More MMT: inflation, inequality and punching left?

Despite the optimistic subheading of my book, "Staying Positive Amidst Disorder", I'm a cynic by nature and so sometimes need to critically examine both the tone of my work and how its content is being interpreted by others. The last thing I want is for my writing to be seen as "punching left", inadvertently promoting crypto-conservative viewpoints like a Dave Rubin, Jon Haidt, Steve Pinker or their ilk. If you don't know I'm a deep progressive, my pieces on MMT (Modern Monetary Theory), UBI (Universal Basic Income) and identity politics could certainly be superficially interpreted that way. While I think the left's openness to novelty is a great strength, I don't believe ideas get a pass merely because they're new, exciting or challenge preconceived notions. Our passion for the new can just as easily lead us into error as to utopia - as it certainly has in the past. 

So in that vein, I want to continue talking about MMT by looking at the criticisms I received for my previous piece on Reddit and Twitter. I try to be fair in what I write about any subject; my goal is not to "punch left", but to see if exposing young policy programmes to critique by outside perspectives can highlight what, if anything, they offer that's new. This is made challenging by MMT proponents constant and tactical shifts between description and prescription, between the desire to challenge existing narratives and to craft a radical vision of their own.

In short, I received two sorts of criticism for my contribution. First, that I misunderstood and misrepresented the case of Venezuela. Secondly, that I (alongside most economists) overegg fears of inflation in economies that are demand-constrained. The following tweet from Adelaide-based economist Stephen Hail is representative of the comments I received:

You don't seem to know Venezuela's economic history, which has nothing to do with MMT, or the MMT literature. I don't recognise your 'MMT welfare state' as having anything to do with that literature. Where is your discussion of the role of the macro role of the job guarantee???

— Steven Hail (@StevenHailAus) March 24, 2018

Responding to my critics

The Venezuela barb in my first post was in all honesty a low blow. Of course Venezuela is not literally a case study of MMT - I was making an analogy. MMT theorists have an account of hyperinflation as a product of political and ecnomic crisis, which is both fair and explanatory in the Venezuela case. They point out that hyperinflation (of greater than 50 per cent) has never occurred in a democratic country with a sovereign currency. But critics of MMT like myself aren't only worried about the most extreme case. By arguing that adverse consequences are only a concern in factually rare circumstances, MMT economists fuel my suspicion that they're unconcerned with persistent high inflation that doesn't reach crisis proportions. After all, there have been at least two episodes where annual inflation rates in the West era have exceeded 10 per cent, both with harmful effects for both the real economy and domestic inequality. 

The Venezuelan economic crisis has unfolded in multiple distinct phases, and by focusing on only its final Act (characterised by the familiar combination of fixed exchanged rates, debt default, currency depreciation, corruption and hyperinflation), we gloss over the earlier phase of the unravelling which produced these conditions. Even before 2014, Venezuela had one of the highest inflation rates in the world (40-50 per cent);  'Dutch disease' caused by oil-fuelled spending was corroding the country's production base; and capital flight and hoarding constituted a full-scale "strike" by capital (which could not be employed productively domestically). This underlying dysfunction led to the later debt and balance of payments crisis, and it's this systemic dysfunction caused by loose monetary policy - not the hyperinflation at the tail end of the story - which I argue by analogy should be of concern to MMT proponents. 

My flippant use of Venezuela is ultimately just a distraction. The core issue is inflation. When even the US Federal Reserve doesn't fully understand how to control it, MMT proponents make an extraordinary claim when they state it shouldn't worry policy-makers at all. Either inflation is indeed an undesirable side effect of monetary financing, in which case new spending is constrained to a few per cent of GDP (which we do already), or inflation is desirable side effect. I suspect that at the end of the day MMT proponents are comfortable with government finance via debt monetization - in other words, an inflation tax. MMT proponents want to do away with finance via bond auctions. But government bonds, as a method of financing, at their core constitute a lease of a real asset held by the private sector by the government; like taxes, they ensure that spending redistributes inefficiently held wealth to more productive sectors of the economy - something monetary finance doesn't do and actively undermines by eroding the willingness of capital to lend to the state. 

Doing away with this real-world resource constraint, by permitting direct central bank purchase of bonds (i.e. printing money at the Treasury's behest), does not change the availability or distribution of real capital and labour assets of an economy. But increasing the money supply does serve as a kind of tax, reducing the value of savings and fixed-asset incomes, while increasing the spending power of debt-laden consumers and the competitiveness of exporters. There are well known pluses and minuses to an inflation tax - it's not a new idea - and if this is what the MMT solution to inequality looks like in practice then advocates need to be upfront about what they're proposing rather than selling a policy as if it had no downsides. 

This is why MMT proponents need to throw in the 'jobs guarantee' idea: it's the escape valve that exempts their policy recommendations from any negative consequences. If government spending is unlimited, there's no reason MMT couldn't be used to fund corporate subsidies and massive tax cuts (in fact, this is arguably a valid description of post-GFC monetary policy). Modern economies are in fact demand-constrained as a result of inequality, and demand-side spending should absolutely spur higher growth and equity. The best evidence MMT proponents have is that supply-side QE has been neither inflationary nor stimulatory; their ideal outcome is that demand-side 'peoples' QE is also not inflationary but does a better job at stimulating growth. But monetary financing is not future-proof or self-correcting: if applied in the wrong circumstances, monetary stimulus would replicate the stagflation of the 1970s or the liquidity trap of the 2010s. It's also a lever that only ever works in one direction: switching between demand- and supply-side monetary stimulus might undermine the adaptive, anti-fragile features of modern economies and erode trust in the value of goods and services. 

MMT is not synonymous with "far left" 

Just because an idea new and radical doesn't make it progressive. With MMT & UBI, this is abundantly clear. MMT proponents as a rule don't possess a  systemetic critique of the structure of capitalism - views of Marx in the MMT community seem to range from attempts at reconciliation, to bemusement or outright hostility. They want to tinker with the levers of finance without challenging the underlying strutures and private incentives that generate inequality in the first place. This is part and parcel of their effort to signal respectibility to mainstream economists, which manifests in a number of facets of their policy advice.  

Here's a controversial opinion: a jobs guarantee, while certainly an improvement on the laissez-faire status quo, is a conservative policy. Let's be clear: if finance is truly unlimited, why not spend heavily on public infrastructure, universal free education and healthcare, public housing, or a guaranteed minimum income? What about those who are unable (the elderly, carers, students and disabled) or unwilling to work - particular those unwilling to dig holes for the government for minimum wage, or to move or commute to where these job programs will take place? I am all in favour of expanding public sector employment, but jobs guarantee is intrinsically liberal in two key respects: firstly, it is a poverty-alleviation program rather than an inequality-alleviation program; and second, it is 'ambition-sensisitive' in the sense that it only rewards those of good character 'willing to work'. A guaranteed income would have the same result on poverty, at lower administrative cost and leave people free to find productive meaningful work that suits their skills and preferences on their own. Except it offends the sensibilities of ambition-sensitive liberals, and is therefore policy non grata. 

The failure of MMT proponents to deal meaningfully with inequality across the income spectrum is a consistent feature of centre, even centre-left, thinkers who see poverty and unemployment as the only fault with capitalist distribution. As a denial of (several) fundamental human rights, poverty is indeed *the* pressing concern of progressive economics. But inequality is additionally uniquely harmful to individual and social well-being at all income scales and I would argue that a poverty program anchored by a requirement to work would do little to improve the relative automony and self-confidence of the low- and middle-income scale, and may in fact reinforce harmful stereotypes and behaviours (cf: Elizabeth Anderson). MMT theorists seem uninterested in the overall progressivity of taxation, or in taxing capital more aggressively. At their most contrarian, MMT proponents also often take a highly critical view of taxes consistent with far right libertarian economics. 

This failure of MMT advocates to address the distirbution of costs and benefits in society is hidden by the (very cool) data-informed sectoral analysis they produce. MMT breaks economic activity into its private and public components, to demonstrate that increased government spending grows the private sector:

So government spending can grow the economy. But how is that growth going to be distributed? MMT has no answers that I've seen other than saying "Look! A jobs guarantee! Everyone like jobs! We're progressives too!". Inflating away debt may very well affect the distribution of wealth in a society, but income and property differentials would only reproduce it in short order. In terms of reducing inequality, funding a jobs guarantee through monetary policy is functionally no different than asking business to employ more people out of the sheer goodness of their heart: it's short-sighted, counterproductive and unsustainable. 

I'm sure many MMT economists are well intentioned and I'm happy to make use of their work in fighting back against the deficit hawks on the right. But transformation of the economic status quo needs to be smart, adaptive and selective about the sorts of policies we pursue, and by acting as if political and economic constraints don't matter, MMT does the wider left a strategic disservice. 

No panaceas: What MMT gets right, and wrong, about fighting inequality

I've been making an effort lately to understand more about so-called "Modern Monetary Theory" (MMT). There's been an uptick in the use of "MMT Welfare State" and "People's QE" talking points from well-meaning but naive progressives that's making me anxious, for reasons I'll get to in the final section of this blog. I've watched a bunch of interviews with and lectures by Dr Stephanie Kelton (Bernie's Chief Economic Advisor), as well as dived into the blog of Australian economist Bill Mitchell, and in all honesty found that there's not much in what they say I disagree with. What concerns me more is what they don't say, and the policy lessons that others are drawing from MMT with their tacit encouragement. 

What's good isn't original and what's original isn't very good

Let's start with what the MMT theorists get right, and that's their understanding of public finance and the role it plays in the economy. MMT proponents understand, in a way that neoclassical economists often elide or obfuscate, that the state is the consumer, producer and investor of last resort . Taxation and redistribution are not arbitrary and selfish activities undertaken by a rapacious bureaucracy, but necessary tasks to: compensate for insufficient or 'leaky' demand in the economy; guarantee social and economic rights; manage foreign trade; and address the dilemma of declining profits under capitalism and the paradox of thrift. 

MMT gets this right, of course, because it's a simple restatement of basic left economics. In general terms, competitive economic activity is characterised by a multiplicity of dilemmas of interdependence, which produce collective action problems for society as a whole. Taxation is an institutional solution to these problems which redistributes surplus profits to support demand-side consumption by those who are left behind by the competitive market. The government performs other essential institutional roles by regulating trade, supporting long-term investment in R&D and infrastructure and funding basic services that cannot be provided through self-help. Unlike classical economists, Keynesians and MMT proponents all accept that market failures are an endemic and permanent feature of competitive economic systems that require the existence of strong public institutions to correct. 

The chief motivating interest of modern monetary theorists is to counteract the right-wing talking point that government spending and deficits are harmful to the economy. They do this very well: governments which run a deficit are trading on their institutional reputation to pump extra funds into the private economy in much the same way that banks loan against the trusted value of real property to increase home ownership rates. But you don't need MMT to fight back against austerity and deficits hawks: any heterodox economic perspective will get you to that point. Which is why orthodox Keynesians consider MMT proponents to be radicals: they're not just interested in finance, but in the role of monetary policy in supporting public spending, a topic which most economists on both right and left treat with the utmost caution. 

The meat of MMT, therefore, lies in its account of the monetary system and the way in which currency is created and employed. While disconcerting for most people (and many economists!), there's little to disagree with in the MMT description of how Central Banks establish the value of currency through the purchase and redemption of government debt and the regulation of fractional reserve banking. MMT presents itself as a revival of German "Chartalist" ideas in which the value of money is set by laws and institutions. They often mix this account with the paranoid right-libertarian version of the same narrative, in which money is given its value through the state's monopoly on the use of violence and the coercive imposition of taxes to create debt. These narratives are uncontroversial, if incomplete. We've lived in a world of fiat money backed by trust in state institutions since the 1970s, and it works just fine. 

From a cultural evolutionary perspective, it's absolutely true that both the reputation of institutions and violent coercion can be used as mechanisms to generate compliance with a social norm (the value of money being essentially, a shared belief or practice). But institutions and punishments are not the only ways in which social order is established and maintained. MMT proponents are dismissive of the neoclassical exchange theory of value: that money obtains utility becuase it's an efficient shared unit of exchange and account. But as I write in Chapter II of my book, "Politics for the New Dark Age", the neoclassical account of exchange value as the product of intersubjective belief and social learning is essentially correct (once we adjust for structural inequalities). Although a powerful hegemon can establish the 'rules of the road' for the economy, the continuing utility of norms can be and is in fact supported by a combination of different social mechanisms including the tacit consent of citizens. 

And by dismissing this part of the picture, MMT proponents start to get things wrong. Because the value of money is mutually constructed by both the requirement of the state that debts be redeemable in its currency and the tacit consent of its citizens that fiat currency is a useful medium of exchange and unit of account, then the capacity of the state to spend by simply issuing currency is not unlimited, not even theoretically. A state *could* dictate the value of its currency using only coercion, but that would be a radically different governance regime to the liberal democracies we prefer to rule us. The Levy Institute, for example, advocates for capital controls typically employed by the very same fixed-exchange rate autocracies they purport to critique! Institutional trust in government and the state's power to coerce compliance are not unconstrained, and therefore the government's capacity to issue currency in pursuit of its policy aims is not unlimited in the way MMT suggests. 

MMT economists are extremely adept at arguing that the progressive economic policy space is  wider than that alloted to the state under neoliberalism. And as a description of the financial and monetary systems, MMT has much to teach lay economists. But MMT proponents are often guilty, I fear, of validating Hume's dictum that human reasoning slips too readily from describing what 'is' to prescribing what 'ought' to be. 

Big Asterisks

The common criticism of MMT is that it while it describes fiscal and monetary systems well, it underplays the complex interactions between them. Kelton and Mitchell, at least, are very open about the caveats they place on their work. But even so, these are pretty big fucking caveats. Inflation is the main issue lurking beneath the surface, and it's a problem that MMT theorists are far too glib about given how poorly it's understood. It's easy to argue that spending which increases productivity doesn't necessarily increase inflation (because the increase in the value of money in circulation is ideally being offset by an increase in the value of goods being produced). Although the right would no doubt disagree, in a demand-constrained economy like the current moment progressives can demonstrate that more spending on consumption will boost growth whereas further austerity will only choke it off. But the relationships between money, productivity and inflation are highly complex and non-linear, to say the least. 

Problems arise when monetary policy is employed on the assumption that there's a strict correlation between spending and economic activity ("Overt Monetary Financing"). If Central Banks are expected to support fiscal expansion (e.g. through the purchase of government bonds that private savers are unable or unwilling to absorb through open market operations), they risk exogenously devaluing the currency. Money supply is not the only factor leading to inflation, of course, but increasing the availability of any commodity does put downwards pressure on its value. Devaluing currencies drives up prices and corrodes the value of savings, which may counteract the domestic consumption and production effects one is trying to achieve through fiscal expansion (For Mitchell's counterargument on this, see: here) There's a reason the conventional policy view, a view I support in the absence of compelling evidence to the contrary, is to keep inflation low and the money supply conservative. 

The flip side of preventing inflation is ensuring that the supply of money remains meaningfully linked to the resources of the real economy. As Kelton herself says in one of the clips linked at the top of this piece, it's trivial for the government to give everyone money in their bank account. The more important problem is making sure there are goods and services that people can buy with those funds. That problem is definitely *not* trivial and it cannot be hand waved away - I've read MMT proponents go so far as to say that government spending is fully independent of the real economy. Production is not motivated solely by the macro-availability of money for production and consumption, but at the micro level by the rate of profit and the demand for consumption (this is the perspective I outline in Chapter XIII of my book).

In a market economy it won't matter if the funds to produce and consume necessary goods and services are available if the owners of capital and labour (i.e. workers) cannot be incentivised to produce them. If the rate of profit is low, capitalists have plenty of other things they would rather do with their wealth (i.e. investing overseas, buying into asset bubbles, rent-seek by privatising public assets etc.) than produce goods and services. And if demand for additional consumption is low (because government-supplied 'wages' are high), workers have little motivation to commit their time to perform additional labour. I'm not saying that fundamentally changing our economy to be less reliant on the profit motive and wage labour is a bad thing, only that leaning on MMT to advance these goals without tackling the bigger structural forces at work under capitalism is likely to be extremely counterproductive. 

MMT proponents offer easy solutions for hard problems. They correctly understand the state as a social mechanism for redistribution of wins and losses but don't engage directly with the political question of "who pays" and "who benefits". Distributional justice is the essence of political conflict, and by arguing that it doesn't matter (because the government’s fiscal resources are not scarce), MMT proponents are making a fundamental tactical and strategic mistake. 

Back to the future

I'm anxious about MMT economics rising to prominence on the left because the "MMT welfare state" that some evangelists have proposed looks to me like a fiat money version of 1960s Keynesianism or a demand-side version of post-GFC quantitative easing. If policy-makers are complacent about the critical role of public trust in money and the risk of inflation, there's considerable risk that progressives could walk headlong into a replay of stagflation and the liquidity trap - both of which dramatically worsened inequality We do not want to repeat on the demand-side the collossal failure and waste of supply-side QE, just because those we aim to help are more 'deserving'. MMT gets the diagnosis right, but the cure wrong. 

Another analogy: MMT social welfare states would look a hell of a lot like the oil-fuelled “socialism” of Venezuela. The resemblence should give anyone caution: the government in Caracas believed it had a quasi-unlimited store of exogenous wealth which it could use to create a welfare state without fundamentally taking on the institutional power of existing elites or reforming the structure of the economy. But of course the economy was more sensitive to international financial markets and the trust of people in its currency than it suspected. The result? For all its good intentions, the Bolivarian Republic is suffering currency depreciation, inflation, the corroding of normal economic production, increased repression and violent political instability.

There is no short-cut to economic equality: it must be built, step-by-step and by imposing direct costs on the wealth and privilege of those at the top of society. We must not only work to redistribute wealth and income, but to build a production system that does not generate belle epoque-levels of inequality in the first place. By all means, progressive governments should spend more, and worry less about the concern trolling of the deficit hawks. And to balance the books? Raise taxes, especially on the rich. Tax capital aggressively and abolish sweet-heart deals for the influential. Such a programme is going to make enemies, and create losers who will use their considerable resources to fight against us. But that's the kind of hard work politics is for: not throwing clever economics against hard problems. 

Cryptocurrencies: It's a bubble, dummies

Chapter XIII of my book, "Politics for the New Dark Age: Staying Positive Amidst Disorder" defines an economic bubble like this:

"Bubbles are deviations from the long-term trend in the value of particular assets where their rate of return exceeds the underlying productivity growth of the capital."

From a policy perspective, bubbles are undesirable and difficult to manage, but they're also a useful diagnostic tool: the presence of a bubble indicates that an economy is unbalanced, and that there's an excess of either supply or demand for capital or labour going unused. 

Crypto-currencies are currently experiencing a bubble. Take a look at the price chart for bitcoin, the founder and standard-bearer of this new type of digital currency:

That's a more than 17-fold increase of value of bitcoin assets in a year, creating a total market valued at about US$280 billion. Other digital currencies are performing similarly. Ethereum, the third most significant cryptocurrency by both value and volume traded increased by more than ninety fold. Perhaps better capturing the irrational exuberance of the bubble, companies are doubling or quadrupling their share value overnight by adding 'blockchain' to their company name, and new currencies are being created and attracting venture capital at an staggering rate. More annoyingly, semi-informed elites are kvetching non-stop about way blockchain technology is going to save the world: honest-to-god, I attended a public lecture recently on how blockchains could be employed to monitor human rights abuses. 

We've seen this scale of bubble before: the best fit is the .com bubble of the late-1990s, during which tech companies posted similarly insane gains before crashing back to earth. I'm not saying the value of bitcoin has always been illusionary (all currencies are illusions, one way or another). Bitcoin has been around for a while now and found genuine niche uses in online (and black-market) transactions. It has developed a reputation as a meaningful unit of exchange, and attracted financial infrastructure investments to improve the efficiency of its operations. In the same way that the .com bubble didn't mean the internet was a failed technology, a cryptocurrency bubble doesn't mean that bitcoin and its peers are useless: merely that their current valuations grossly exceed the underlying productivity of the asset class. 

Why now?

Let's be clear. The value of cryptocurrencies isn't miraculously increasing because blockchain is the future of money. Cryptocurrencies cannot repace fiat money because they operate on the same principle as gold or other precious materials: they are resource-constrained prestige assets privileged by some consumers but unsuitable as a universal medium of exchange. Why are cryptocurrencies resource constrained? Well, the fact that bitcoin mining currently consumes more electricity than the Republic of Ireland gives a clue. While digital currencies themselves may be unlimited, the computing power required to cryptographically process blockchains consumes a scarce common good (electricity) and produces waste (heat and carbon dioxide). When the prices of these inputs and outputs are taken into consideration, cryptocurrencies will face natural limits to growth, much as the value of gold is constrained by the accessiblity of the mineral in the Earth's crust. Fiat money is not limited in the same way: assuming trust in public institutions, it's a more efficient solution for creating an unlimited medium of exchange.  

So why is the cryptocurrency bubble happening now? Let's take the productivity of bitcoin as a given and look at why more capital might be flowing into the market. First, most digital currencies have in-built inflationary drivers: there is a mathematical limit of 21 million bitcoins that will ever be created, and even currencies that are unlimited in the same way exponentially slow the creation of new units of currency over time. In other words, the longer cryptocurrencies exist, the more stable and predictable the supply of coins becomes. Secondly, several events in 2016/17 significantly improved the regulatory certainty of the major digital currencies. Ethereum famously split into multiple versions in 2016 as a result of attacks on its value, whereas the bitcoin market changed some of its internal rules in 2017 without splitting. A stable asset pool with regulatory certainty is a good de facto target for market speculators. 

But the core reason for the timing of the cryptocurrency bubble is that there is just too much capital sloshing around the financial system right now without anything productive to invest in. The same factors that are pushing the US stock market higher are creating, at miniature scale, the digital currency bubble. That is: obscence rates of corporate profit, the promise of debt-funded tax cuts by irresponsible conservative governments, stagnant wage growth and rampant inequality. Supply-side economics when there is a glut of capital supply does not work. Capital availability does not make capitalists invest in low-productivity, low-return activities: it increases their tolerance of high-risk, high-reward assets. In other words, it drives speculation and bubbles. Whereas the Bush tax cuts were invested in speculation driving up the price of housing and food (which was bad enough), the Trump cuts are being invested in bitcoin, share-buy-backs and an increasing concentration of corporate monopolies. 

Three Futures

Overall, I'm not very concerned by the cryptocurrency bubble. It's a warning sign that things are seriously wrong elsewhere in the economy, but not a problem for public policy-makers per se. Unlike housing, food and superannuation, cryptocurrencies are not (yet) essential to the provision of essential public goods and services, and so there's little reason for governments to be concerned about their prices (by analogy: why bother controlling the price of expensive art?). To that end, I see the cryptocurrency bubble ending one of three ways:

1) In the first (and most likely) scenario, the market for cryptocurrencies crashes without significant consequence for the broader economy. Lots of people take a haircut, and a bunch of financial instrastructure investment is effectively wasted, but cryptocurrencies continue to be used and develop at their underlying growth rate - as happened to tech companies after the .com bubble. The bitcoin crash may come about either on its own, or as a consequence of a broader systemic financial crisis: either way, no one will really take notice except the speculators who were playing the bitcoin game. 

2) The second scenario is that the bitcoin bubble crashes and creates negative feedback for the real economy because of the overexposure of key financial institutions (including pension funds and banks) to cryptocurrency risk. This is far less likely. US$280 billion may seem like a large asset pool, but it's a drop in the ocean in terms of global financial markets. While I have little faith in the market's ability to handle systemic risk, I'm marginally more confident that institutional investors will be warier of cryptocurrencies than they were of mortgage swaps. 

3) The third, and least likely scenario in my mind, is that there is in fact a positive feedback between the cryptocurrency market and the broader financial world. In this scenario, amidst a broader systemic market crash, in which the faith of investors and consumers in national currencies is shaken, trust and confidence in crypocurrencies actually leads to their increased use in market transactions, such that cryptocurrencies ultimately help stabilise the real economy. Think of people hoarding gold during the Great Depression to get an idea of how this would look. I refer to this as a the "Mr Robot" scenario (spoilers for season 3), and it's the preferred vision of the techno-libertarians who have the most faith in bitcoin. It's an extremely unlikely outcome for the forseeable future, but an interesting possibility nonetheless. 

Equality Matters. Period.

Politics for the New Dark Age covers a wide variety of topics in my quest to provide a comprehensive approach to modern progressivism. Some chapters look at areas of traditional strength for parties of the left (health, education), others look at areas of traditional weakness (individual rights, foreign policy). But no issue is arguably more important to left identity than inequality, which I tackle at length in Chapter IX. My central thesis, that socialists’ focus on equality and fraternity represents a necessary return to the core values of the liberal enlightenment, is a philosophical call to arms.

In some ways, I wish I’d been bolder. Tackling inequality was an unsexy concept in the 90s and early 2000s when I was educated, and it’s rarely taken seriously as an ethical or policy position in Canberra. Classical liberals, including many in the centre-left, argue at length that what matters most is inequality of opportunity. Beyond pointing out the importance of inequality of risk as well, in the book I argue that material inequality is bad for society largely in terms of its negative effect on material outcomes: lower, shorter, riskier economic growth. In other words, I am fighting for equality on the enemy’s [technocratic] territory. It’s an argument I think the left can win on the evidence, but it’s not our best frame.

The bottom line

So let me be clear: equality of outcomes matters for every single metric of a good society the left should hold dear. Whether it’s individual or group performance; economic or productivity growth; citizens’ trust in and the resilience of social institutions; or individual health and well-being. Material and social inequality is universally and uniquely harmful. It is harmful to the social contract, inasmuch as it creates markers of hierarchy and difference that corrode the mutual trust necessary for people to act cooperatively. And it is deeply corrosive for individuals, as we are all biologically conditioned by evolution to react to markers of hierarchy and difference with psychological responses and behaviour sets that are socially and personally harmful. There is no single policy the left could pursue that could have better results on every metric of social health and resilience than to advance equality at every turn.

Which brings to an article in Evonomics (which I highly recommend) by the power duo of Richard Wilkinson and Kate Pickett. Wilkinson & Pickett’s 2011 book, “The Spirit Level: Why Equality Makes Societies Stronger”, lays out the fundamental evidence for inequality’s pernicious effect(s) on social outcomes; the piece is a useful and timely reminder of the book’s key arguments. Wilkinson & Pikett are epidemiologists first and foremost, and what biology tells us is that citizens of more equal societies life longer, healthier lives than citizens of unequal countries regardless of their absolute level of income. The harms of inequality are:

“not caused by the society not being rich enough (or even being too rich), but by the material differences between people within each society being too big. What matters is where we stand in relation to others in our own society.”

Inequality doesn’t only affect the worst-off in society (that’s poverty, a denial of basic rights), but worsens social and individual outcomes for everyone. If you consider how rising middle-incomes in Australia and other developed countries have been coupled with massive increases in social fear and anxiety, you can start to see how the effect operates. Beyond the physiological impacts, the effects of inequality on cognition and individual behaviour are even more concerning. Multiple recent studies have shown that priming children with an awareness of their place in social hierarchies dramatically lowers test performance. 

Once this realisation is made, policy interventions to address social harms rapidly simplify:

“[Traditionally, e]very problem is seen as needing its own solution—unrelated to others. People are encouraged to exercise, not to have unprotected sex, to say no to drugs, to try to relax, to sort out their work-life balance, and to give their children “quality” time. The only thing that many of these policies do have in common is that they often seem to be based on the belief that the poor need to be taught to be more sensible. The glaringly obvious fact that these problems have common roots in inequality and relative deprivation disappears from view. However, it is now clear that income distribution provides policymakers with a way of improving the psychosocial well-being of whole populations.”

As I have written elsewhere, we don’t need to merely educate people to eat right, exercise and avoid self-destructive behaviours. We need to address the root cause of why they perform those behaviours in the first place. In fact, telling people how to behave without addressing the underlying material and social inequalities that affect them will likely only exacerbate such behaviour. When people are economically and socially secure, when they believe that risk and opportunity are socialised, then I suspect we’ll find that many of their anxieties about novelty – for example, doing something in energy policy to prevent climate change, or to help refugees fleeing conflict ­– will similarly melt away.

In the final analysis therefore, when someone on the left equivocates about whether or not striving equality should be our goal, look them in the face and tell them it must be.

Guaranteed vs Universal Basic Income

Politics for the New Dark Age explicitly disavows a revolutionary approach to political activism. It requires us to engage with our societies, our democracies and our natures as-they-are rather than how we would have them be. As a result I expect to cop some flak from comrades for being insufficiently bold, or even legitimising and defending the liberal (read: mixed capitalist) status quo. Yet I think what I have been successful at showing is that even using only a handful of very basic, shared premises the left can achieve policy progress that is downright radical. Today’s blog will look at one of those bold prescriptions: Guaranteed Minimum Incomes. 

The Welfare Principle

For those yet to read it, the central connection I make between rights-based individualism and the need for social cooperation is what I term the ‘welfare principle’. The welfare principle requires that, when competitive institutions or self-help cannot guarantee citizens’ fundamental rights, cooperative institutions must be and are created to do so. Although I will freely admit to borrowing the principle from human rights law, I’ve not seen it used much in political philosophy, much less in socialist discourse. Since society and social institutions exist to guarantee individual’s civil, political, economic and social rights, and self-help through market mechanisms is very often unable or unwilling to procure them, institutions – including the state itself – arise in order to secure the positive enjoyment of those rights for all.

Which brings us to the topic of poverty. In a liberal, rights-based framework, poverty must be understood as the denial of an individual’s fundamental economic and social rights. It is a failure to secure the income and resources needed to acquire an adequate standard of living (given the surrounding society’s level of economic development). In a monetised society, a person’s standard of living can be approximated by their income – which is a measure of their power to obtain ("purchase") goods and services. Since the value of money is essentially arbitrary, we define poverty as falling before minimum income without which a person can no longer be said to enjoy adequate access to essential human goods and services. As Martin Luther King Jr once said, "the solution to poverty is to abolish it."

As I write in Chapter VII of the book:

“[I]f markets operate efficiently to produce full employment, the state would have only minimal cause to intervene to provide incomes directly to citizens. . . . Everyone could obtain a job that provided for their fundamental needs and wants, and upon retirement, workers would have access to either sufficient savings or a workplace pension to see them through their retirement. Such a society would likely see lower levels of taxation and redistribution, but a lower profit outlook for private economic actors; it is a rough approximation of societies like Japan and South Korea.”

But of course, pure self-help does not generate full employment. In additional to the well-known economic literature on market failures, social interdependence means that economic equilibria may very well not be optimal. And even if they were, vast numbers of people, including children, students, the elderly, the disabled and carers would likely not have access to an adequate standard of living. To that end, I propose the guaranteed minimum income as a way of satisfying the right to an adequate standard of living: a way of simplifying and unifying existing benefits schemes so as to ensure that no one lives in poverty if they do not earn a minimum standard of living by market mechanisms. 

One of the these things is not like the other

Since I wrote those words, the related idea of a universal basic income (or UBI) has gained a certain amount of popularity (or at least, curiousity) in policy wonk circles. This is perhaps exemplified on the left by the overrated books “Post-capitalism: A Guide to Our Future” by Paul Mason and “Utopia for Realists” by Rutger Bremen. But UBIs are not merely a socialist "fairy-tale": they’re also modestly popular on the right and even in the centre. UBI schemes have been rolled out on a trial basis in several localities in the US and EU. In Alaska, every citizen receives a royalty cheque from the state’s oil production each year, and certain native American groups have had great success addressing poverty and inequality by directly distributing the proceeds from tribal businesses. 

The debate on universal or minimum incomes is becoming rapidly complex, so I thought I should clarify my own stance. I tend not to endorse the most common, universalist models of UBI.  This recent article in Evonomics provides a useful way of categorising different approaches to basic social incomes. The author, Charles Young, proposes a typology of UBIs which either:

·       Recalibrate existing tax and benefit systems (more common on the left); or

·       Replace the Welfare State (more common on the right); or

·       Communalise the profits from common assets. 

Thumbs Up: Universal incomes that satisfy basic needs

In the first category are proposals that

“restructure[e] the existing ‘inefficient’ and ‘unfair’ benefit systems. Advocates tend to offer what is referred to as a ‘no-frills’ UBI: subsistence or sub-subsistence levels of income . . . . . .[Such p]roposals . . . often set out to combat inequality and poverty, including through the dismantling of poverty traps such as the sudden removal of benefits as low-earner's incomes rise.”

My own prescription of a guaranteed minimum income fits solidly in this category. If we want a minimum income scheme to be achievable, we should be iterative and target our interventions where they will deliver the most benefit. While others on the left may see the revolutionary appeal of more grandiose schemes, as you’ll see below, I think such a revolution would be potentially catastrophic for the goals we're trying to achieve.

Thumbs Down: Voucherisation

The second category of UBI is supported by “[e]conomists and political theorists on the right, especially those identifying as libertarian, [who] see UBI as a vehicle through which to reduce government intervention in public and private life at large.” Right-wing support for UBI schemes essentially represent the ‘voucherisation’ of the tax-and-transfer system. Rather than benefits targeted at specific inequalities, conservatives argue that everyone is entitled to the same ‘payout’ from the state’s taxation system regardless of their socio-economic status. Schemes of this type include negative income tax proposals and it should come as no surprise that Milton Friedman is one of the intellectual originators of such ideas. 

Essentially, right-libertarians seek to remove any role for collective decisions in the allocation of social resources. The seek to privatise the benefits that accrue from the tax-and-transfer system, hoping that people won't realise that all the power and risks of that system are simultaneously being privatised. As Chapter XI of Politics for the New Dark Age argues, many social costs are distributed probabilitically, and if your basic income doesn't cover the cost of a car accident or cancer treatment, well then you're just unluckly. The privatization of social benefits also (deliberately) restricts the capacity of individuals to band together and bargain collectively; to share risks and costs and arrive at  solutions to collective problems that are sustainable at lower cost.

Means testing (i.e. restricting benefits only to those in need) has its flaws, certainly: it imposes administrative costs and tapering effects must be carefully accounted for. But the idea of government cash grants to already wealthy citizens is not only perverse, but unnecessarily costly and inefficient when the wealthy already possess the power and resources to meet their own need. I have doubts that a basic income that was truly universal would have much of effect on alleviating poverty and inequality at all: price inflation would be a huge risk and likely wipe out most of the gains in purchasing power of the least well-off.

A UBI of this model would also put downwards pressure on wages and thus reduce the labour share of surplus value produced by enterprises. Concerns are widely expressed about the ongoing automation of an increasingly large proportion of the economy, which is set to increase the profit share of capital owners at the expense of workers. But despite what UBI proponents like Mark Zuckerberg and Elon Musks would have you believe, a UBI is like the exact opposite of what we would need to do to actually fight inequality. While big business would happily pension off the working class if it allowed them to keep their monopolistic economic and political power, democratic socialists should look for ways to increase democratic control of the means of production and reverse the alienation of workers from the products of their labour. 

Probable Also Thumbs Down: Common Resource Rents

The third and final category of UBI consists of proposals that would:

“communalis[e] common assets  . . . [such as] the carrying capacity of the biosphere, atmospheric carbon, fisheries and forests, unearned income, or even the productive capacity of automation and technological change. The fundamental assumption here is that such assets – be they physical, biological or cultural – should be respected as the common property of all, rather than be the source of exploitative disparities from unequal access and power.”

I’ve seen such proposals from my own Australian Labor Party (ALP) brethren: often suggested somewhat cynically as way to generate public support for new taxes by promising voters that all the proceeds will go directly into their pocket (so then, I wonder, why bother?).

Certainly, in small, specialised economies with few, but highly productive common assets, such proposals might make sense (although a better approach might be a managed sovereign savings fund to prevent inflation and Dutch Disease). But in a modern diversified economy, such payments are likely to be complex to manage and insufficient to cover the cost of a guaranteed minimum income for all. I also see risks in aligning the interests of voters with particular, already highly profitable, extractive industries. If everyone is receiving a cheque direct from the profits of extractive, gambling or polluting companies, it would create disincentives to properly regulate them (an argument currently made on both right and left about Venezuela). In other words, although the profits would be socialised, the risks of social and environmental harms from those industries couldn’t be. It would align the interests of the majority against those of affected minorities.