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Bureaucracy-Ridden Welfare System vs. Guaranteed Income

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Geolibertarian:
It is a decades-old tradition among right-wing ideologues (particularly from the Austrian School) to rail self-righteously against the “welfare state” that was instituted by FDR and then expanded by LBJ. And while much of this right-wing criticism is rooted in Malthusianism and in simple class bias -- and is thus, to that extent, invalid and self-discrediting -- what few on the political “Left” seem to realize is the significant extent to which this criticism is actually valid and justified.

In fact, the most devastating critique of federal welfare programs I know of is not even from a right-winger, but from someone who may surprise most progressives and left-leaning independents. To illustrate what I mean, consider the following excerpt:

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"Welfare as we know it cannot be fixed. Tinkering with it for decades has accomplished little of value. Bureaucracies within bureaucracies have bloomed, mutations of a polluted society. Too many contradictory interests compete at the public trough in the name of poor people....Poor people of our inner cities, small towns, and rural countryside exist in a sprawling banana republic where fighting factions of outsiders -- institutionalized poverty pimps -- battle over which issue, which treatment, what cabal will dominate at any given point in time....

"A major impediment to dismantling the existing social welfare programs is the extent to which they have degenerated into patronage troughs. The government contracts to 'help' are first and foremost political tools to strengthen the base of elected officials at all levels of government."

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The above is from page 261 of Tyranny of Kindness: Dismantling the Welfare System to End Poverty in America -- a book written by Theresa Funiciello, a former recipient of welfare. It was this book (large portions of which can be read here) more than any other that made me realize just how horribly flawed and shamefully corrupt the federal welfare system truly is.

Now, at this point some of you are probably wondering: what (if anything) does Ms. Funiciello propose replacing these ridiculously bureaucratized “social welfare programs” with? What again may surprise some to learn is that she proposes none other than Milton Friedman's negative income tax.

On page 278 of the same book, she writes:

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"People unfamiliar with the history of income maintenance are often surprised to learn that a conservative economist, Milton Friedman, developed the negative income tax model and a Republican president, Nixon, first proposed a bill to implement it. As a practical and political matter, though, it makes sense. In theory, this plan wiped out much of the entrenched multilayered, self-perpetuating welfare bureaucracy." [Emphasis Funiciello's]



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I agree with Ms. Funiciello that instituting a guaranteed income via the negative income tax has, over the current system, the advantage of eliminating from the social safety net equation the “entrenched multilayered, self-perpetuating welfare bureaucracy” she rightly criticizes, and hence all of the “institutionalized poverty pimps” who, as such, do far more to exploit poverty for their own personal gain than they ever do to eliminate it. Unfortunately, however, it retains the self-defeating disadvantage of being financed by a tax on labor.

To eliminate the job-destroying, poverty-increasing wage tax from the equation as well, I propose that -- instead of a negative income tax -- we institute a hybrid system consisting of both (a) the credit-based “National Dividend” advocated by author and monetary reformer, Richard C. Cook, and (b) the rent-based “Citizen’s Dividend” advocated by many Georgists.

In the following two posts I’ll provide a brief introduction to each.

Geolibertarian:
In his excellent book, We Hold These Truths: The Hope of Monetary Reform, Richard C. Cook advocates as a solution to “poverty in the midst of plenty” what he calls the “National Dividend.”

What, specifically, is this Dividend?

It is a “cash stipend” drawn from our national credit and paid out equally to all the legal residents of the U.S. (or, if you live in England, Canada, or some other country, from the national credit -- and to the legal residents -- of that nation).

If you’re now asking, “What is our national credit?”, the answer is that it’s the very same abstract (yet unquestionably real) source that private banks as a whole currently draw from -- in effect -- when they “extend” financial credit to cash-strapped loan customers.

More specifically, and in the words of Richard C. Cook, national credit refers to “the total ability of a nation to produce goods and services through increasing efficient use of science and technology.”

As he puts it on page 57 of We Hold These Truths:

"The idea of credit when viewed from a macroeconomic perspective refers to the ability of an economy to produce goods and services of value to the members of that community. It refers to the potential value of that economy to support life."
And from page 32:

"Viewed from a philosophical level, the nation's credit, including that portion from which the National Dividend would be drawn, is the monetization of an intangible; i.e., the totality of the nation's real wealth as expressed by its laws, history, physical plant, land, resources, and the education, skills, and character of its people. Without all of these, the government could print dollars--or the banks could lend them--from here to eternity, and they would be totally useless."
On what basis will the size of the National Dividend be determined?

In short, on the basis of the objectively assessed “gap” between (a) the total market value of the goods and services that are produced in the aggregate and (b) what society, as a whole, is able to purchase.

From pages 18-19:

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"In 2006, our Gross Domestic Product was about $12.98 trillion, with the enormous trade deficit of $726 billion figured in. Our total national income was $10.23 trillion, including wages, salaries, interest, dividends, personal business earnings, and capital gains. Of this amount, at least 10 percent, or $1.02 trillion, was reinvested either at home or abroad, including retirement savings, leaving total available purchasing power of $9.21 trillion.

"The $12.98 trillion GDP minus $9.21 trillion of purchasing power equals $3.77 trillion. That's what the figures indicate was the shortfall that would have been required to consume the entire GDP.

"Simply put, we do not earn enough to buy what we produce. What does this mean, and who, or what, is to blame?

"Despite the high CEO compensation, the huge Wall Street salaries and bonuses, and the wealth and income disparities between high and low earners, we should not blame the “capitalists,” i.e., the business owners, for the entire problem. Business profit taken as dividends is only about seven percent of GDP.

"Besides, many of the 'capitalists' are us! Forty-five million Americans have some measure of stock ownership, including a multitude of tax-deferred retirement plans and mutual funds. This is one of the strengths of our economy--the 'ownership society'--for  which we deserve a pat on the back. Also, the dividends we earn are mostly spent, so most of it finds its way back into the economy.

"Let's look at the situation from a slightly different standpoint, starting with the $12.98 trillion GDP. It's said that the U.S. economy is the most powerful and productive in the history of the world. This is true, even with our trade deficit and our decline in manufacturing due to relocating so much of our factory production abroad. So we should be dancing in the streets. There should be festivals, celebrations! Obviously that's not happening. Why not?

"It's not happening because of how we define the $3.77 trillion gap between GDP and earnings. Since we produce the value of our entire GDP with such lower labor costs, the $3.77 trillion differential really should be viewed as the total societal dividend, right?

"Wrong! It's not defined as a dividend; rather it's defined as a shortfall. This is because it still appears in prices. And with the stagnation of wages and salaries, combined with the current slowdown in appreciation of housing values, resulting in lower capital gains, the shortfall is growing.

"Obviously, those goods and services still have to be paid for--the entire $12.98 trillion. The way they are paid for is through income and through debt. Purchasing power covers three-fourths of it. The rest is covered by borrowing. Yes, you, the consumer must go out and borrow to cover the $3.77 trillion gap between GDP and purchasing power. This is how much our debt increased in 2006--the amount of new debt less what we paid off. This new debt was 29 percent of GDP last year.

"Note that this analysis deals with gross numbers, so does not dwell on the major social problem that income disparities are growing within the U.S., with a higher proportion of income each year going to the wealthiest segments of society. Conversely, the debt burden which fills the gap between GDP and income falls disproportionately on the lower income brackets.

"But the point is undeniable. Our ability to produce our incredible GDP with relatively little labor means that, under the existing system, we have to borrow money from financial institutions and pay with interest to enjoy what really should be the leisure dividend mentioned at the start of this report....

"Finally, these numbers shouldn't surprise anyone. Every responsible analyst has made the point that ours is a consumer-based economy and that consumer borrowing keeps it afloat. It's why economists and politicians keep such a close eye on the "consumer confidence" polls. It's why President George W. Bush, after the 9/11 tragedy, told us to 'go shopping.'"

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What is the cause of this production/consumption gap Mr. Cook speaks of?

As hinted to above, it is the unavoidable fact that a significant portion of the business costs that show up in the prices of the goods and services we buy is not paid out in individual earnings (particularly wages and returns on capital goods).

From pages 26-27:

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"In 1920, Scottish industrial engineer Major C.H. Douglas published a book entitled Economic Democracy, where he wrote that several major factors associated with modern mechanized production result in a gap between the value of manufactured goods and the purchasing power distributed through wages, salaries, and dividends. That is, he addressed the exact problem the U.S. and other developed economies were facing both then and now.

"After more than a decade of continuously writing on the subject, Douglas, in a 1932 publication, The Old and New Economics, listed several systemic causes 'of a deficiency of purchasing power as compared with collective prices of goods for sale.' These included business profits not distributed as dividends (retained earnings); individual savings, i.e., 'mere abstention from buying'; 'investment of savings in new works, which create a new cost without fresh purchasing power'; accounting factors, where costs previously incurred are carried over into current prices; and 'deflation', i.e., 'sale of securities by banks and recall of loans.'

"Other elements not mentioned by Douglas include insurance, which is costly in the U.S., maintenance of unused plant capacity, which is extensive due to the decline of U.S. manufacturing output, employer retirement contributions, and the cumulative sum of retained earnings and other cost factors when businesses buy from each other.

"These factors all show up in the prices of goods and services but are not paid as earnings to individuals. A simple way to understand what happens is that prices that a business charges must not only pay for labor costs but must also cover all non-labor costs, as well as equip the firm to perform in the future.

"Also, while the financial and accounting systems force consumers to pay for the costs of capital depreciation, they do not give them credit for appreciation of the value of the business that will appear through future capital gains. This applies particularly to technology-intensive companies where high R&D costs much be recovered in prices but do not show up proportionately in employees' immediate take-home pay.

"Taken together, the impact of all these factors is devastating to consumers and the economy at-large, because we cannot possibly earn enough to compensate for what the tax and accounting systems label as costs."



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Thus, at a macroeconomic level, the National Dividend will merely delink the “extension” of socially-created credit from institutionalized indebtedness to private banks. So instead of borrowing our own credit from private bankers as we do now, we (through our elected representatives in government) will simply issue it to ourselves. It will be comparable to the amount of credit being “extended” to us already via fractional reserve lending, except that, unlike now, we won't owe it all back -- plus compound interest -- to private banks.

For a more detailed explanation, see:

       http://www.globalresearch.ca/bailout-for-the-people-the-cook-plan/11397

Geolibertarian:
There are many Georgists and Neo-Georgists who advocate instituting a “Citizen’s Dividend.”

What, specifically, is this Dividend?

It is a dividend paid on an equal per capita basis to all the citizens of a nation out of the surplus revenue generated by a tax on the economic rent of land (otherwise known as the land value tax or Single Tax).

What is the economic rent of land?

To any relative newcomer wishing to fully understand the answer to that question, I first offer the following ten-page visual illustration (which takes only about five minutes to read through):

       http://henrygeorge.org/rent1.htm

Assuming the reader has carefully examined the above illustration, I now offer to him or her the following article by economist Fred Foldvary (all emphasis original):

------------------------------

http://www.progress.org/archive/fold10.htm

See The Cat

by Fred E. Foldvary, Senior Editor

A man was walking down a shopping street and came to a store window where there was a big drawing full of lines and squiggles. A sign by the drawing asked, "Can you see the picture?"

All the man could see was a chaos of lines going every which way. He stared at it and tried to make out some kind of design, but it was all a jumble. Then he saw that some of the lines formed ears, and whiskers, and a tail. Suddenly he realized that there was a cat in the picture. Once he saw the cat, it was unmistakable. When he looked away and then looked back at the drawing, the cat was quite evident now.

                                       

The man then realized that the economy is like the cat. It seems to be a jumble of workers, consumers, enterprises, taxes, regulations, imports and exports, profits and losses - a chaos of all kinds of activities. Here are fine houses and shops full of goods, but yonder is poverty and slums. It doesn't make any sense unless we understand the basic principles of economics. Once we have this understanding, the economy becomes clear - we see the cat instead of a jumble. We then know the cause of poverty and its remedy. But since most folks don't see the cat, social policy just treats the symptoms without applying the remedies that would eliminate the problem.

What is this economics cat? It starts with the three factors or resource inputs of production: land, labor, and capital goods. Land includes all natural resources and opportunities. Labor is all human exertion in the production of wealth. Capital goods are tools (such as machines and buildings) used to produce wealth. The owners of land get rent, workers get wages, and the owners of capital goods get a capital return.

Picture an unpopulated island where we're going to produce one good, corn, and there are eleven grades of land. On the best land, we can grow ten bushels of corn per week; the second land grows nine bushels, and so on to the worst land that grows zero bushels. We'll ignore capital goods at first. The first settlers go the best land. While there is free ten-bushel land, rent is zero, so wages are 10. When the 10-bushel land is all settled, immigrants go to the 9-bushel land.

Wages in the 9-bushel land equal 9 while free land is available. What then are wages in the 10-bushel land? They must also be 9, since labor is mobile. If you offer less, nobody will come, and if you offer a bit more than 9, everybody in the 9-bushel land will want to work for you. Competition among workers makes wages the same all over (we assume all workers are alike). So that extra bushel in the 10-bushel land, after paying 9 for labor, is rent.

That border line where the best free land is being settled is called the "margin of production." When the margin moves to the 8- bushel land, wages drop to 8. Rent is now 1 on the 9-bushel land and 2 on the 10-bushel land. Do you see what the trend is? As the margin moves to less productive lands, wages are going down and rent is going up. We can also now see that wages are determined at the margin of production. That is the "law of wages." The wage at the margin sets the wage for all lands. The production in the better lands left after paying wages goes to rent. That is the "law of rent." If you understand the law of wages and the law of rent, you see the cat! To complete our cat story, suppose folks can get land to rent and sell for higher prices later rather than using it now. This land speculation will hog up lands and make the margin move further out than without speculation, lowering wages and raising rent even more.

Now we have good news and bad news. The good news is that when we put in the capital goods we first left out from the example above, the tools and technology increase the productivity of all the lands. If production doubles, rent doubles, and wages go up. Wages won't double, because workers have to pay for the tools, but even if wages go up 50 percent, that's good news, and why industrialized economies have a high standard of living. Also, high skills enable educated workers to have a wage premium above the basic wage level. The bad news is that the technology enables us to extend the margin to less productive land, which lowers wages again. So there is this constant race between technology raising wages and lower margins reducing wages.

It's bad enough that a low margin sets the wage level at the poverty level, especially in countries with low technology and low skills. Government then taxes away a large chunk of those wages, which hurts those workers with higher wages. The result is a highly unequal distribution of income. Workers have the low wage set at the margin and reduced further by taxes, while the owners of land get all the extra production as rent, but pay less in taxes because of tax breaks to landowners. (Capital-goods returns boil down to wages and rents, because capital goods are ultimately produced using land and labor.)

Behold the cat! The margin at the least productive land sets low wages, and the rest goes to rent, resulting in inequality, with poverty for low-skilled workers. If we see the cat, the remedy is also clear: stop taxing workers, and let everybody share the rent. If we get public revenues from the rent instead of wages, the public benefits equally from the rent, while workers get the full product of their labor. And wages will be higher, too, because by collecting the rent, we eliminate land speculation, moving the margin up to more productive lands, which raises the wage level. The economy grows faster too, since the government no longer punishes enterprise and investment with taxes, so wages go up faster over time. We all become fat cats.

Those who see the cat have a clear picture of how the economy works. They can see why we have social problems, and what the remedy is. Those who don't see the cat keep trying treat the symptoms with welfare, but they never cure the economic disease. Others see the welfare as not curing anything, and think they can just get rid of the welfare. Only those who see the cat realize that the remedy is a shift of public revenue from labor to land so that we eliminate poverty and thus any need for the welfare state.

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For those who haven't already seen it, the following YouTube clip dovetails quite nicely with the above:

       http://www.youtube.com/watch?v=6ZkfmY1PMng (The Great Tax Clawback Scam)

For answers to common objections, see:

       http://forum.prisonplanet.com/index.php?topic=160421.0

Geolibertarian:

--- Quote from: Geolibertarian on January 29, 2010, 12:47:54 pm ---I propose that...we institute a hybrid system consisting of both (a) the credit-based “National Dividend” advocated by author and monetary reformer, Richard C. Cook, and (b) the rent-based “Citizen’s Dividend” advocated by many Georgists.
--- End quote ---

I'd like to elaborate on the above. Based on his estimation that the production/consumption "gap" is approximately $3.8 trillion, Mr. Cook advocates closing this gap by paying out to every U.S. citizen an annual dividend of $12,000 (give or take a little, depending on how large the "gap" is that year).

Yet according to his own argument, much if not most of this "gap" could be closed simply by instituting both a Greenback money system and a Georgist tax system. Allow me to explain.

On page 26 of his book, We Hold These Truths, Mr. Cook writes:

------------------------------

"After more than a decade of continuously writing on the subject, Douglas, in a 1932 publication, The Old and New Economics, listed several systemic causes 'of a deficiency of purchasing power as compared with collective prices of goods for sale.' These included business profits not distributed as dividends (retained earnings); individual savings, i.e., 'mere abstention from buying'; 'investment of savings in new works, which create a new cost without fresh purchasing power'; accounting factors, where costs previously incurred are carried over into current prices; and 'deflation', i.e., 'sale of securities by banks and recall of loans.'

"Other elements not mentioned by Douglas include insurance, which is costly in the U.S., maintenance of unused plant capacity, which is extensive due to the decline of U.S. manufacturing output, employer retirement contributions, and the cumulative sum of retained earnings and other cost factors when businesses buy from each other.

"These factors all show up in the prices of goods and services but are not paid as earnings to individuals. A simple way to understand what happens is that prices that a business charges must not only pay for labor costs but must also cover all non-labor costs, as well as equip the firm to perform in the future." [Emphasis added]

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Of all the "non-labor costs" that add to the prices of goods and services, the three most costly to business owners as a whole are

(a) usurious interest (which business owners pay not just directly through debt service to private banks, but indirectly as a result of the silent incorporation of usurious interest costs into the selling price of all the capital goods they buy -- higher prices being the only way that the indebted producers of those capital goods can capture the necessary portion of other people's loan principal to service their interest-bearing debts to private banks);

(b) the deadweight loss imposed by taxes on labor and capital goods (see this and this); and

(c) speculative rents and land prices ("rack-renting" for short).

A Greenback money system will delink the issuance of new money from the lending of it. In doing so, it will greatly reduce the need that most (if not all) business owners currently have to incur usurious interest costs in the first place, and thereby reduce the aforementioned "gap" to a considerable degree.

A Georgist tax system will reduce this gap still further by simultaneously eliminating both the deadweight loss imposed by taxes on wages, sales and capital goods and the parasitic rack-renting to which land speculation invariably and inevitably gives rise.

Thus, by implementing those two reforms, the "gap" between our gross domestic product and what each of us, on average, is able to purchase will be much smaller than it is now. Consequently, although there might still be a need for the size of the gap-closing National Dividend to be several hundred billion, it will not be necessary to resort to the multi-trillion dollar cash outlay that Mr. Cook calls for.

It is for this reason that the "hybrid system" I advocate contains a much more modest version of Mr. Cook's "National Dividend."

Geolibertarian:

--- Quote from: Geolibertarian on January 29, 2010, 01:04:22 pm ---In his excellent book, We Hold These Truths: The Hope of Monetary Reform, Richard C. Cook advocates as a solution to “poverty in the midst of plenty” what he calls the “National Dividend.”
--- End quote ---

If a grassroots push for the National Dividend -- whether the all-out version proposed by Richard C. Cook, or the more modest version proposed by me -- ever attracts serious media attention, it will be met by all sorts of objections (including the usual hysterical reactions by monetary flat-earthers from the Austrian School). Below are responses by Cook himself to what I predict will be the two most common.

Wouldn’t even a modest version of the National Dividend cause runaway hyperinflation?

From pages 33-34 of We Hold These Truths:

"Bankers and their apologists have always argued that any program that publicly-generated credit would cause inflation. This is nothing but propaganda.

"Because a National Dividend would replace bank-credit of the same amount, it would bring the total monetary supply of the nation only up to the level of the GDP. It would not result in 'more dollars chasing the same amount of goods,' but would simply bridge the gap. Not only would the National Dividend be non-inflationary, it could even be counter-inflationary. It would allow businesses to liquidate previous financial costs incurred when they borrow from banks without creating new ones to the same extent.

"Besides, what is truly inflationary is the Federal Reserve's policy of creating, then deflating, asset bubbles, the latest being the housing bubble. With such bubbles, prices inflate on the way up but stay well above their original level on the way down. This can do irreversible structural damage to the economy and is in fact a wealth transfer mechanism from ordinary consumers to wealthier people who own more assets.

"Inflation due to the housing bubble has affected not only home prices--it has also escalated rents and business leases, made it harder for people to start small businesses, and increased the difficulty for young people even to find a rented room. Meanwhile, home and property ownership is becoming a high-priced commodity available only to the rich.

"This type of inflation has an immense ripple effect. What it means is that the dollars people earn purchase less throughout the economy, because every business must operate in a building and on a parcel of land which now costs much more....

"Also, bank interest by itself is inflationary, because it adds to the cost of doing business at many points in the production-consumption stream. The Federal Reserve claims it is fighting inflation when it raises interest rates, but what it actually does is slow down economic activity by suppressing wages and salaries or throwing people out of work. The higher interest itself pulls in the other direction by adding to costs. Thus inflation has continued even during periods of monetary contraction, as in the 1979-83 recession when the Consumer Price Index rose almost 20 percent."
Isn't the National Dividend just “socialism” or “communism” in disguise?

From pages 31-32 of We Hold These Truths:

"A National Dividend would represent the truth wealth of the community, the bounty of our incredible GDP and our amazing efficiency, of which all citizens should be the beneficiaries once the business owners receive a reasonable profit. Again, it's important to realize that Social Credit is not a socialist system. Rather it is 'democratic capitalism,' in contrast to the 'finance capitalism' that has become so destructive that it threatens to destroy the world rather than submit to reform."
And from pages 84-85:

"The idea current today of the individual and community in conflict is a sign of an unbalanced, even sociopathic, frame of mind. Thus we have in our own time two extreme views. One is that individuals should be able to do just about anything they want and that society is a hindrance—the mind-set that has fostered free-market capitalist economics. The other is that the individual should be totally subservient to the group as in state communism.

"Curiously, though, neither ideology upholds the same ideals for all members of the culture. Free-market capitalists see nothing wrong if a handful of oligarchs holds everyone else in thrall to debt. The commissars of communism find it perfectly natural if their position in the party grants them privileges the rank-and-file will never attain. So both systems are rife with oppression, brutality, and hypocrisy."

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