Mr Medlock and the Classics

A social democratic economics manifesto.

Trevor Chow

Disclaimer: This has been tagged as an effortpost due to the time and work put in. However, this is very much a work-in-progress that I will add to and edit over time - right now, it’s better described as a collection of twitter and blogpost links than necessarily a fully fleshed-out piece. Any mistakes or misrepresentations of people I’ve linked to are mine and mine alone, and I would be grateful if they were sent my way.

Edit: Wow! I did not expect this post to blow up as much as it has, with over 120,000 impressions on my tweet publicising this. I am glad that so many people said this was useful, and if you have any comments please do DM me!

Oftentimes, the discourse around government intervention in the economy is couched in language and framing which implicitly assumes that efficient outcomes from unfettered markets are the norm rather than the exception. And by and large, I believe in that - I think our first instinct should be to think about tweaking the price mechanism and looking for market-based solutions. But there is a competing set of claims which is much less sceptical about intervening in markets. And although I’m not persuaded they are entirely correct, what they do say is credible, coherent and corroborated by academic work - as such, it is worth listening to. That’s right. I’m talking about social democrats. And this is going to be my suggested interpretation of what it means to be Medlock-pilled, featuring content from James Medlock, Jacob Keegan, David Sligar, Matt Darling and Matt Bruenig.

Big Picture Aims

It seems helpful to begin with an outline of what some social democratic goals might be. One description might be competitive egalitarianism. This has two components. Firstly, it recognises that people deserve equal worth, having been brought into this world by the arbitrary lottery of birth - as such, inequality can only be justified on the basis of the Rawlsian difference principle. Secondly, it notes that markets do not exist ab ovo, but instead are moulded by the laws and norms of the land. As such, we can use those laws to produce markets which serve the public interest.

To get this sort of collectively beneficial creative destruction, we need a population that is adequately supported in all aspects of life. This can only be provided by governments - as such, what we are looking for is society as a service. In effect, you pay a fee (better known as taxes) in order to get services like risk-pooling, income-smoothing, poverty-elimination, public goods etc. This can manifest itself into policy proposals in several ways. I’m going to highlight five key strands.

  1. Tax positivity. Insofar as governments exist to solve collective action problems, they are only able to do so via funding from taxation. And that’s something we shouldn’t shame, but instead celebrate.
  2. Welfare positivity. We should be providing benefits in a universal fashion without the odious and exclusionary apparatus of means-testing.
  3. Robust state provision. An effective state is one that invests in its people’s capacity and uses state capacity to address market failures.
  4. Full employment labour markets. When there are job opportunities and when workers are empowered, we can fix other issues in society.
  5. Social wealth funds and YIMBYism. Insofar as wealth begets wealth, we should make financial and housing wealth widely accessible.

In all of this, it is important to remember than the equity-efficiency tradeoff which often stymies attempts at this competitive egalitarianism is somewhat unfounded. In fact, efficiency requires equity to some extent, and equality of opportunity cannot be divorced from equality of outcome. Suppose the first generation had equal opportunities at the beginning - almost as soon as that occurs, the next generation and onwards will have unequal opportunities due to their forebearers being rewarded for previous merit. In fact, what we see is that the competitive market equilibrium is suboptimal if there is substantial inequality, in part because surplus is not a reliable measure of welfare. One example of this is in conservation and environmental policies, where pricing policies are less effective compared to prescriptive policies in reducing water consumption due to differences in household endowments. Another would be the fact that more equal countries have more intergenerational mobility. So we need a state that balances equity and efficiency such that they complement each other.

These are not goals that are ridiculous. The Nordics aren’t collapsing. In fact, these are goals we’ve seen achieved in some form or another across the world. And many of these successes have been made possible by linking tax-and-spend policies together, or by engaging in broad tax-and-spend policies which are low salience and income-replacing. So this is very much a viable policy agenda!

Tax Positivity

The basic idea behind social democratic taxation is to ignore the conventional wisdom of solely focusing on efficiency and progressivity - instead, we should aim for broad-based and large taxes. Broad taxes are efficient as they reduce the elasticity of taxable income to the tax rate, allowing a higher revenue-maximising rate. They also mean that the system is not dependent upon the existence of billionaires, avoiding the trilemma of a large welfare state, low middle class taxes and a small share of market income going to the rich not being able to co-exist. The sense of fairness arising from broad-based taxes that everyone pays also means people tolerate higher taxes rates.

More importantly, efficiency is not the be all and end all. By any account, France is a country with a huge amount of taxes and with very high tax rates. They have incredible amounts of regulation and lots of industrial action. And yet, France has a GDP per hour of work that ranks as one of the highest in the world, in line with the USA ad much higher than the UK or Australia etc. If all these cumbersome government interventions really distort markets, it’s not terribly visible. Indeed, research has suggested that the supply of inventions is much more affected by childhood exposure to innovation than changes in taxes. As James Tobin noted, “it takes a heap of Harberger triangles to fill an Okun’s gap”. So we can dispense with the notion that taxes inherently reduce growth and worry less about inefficiency.

Taxation should also be focused on being large rather than necessarily progressive - this is because all you need to reduce inequality is to be less pro-rich than the market, not necessarily to be pro-poor. Consider two people - one has £30,000 in income and the other has £300,000. If we tax at 50% and 30% and redistribute at 40% and 60% respectively, we get net incomes of £57,000 and £273,000. In other words, we see a Simpson paradox-esque situation, where a regressive tax system and regressive transfer system produce a progressive outcome, just by the sheer volume of redistribution. This is reflected in real life - some of the most social democratic countries like the Nordic ones have the least progressive taxes and transfers among developed countries. In fact, progressivity metrics tell us little - a country raising a significant chunk of its taxes from the top 10% could reflect more pre-tax inequality just as it could reflect higher rates of taxation on the wealthy. This is why we should look at the absolute amount of redistribution rather than these flawed measures of progressivity.

Obviously by the principle of MOAR we’ve established, we’re taxing lots of things and taxing lots of people. But what taxes do we want exactly? As I’ve established elsewhere, the first-best option (ignoring Pigouvian and land value taxes) is a tax on consumption - that’s because consumption is the most meaningful measure of inequality in people’s wellbeing. However, what we want in particular is a value-added tax, rather than a sales tax. This means that rather than having a tax paid at the retail sale of the final product, there is a tax levied at every stage of production. Via the credit-invoice method, this means that customer is told the VAT they have to pay, while firm will receive a credit on the VAT already paid on their inputs.

This provides a mechanism for self-enforcement, since there is cross-reporting i.e. the seller knows that the buyer is reporting the transaction in order to get the credit, creating an incentive for them to pay the tax. Another advantage is that it avoids tax pyramiding, which would occur if a sales tax were levied on every sale. That is, taxing sales at every stage of production would punish industries with lots of intermediate steps, while a VAT avoids this by letting firms claim credit on VAT paid on the value-added before their stage of production. As such, there will not be an undue incentive to vertically integrate.

Another lovely tax is the employer-side payroll tax. By being withheld from everyone’s paychecks, it is not that salient, is difficult to avoid and has a broad base. And when coupled with a minimum wage, it means that the incidence of the tax is not passed on to low wage workers due to a binding floor on wages.

The third prominent tax we ought to consider is wealth taxes. We can see the benefits in Norway, where a wealth tax seems not to have had a negative effect on employment. Instead, it has actually incentivised individuals to invest in employment within family-owned businesses to avoid the tax. Furthermore, it increases aggregate productivity by forcing the burden of the tax onto less productive entrepreneurs who don’t efficiently allocate their capital, making it advantageous compared to a capital income tax. To the extent to which this might incentivise a reduction in the capital stock, this seems not to hold up in practice in Norway, where the income effects dominate the substitution effects. But even if it did, that’s why we have a VAT to tax that spending. One example of a wealth tax would be an inheritance tax, which is also helpfully a Pigouvian tax on death. Something about “less dying, more gooder” seems relevant here.

All of this isn’t to reject capital income taxes - although the canonical Chamley-Judd results suggest capital income taxes should be zero, this is based on a very specific set of assumptions that likely don’t hold in real life. It takes a standard Ramsey growth model with constant returns to scale in its production function and it concludes that we shouldn’t tax capital but should tax labour, because capital can accumulate. Of course, this ignores the accumulation of human capital. And if people remember Mankiw, Romer and Weil, human capital is pretty damn important. Coupled with the many other assumptions which may not hold up, we get a world where capital income is very much taxable.

We can also look towards taxing various finance-related things. The most obvious is to tax capital gains on a mark-to-market basis. This involves taxing the capital gains as they accrue annually, rather than at the point of sale - this ensures there is no disincentive to hold on to assets for longer just to avoid the tax. Notice that there is no good reason to privilege capital gains over other possible things to tax, because doing so doesn’t incentivise investment as much as it incentivises the structuring of investments to avoid taxes on income. So that’s an option on the table.

Another would be to tax financial transactions, because there are gains from curbing speculative behaviour that outweigh the reduced level of liquidity. If you believe that the zero-sum nature of jobs in industries like finance are not things we should be encouraging due to their negative externalities, higher income tax rates might even grow the economy by changing the allocation of talent. And the amount we can tax is reasonably high here too, with some estimates going as high as 83% for the top 1% of earners.

Finally, there are also administrative and institutional things we can do. For example, we can reduce the salience of property taxes. Or we can get prepaid taxes which make taxes less burdensome for households and lead to significant cost savings. Or we can actually fund tax collection agencies, which is a policy that basically pays for itself. Or we can create a broader base that lowers the ETI by minimising tax evasion via third party reporting, while expanding the labour supply with good spending choices.

Welfare Positivity

Having figured out how we raise revenue, what are we spending it on? Welfare is the obvious answer - but what is welfare actually for? It is primarily a form of social insurance - so the question we’re really asking is why social insurance is needed over private insurance and why it achieves functions that cannot be replicated by charity.

Firstly, there is a moral argument that people who should not be punished for things outside their control - for example, it is reprehensible that there are children without healthcare coverage through no fault of their own. Secondly, there are improvements in economic efficiency by correcting for market failures and incompleteness - social insurance allows the pooling of risk, it means people can take entrepreneurial risks and drive the process of creative destruction, it creates more efficient labour matching and it helps people engage in income-smoothing over their lifetime. Thirdly, it prevents the rise of reactionary backlash caused by creative destruction. Fourthly, it redistributes money towards those who are likely to get more utility out of it. Fifthly, it frees people from familial dependence.

There are some who argue that we need work, not welfare. And intuitively, this sounds nice - why give handouts when we can give people jobs? Isn’t this more dignified and more cost-effective? The problem with this is that non-workers make up a significant portion of the population - around 49% of Americans work 0 hours a year, and about 86% of them should not be working i.e. they are children, elderly, disabled or students. And since the poverty rate for non-workers is thrice that of workers, it becomes apparent that the way to deal with poverty is welfare, not work.

Recognise that most of the aforementioned five benefits are best achieved with universalism. For one, universalism ensures horizontal equity, where those with similar levels of income and wealth are treated equally. Universalism also means a reduced level of bureaucratic burden, which results in fewer poor people being inadvertently excluded from benefits. It creates popular buy-in, generating political sustainability for these programs while reducing the stigma of using them by delinking feelings of redistribution from the welfare state - insofar as welfare budgets are endogenous to the targeting regime, this can increase the total amount available to be redistributed. And it makes sure there aren’t welfare cliffs, where there is a high marginal tax rate that disincentivses work. Furthermore, universalism has institutional benefits - its simplicity requires less state capacity and allows a better division of labour, where the welfare side only has to worry about underpayment instead of obsessing over clawing back overpayment, since tax authorities are the ones focusing on collecting revenue.

Why does means-testing suck? For one, it often comes with all sorts of ordeals that are designed to make life more difficult, which themselves create deadweight losses. An example would be the incredible list of conditions in order to be eligible for SSI disability payments, all of which makes applying and getting help nigh impossible. Another would be the 47 page Medicaid renewal application form in Tennessee that has caused 250,000 children to lose coverage. In fact, means-testing can basically act as a tax, exemplified by the existence of various deductions for food stamps. The consequence of all of these restrictions is it suggests we don’t trust people. Not only does this make people’s lives difficult, it reduces social trust. And it isn’t even justified, because the narrative of “welfare queens” is not based in reality - by and large, welfare programs lead to people spending the benefits well.

A second issue with means-testing is that income volatility makes this targeting difficult - within a year, half of those below 200% of the poverty line will have seen a shift in their eligibility for Medicaid. That’s 28 million people who will be fluctuating in and out of just one welfare program. And the result of falling off these eligibility cliffs, even when there is a household income increase, is of significantly increased food insecurity and healthcare unaffordability. While means-testing within programs would be an improvement compared to means-testing into programs i.e. we could let those over the eligibility limit pay a small fee to stay on the program, universalism is a much easier option. A third harm is that means-testing results in a smaller tax base, meaning higher marginal rates. And since deadweight losses are not linear to the tax rate, we will get a larger amount of deadweight loss overall.

And fourthly, the actual process of means-testing can often result in very badly designed welfare programs. The most prominent problematic mechanism is that of trapezoids - essentially, this is where the benefits increase with income for a bit, then flatten out and even are phased out. The problem with this is not only that the very poorest are excluded, but also that this can incentivise bad practices - for example, the trapezoidal Earned Income Tax Credit may have encouraged mothers to spend less time caregiving, resulting in worse child test scores. Another problematic structure arises from the Child Tax Credit, which is actively regressive, excluding 90% of children in the bottom income decile while including nearly all children in the top half of the income distribution. More generally, means-testing results in chaos, due to the need to claw back overpayments, the delay in payments causing liquidity problems and hardship for families, as well as the uncertainty in incomes making budgeting a nightmare.

Incidentally, universal welfare provision isn’t just better than means-tested approaches. It is superior to the rent seeking that can occur when welfare is segmented on an occupational basis, as those often result in spending being directed towards pensions instead of more poverty-reducing measures. And it’s also better than benefits which are tied to employers, as they reduce labour mobility and exclude non-workers.

But for all of this analysis, is welfare actually the most important factor in stopping poverty? Yep - there’s a strong negative relationship between public social spending and post-transfer poverty. And we can also see this in the relationship seen between Social Security expenditures and elderly poverty or in the results of the War on Poverty or in the CARES Act. In fact, we can see that the US, despite leading the pack in post-tax-and-transfer poverty, is only the middle of the pack pre-tax-and-transfer. That is, it is the welfare state that makes the difference.

So should this welfare be provided in kind or in cash? Insofar as providing cash of the same value will always provide at least as much utility (and grants more choice), this is fundamentally a question of trust. Because poor people are very much financially literate, cash transfers generally reduce the consumption of temptation goods and pay for themselves. So the party we should distrust isn’t those we are distributing to, but the people who decide the restrictions on in-kind benefits, producing ridiculous policies about sodium-content in tofu and legume types in the WIC program. Indeed, this regulatory overreach is how we got a shift to purely digital payments for WIC which resulted in fewer stores participating in the program.

Now if we are providing welfare as money, how should this be dispensed? As a Universal Basic Income? Or as a Negative Income Tax? There are many people who support a NIT, because it is progressive in a way that the UBI isn’t. But once you recognise that progressivity is a term that only makes sense in reference to one’s income, you realise a UBI is progressive. In fact, a NIT and a UBI are basically equivalent. The difference comes down to implementation, where we’ve already established that a universal program like UBI is likely to provide a better administrative division of labour.

In practice, we can see these principles playing out in ideas like a universal child allowance. This has all the trappings of universalism, but is helpfully targeted in a way that is most effective at poverty reduction i.e. for children. And as with tax policy, there are lots of administrative fixes to be made such that welfare brings joy. One of the biggest changes we could get is a far better system of cash transfers via public banking, but even within programs, there are lots and lots of possible minor tweaks.

Robust State Provision

As lovely as the previous welfare support sounded, it represents a very limited part of what governments provide. There are quite a few areas where effective governance can make a difference and address some market failures. One is in healthcare, which represents a huge component of people’s concerns and spending. Healthcare faces two key issues. The first is of private insurers - insofar as they are unable to price risk due to not being allowed to charge those with pre-existing conditions more, their role becomes one of pooling risk. This makes employer-contingent pooling less useful, because risk-pooling is at its most effective when the pool is largest, and not arbitrarily segregated on the basis of occupational factors that may themselves influence health risks. The second is of skyrocketing medical and drug costs - where they haven’t, this has almost always been a result of government intervention, such as with the UK’s National Health Service having monopsony power in negotiating drug prices.

The result of these two problems is a great deal of messiness right now, where private insurers are bad both at pooling risk and negotiating prices. As such, they are left as glorified customer service representatives, which seems awfully inefficient given the actual plans aren’t great either. For one, the way in which deductibles reset means that we see very uneven costs for people who get sick just before versus just after the new year, making income smoothing rather difficult. And the patchwork of Medicare options are just as confusing.

The government can do several things in addressing healthcare issues. Firstly, even a simple matter of giving free rides to the doctor would save a lot of money, by ensuring people got preventative instead of emergency care. Secondly, liberalising the supply side and publicly funding research in lieu of relying on patents would reduce the physician shortage and high drug prices that pervade right now. Thirdly, the government could get involved in a provision of healthcare plans, whether that is a basic public plan or Medicare for All. Notably, existing publicly run Medicaid plans or Veterans Affairs hospitals already outperform their private sector counterparts, and a unified public plan would only provide more administrative cost savings.

Another big part of people’s lives is their families. One of the largest costs people will face is having a child - we can support families in that period with paid leave and a child allowance. On the former, we see that things like paid paternity leave can significantly improve maternal health and reduce the gender pay gap. A child allowance like the American Families Act would cut childhood poverty by more than 40%, and that’s just the tip of the iceberg. Baby boxes would similarly make having a child more affordable, as would public childcare, which also performs better than its private alternatives. And crucially, investments in children are efficient and pay for themselves, beating out any other welfare program in marginal value produced. Combined together, this could be packaged as a Family Fun Pack that makes parenthood accessible and affordable for all. Of course, children aren’t the only vulnerable parts of families - so are the elderly. As such, subsidising and supporting at home care will go a long way towards improving end-of-life quality, as we’ve seen Finland do.

A third avenue for government involvement is the day-to-day activities people which engage in, such as areas like education, post office and prison. Schools and universities are one of the most important parts of social mobility, and define the first two decades of someone’s life. However, market-based options like charter schools have proven themselves to be of mixed quality, so we should instead be increasing public school funding, which has tangible benefits to child outcomes. As for university, sticker price shock means that we don’t just need more tuition aid, we need a way of making it more accessible at point of access. That is, via income-based repayment, which won’t put people into terrifying levels of debt immediately. The post office is yet another area where state provision of services can be built up, with a precedent in Finland for postal employees helping disabled and elderly individuals. Postal banking would be another way of making welfare provision easier, and would also increase access to financial services for low-income households. And as for prison, private prisons don’t work - if they did, prisons would be fine with prisoner’s picking their prison on the basis of its quality. And given the perverse incentive to reduce the quality of life for prisoners, it would be prudent to stick with state-run ones. Another way of improving the humaneness of prison would be to abolish life sentences and cap them at renewable 20-year sentences, giving people a chance to be released without eliminating the possibility of prolonged incarceration.

Finally, governments can help get us closer to some longer-term aspirational goals regarding leisure and the environment. The phrase dignity of work often gets thrown around - but it really refers to two different sorts of dignity: one from productive activity and one from sufficient personal income. Right now, lots of people are compelled by economic necessity to try and derive the latter from a job - often this means they cannot access the former. So governments should pursue a leisure agenda that empowers people to work less - and although there are many components to this that overlap with other reforms, one step forward might be a 6 hour workday. The other big picture goal we need to be focused on is the environment - here, government can make a meaningful difference. Not only in funding natural parks, but in ensuring that the necessary green transition as a response to climate change is an equitable one.

Full Employment

Having said “welfare over work”, it is worth recognising that full employment is nonetheless a crucial part of any social democracy. Not only does it makes pushing for things like leisure or the environment easier, it remains one of the most important aspects of the lives of the working population. Unemployment is painful, causing psychological and physiological harms as well as having long-term scarring effects on earning potential. And even underemployment is bad, because it often comes with limited bargaining power and poor workers’ rights. So full employment is a goal that is worth working towards. And as part of getting there, it is important to have equal pay for equal work - that is, to reproduce the characteristics of a perfectly competitive labour market, which do not simply appear when labour markets are deregulated and decentralised.

One of the main ways of getting to these goals is via sectoral bargaining - this is where unions collectively bargain for standards across an entire industry, rather than just within a particular enterprise. One reason unions have become scarcer in the USA is due to the incentive for insiders to exclude new entrants, the incentive for firms to discourage workers from joining unions and the slower growth of firms with unions. A sectoral-level union would not face these issues - in fact, it would allow unions to be more effective, since they could take advantage of a level of interfirm coordination that is currently prohibited as well as benefit from the economies of scale that mean bargaining is less of a strain on union resources. The benefits they provide, like increased wages, would generate further support for unions. And although there may be problems of free-riding, this could be mitigated by the union providing other services - in the most extreme case, this looks like the Ghent system where unions provide unemployment insurance.

In general, unions can solve a Hayekian informational problem, as they are uniquely placed to advocate for and provide support to workers as well as pushing for a more democratic society where workers are listened to. Furthermore, the sense of unity and solidarity they provide is helpful in reducing racial resentment. And they can internalise externalities. They also help equalise access to unemployment insurance, making sure that one’s race and educational level doesn’t affect one’s ability to access these benefits.

But there are benefits to having sectoral unions in particular, as opposed to enterprise-level ones. For one, it means we are no longer dependent on a single statutory minimum wage, as each sector will have its own via negotiation. This is beneficial not only in reducing the political capital required to improve material living standards, but also in providing flexibility for sectoral disparities, since the appropriate statutory minimum wage will never be high enough to counteract monopsony power in higher-paying industries.

This can also act as a form of industrial policy - by compressing the wage distribution and leading to higher wages via more worker power, it forces unproductive firms out in a way that simply raising the minimum wage fails to do. This is buttressed by the fact that it allows sectoral training programs to be created, bypassing the prisoner’s dilemma that currently exists, where worker turnover disincentivises individual firms from upskilling their employees. It also makes workers more productive via the efficiency wage theory. And it does so without leading to increases in unemployment within these productive firms, because the workers have become more efficient. Nor does this faster process of creative destruction necessarily hurt smaller firms - in fact, smaller firms in Spain actually wanted to keep sectoral bargaining, due to their higher wage-bargaining costs without sectoral unions.

Furthermore, it is worth realising that a firm-level wage-bargaining system will reward assertive individuals - insofar as women are punished for displaying assertiveness, this can lead to sexist outcomes. A system that takes wage-setting beyond a firm level will mitigate the extent to which discriminatory bosses can discriminate by ensuring that wages are set by rules over discretion. So sectoral bargaining can reduce the gender wage gap. The unsurprising result of efficient workers, productive firms, training schemes and an inclusive workforce is that sectoral bargaining is associated with higher employment rates and lower unemployment rates. We also see that it results in labour markets that are much more favourable towards traditional “outsiders” like young workers, female workers and low-skilled workers.

We can get even more gains in productivity and wage compression if we have cross-sector coordination, where different sectoral unions cooperate in their plans. The reason these benefits occur is because of the fact that competitive wage premia can slow growth - that is, sunrise industries need to pay higher wages than those paid by existing industries due to the frictions in labour adjustment. The consequence is that these new industries will be disadvantaged. This cross-sectoral coordination can compress this wage differential, which is what happened in Sweden. The result of this equalisation of wages within sector and compression of wages between sectors is that of more aggregate output and productivity.

Although some worry that this could lead to increased employer concentration within a sector, this can be mitigated by other policies like anti-trust regulation etc. Equally, the danger of higher profits due to wage compression is simply an opportunity for that to be taxed. And although there might be a reduced incentive to train up one’s human capital due to the smaller skill premia, this can be mitigated with active labour market policies. A final concern relates to too much union power - this is possible, though not really a concern right now. But more importantly, strong unions don’t always slow down changes - in fact, the security and collective action they provide can aid in sectoral transitions. As such, the case for sectoral bargaining is strong and its downsides are limited, suggesting we should start on that path by establishing wage boards.

While sectoral bargaining can provide sector-level worker power, there are often idiosyncratic elements to each individual firm. That’s where co-determination comes into play - this is where workers have some level of power and involvement in a firm’s board of directors. This can allow the voices of workers to be heard and reduce corporate myopia. It can improve the efficiency of labour investment decisions, resulting in higher profits. And more broadly, this sort of participatory workplace makes workers more sceptical of authoritarianism and more politically engaged. Indeed, you see many of these effects replicated with employee ownership too.

Now all of this means that workers have a great deal of influence - but part of what was discussed above involves the continuous culling of unproductive firms. That means we need a way to support workers who get laid off as a result. We can do that in two ways: by unemployment insurance to support them during periods of transition and by active labour market policies that get that back into work quicker. Unemployment insurance ensures that the adverse health effects of job loss are mitigated. It also helps employer-employee matching, since the unemployed don’t need to immediately find another job. In fact, to the extent to which there may be an increased unemployment duration from unemployment insurance, this comes more from these beneficial liquidity effects rather than the detrimental substitution effect between leisure and work.

Indeed, we can look at how people reacted to the CARES Act to see if generous unemployment insurance will lead to people not working, which was argued by some at the time. The fact of the matter is that workers understand there is a net present value to having a job, even if their salary is less than the UI money. This is not to mention the very real non-pecuniary costs of being unemployed. Consequently, it is no surprise that the Pandemic UI was actually very successful, with no adverse employment effects and with reductions in poverty.

As for active labour market policies, these are needed because some jobs will and should be destroyed over time. Indeed, the job satisfaction on many of the most automatable jobs is low, so it would be no bad thing if people did not have to do them. There are a plethora of possible ALMPs, like work complements, job placement services, training schemes and public works programs - indeed, the last of the four can be a way of helping in the climate change transition to greener jobs. And with sectoral unions, this can be organised and funded by them, providing what Gösta Rehn described as “security by wings”.

The result of all of this is a labour market where workers have a meaningful voice, where they get support if they are out of work and where they receive training to get back into work. That allows us to have continuous competitive pressure on firms without workers being harmed in the process of transition. And not only is this something workers want, it actively improves the economy as a whole. Perhaps the best demonstration of this is by looking at how some of the most vulnerable workers, i.e. those long-term illnesses, fare much better under this system than one with lots of deregulation.

All of this isn’t to say that more blunt instruments like minimum wage increases are bad. In fact, I have an old post summarising the possible benefits of a minimum wage. We can see that they remain a useful part of the toolkit where these wider reforms cannot be achieved, by helping combat monopsony power with a minimal effect on employment.

Wealth Disaggregation

There’s no point in doing all of the above if 40% of society’s output is accrued on the basis of no labour and is disproportionately going to the wealthy. That’s why, as important as employment and labour income is, we also need to look at the role capital income and wealth plays in economic inequality. Unsurprisingly, wealthy people have more to save and earn more in capital income. But crucially, they not only earn more via the volume of wealth, but they get higher returns on their wealth. In short, the rich get richer and small disparities in initial endowments create a feedback loop that magnifies the gap.

This is why some have suggested a social wealth fund - this is where the government would have a large fund of assets it invests in, with every member of society owning a share and earning dividends from that. We’ve seen in the case of Norway that this is perfectly doable - its government owns around 60% of its country’s wealth, with seemingly no economic calamity in sight. And funding it is also very much workable - this could be done by a financial transactions tax, forcing companies to issue shares or countercyclical asset purchases etc. The result is a universal dividend that provides some poverty relief and addresses wealth inequality without being a tax. Although there are some critiques of this, these tend not to hold up. In particular, the ownership of firms is not the determinant of efficiency as much as competition is, so there isn’t a danger of a SWF leading to reduced market pressures.

There’s one thing that’s so far been missing from this discussion of wealth - that is of where the capital share actually goes to. Some might remember the kerfuffle that Matt Rognlie stirred up half a decade ago, when he published his paper on the net capital share. One important component of his work was to suggest that the main mechanism by which capital’s share of income was rising was in housing. That has important implications, because it means we need to think about rising housing prices and housing scarcity. Coupled with the possibility for landowners to capture the gains of a well-funded welfare state, it is important to support YIMBYism that expands the housing supply.

Policy in Practice

Ultimately, there’s a whole set of plausible policy platforms that could be formed on the basis of these five principles. Some have argued that we ought to be looking at healthcare at a national level and housing at a local one, in terms of things to focus on first. Other higher priority areas might be supporting childcare. Or maybe sectoral wage bargaining might be up there.

But regardless of what one chooses to prioritise, two things ought to be kept in mind. Firstly, the long-run sustainability of these programs depends on people having positive interactions with government and having confidence in the state - that means it’s worth building up state capacity. And at all levels of government, because in many cases state-level rather than national-level change represents the most plausible avenue of change. Secondly, these principles work best together i.e. they are complementary not just in political messaging but also in practice.

The societal allocation of income, wealth, opportunities and services is entirely institutionally constructed. There is no such thing as a baseline pre-intervention state of the world. Nor do people get a choice of who they are born as - as such, everyone deserves equal moral worth. That’s why we should craft our laws to provide a competitive egalitarianism. In a market economy, it means raising taxes to redistribute as welfare and services. It means giving everyone the equal chance to access the labour market. It means providing each and every individual with a stake in the collective wealth. And this is exactly what the five areas I’ve outlined achieve.