The sky is falling! The sky is falling! But there is no need to run if the nature of the problem is understood and proven solutions applied. The problem is overpopulation and overpriced labour. Population control has been successfully tried, check with the Chinese if guidance is needed, so I will concentrate here on bringing labour costs into equilibrium. And the best tool to accomplish this is the unfettered market.
In the short-term, the solution is to return government to the position of reducing inequalities in society but not as was done under the mixed economy model.
Under that model, the government in some cases tackled inequalities by interfering with the efficient functioning of the market (establishing minimum wages, promoting labour unions, gender equality, etc), which is the cause for the disequilibrium.
All forms of labour restrictions should be eliminated and replaced with legislative workers’ rights on hiring, firing, work durations, overtime pay, severance payments, etc.
Under this new role, the government would participate only after the market has done its job and made its allocations. The working poor will increase from falling world demand and threat of greater automation in production processes.
That’s because, if left unfettered, the market is an efficient allocator of resources but not a fair one. In other words, full employment would exist but at lower real wages creating the higher numbers of working poor.
Larger governments are needed to provide security, population control and to be the conduit of transfer payments from the haves to the have-nots. The wages from certain jobs would be so low that transfer payments would by necessity require direct subsidies to workers in the form of monthly payments similar to those paid unemployed persons in the past.
These payments are not only needed to prevent unrest but to increase the demand for goods and services.
Government programmes could be refined to be more effective without distorting the market. For example, instead of making welfare payments to poor people, such payments could be tied to social and economic objectives such as having smaller families, sending their children to school and skill training for adults. Services that are costly, such as tertiary education and health care
can be provided, starting at no cost to the participant on a graduated means-tested basis.
Governments could allow labour to relocate to where the jobs are by the issuance of temporary work permits or provisional agreements between employer and worker.
In other words, unlike what Conservatives in the US are advocating, governments would play a bigger, not smaller, role in the economy by supporting measures that reduce income inequalities without distorting the market. Where will the funding come from for this bigger
government role? The major source of all government revenues is taxes – a levy on a particular good, service, return or transaction.
This tax regime has to be carefully crafted because if governments soak the rich, they will simply move their money elsewhere, even finding it preferable to become Russian citizens as witnessed a few years ago, when France raised taxes on its wealthy citizens.
But the rich can be soaked without targeting their income. Actually, income tax is probably the worst form of taxation as it penalizes production, and should be phased out.
Governments should raise their revenues by taxing financial transactions, the life-blood of the capitalists, and through a progressive consumption or value added tax. Both would have a disproportional impact on the rich.
What about the long-term? In 1923, John Maynard Keynes, the eminent economist, wrote that in the long-term we are all dead. But planning for the period just before we all die, requires a vision of what the world would look like then.
Although by then, populations will be kept at sustainable levels from a combination of natural disasters and radical population planning, the wage levels will be lower, kept in check by greater automation in production processes.
The good news is that falling wages drag the cost-of-living down with them. An engineer in Asia earning a fraction of what a similar qualified one in the US earns, lives a comfortable life because the cost-of-living there is comparably lower.
So lower wages do not necessarily mean a lower standard-of-living, and in the long-term, cost-of-living levels will be brought into equilibrium with wage levels.
Equilibrium also means that wage and cost-of-living levels will be the same worldwide, thus no need for dislocation of jobs. As world equilibrium is established between wage levels and cost-of-living, the support role of government is reduced, if not eliminated.
If handled correctly, the future would have little likeness to what pertains today. The world would be less populated, less polluted, and fully employed.
In the next installment, I will examine a proposal from one of the progressive European nations intended to address the mass dislocation from automation.
