Transcending False Dilemmas with Living Income Guaranteed – Part 3 – Tools of Intervention

This post is a continuation to the blog-posts:

Transcending False Dilemmas with Living Income Guaranteed – Part 1
Transcending False Dilemmas with Living Income Guaranteed – Part 2 – Sustainability vs Full Employment

Please read them first for context.




Example 2

‘The government has two kinds of policy at its disposal to correct market failures: fiscal policy and monetary policy – not using these policies means letting the free market dictate economic conditions.’

Most economists have come to accept that the free market is the ideal way of conducting economic activity – let market forces dictate prices and output and don’t try to control these forces, because they eventually create the best outcome for everyone. Most economists, however, have also come to accept that there are certain situations in which intervention is called for – to correct market failures and inefficiencies. Looking at only the national economy – the ways in which intervention happens, apart from declaring laws that set standards, minimum or maximum requirements, quotas, etc. – fall under the categories of either fiscal policy or monetary policy.

Fiscal policy refers to those policies that have to do with tax collection and government spending. In overly simplistic terms: if the government sees it is needed to increase output and income/employment – it can implement expansionary fiscal policy through reducing taxation and/or increasing government spending.

Monetary policy refers to those policies that have to do with the rate at which money is released into the economy. Here the government has no authority, it is the central bank in each country that influence interest rates to either contract or expand the economy.

Both kinds of policies, when used to achieve a certain goal, always have certain drawbacks in other areas. In other words, the usefulness of their application is always limited by the nature of the free market principles – where their use becomes a careful balancing of adjustments here and there to ‘kind of’ have ‘some’ movement in a certain desirable direction.

Problems such as poverty, deprivation, insufficient incomes and job insecurity, to name but a few, cannot be tackled directly from within this economic paradigm – to do so with the use of fiscal and monetary policies would in most countries require substantial interventions – and create substantial drawbacks, crippling the economy in other areas, and over time, undoing its own efforts. So – what can we do? This is just how it is, right? This is just the nature of economics, right? ‘Sorry for those fellas struggling to survive, but there’s really not that much we can do for you. Sure, in theory you have certain basic human rights, but looks like it’s just not gonna happen.’ In brutal terms, that is the attitude that has been adopted when it comes to our economies and the intertwined question of human rights.

At the Equal Life Foundation, we take the guaranteeing of human rights very seriously – in our view, they are not optional and they should not be seen as variables that are dependent on the grace of market forces that may or may not grant these rights at some points in time. Seeing that the conventional paradigm and available policies lack the capacity to ensure these rights, it became clear that it was necessary to step outside of this paradigm and dare to look for alternative measures that CAN guarantee human rights, yet won’t result in the crippling and destabilizing of the whole of the economy.

Providing a Living Income to those who are unemployed or retired through the profits of companies that are considered human rights companies and national resources companies is exactly such a measure. It’s not a fiscal policy, because it is not funded through taxation and it’s not a monetary policy, because it is not funded through printing more money. Fascinatingly – if a measure is none of those two – and it’s not purely free market… ‘well… well… then… it has to be communistic!’ Lol. Yet, it’s not communistic, because the economy will still operate according to free market principles, there will be no centralization of ownership – there will be decentralization – and the role for government would become smaller than it is now.

For more information about Living Income Guaranteed,
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Day 84: Fiscal Policy and the Budget

So - what tools does the government have available to intervene in the economy?

These tools are:
- Government spending
- Taxation
- Borrowing

Every government specifies how they will make use of these tools in the budget. So - the budget will reflect a government's policy in terms of what types of results they wish to achieve and how they will practically do that. The main points that are given attention within the budget are government spending and taxation. For instance, the government will specify how much funds will be available for education, for healthcare, for military training, etc. - as well as what types of products will be taxed, by how much and how incomes will be taxed. Looking at a government's budget will give you an idea of what the government deems to be important and what not. The budget is in essence a plan in terms of how the government wishes to regulate the demand and supply for goods and services in the economy.

We have already discussed monetary policy extensively in previous blog-posts. The budget and all the tools a government has available are referred to as 'fiscal policy' ('fiscal' comes from the word 'fiscus', which is what the public treasury was called in ancient Rome). Monetary policy - as carried out by the central bank - and fiscal policy are attempted to be carried out in harmony to prevent the one policy from counteracting the other one.

In this blog-post we'll introduce you to the 'general idea' of how governments utilise the tools of government spending, taxation and borrowing - after which we'll discuss each point individually.

What will a government generally do when the economy is in a recession?

Firstly - what is a 'recession'? Recession is when the economy is doing 'bad'. Compare the economy to the human body - where exchanges take place, blood flows, organs interact with each other and each cell has certain requirements in terms of the sustenance that it requires in order to function properly. A recession is when the economy is 'ill' - where fluids don't move through the body effectively and resources/sustenance are not reaching the participating cells in an effective way. Signs of a recession are a fall in income, total production, investment spending, business profits and inflation - and a rise in unemployment and bankruptcy.

So - with the understanding of the word 'recession', we ask the same question again: What will a government generally do when the economy is in a recession?

When in a recession, the government will pursue 'expansionary' fiscal policies so as to stimulate economic activity. 'Expansionary fiscal policy' can be translated into: an increase in government spending and a reduction in taxes. Increasing government spending and reducing taxes are both policies to increase the money supply - eg: increase the amount of money in circulation in the economy.

When applying expansionary fiscal policy, a budget deficit is usually created - because governments increase what they spend, and decrease what they earn. The difference between what is spent and what is earned (the difference between what goes out in the form of government spending and what comes in in the form of taxes) is called the 'budget deficit'.

The opposite can also occur - when an economy, instead of being in a recession, is expanding too quickly. In those cases, all prices will rise (inflation) and industries in other countries will become more competitive in comparision, leading to balance of payment problems (where more money leaves the country than comes into the country). In such a situation, the government will attempt to pursue 'restrictive' or 'contractionary' fiscal policy. This can be translated into: a reduction in government spending and a raise in taxes. The idea here is to withdraw money out of circulation.

This all sounds really neat and simple - but in practicality, it's not that clear-cut. The problem is that there is usually quite a big delay between what happens in the economy (for instance a recession) and the response of the government (for isntance expansionary policy). Sometimes - by the time the government is aware of the recession and starts implementing expansionary policies, the economy may have already started expanding by itself and the governments' measures are pointless, or even make matters worse.