Asset Based Welfare
Robert Skidelsky
Hansard | Saturday, November 10, 2001

Capital endowment proposals of the type of Ackerman and Alstott come from the same stable as proposals for a Basic or Citizens’ Income. They can be called Asset-Based theories of welfare (ABW) to work-based theories.
The main idea is that every citizen should receive an unconditional grant of resources. This might take the form of a capital endowment or a basic income. Its main purpose is that of enablement: to give people a degree of freedom from immediate economic necessity to shape their own lives. It reflects the view that ‘the only thing wrong with an unearned income is that too few have it’. It would extend to the whole population the inherited modest competence currently enjoyed by a minority, unencumbered by dependence on family or state. It might be regarded as a dividend a prosperous and progressive society can afford to pay to all its members.
A and A’s paper is mainly concerned to show the superiority of their capital endowment (‘stakeholding’) proposal to proposals for a basic income. Basic Income gives people the imputed income from a stock of capital, but not the capital itself. If, in the A and A plan, people invest their capital endowment to generate income, the result is equivalent to a Basic Income. But they might use it to start a business, or buy a house, or invest in their education –or ‘blow it’. So their freedom –and the risks attached to it –is significantly greater.
Europeans are traditionally more risk-averse than Americans. So it is not surprising that a guaranteed minimum income for all should be the form of ABW favoured in Europe. It draws on the familiar European idea of a social safety net, whereas the A and A plan is rooted in the American dream of the opportunity society.
Recently the British government has proposed two schemes which try to combine features of the capital endowment and basic income approach. The first is a trust fund (or ‘baby bond). The government will pay an initial contribution, means-tested, but all children will get something, though the poorest will get most. The assets will be available at 18. As an illustration: the state pays an initial £500 to the poorest children with an additional £100 at 5, 11, 16. At 5 per cent compound real interest the child would get £1,640 at 18.
The second proposal is a ‘savings gateway’ targeted at low income groups. As with the Individual Development Accounts (IDAs) in the United States, up to some maximum amount of individual savings will be matched by the government. If the individual, for example, is allowed to save up to £50 a month in his account, he will have accumulated £3600 over three years, plus interest.
In addition to the quarrel over the rival merits of the two types of endowment, advocates of ABW are divided between those who see it as replacing the traditional welfare state and those who see it as complementing it, with the hope of reducing dependency on it; and between those who see it as a possible alternative to work (a leisure dividend) and those who see it as preparing people for more skilled work.
My purpose is not to enter directly into the debate between capital endowment and basic income. It is to examine the philosophic and economic case which underlies both sets of proposals, and to consider whether one or the other is the best way of achieving the objects of its proponents.
On one point there will be wide agreement. There is widespread dissatisfaction with the performance of traditional welfare states in all developed countries, specifically their failure to abolish poverty and their paternalism. It is widely agreed that the traditional forms of delivering welfare create ‘poverty’ and ‘unemployment’ traps –that is, keep the poor in the very state of poverty and dependence which the welfare state was supposed to end. Further it is argued that traditional means of delivering welfare are too rigidly tied to archaic conceptions of work –particularly traditional ‘men’s’ work – and households, leaving large holes in welfare provision through which lots of people fall.
These failures of traditional welfare states point to reform, but not necessarily to ABW.. ABW draws inspiration from recent developments in political philosophy and economic theory. It is to these developments that I now want to turn.
The Philosophic Case for Redistribution
All forms of public welfare which involve cash payments are redistributionary. Put crudely, they involve taxing X (usually the rich) for the benefit of Y (usually the poor). Redistribution is more readily accepted if it is not explicitly egalitarian, but is presented as a corollary to the alleviation of poverty, or universal insurance against risk.
The traditional case for redistribution is utilitarian. In accord with the doctrine of diminishing marginal utility it requires that wealth should be taken from the rich and given to the poor until their marginal utilities are equalised. This will result in total utility being maximised. Utilitarianism was the driving force behind most equalizing social reforms in the 19th and 20th centuries. As a scientific argument it foundered on the fact that people are not all equally good at converting resources into utility, but the intuition that an extra dollar is worth more to the poor man than the rich man remains
Rights-based arguments for redistribution have been developed by Rawls, Dworkin, and Nozick among others. For example, Rawls’s principle of justice requires that social and economic inequalities are so arranged as to give the greatest benefit to the worst off.
A and A in common with other proponents of ABW reject the utilitarian argument for redistribution. (pp.2-3) ABW is a right of citizenship, not a mechanism for making the poor better-off. Hence it is unconditional. An important element of unconditionality is non-paternalism, by which they mean the right and ability of everyone to choose his own plan of life. Like John Stuart Mill they see this as an essential aspect of a liberal society. Their ideal is a United States in which all children begin life with ‘first rate educations and roughly equal resources’. This involves confiscating wealth from the rich and giving it to the rest. Their scheme was hatched before the great American boom of the late 1990s which reversed the increase in wage dispersal of the 1980s and also before the subsequent bursting of the Wall Street bubble which has wiped out about one-third of US wealth in the last twelve months.
The trouble with rights-based arguments for redistribution is that the language of rights was originally developed to mark a ‘frontier of freedom’ (Isaiah Berlin) which no person or government was meant to cross. On the free side of the frontier were property rights protected by law. There is thus always a tension in the liberal theory of the state between the state’s duty to protect lawful title and the demand that property be assigned according to criteria of fairness or justice, unless justice is equated with lawful acquisition.
The tension does not arise if there is ‘free’ or ‘unowned’ land. The classic case of a non-contentious assignment is the US Homestead Act of 1862, which entitled settlers to 160 acres of free land if they lived on it and developed it. The problem arises when all existing resources are already owned.
Locke’s proviso, that property rights are justly assigned ‘if there is enough and as good left in common for others’ might seem to cover the case in which the continual expansion of wealth through entrepreneurship and work automatically increases the amount of resources available for ownership. This is the defence of capitalism. Not only does it enlarge total wealth, but it provides for a continuous redistribution of existing titles through trade. However, this is not a robust enough defence against the charge that initial title confers cumulative advantages, so that the cards are stacked against those who start off with no property except their labour power.
This leads to Dworkin’s ‘equality of opportunity’ argument for redistribution: all resources external to the effort required to generate wealth and income should be equally distributed. Outcomes should be ‘ambition sensitive’, but not ‘endowment sensitive’. But people must be allowed to retain the gains from savings, hard work, and the use of their differing talents. The tax system will be arranged so as to deprive the current generation of all income and wealth not due to their own efforts and redistribute it equally to the next generation. But ability is part of endowment. It is not freely transferable.
Nozick’s rectification principle is another example of a rights-based argument for redistribution. People should be compensated for previous forcible expropriation of land. But except in certain cases like Red Indians and Maoris (or perhaps the Palestinians) it is hard to identify the victims of previous expropriations. How far back does one have to go? And do groups have rights?
A and A’s argument for redistribution has some affinity with Nozick’s rectification principle. Their central claim is that the current owners of wealth capture a disproportionate share of the fruits of a cooperative process of wealth-generation. They do not in fact have just property rights over these ‘externalities’, which belong to the society which created them. These externalities are like ‘free’ land, available to be distributed to the general social advantage without infringing lawful titles to property. Take two passages from their book, The Stakeholder Society:
‘Each individual citizen has a right to a fair share of the patrimony left by the preceding generation’ ( p.9)
‘Nobody makes money simply on the basis of his own efforts. However hard-earned it may be, the wealth gained by every self-made man depends on countless acts of cooperation by others…Given the continuing dependence of the wealthy on the cooperation of their fellow citizens, stakeholding does not involve coercive ‘gifts’ to strangers. It represents a suitable act of recognition by the wealthy of the role played by fellow Americans in creating the conditions for the very system necessary for their own success’. p.32)
Two different types of argument seem to be conflated. The first is that the system as it now operates deprives most people of their earned share of the ‘patrimony’ which they and the capitalists together have created. The second is that unless the wealth-owners are prepared to sacrifice some of their ill-gotten gains they will no longer be able to rely on the ‘cooperation’ of others on which their success depends. The first is meant to be justify redistribution on grounds of principle, the second on grounds of expediency. The passage effortlessly slips from one into the other. Only the first need concern us here; the second is a matter of political judgment.
Curiously no supporting argument is offered for the first proposition that there exists an unjustly owned pool of wealth available for redistribution
An argument might be constructed along the following lines. Wealth-generation is co-operative in the sense that it could not be carried out-or at least carried to the point it is –without a large array of public goods. These can be considered as the sum of government services, including a public material infrastructure, law and contract enforcement, social insurance, health, education, etc. From the point of view of the producer/businessman these are beneficial externalities for which he should be made to pay.
This argument would be correct were it not for the fact that he has already paid! These external conditions of wealth-creation have been paid for, and are currently being paid for, by taxes which fall predominantly on the wealthy. It is not ‘free’ wealth available for distribution, in the sense that ‘land’ was free. It has already been redistributed –from the taxpayers who provide the beneficial externalities to the non-taxpayers who receive them.
And the same is true of all other ‘social’ factors of production like inventions, information, technology, and so on. They have already been taken into account, by e.g. being embodied in physical capital. A and A are simply double-counting.
Nor do A and A avail themselves of another familiar argument. According to standard economic theory, in a perfectly competitive market all factors of production are paid their marginal products, that is, no one robs anyone. Markets are not perfectly competitive. So it is certainly possible that some factors are paid less than their marginal products, and others more. But A and A do not even try to show (as Marx at least did) that this outcome is systematically visited on an identifiable group.
Their principled argument for redistribution amounts to this. Many people are poor, therefore they must have robbed of the social inheritance which is rightly theirs. But there are surely many other reasons for poverty. One, from the most recent economic history, is that technical progress has increased the wages of skilled workers relatively to those who are unskilled. This points to a different kind of justification for ABW.
The Economic Case for Redistribution
The traditional economic case for redistribution was utilitarian. A new economic argument for asset-based redistribution has been provided by endogenous growth theory.
Traditional growth models (eg Solow) made economic growth depend on population growth and technical progress. These sources of growth were exogenous: they could not be influenced (at least not except in the very long run) by changes in government policy or private behaviour. At some point diminishing returns to capital set in. Applying more and more capital to a given population could not be the source of permanent productivity growth. Per capita growth would stop. Diminishing returns to fertility would have the same effect on population growth. So economic growth would at some point stop as well. We would have a stationary state.
Paul Romer pointed out that while diminishing returns were true for an individual firm, they were not true for an economy as a whole. He argued that there were significant externalities to capital. Higher capital in one firm increases productivity in other firms. This also applies to human capital. Training by one firm has beneficial effects on others. When all firms expand together, the economy as a whole may face constant, rather than diminishing, returns to aggregate capital. Growth can continue into an indefinite future.
Assume that per capita outcome y is proportional to capital per person k. Suppose that that technology is constant, so y=Ak.
Given a constant saving rate s and a population growth at rate n can there be a steady state in which capital per person grows at rate g?
If so investment for capital deepening (increasing capital per person) is gk and investment for capital widening, to keep up with population growth, is nk. Hence in per capita terms:
Gross investment = (g+n)k = sy =sAk =saving
So the steady state growth rate g is given by g =(sA-n)
Endogenous growth is possible because it depends on parameters which could be influenced by private behaviour or public policy. In the Solow model, without technical progress, steady-state growth is always n, whatever happens to s or A.
However, the second equation says that any policy which succeeded in raising the saving rate s would permanently increase the growth rate g. Any policy which achieved a once and for all change in the level of A (technical progress) would permanently increase the growth rate of capital per person, k. Since y=Ak this means permanently faster growth, and the possibility of a long postponement of diminishing returns.[Adapted from Begg, Fischer, Dornbusch]
There are many possible channels for endogenous growth. The most intuitively appealing is increased investment in human capital to raise productivity growth.
If you then posit a failure in the market for human capital, you get a case for redistribution. The failure might arise from the fact that . human capital cannot serve as collateral on loans (in the absence of slavery) while physical capital can. Therefore human capital is likely to be undeveloped in a market system, for example, the market will undersupply education and training, especially for poor children who have high potential human capital. Redistributive policies targeted on human capital development will not only increase the earning power (and life choices) of their recipients, but will produce a beneficial externality for the whole economy.
A social policy which takes endogenous growth theory seriously will target resources on developing a population’s ‘human capital’ rather than maintaining them in means-tested poverty. The British government’s ‘baby bond’ and ‘savings gateway’ schemes, as well as many other education and training initiatives, signify a shift towards an asset-based approach to welfare.
Although A and A do not make use of this type of argument, it offers a stronger justification for redistribution than the arguments they do use. It is not a question of restoring to the poor their ‘stolen’ inheritance, but of making their future inheritance, and that of the whole society, larger than it would otherwise be. It is more genuinely like ‘free’ land.
Critique of the Ackerman and Alstott Scheme
A and A propose that the government give every American $80,000 when he or she reaches twenty-one (or eighteen for the specific purpose of financing a college education). This would cost $255bn, or 3.4 per cent of US GDP at 1997 prices. It would be financed by a 2 per cent wealth tax. The ‘stakes’ thus distributed, plus interest, would have to be paid back, on death, into a ‘stakeholding fund’. They call this a ‘trusteeship tax’. A stake of $80,000 received in 2010 would carry a pay-back obligation of about $250,000 in 2070. If all stakeholders are worth at least $250,000 when they die, the stakeholding fund would replenish itself, enabling the wealth tax to be discontinued after forty or fifty years. A and A nevertheless expect a leakage from the fund as some stakeholders will squander their stakes.
A and A also propose that every American would receive a right to an equal retirement-pension, to be financed by a ‘privilege tax’ payable during their working lives. The privilege tax would be based on the amount of income earned by the parents of the taxpayer when their child was growing up. This would replace the payroll taxes currently funding retirement benefits. Privilege taxes might also be used to finance social security and medicare.
The following criticisms of their plan are not arranged in order of importance.
1.Like all ABW schemes, they are a wasteful and fuzzy way of achieving quite precise purposes. Stakes are given to those who don’t need them at the expense of those who might.
Education. Poor people can’t borrow money to finance their higher education because they can’t offer increased potential earnings as collateral. Endowing everyone with assets may not be the most efficient solution because it will go to individuals who do not want to go to college or university, and to those whose parents can finance them anyway. It would be more efficient to give means-tested scholarships for tuition and maintenance.
Educational deprivation starts much earlier in life, being closely linked to social deprivation. A policy which aimed at Rawls’ ‘fair equality of opportunity’ would aim to raise the standard of schooling (and skilling) in poor areas. A and A argue that the prospect of having their college education paid for will encourage weaker students to work harder at school, stay off drugs, and so on. This may or may not be so. But motivation to study is the result of many more things than the expectation of a windfall which can, in any case, be claimed by those who have qualified for a college education, but prefer to spend their money in other ways.
Here again there may be a genuine market failure in that poor young adults cannot offer collateral to start a business. But even when their borrowing requirements are backed by assets, banks may reject lending them money on the ground that they don’t have the necessary skill and experience.
Management of Assets
The A and A argument is that holding assets gives people an incentive to manage money sensibly, and particularly to acquire the financial information needed to do so. This is plausible. But giving people assets without also making them engage in the process of saving is not necessarily the way to improve their management of them. Too many examples of rich kids squandering their inheritances tell an opposite tale.
2. An attractive feature of the A and A plan is non-paternalism. This is their main argument against earmarking assets for specific uses, or targeting redistribution on specific groups.(It is also one of the arguments they use to support their scheme as against Basic Income, which gives less choice of life-style.) The flip-side of non-paternalism, though, is the destruction of the family as a nurturing unit. They seem to resent rich kids depending on their parents for college education almost as much as poor kids not being able to do so Typical is the statement from their book that stakeholding is a ‘more democratic and more effective substitute for inheritance’. Tocqueville famously noted that the extreme individualism of American life bred an extreme egalitarianism. In the urbane prose of A and A, the claims of an equal citizenship override all other claims. There is no recognition that citizenship grows out of community, and communities grow out of families. A collection of free-floating individuals –‘Joe Six Pack as good as College Joe’ –each equipped with an equal pot of gold to pursue fame and fortune seems to be their ideal. Fukuyama is one of many sociologists who offer a different perspective on the consequences of family and community breakdown.
3.Ackerman and Alscott never seem to have heard of bureaucracy. Their new taxes require much more extensive investigation into the personal circumstances of the taxpayers, and interference with their right to dispose of their property than at present. Fifty thousand dollars would be the maximum for tax-free bequests. Current inter-family exchanges would be limited to birthday presents and the like: ‘one thousand dollars a year should be more than enough to allow moms and dads to show familial affection’. The amounts payable under the ‘privilege tax’ would have to be determined. There are complicated arrangements for securing the payback of the ‘trusteeship tax’.
Moreover, the wealth, privilege, and trusteeship taxes are bound to set up a chain of evasive behaviour. Resources now devoted to creating wealth will be channelled into putting it beyond the reach of the tax collector. This will give employment to extra armies of accountants and lawyers and (I would have thought) to almost continuous litigation. And the authors never consider perverse incentives of these new taxes on work and saving.
The proposal to equip all young people with assets to help equalise life-chances has many ancestors, starting with Thomas Paine. Its recent revival marks a genuine advance in thinking about the design of 21st century welfare. It switches the emphasis from plugging holes in the earnings cycle to creating equal opportunities for all young adults to make of their lives what they will. While governments may be attracted to it as a way of motivating deprived young people to acquire job skills, an equally important, and attractive, motive is to prepare people to use their leisure wisely, agreeably, and well.
However, the principled arguments which A and A use to justify mulcting the very rich of their wealth appear to me to be largely groundless, and there are serious drawbacks in the scheme they actually propose. The ones to which I attach most importance are the policing requirements of their plan, and its anti-family bias. As has so often happened in history, a scheme which on paper promises a great extension in freedom would, if implemented, have the opposite effect.