some questions about harvey's discussion of the

Rutgers Journal of Law & Urban Policy

Vol. 2 ● Fall 2005 ● No.1

SOME QUESTIONS ABOUT HARVEY’S DISCUSSION OF THE RELATIVE MERITS OF THE BASIC INCOME AND THE RIGHT TO WORK Michael A. Lewis1 Like Philip Harvey, in “The Right to Work and Basic Income Guarantees: Competing or Complementary Goals?,” I have given quite a bit of thought to the relative merits of a basic income (BI) in comparison to a policy that would secure a right to work (RTW) as well as the question of whether these policy approaches are best regarded as substitutes or complements. Having read his very thoughtful discussion of these matters, I find myself in agreement with much of what he has to say, my being a supporter of a BI (as he points out) notwithstanding. As I read through his paper, however, I also found myself questioning some of his assertions, and it is these lingering questions that prevent me from endorsing his call for a kind of merger of the two proposals, although I am quite sympathetic to the goals of a RTW program. Let me begin with points of agreement.

I. POINTS OF AGREEMENT WITH HARVEY As I understand him, Harvey is basically arguing that BI and RTW are two approaches which both have merit, but accomplish somewhat different things. A BI is essentially a way of assuring that people have the right to an income without having to sell their labor in return for it. A RTW could be regarded as a kind of right to income as well, but it is mainly a way of assuring that people who want to work but can’t find a job will be able to do so. It recognizes that people have different preferences and needs other than those they can buy with income, and that a right to work could meet some of these needs in a way that BI could not. For example, people may want to work for pay because it makes them feel that their contributions are being valued by fellow human beings or for some other psychological or emotional reasons. If these people were entitled to a BI but not a job, there is a chance that this desire will be unfulfilled simply because noone would be willing to hire them. If the BI were high enough, they could volunteer their time without being threatened with starvation. Or they could stay at home and take care of their families, regarding this as a social contribution. But, as Harvey points out, people that stay home and sleep all day would be entitled to the BI too. If we assume that volunteering or taking care of a family

1 Michael A. Lewis is a faculty member of the Stony Brook University School of Social Welfare. Mr. Lewis would like to think Eri Noguchi and Yannick Vanderborght for their very helpful comments on this paper. Mr. Lewis bears all responsibility, of course, for any errors, etc. found within the paper. All correspondence to Mr. Lewis can be addressed to [email protected].

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member is a bigger social contribution than staying home and sleeping all day,2 a volunteer or a family caregiver may not feel that society is valuing their contributions by giving them the BI alone. Considerations like these lead me to agree with Harvey that a BI alone is mainly an assurance of a right to income, not a right to work, and because it is not such a right, it may fall short in providing the things that it should provide. Harvey also seems to be arguing that a universal form of BI need not be enacted to generate the effects that many BI supporters would like to see generated. For example, in his paper, he discusses Joel Handler’s concern about the coercive nature of conditional income assistance. The concern is simply that as long as government authorities can take away assistance as soon as a beneficiary fails to hold up his or her end of the “contract,” the contract is not really voluntary. Only an unconditional grant of income assistance can give recipients a true “exit option.” Harvey also recognizes that a BI could take some of the pressure off workers to take a job on poor terms, since a BI would enable them to hold out, to some extent, until something better comes along. Harvey contends, though, that Handler’s concern as well as the latter can be met with a selective form of guaranteed income such as a negative income tax (NIT) or some other form of means-tested unconditional income support. I agree with Harvey that means-tested guarantees at similar levels could create these effects to the same extent as a BI. Harvey also contends that a BI in the form that most proponents prefer would be an expensive program. Most of the BI discussions I have read lead me to concur with this conclusion. Harvey, however also contends that a BI would be more expensive than a RTW program. It is here where my questions about Harvey’s analysis begin. It may be true that a BI would be more expensive than RTW but, due to problems associated with it, this cannot be concluded on the basis of Harvey’s analysis.

II. QUESTIONS ABOUT HARVEY’S ANALYSIS Cost Questions: In the paper that appears in this journal, Harvey briefly touches upon the relative costs of RTW and BI policies. He goes into more detail in his unpublished paper entitled “Income, Work, and Freedom” (2005). Let me start by stating that Harvey focuses on the budgetary costs of both programs instead their social costs. For those not familiar with the distinction, the budgetary costs have to do with the net expenditures a given level of government, in this case the federal government, would have to incur to implement a given program. The social costs have to do with the net cost to society as a whole that would result from the program’s implementation. The important points are 1) that society and 2 It is possible that a person who stays home and sleeps all day may be making an important social contribution. Perhaps he is taking part in important medical research on sleep disorder. I am assuming away such socially useful forms of all day sleeping.

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government are not the same, and 2) that some social costs would not show up as budgetary costs. I’ll have more to say about these points later. Let’s turn first to Harvey’s discussion of budgetary costs. In “Income, Work, and Freedom,” Harvey engages in a quite thorough discussion of the estimated budgetary net cost of implementing a RTW program without offering any empirical support for his cost estimation. Yet when he turns to BI, he relies on an analysis by economist Charlie M.A. Clarke for his estimate of costs. In doing so he estimates the gross budgetary cost of a BI program, not the net cost. That is, he simply focuses on how much federal money would have to be given to children and adults taking into account assumed BI levels, population size and the elimination of some other income security programs. He then estimates that flat tax rates of 35.8% (federal income), 7.7% (federal FICA), and 2.7% (state and local) would have to be imposed to support a BI program. The problem with this analysis3 is that it doesn’t take into account the fact that all those who receive a BI grant “up front” won’t be net recipients. Also, it fails to consider the labor supply effects of BI grants and the flat tax on income used to finance them. But not considering these issues is what makes Clarke’s estimate of the budgetary cost of a BI a gross estimate. Harvey’s reliance on Clarke to make the case that a BI would cost more than a RTW program means that he is concluding this on the basis of a comparison of net (for RTW) to gross (BI) costs. It seems to me that this isn’t an appropriate comparison to make. I stated above that Harvey focuses on budgetary as opposed to social costs to make his comparison. But, from an economic point of view, the relevant costs to compare might include the external costs of a RTW program versus a BI program as well as the budgetary costs of these programs. When goods and services are produced for markets the resources used to produce them cannot be used to produce the next best alternatives. Thus, society incurs costs of production in terms of these forgone alternatives because no member of society gets to benefit from them. The same is true when government utilizes resources to produce goods or to dispense benefits. Harvey’s discussion of budgetary costs is, presumably, meant to capture this notion of forgone alternatives. In a complete system of well functioning markets, all societal or social costs would be reflected in market prices. However there remain “missing” markets, government provided goods and services, and market failures, which mean that some costs are not reflected in market prices. Companies that pollute the environment don’t necessarily pay higher prices for factors of production and have no incentive to take into account the cost that pollution imposes on others; a so called negative externality. Some have argued that the externalities problem is really a property rights problem. That is, we have problems with people having no incentive to take into account the costs (and benefits) they impose on others because, as a society, we haven’t clearly specified property rights to various types of commons (Nicholson 1989). Well what does all this have to do with the social costs of RTW programs versus BI programs? 3 I’m sure Clarke is aware of this. Also, in a personal communication Harvey stated that he’d try to address this problem in a future work. But since this hasn’t been done in the paper I’m discussing here I think it’s appropriate to go on record raising questions about his analysis.

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Presumably a RTW program would result in a net increase in employment. But if this were to occur, depending on the size of this increase, this might result in more crowded trains, buses, and highways. More crowded highways mean longer commutes to work, breathing in more carbon monoxide in traffic, having to listen to more blaring horns, constant starting and stopping of one’s automobile, increased fuel costs, and, perhaps, increased negative health effects due to stress, hypertension, etc. More crowded trains may also lead to more stress and other health effects as anyone who has ridden a crowded New York City subway or bus knows. Then there are the possible external costs of the increased production of goods and services that would result from this increased employment. Depending on what’s produced we could have more noise and other kinds of pollution as well as other types of negative externalities. Now it’s true that unemployment also results in external costs, such as the forgone goods and services that could be produced with the unemployed resources as well as crime and other social ills (Currie, 1985). To the extent that a RTW program would result in a decrease in these costs it would promote a social benefit. It is an open question whether, after considering and trying to estimate the external costs and benefits associated with a RTW program, that the external effects of such a program would be a net positive. My point here is that it isn’t one that Harvey even considers, and I see this as a shortcoming of his argument. Turning to the BI, it could be argued that the fact that the program might result in a net reduction in labor supply could lead to a net increase in idleness. And such an increase might result in external costs such as crime, loitering, etc. Such consequences would have to go onto the loss side of the ledger. Yet work I’ve done with Eri Noguchi (forthcoming) suggests that if a basic income resulted in a reduction in labor supply, this might lead to a net increase in civic participation. The work of Putnam (2000) also suggests that an increase in civic participation could decrease crime rates, improve health outcomes, and generate a host of other external benefits. Finally, if a net increase in labor supply means more negative externalities, a basic income induced net decrease in labor supply might result in fewer of them. For example, the person who stays home and sleeps all day, referred to above, might be doing some social good by not utilizing non-renewable resources.4 Again, we don’t know if the external gains of a BI program would outweigh the external costs of this innovation, but I don’t think such gains and cost should be completely ignored in an analysis of the relative costs of a RTW program versus those of a BI program as Harvey does. If we could somehow surmount the technical difficulties that would be involved in estimating the net external costs of RTW and BI programs, and add these costs to their net budgetary costs, it isn’t at all clear that a BI program would cost more than a RTW program. Questions about Harvey’s Discussion of the BI and the Unemployed

4

I’d like to thank Yannick Vanderborght for this example.

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At a couple of points in his paper, Harvey argues that BI advocates have overstated the extent to which a BI would address the problem of unemployment. I think he may be right about this because, as I said above, I agree with him that a BI is essentially a right to income, not a right to employment. Yet a lack of consideration of net effects renders Harvey’s position an understatement of the extent to which a BI could “compensate” for the loss of employment. Harvey’s discussion is centered on a hypothetical involving Jane and John Doe. Both are receiving a full basic income of 200 monetary units (MUs)/month and also earning 200MUs/month. Jane is laid off and, because there is no right to work, can’t find another job. She loses her 200MUs/month in earnings and is left with her 200MUs/month basic income, a 50% reduction in her income. Harvey concludes that the BI doesn’t compensate her for this loss income because it doesn’t, “replace a penny of her loss.” What this argument neglects to consider is the implications of the most commonly discussed financing mechanism of a basic income. Most discussions of the basic income, that consider financing at all, consider income taxes as the main mechanism of financing (recall from the discussion above that Harvey does so as well). The following equation will be a useful tool for me to discuss the problem inherent in Harvey’s analysis (where NI is net income, BI is the basic income, t is the marginal tax rate, and E is earnings): (1)

NI = BI + (1-t)E

This equation stipulates, assuming no other sources of income, that, under the BI scheme represented, an individual’s net income/time period depends on the BI level, the marginal tax rate, and her earnings. Harvey’s assumptions imply that both Jane and John Doe’s net incomes/month can be modeled as: (2)

400MUs/month = 200MUs/month + (1-t)200MUs/month

But this model tells us that t must equal 0. I know of no one who has proposed that a BI be financed with a 0% marginal tax rate. In fact, I think it’s safe to say that any serious BI proponent understands that some marginal tax rate that falls within the open interval 0 < t < 1 would have to be enacted. But once t falls within this interval, each MU increase in earnings results in a less than MU increase in net income. This also implies that each MU decrease in earnings results in a less than MU decrease in net income. Thus, if Jane and John Doe both live in a society with a BI and a positive marginal tax rate less than 1, Jane’s net monthly income would not decline by the full 200MU/month when she is laid off, but by some amount less than that. This less than 100% decrease in net income can be viewed as the extent to which a BI would “compensate” Jane for the loss in income from being laid off. We can see from equations (1) and (2) that the greater the value of t, the smaller the decrease in Jane’s net income, and the greater the amount in compensation that a BI would provide. Thus, if we assume 242


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a marginal tax rate between 0 and 1, then Harvey’s conclusion that a BI would provide no compensation for unemployment is unwarranted. How Much Would a RTW Program Improve Workers’ Bargaining Power? On page 43 of “The Right to Work and Basic Income Guarantees: Competing or Complementary Goals?,” Harvey states that what low-wage workers need to put pressure on employers to raise wages is ready access to decent jobs. This is in the spirit of things Harvey has said to me in a number of discussions I’ve had with him about these matters. His main contention has been that a RTW program would enhance worker’s bargaining power to a greater degree than would a BI simply because a RTW program would grant an entitlement to a job while a BI would not. John and Jane Doe have made their appearances in these discussions as well. Here is the hypothetical. John and Jane both have a basic income yet Jane is in a society without a RTW program while John is in one with such a program. The BI would prevent Jane from starving but may not put much pressure on employers to raise wages because they could get away with paying the same level of wages since, with a basic income, workers would be less dependent on wages. Now the extent to which this would happen would depend on workers’ reservation wages, how these reservation wages compare to the level of the BI, as well as, how both of these compare to market wages. So, although Harvey’s predictions may be correct, I don’t think we have any way of predicting the magnitude of the effect he highlights since the data on reservation wages in unavailable. But lets put aside the question of how a BI would affect the job market. What I want to focus on is what Harvey says about the effect on the job market of a RTW program. So let’s go back to John. In discussions I’ve had with him, Harvey has contended that since a RTW program would give John the option of turning down a bad (presumably) private sector job offer, there would be pressure on employers to raise wages. But there are some things Harvey says (and doesn’t say) in this paper that make me wonder how much there really is to this claim. During his discussion of some points raised by Jon Elster, on page 30 of “The Right to Work and Basic Income Guarantees: Competing or Complementary Goals?,” Harvey states that in a RTW program it would not be necessary to offer anyone who applied for one a public sector job regardless of private sector job availability. It seems to me that, on the contrary, it might be necessary if a RTW program is to put the pressure on private sector wages that Harvey contends it would. Suppose John has a private sector job and he thinks that the cost of living is increasing but his wages are not. If the RTW rules don’t allow him to quit this job to obtain a public sector job, since he isn’t involuntarily unemployed, then he, and other workers in the same situation, wouldn’t be able to put much pressure on the employer to raise wages under a RTW program. Later Harvey states that his preference is for public sector jobs in a RTW program to pay, “the going market rate for comparable employment (pg. 33).” It seems to me that in such a program the “wage standard” would be set by the private job market not the public one. But if this were the case how would a RTW 243


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program put much pressure on private sector employers to raise wages? If John has a private sector job that pays him too little, even assuming that he could leave this job for a similar public sector one, this wouldn’t amount to much if the public sector job paid about the same as the private sector one. Third, Harvey also states that, “wages paid in guaranteed jobs could be set marginally below their private sector counterparts (my emphasis, pg. 33).” So although Harvey thinks wages in the public sector should be set comparable to those in the private sector (see above), the previous quotation seems to indicate an openness to the idea of setting them lower. It seems to me that this openness is not consistent with the view that a RTW program would put a great deal of pressure on private sector employers to raise wages. Let me be more precise: It is not clear to me that this openness, as well as the first two of Harvey’s statements discussed above, are consistent with the view that a RTW program would put more pressure on private sector employers to raise wages than a BI program would. I said above, parenthetically, that there is also something Harvey doesn’t say which makes me wonder about his claims for the private sector labor market benefits induced by a RTW program. He seems to have in mind a RTW program that would only allow public sector jobs to go to those unable to find private sector jobs. I’ve already stated how such a program might not put much pressure on employers to raise wages. But what Harvey doesn’t clearly state is what it would mean to be unable to find a private sector job. Consider three people John, Jane and Enrico Doe. John can’t find a private sector job at all, meaning no private sector employer has shown any interest at all in hiring him. Jane can only find one that pays the minimum wage about $5.35/hour. Enrico can find one that would pay at least $20/hour. I assume that the RTW program Harvey has in mind would allow John to receive a public sector job and I assume that Enrico would not be allowed to have one. But the question I’m interested in is would Jane be allowed to leave her private sector job for a public sector one. In other words, assuming the minimum wage is not a “decent” or living wage, would public sector jobs in RTW programs be open to only those who can’t find some private sector job, or only to those who can’t find a private sector job that pays decent wages? If the answer is the former, it seems to me that this constitutes another reason why a RTW program might do little to put pressure on private sector employers to raise wages. This is simply because such a program would not allow public sector employment to fulfill the increase in labor demand that mainstream economic theory would predict would lead to upward pressure on wages. How the Right to Work Compares with the Right to Health and Education Near the end of his paper, Harvey presents a challenge to BI supporter Philippe Van Parijs. He poses the following question: why is it that Van Parijs acknowledges the importance of a right to health care and education, in addition to (perhaps having priority over) a BI, but not one to work? There’s no need for me here to go into the details of Harvey’s discussion with Parijs on this point. I’ll

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simply take this challenge as one to all BI supporters who do not explicitly acknowledge a right to work. I think Harvey’s question is extremely important and feel an obligation to give it some thought. I’ve done so and, although I won’t say that my ideas are settled, I do have some that I’d like to put forward for consideration. As I’ve said at a few points in this paper, Harvey seems to be advocating a RTW program that would grant a right to a public sector job only to those who are unable to find one in the private sector. Harvey seems to view governmental creation of such a right as analogous to its enacting a right to education and health care. Given the nature of Harvey’s RTW proposal, I think this analogy holds only if the rights to education and health care are of a special kind. Using the United States as our context, the right to public education would only hold if one could not obtain education in the private or parochial sector. Presumably, this would occur because people cannot afford private/parochial education or are unable to get into such an educational institution because of limited slots. The right to public health care would only hold if people could not find health care in the private health care market. Now suppose that Medicaid and other health benefits for the poor and public education did not exist. Although, I would support the enactment of entitlements to public education and health care I would not support the granting of these rights in the forms referred to in the above paragraph. Although I am sympathetic to the goals of those who would advocate these rights in these forms, I would advocate universal public education and health programs that provide agreed upon benefits to all regardless of whether one also has access to private sector benefits. To be more concrete in reference to health care, I would advocate a single payer health care plan, not Medicaid. Getting back to Harvey’s RTW proposal, although I sympathize with his goal of seeing work provided to those who want to provide it, in principle, the type of RTW program he’s proposing is not one I’m willing to allocate much effort to see enacted. In principle, the kind of RTW program I could support, the kind I think is more likely to result in the positive consequences for labor markets he’s predicted, is one consisting of the following: Anyone who wants to work would have the right to choose between working for decent wages in the private sector or doing so in the public sector. The government would create enough public sector jobs at wages somewhat higher than comparable private sector jobs to make this right a reality. This type of RTW program would give the Johns of the world the bargaining power that would result in considerable upward pressure on private sector wages. Yet the moment I think about this type of RTW program I also think about how politically infeasible it seems. I could be wrong, of course, but it seems much less feasible to me than a BI program, and that’s saying quite a bit, given the uphill battle facing BI proponents. I suspect businesses, in the United states at least, would be much more antagonistic toward a RTW program that created a “real” increase in the demand for labor at higher wages than those paid in the private sector than toward a BI program, even a relatively high one. Any upward pressure on wages that would come from a BI program would be indirect. The type of RTW program I have in mind would constitute direct competition with the private sector for labor power. 245


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The political infeasibility of the type of RTW program I support in principle causes me not to allocate any political effort to trying to get it enacted. I can’t align myself enthusiastically behind the RTW program Harvey supports for reasons discussed above. What I can support and what I do think is feasible enough to warrant my political effort is a policy that would grant everyone the right to an unconditional income – a BI is, of course, such a policy.

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References Currie, Elliot. Confronting Crime: An American Challenge. New York: Pantheon Books, 1985. Harvey, Philip. “The Right to Work and Basic Income Guarantees: Competing or Complementary Goals.” Rutgers Journal of Law and Urban Policy (2005). _____. “Income, Work, and Freedom” (unpublished) (2005). Nicholson, Walter. Microeconomic Theory; Basic Principles and Extensions. Illinois: The Dryden Press, 1989. Noguchi, Eri and Lewis, Michael A. “Too Busy to Serve: An Analysis of the Effect of Work on Civic Engagement” (forthcoming in Race & Society). Putnam, Robert. Bowling Alone. New York: Simon & Schuster, 2000.

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