and safer workplaces.