E-mail to the treasury – Covid 19 Demand Side Economic Response

Ladies and Gentlemen of the Treasury.

I head up a political party: Direct Democracy Forum Reg Number 936.

We have as cornerstone policies:

1) A Senate, drawn from the streets, 2) Tax Reform (Total Economic Activity Levy, Replaces all other taxes) (TEAL), 3) A Universal Basic Income (Including National Health Insurance Funding) (UBI), 4) An Advancement Grant (for tertiary education and other advancement activities) (AG), 5) A Sovereign Wealth Fund (SWF), 6) Banking and Monetary Reform

We suggest the last five items should be adopted to relieve the effects of the Covid 19 pandemic and any subsequent economic fall-out.

Assuming an adult population of 35 Million adult South Africans, a UBI of R5000 per month would deliver R175 Billion into the demand side of the economy, each month. Apart from the obvious economic stimulus this would bring to the economy it would also have the effect of empowering and uplifting every recipient in the economy, and to ‘challenge’ the supply side to claim their share of that stimulus through trade and industry. A UBI is intended to replace all other grants.

A UBI can be paid for by a 2%TEAL on all the money flowing through the banking system. You would not be printing money so much as re-purposing existing money. If you created or borrowed the money you might wish to recycle it using TEAL. A ½% TEAL could also fund the Fiscus.

You can ‘create’ the required money, if you wish (see below*). This is what the banks would do if you borrowed R175 Billion from them, at interest. They would create the money from nothing, as is their wont, then lend it to you at interest. If treasury themselves created the money from nothing instead of going to the banks, treasury would get the money and save the country and the taxpayers the interest.

The ANC are talking of a Sovereign Wealth Fund (SWF). If you stimulate the demand side of an economy without ensuring that the supply side keeps pace, you have a classic inflation/hyper-inflation situation. The SWF can be used to intervene in the supply side of the economy to help it maintain the required balance between demand and supply. This it does by investing in the supply side economy. This, however, would not be the SWF’s sole function. The SWF can be rapidly funded using TEAL and other mechanisms to become effective in this manner, inside of months, or even days (see below**).

Part of the supply side intervention would be for the SWF to own and run commercial, industrial and community banks alongside privately owned and run banks, thus influencing the financial services sector. We believe that the S A Reserve Bank (SARB) should be wholly owned by the SWF and operated for the benefit of the economy, regulating the money supply and interest rates to that end. Any money creation (see above *) would be under the auspices of such a SARB.

The rational for this is that a UBI is an intervention designed to fill the void left by the already existing 4th Industrial Revolution’s lack of formal sector employment opportunities. The Covid 19 pandemic seems just to have accelerated the onset of this dilemma. There is more to this (see below **).

** Further details are available at our web site, http://ddforum.co.za. If you wish to discuss any of this you may contact me on +27 76 060 1973 and or at

Thank you for your attention.

John Barrington.
Leader, DDF.
24/03/2020

The Third Economy

Jeremy Rifkin’s works, in particular ‘The End of Work’ and ‘The Zero Marginal Cost Society’ have had the world talking because they are a take on a very real problem, the decline of the (non-specialist) labour market which together with burgeoning population predicts huge proportions of the world’s populations facing unemployment and poverty while an ever diminishing proportion of specialists (the elite) are stunningly successful and affluent, all the time while capitalist productivity rises and demand falls. In short they are arguing that Capitalism will become the victim of its own success and end up producing large volumes of goods for which there are few markets and (presumably) capitalism will eventually implode.

Rifkin imagines that the employment slack will be taken up by the rise of a third economy (the first and second being the public sector and the private sector economies). This third being largely a social economy or a ‘social commons’, servicing diverse community needs through non-profit non government organisations powered largely by a low-paid, oft-times voluntary and probably relatively unskilled workforce. Rifkin imagines that the third economy will service the social needs of society which are not being met by a shrinking public sector economy, which is under constant budget constraints, nor being met by a disinterested private sector economy for which there is little profit in public service. Rifkin also envisages much shorter working weeks with more workers earning lower weekly wages, to try and help take up the employment slack.

Writing here in 1995, Lance A Compa, then of Cornell University, notes that in addition to the reduced working hours, Rifkin proposes a social wage funded by a value added tax (VAT) (in the USA) but excluding vat on basic necessities, along with defence spending budget cuts. Aronowitz and DiFazio in their book ‘The Jobless Future’ also propose reduced working hours but with more progressive income taxes instead of a VAT, along with a host of other measures, many of them in support of social welfare type expenditure along with infrastructure spends to help take up labour slack.

According to Compa, both books imply “a willing turn toward a shared genteel poverty”. However, Compa does not seem to share Rifkin’s nor Aronowitz and DiFazio’s sense of gloom regarding employment, and instead argues that history and the current experience suggests “that there is still plenty of work to be done and plenty of people wanting to work”. In short he is suggesting that while the mix of supply and demand for work is changing, it is not evaporating.

The Direct Democracy Forum (see DDF) have a slightly different take on these problems, agreeing in part with Rifkin et al’s perceptions, on the one hand, and in part with Compa’s contrary view, on the other.

We agree that three separate economies are emerging, the already existing public sector and formal private sector economies and a third economy that we would categorise as an informal private sector economy, an alternative to the formal sector economy of the Fortune 500 corporates and their ilk. We imagine this economy as being a merging of the formal and the commons economies of Rifkin’s imagining, but definitely not a second class economy of genteel poverty as Compa interpreted Rifkin et al to imply.

We do not believe a social wage will work as an adequate motivation for employment (as demonstrated by the failed Finnish so-called Basic Income Grant experiment), rather we see the need for a UBI or BIG (Universal Basic Income or Basic Income Grant) which, being universal and unconditional, goes to every adult citizen in an economy. We believe that an adequate UBI/BIG will to a large extent pay for the basic needs of most recipients. Those needs which cannot be met by a UBI/BIG we believe will motivate folk to trade with others in their communities and in this ‘third economy’, for mutual profit. Some may be content to seek low income service positions in NGOs and other service organisations but nothing will stop the more ambitious from exercising their entrepreneurial skills to rise above a mere survival level.

The DDF anticipate there could be significant movement between the formal and informal economies, of skills and labour and finance, as members of all three economies interact and move between the economies, as and when circumstances allow or dictate. So the DDF don’t see a rigid stratification where the ‘have-nots’ cannot or may not enter into the domains of the ‘haves’. Nor do we envisage the opposite.

Rather we see a more fluid society with movement between the different economies occurring more or less on a voluntary basis. Because whichever economy one occupies, the basic needs of everyone could be met from the UBI/BIG, there would be less importance attached to which economy one occupies at any point in time, and less stigma attached to not being a part of a formal economy if one is part of the informal third economy. That is not to say that one should lack ambition, just that it would not be a question of life or death, or survival or poverty, so much as to how one can move up (or down) in society, either within the economy one occupies or between economies, so as to improve one’s circumstances.

The question of how to pay for this UBI/BIG leads us to the topic of tax reform. A UBI/BIG in most economies would exceed the GDP. So, if one were to tax the GDP to pay for a UBI/BIG, that would be the same as having a higher tax than one earns, say a 120% tax on income. Clearly that would not work.

Before we look at an alternative to income tax, think of how iniquitous income tax is. What the tax authorities say, is, if you succeed, if you earn a wage or salary (you are one of the employed and therefore a success when compared to the unemployed), or if you trade at a profit (you are a success compared to those who trade at a loss), we will take from you, a part of that wage, salary or profit. Generally, the goal is to collect 30% or more of one’s income (or the GDP) in taxes. However, if you fail (do not earn an income or declare a real or concocted taxable loss,) you get off scot free, or tax free.

So what is the alternative? Both Rifkin and Aronowitz and DiFazio suggest that we add more and more complex taxes, when we should at least be trying to simplify taxes and make the collection process less complex and less expensive, even if we cannot actually reduce the taxes themselves. The DDF believe that is too complex and too costly and also believe they have a more effective and more economical alternative solution.

The DDF has a core policy to replace income tax and all other taxes, direct or indirect, with a Total Economic Activity Levy or TEAL. TEAL levies all the funds flowing through an economy’s banking system. In South Africa, where we have a good idea of what that amounts to, a ½% levy on all the transactions debited or credited to one’s bank account in all the bank accounts in the land, would collect about 30% of the GDP. This in effect reduces one’s tax payments from 30% or so of one’s income and profits, to 1% of one’s income or 1% of all of one’s trading activities (½% on all debits and ½% on all credits in your bank accounts). This presumes that you spend all that you earn. By comparison, banks in South Africa can charge more than ½% on all transactions for bank fees.

The DDF think TEAL is a far more equitable system than income and profits tax. Some of the advantages of TEAL are:

  • 1) All will pay the same low ½% TEAL.
  • 2) TEAL effectively works like a progressive tax, thus the more active you are in the economy the more TEAL you pay in absolute terms.
  • 3) TEAL is uncompromising and unconditional – all persons active in the economy’s banking system pay TEAL, so there are none who get away scot free (or tax free).
  • 4) TEAL broadens the tax base from the narrow GDP tax base to a much broader tax base, encompassing all economic activity in the economy. In South Africa this broader tax base is, on average, some 30 times the value of the GDP.
  • 5) TEAL can be thought of more as a rent that everyone pays rather than a tax that only some pay.
  • 6) The cost of collecting and administering TEAL is estimated to be some 10% of the costs of administering the conventional tax systems.
  • 7) The savings from implementing TEAL would more than pay for the costs of implementing and running a Senate, drawn from the streets rather than from a political party base, thus broadening and strengthening the reach of democracy at little or no extra cost.
  • 8) TEAL makes a UBI/BIG fiscally possible.

So how does TEAL make a UBI/BIG possible?

In South Africa’s economy, a 2.165% TEAL on all the economic activity, as measured by the flow of funds through the banking system, will pay for;

  • 1) the fiscus
  • 2) a moderately significant UBI/BIG
    • including funding for a National Health Insurance scheme,
  • 3) an Advancement Grant
    • to pay for Tertiary Education or any other advancement initiatives,
  • 4) help seed a Sovereign Wealth Fund.
  • 5) A UBI would effectively be an investment in the demand side of the economy, stimulating both the demand side and the supply side of the economy and both the formal and informal economies.

We believe the above makes TEAL an eminently more desirable alternative to income and profits taxes and makes a UBI/BIG and an informal third economy a viable and preferable alternative to genteel poverty in a social commons.

Is a Basic Income Grant stealing from the rich?

An interesting article from BBC Future (There is a problem with the way we look at inequality) looks at the wealth gap and some publications on the subject and concluded that there were actually three different elements that one should distinguish between in order to understand what needs to be done to rectify an obviously unjust situation. The issue, they say, is not the existence of a gap between rich and poor, but the existence of unfairness”.

So the trick is to understand what of the wealth gap is just and what of it is unjust. We would paraphrase the situation thus, we need to deliver justice without destroying that which is just and desirable, because, if we destroy that which is good in an attempt to destroy that which is bad, what is left for those of us who want the good? Perhaps only the bad. This is reflected in the law of unintended consequences.

English is full of pithy little sayings and a very pertinent one for this topic is; “don’t throw out the baby with the bathwater”. In other words, be careful of the baby (the economy). You don’t wish to destroy the economy.

A point highlighted in the article was that one study argued that the public perception of wealth inequality itself being aversive to most people is incorrect, and that instead, what people are truly concerned about is unfairness” and that “People typically prefer fair inequality to unfair equality”. Nicholas Bloom, an economics professor at Stanford University arguing against a world of absolute equality, observed “why would I work for 50 hours a week if everything I’m given is free?”. Indeed, why work at all if you receive the same as Joe Blogs who works 50 hours a week, when you get the same for not working at all?

The three ideas we need to grasp about equality are 1) People should have equal opportunity in society, regardless of their background, race, sexuality, gender and so on. 2) Fair distribution says that benefits or rewards should be distributed fairly based on merit. 3) Equality of outcome says that all in society should earn the same rewards irrespective of their input into society.

Most of us would agree with points 1 and 2 but many would disagree with point 3 (see Bloom (above)).

Many economist interviewed for the article agree that too much attention is paid to the fact that the 1%, and the super-rich exist. Instead, they argue, we need to concentrate more on helping those less fortunate, who via a lack of fairness, are unable to improve their situation.

Harry G Frankfurt, emeritus professor of philosophy at Princeton University argues in his book On Inequality that “the moral obligation should be on eliminating poverty, not achieving equality, and striving to make sure everyone has the means to lead a good life”.

Experts say the solution to poverty lies in addressing the fact that poverty and unfairness exist because addressing that should be the real moral obligation.

While we at the Direct Democracy Forum (DDF) agree with all of this, our approach is more pragmatic than moral. We suggest it is in fact in the interests of all of society, including the rich and the super rich, that poverty be eradicated, and that it is also in the interest of the market economy that poverty be eliminated. After all, the poor cannot afford to buy cars and washing machines and dishwashers and clothing and medical services and education and housing and recreation and food and travel and electricity and swimming pools and stereo sets and computers and video equipment and so on and so on and so on, while even the modestly affluent, the sort of lower middle class (financially speaking), can, over time, buy all these goods and services. By making the demand side of the economy stronger, we all, even the rich and the super rich, grow richer.

If we use a slightly different analogy, every farmer knows he has to sow the seeds of his prosperity by investing in his land and his livestock. Similarly every person who relies on the economy for his prosperity, both the rich and the poor, needs to sow the seeds of this prosperity by investing not only in the means of production, but also the means of consumption.

So we at the DDF argue that a Basic Income Grant (BIG), funded at first by the economy through the application of a BIG TEAL, will sow the seeds of that prosperity, and should not be viewed as stealing from the rich to give to the poor, but as an investment in the demand side of the economy, and if at the same time, a BIG makes the lives of countless of individuals better and makes ”sure everyone has the means to lead a good life”, to quote Harry G Frankfurt, so much the better.

In addition, it should be remembered that TEAL collects in equal proportion from everyone. While the rich may contribute more than the poor, that is only because the rich are more economically active than the poor. But they all contribute in equal proportions.

So, in answer to the question, is a BIG stealing from the rich, we would answer emphatically and resoundingly, NO! It is an investment in their own and everyone else’s prosperity.

For those who wonder how we could pay for a Basic Income Grant, see how to pay for a basic income grant and take a look at DDF policy on the Basic Income Grant (BIG) and DDF policy on the Total Economic Activity Levy (TEAL).

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How to pay for a Basic Income Grant

How can one pay for a Basic Income Grant (BIG)?

The short answer is that a TEAL (a Total Economic Activity Levy) would pay for a BIG. Later, the role of TEAL as a source for a BIG may be taken over by a Sovereign Wealth Fund, in part or in full, depending on the success of the SWF project (see SWF)

Let us explain how:

First what should a basic income grant be set at?

In the UK people who typically use food banks earn less than £320.00 (at R17/£ = R5440) per month and in the US they are thinking of $10 000 pa or about $800 BIG per month (at R13:50/$ = R10 800) while Finland are talking about €800 BIG per month (at R15.50 = R12 400), so the Direct Democracy Forum’s (DDF’s) suggestion of R5 000 BIG per month is quite modest when compared to other countries’ needs and suggestions. But let’s stick with R5 000 per month as a starting point.

What would the monthly and annual BIG bill be at R5 000 per month?

Our best guestimate is that the adult South African population is about 34,4m. That would mean a monthly BIG bill of R5 000 X 34.4m equals R172 Billion or an annual BIG of 12 times that amount (no thirteenth cheque) or R2.064 Trillion.

That’s frightening. Where on earth do we get R2.1 Trillion Rand a year, an amount rising along with the population as we go on in time? That is almost the value of the current GDP (our estimate at R2.8T for 2017).

The DDF reasons as follows.

If there is a relationship of 30 times the GDP to the amount of money flowing through the banking system (a relationship we observed in an earlier TEAL exercise in 2011) , a GDP of R2.8T would equate to R84T passing through the banking system, per year, We call that the TEA or Total Economic Activity. But each Rand of TEA represents a deposit into one bank account and a withdrawal from another bank account (we call this the doubling factor). So the TEALable amount is the TEA doubled, or R84T doubled to R168T.

Suddenly, 2.1 Trillion Rand seems quite small. In fact a 1.2% levy on the Tealable amount of R168T would deliver R2.1 Trillion. Not cheap but also not that expensive when you consider that the R2.1 Trillion will go back into the economy and effect the money velocity and the GDP (more about that later) and generally increase the size of the pie that we are all eating from.

Is a BIG just a thinly disguised wealth redistribution?  Does it not steal from the rich to give to the poor?  

This is not the topic of this post but for those who are thinking along those lines and do not at first see beyond the wealth redistribution element (yes, there is such an element) then we suggest you consider the effect on the economy of boosting the potential spend of the population by a net R1.5 T a year (remember the social welfare grant offset).  That has to boost the demand side of the economy enormously and provide the suply side of the economy with numerous wealth making opportunities, not just for the existing industrial and commercial powerhouses but also for the small trader and industrialists (the SMEs that everyone says should be the backbone of our economic revival) and individuals at large. In addition the socio-economic benefits for the population as a whole probably make it worthwhile.  But this is discussed more fully here and elsewhere in DDF’s current affairs posts,

Are there dangers? Yes, there are:

Will a BIG effect inflation?

Yes, it probably will, but that would need to be countered by 1) easing into a R5 000 BIG over time (say over 5 years) to ease the inflationary pressures on the economy, and 2)  dropping existing social welfare benefits (for example old age pensions) as the BIG matches or betters them (you won’t receive both an old age pension and a BIG together) and 3) increasing the GDP, in short increasing the supply of goods and services to match the increased availability of the R2.1T of BIG money.

Will a BIG effect the money supply and won’t that in itself be inflationary?

The answer to that is probably not a simple yes or no. Yes a BIG of R2.1 will effect the availability of money but not to the extent of R2.1 T.  Remember the social welfare offsets and that TEAL does not create money.  The economy may become more liquid.  A BIG will probably make existing money more accessible, particularly for the poor, and make money circulate more quickly and more often and that could be inflationary (see above on counter measures).  The No side to that is that TEAL does not in itself create money, print money or borrow money.  So the money supply per se should not be effected by a TEAL funded BIG, and that in itself should restrain inflationary tendencies.

Will a BIG of R2.1 Trillion lift the GDP to R4.9 Trillion?

No, probably not: 1) the BIG will substitute for existing social welfare grants, so there will be an offset factor, and 2) any increased demand trend will probably be met by a trend to import more, not produce more (remember we are in a post industrial phase in South Africa and are more a nation of consumers than producers, and I squarely blame the ANC for that).

So how do we move the supply trend to produce more and import less?

This will need a concerted and coordinated effort of the private and public sectors to boost production, maybe even engaging in targeted programs of import substitution and production benefaction, particularly by engaging as many of the BIG recipients as possible to invest as much of their BIG in production capacity, either of their own or through the JSE by investing in corporations which can expand their capacity to compete for the expanding markets for their goods and services, and of course, investments by the Sovereign Wealth Fund in South Africa’s production capacity.

Would a DDF administration have an overarching socio-economic-industrial strategy?

Yes, there would have to be such a strategy. In short, all the damage that successive ANC governments have done and in particular the damage the most recent (2014-19) ANC government has done, would have to be reversed. This is a tall order but when South Africans can stop hating one-another and when even the poorest of the poor has a stake in the economy and has some security and hope for the future, we believe that a united and determined South Africa can do just that, and in fact must do it, because the alternative is an ever downward spiral toward abject misery for most of our population.

So that is how a Total Economic Activity Levy will pay for a Basic Income Grant.

Capisce?

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Minister Nene and the Tax Base

South Africa’s Finance Minister Nhlanhla Nene is absolutely right, we do need to broaden the tax base, but the Direct Democracy Forum (DDF) are streets ahead of his thinking. Imagine a tax system that was all-embracing and set at 1% of economic activity. Sound too simple? Too good to be true? Nope – go to http://ddforum.co..za and look at their proposal for TEAL. Not only is it doable but it is the solution to SA’s tax and National Debt conundrums. It follows the KISS principle. What can be better than simple?

But the DDF are about more than just TEAL. DDF policies will lead to fair government and fair tax and an economy based on prosperity, not poverty. You simply cannot beat that.

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