Guaranteed Annual Income: Why Milton Friedman and Bob Stanfield Were Right

GUARANTEED ANNUAL INCOME: WHY MILTON FRIEDMAN AND BOB STANFIELD WERE RIGHT

Hugh Segal

In this article, former IRPP president Hugh Segal considers the merits of a guaranteed annual income or a negative income tax, an idea whose time may never come, but which always generates a good debate. It’s a concept where thinkers on the left and right have found some common ground, from conservative economists such as Milton Friedman in the United States, to Red Tories such as Robert Stanfield in Canada. “If it is done right,” Segal argues, “instituting a basic floor income could diminish federal-provincial and labour-management tensions” and could even, “over time, reduce the net burden of state spending while increasing aid to, and the privacy and dignity, of those who fall behind.”

Dans cet article, le sénateur Hugh Segal analyse les mérites d’une idée qui ne se concrétisera peut-être jamais mais qui suscite toujours un riche débat, à savoir le revenu annuel garanti, ou impôt négatif sur le revenu. Cette idée a rapproché de nombreux experts de gauche comme de droite, qu’il s’agisse d’économistes conservateurs comme l’Américain Milton Friedman ou de « conservateurs sociaux » comme le Canadien Robert Stanfield. « L’application adéquate d’un revenu minimum de base pourrait amoindrir les tensions fédérales-provinciales et patronales-syndicales », croit Hugh Segal, voire même « réduire le fardeau net des dépenses gouvernementales tout en favorisant le soutien, le respect de la vie privée et la dignité des laissés-pour-compte. »

t was at a Conservative policy conference at Niagara Falls threshold below which a family would find themselves in in 1969 that, based on a paper from the research office, “straitened circumstances.” The LICO is most often used as I Robert L. Stanfield and his party first reflected on the the surrogate of a poverty line in studies. benefits of a more efficient and humane income security sys- The LICO is dependent on a before-tax income varying tem implied by a guaranteed annual income (GAI). The paper with family size and geography. Where in the country do you envisaged an eventual end to rules-based, overlapping live? What is the population of your community? How many income security programs at the federal and provincial levels people living in your home are related to you by blood, adop- in favour of a negative, income-tax-based universal income tion or marriage? What is your household income before floor, responsibly above the poverty line, available to all taxes? Yet even Statistics Canada warns against using the LICO Canadians, when and only when they fell beneath that line. as a measure of poverty. This caution is echoed by Christopher I was 19 at the time. The paper, as then presented, sug- Sarlo, a senior fellow with the Fraser Institute and a Nipissing gested practical efficiency and humanitarian reasons for this University economics professor. He stated in a 2006 press more holistic approach to equality of opportunity that release regarding his report on poverty: “All too often, claims appealed to me then and have stayed with me in every about the number of poor in Canada are based on Statistics political assignment I have accepted since. Canada’s low income cutoff lines... However, Statistics Canada Canada, unlike the United States, does not define an repeatedly warns that it is not a poverty measure but rather a official poverty line. There is no official demarcation identi- ‘relative’ measure of how well off some Canadians are com- fying one individual as poor and his neighbour as well-off. pared to others.” He goes on to say: “Poverty is fundamental- In Canada the low-income cut-off (LICO) determines the ly a problem of insufficiency, not inequality. If we want to

46 OPTIONS POLITIQUES AVRIL 2008 Guaranteed annual income: why Milton Friedman and Bob Stanfield were right understand how Canadians are doing, in the world, even by industrialized in the welfare catch-all — itself highly we need to know how many of our fel- nation standards, do in fact prevent the regulated and dependent on provincial low citizens cannot afford the basic worst instances of absolute poverty. and municipal particularities — is an necessities of life.” But Canadians do not measure abdication of the core question of indi- themselves against the Third World, vidual dignity and self-respect. When largely agree with his first statement. they measure themselves against their companies and governments buy out I I am afraid I do not agree with the neighbours. You and I are neighbours senior employees, the main item in “basic needs” approach as a definition of the poor. By using terms such as the severance package is always transi- of poverty. I take the view that the “straitened circumstances” or “eco- tional income. The case for the status LICO has its drawbacks, but then so nomically disadvantaged,” we insulate quo in government assistance might does the “basic needs” approach. ourselves against the individual life be sustainable if it could be argued that Measuring poverty by determining choices — or lack of choices — of the the present spiderweb of programs only the level of income individuals or child, the single mother, the senior (sticky enough to entrap but not families need to buy the basic necessi- and the Aboriginal person; these strong enough to support) had pro- duced real progress, less “Poor” is indeed a relative term. Individuals who live below an poverty overall, higher lev- average standard of living are considered poor, but we must els of return to the labour determine by whose standard of living the comparison is market, greater independ- made. Obviously a poor rural Canadian is often much better ence and increased con- sumer confidence. Sadly, off than his or her counterpart in the Third World. Canada’s there is no such productive social safety nets, considered some of the best in the world, progress to report. even by industrialized nation standards, do in fact prevent the Incomes collapse for a worst instances of absolute poverty. host of reasons: illness, infir- mity, a pause to re-educate ties of life, such as food, clothing, shel- descriptive terms make it easier to or build skills, age, youth, local and mas- ter and other “essentials,” implies a life ignore rather than address the circum- sive job evaporation, addiction and lack of mere subsistence, which none stances at the root of the problem; and of education or training. The principle among us would wish for ourselves or ignoring poverty is not a good thing that every citizen should have the right those we love. Designating as the cut- for a productive and humane society. to dependable bridging support at liv- off the amount needed to buy food and It is hard to fault the motivation of able levels when there is income col- shelter does nothing to address the the academics, civil servants and politi- lapse is a fair balance to the principle stigma or marginalization of poverty. cians who crafted, at various times in that the state has the right to deduct tax We all worry about the child who sens- our history, separate rationales, policy at source from the income an individual es that everyone else in the class can frameworks and operative regulations earns. It would be the ultimate socialist afford to go on a field trip, so he or she for different programs designed to excess to suggest that the state has an a has at an early stage in life the sense of address income needs resulting from priori right to take money from the being outside the mainstream. different circumstances and for differ- salaried citizen for its general purposes, Marginalization is a trap that can per- ent reasons. But in the end, whether but has no concurrent obligation to petuate poverty and the negative one injures one’s back at a job site or respond to a citizen’s income collapse. pathologies that come with that trap, sees the local steel mill or cod fishery which sap economic efficiency and shut down, the issue is lack of income. he way governments bureaucrati- productivity. Neither the LICO nor the The disruption to family security, the T cally seek to determine why income “basic needs” perspective moves us threat to a marriage’s stability, the col- has collapsed still seems to carry with it ahead — or breaks the cycle of inertia lapse in local buying power all occur a moral judgment about the person on poverty that we need to address. because adequate income is gone. whose income it is. Poverty is not a “Poor” is indeed a relative term. moral failing — as many narrow and Individuals who live below an average hatever the reason for the col- moralistic 17th and 18th century social standard of living are considered poor, W lapse in income, the local cost prejudices held. Poverty has many caus- but we must determine by whose stan- of living respectably above the poverty es — not all of which are within our abil- dard of living the comparison is made. line does not change by virtue of one’s ity or purview to solve. But poverty is Obviously a poor rural Canadian is often eligibility for program A or ineligibility about not having enough to live on with much better off than his or her counter- for program B. Letting the condition of self-respect, dignity or hope. When our part in the Third World. Canada’s social people’s lives filter its way through reg- incomes go up, Her Majesty just takes safety nets, considered some of the best ulation-driven programs until it lands more — it’s called progressive taxation

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— and that is how our system operates. combined with provincial expendi- government brought in the guaranteed And, within the frameworks of reason- tures, and excluding the personal basic annual income supplement for seniors: able and progressive taxation, I accept tax exemption, the total reached $61 a holistic response to a compelling and that — however I may differ with some billion — and that was 25 years ago. measurable problem of indigent seniors, on what “reasonable” means. But when largely female, facing the unacceptable income collapses, welfare officers and oday, according to 2004 numbers prospect of prolonged poverty. While civil servants have a million questions T and based on available data, the Ontario’s was a more generous response before folks get what they need: are you total government (both federal and than Ottawa’s laudable but meagre guar- unemployed; how long, where, for what provincial) transfer payments to per- anteed income supplement introduced in the 1960s, it was flawed in Are you part of a First Nation, on or off the reserve? Are you many ways. It was one initia- handicapped? And on and on. There are thousands of civil tive in one province, limited servants, forms, questionnaires, interviews, bank account to one age segment. It topped up existing programs audits — checking into whether you live alone or with for which meaningful long- someone — all cost person-years and millions upon millions term guarantees were, as we that never actually get to the poor themselves. have since learned thanks to 1990s federal cutbacks and reason? Have you been widowed? Are sons were $130 billion, more than transfer “re-profiling,” largely illusory. you part of a First Nation, on or off the double the Macdonald Commission In that regard, it simply mirrored reserve? Are you handicapped? And on numbers — excluding health care and what has been wrong with income and on. There are thousands of civil ser- education: employment insurance (EI) security policy in Canada for some time vants, forms, questionnaires, interviews, at $13.3 billion, Old Age Security at — namely, the failure to design a frame- bank account audits — checking into $28 billion, social assistance at $10.3 work that responds to income collapse whether you live alone or with someone billion, child tax benefit or credit at without regard to age, occupation, loca- — all cost person-years and millions $8.5 billion and the GST tax credit tion, employment or disability — and upon millions that never actually get to (paid to persons making less than which does so nonjudgmentally, the poor themselves. $30,000 per year) at $3.4 billion. So respecting privacy and without exces- replacing some of these with a more sive bureaucracy. hose who argue that a guaranteed humane and efficient negative income I am a Conservative and a relative- T annual income/negative income tax is hardly a question of wasteful or ly enthusiastic capitalist. Those of us tax would break the bank should first even new spending. There are large, who favour the freedom to invest and reflect on what we are now spending, in well-intentioned spending machines thus expand and change the economic some cases quite wastefully. The now operating under a huge range of framework in order to liberate forces of Macdonald Royal Commission on the different rule books and eligibility cri- excellence and growth cannot have it Economic Union and Development teria. And the numbers I cite are the both ways. One cannot, with technol- Prospects for Canada (the same one ones currently available — to obtain ogy and global supply chains, radically that rightfully called for a leap of faith more specific numbers relating to sub- alter the structure and nature of work, to free trade) reviewed the income secu- sidized housing or subsidized daycare, and thus the sources of economic sta- rity spending of the 1980s. Highlights one would need to research on a city- bility for the average wage earner, included unemployment insurance (UI) by-city basis. Needless to say, the real without at the same time redesigning at $11.6 billion, Old Age Security at numbers are overwhelming and larger. the framework for income stability to $11.4 billion, pension-related tax make it more supportive of the user exemptions and deductions at $7.6 bil- overnments have felt comfortable and less biased toward the bureaucra- lion, social assistance at $6.6 billion, G with programs that respond to cy. Continuing to approach income family allowance at $2.4 billion, child income collapse only for collectively security by norms of the 1960s, when tax exemptions at $1.4 billion, a child defined statutory groups (“unemployed,” life, work and income cycles are so tax credit of $1.1 billion and married “aged,” “handicapped,” “injured in the drastically different, is utterly unrealis- exemptions at $2 billion. To include the workplace,” “veteran,” “child”), largely tic. Radical change, for the better, to a basic exemption — which is supposed because those were seen as the categories global economy where profits accrue to reflect the progressive nature of our for which voters would accept income because input costs are competitive tax system — would have added anoth- support. A decade after the conference I cannot proceed apace as it should, er $14 billion. This still leaves out attended at 19, I served as principal sec- without the provision of transitional native programs, veterans’ pensions retary and then associate cabinet secre- security for those whose jobs are and training allowances. In fact, when tary at Queen’s Park when the Davis affected by the change.

48 OPTIONS POLITIQUES AVRIL 2008 Guaranteed annual income: why Milton Friedman and Bob Stanfield were right

It would be hard in any area of public policy to find one approach that could count among its supporters Sir Winston Churchill, Richard Nixon, Donald S. Macdonald and his royal commission on our economic prospects, Milton Friedman, Robert Stanfield, Senator Patrick Moynihan and Linda Frum, but a basic income floor, or a negative income tax, would meet that test. I agree with Churchill, who abhorred the state imposing limits on how well one can do — but also attest- ed to the need for a clear income “balustrade” against which all could lean when trouble hits. It was a Liberal senator, David Croll, who led a Senate committee study on poverty, which reported in 1971. I quote him now: If the social welfare business of Canada had been in the private sector, it would have long ago been declared bankrupt. The reasons are not hard to find. Resistance to change, a stubborn refusal to modernize its thinking, a failure to understand the root causes of poverty, inadequate research and the bureaucracy digging in to preserve itself and the status quo, are some of the basic causes of the dilemma in which we find ourselves today. Harsh words? Yes, but they The Gazette Montreal apply with complete accuracy to Robert and Mary Stanfield at the Progressive Conservative leadership convention in the situation in Canada. We are 1967. Throughout his tenure as Conservative leader until 1975, Stanfield was known as pouring billions of dollars every a Red Tory who entertained progressive ideas such a guaranteed annual income. year into a social-welfare system that merely treats the symptoms over — and if the employed population “Goldilocks,” approach to public poli- of poverty but leaves the disease demographic remains constant, only 49 cy. Policy A is too extreme or too expen- itself untouched. percent of the population will be sive; policy C is utterly impossible in employed full-time to help finance this the present context; and the incremen- hat was Senator Croll speaking at particular and important obligation. talist policy in the centre (policy B) is T the Empire Club in 1972 — 36 Ottawa would need to come up with an just right! In all bureaucracies, private years ago and more than a decade before additional $12 billion for this payout or public, provincial, federal or munici- the Macdonald Commission report. alone — which is currently $31 billion. pal, the apostles of inertia usually rely And let’s think about the coming demo- on a gospel of complexity. graphic reality: Canada will very soon he theory of “path dependency” But the twin forces of unimpeded, be paying a large portion of its popula- T suggests that it is easier to continue planet-wide capital mobility and the tion Old Age Security benefits and the on in an existing furrow than to propel massive diffusion of information tech- guaranteed income supplement for oneself out of that furrow to head in a nologies mean the end of the tradition- lower-income seniors. By the year 2020 new direction. This is especially true of al work pattern, as part of both the life (just 12 years from now) the demo- entrenched bureaucracies, however cycle and the earnings and savings graphics will have jumped to 18 percent well-meaning. The bureaucracy tends cycle. This will continue to mean huge from 13 percent for those aged 65 or to follow the classic incrementalist, or economic dislocation for millions of

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people in the industrialized world, largest amount of the workload for of the lives of the poor. He was right including too many people in Canada. our police forces. then; he is still right now. In regions with traditional and thus Police, judges, Crown attorneys It is not hard to understand the declining industries — fisheries, lumber, and prison officials across Canada talk bureaucratic bias for incremental, pulp and paper, mining, manufacturing to me about the futility and cruelty of group-based, specific supplement solu- and refining — employment devasta- this cycle all the time. tions. We need only reflect on how our tion is particularly oppressive. The And while there have been modest social policy history on income security notion that one’s eligibility for support innovations in some areas of social poli- has always favoured a piecemeal is to be determined by some 1960s- cy — such as the child tax credit, the approach.

Milton Friedman, the Nobel-prize-winning economist, had a rior to the Second view of government that can be summarized with one of his P World War, mother’s allowances, workmen’s more famous quotations: “If you put the federal government compensation and early in charge of the Sahara Desert, in five years there’d be a forms of unemployment shortage of sand.” insurance began. Following the war came family based statutory or regulatory attach- guaranteed annual income supplement allowances and elderly benefits (univer- ment to a subgroup — the handicapped, for seniors, the working tax benefit sal at 70, and means-tested between 65 children, the aged, the narrowly defined incentive recently introduced by Finance and 69). Special social assistance was unemployed or welfare-eligible indi- Minister Jim Flaherty, and a series of introduced for the blind, the disabled gents — does much for social work case- incremental provincial initiatives — the and the unemployed not eligible for UI. loads and program designers but very truth is that the number of poor and In the 1960s, the pace quickened: little for self-respect and personal digni- working poor living beneath the poverty Canada Pension Plan (and Quebec ty. There is a better way. line has not diminished. While folks Pension Plan) and the Canada have moved in and out of poverty, for Assistance Plan in 1966. A host of feder- bias that subjects those needing too many Canadians poverty is inter- al labour-market programs aimed at job A regular income to make ends meet generational and quasi-permanent. creation and training were developed in the new millennium to 1960s rules, Milton Friedman, the Nobel-prize- and Old Age Pension eligibility lowered categories and programs, while allowing winning economist, had a view of gov- to age 65. The guaranteed income sup- those with capital to invest to benefit ernment that can be summarized with plement for seniors was introduced in fully from all the potential of 21st-centu- one of his more famous quotations: “If 1967 and the UI program was signifi- ry technologies, is a recipe for serious you put the federal government in cantly expanded in 1971. But this social dislocation. Income gaps will charge of the Sahara Desert, in five approach — when one now includes grow. Intergenerational pressures will years there’d be a shortage of sand.” the myriad of other programs, provin- build up. Levels of social civility will That is why he proposed a negative cial and municipal — has evolved into decline as levels of criminal activity, income tax more than 40 years ago. In a series of complicated and demeaning nonviolent and otherwise, will increase. an essay titled “Is Capitalism mazes to be navigated by those least The price the poor pay for the continued Humane?” Friedman said that “a set of able to figure out the system. Let’s be sclerotic and inefficient nature of our social institutions that stresses individ- clear, employment insurance — as rede- federal and provincial income security ual responsibility, that treats the indi- fined in the 1990s, so that it helps only programs is, in human terms, very high. vidual...as responsible for and to about 25 percent of the genuinely The price the rest of society pays for the himself, will lead to a higher and more unemployed — has a huge, multi- pathologies often associated with pover- desirable moral climate.” His belief was billion-dollar surplus. If it is done right, ty is frightening, expensive and destruc- that the individual was more able to instituting a basic income floor could tive of productivity: manage his or her money than the diminish federal-provincial and labour- ● The poor get sick first and stay sick bloated government bureaucracies, management tensions. If it is done longer. and his intention was to create a sys- right, it could, over time, reduce the net ● The poor have more serious litera- tem that cost less than the welfare sys- burden of state spending while increas- cy problems. tem, but that avoided the degrading ing aid to, and the privacy and dignity, ● The poor are more often involved nature of welfare. He argued that a of those who fall behind. in crime, substance abuse and are negative income tax would be admini- wildly overrepresented in our stratively cheaper and more effective, ut that debate could acquire new expensive and expanding jails and and it would remove the intrusive and B significance and urgency if some- penal system — and produce the offensive nanny-state over-regulation one had the courage and will to put

50 OPTIONS POLITIQUES AVRIL 2008 Guaranteed annual income: why Milton Friedman and Bob Stanfield were right the goal of a consolidated negative now. A myriad of other costly, means- deal with those who are poor now. It is income tax credit on the public agen- test-driven, demeaning, overlapping, practical. It would be a mark of civility da. Its benefits would be enormous. duplicating and excessively bureaucratic and humanity. It would be Canadian pol- Billions of dollars now spent on group- federal, provincial and municipal pro- icy leadership that could move the world related social programs would be spent grams could be phased out over time as ahead and, above all, change the lives of far more efficiently as the costs of individuals applied through their tax millions of Canadians — our fellow citi- bureaucracies and caseloads in many return for the negative income tax cred- zens, our neighbours, members of the of these programs were eliminated. it. As tax filers in a province filed and Canadian family. The implicit assertion of the dignity of received the federal top-up in year 1, the We cannot tolerate partial genera- all citizens without state über-judg- next year’s federal transfer to the tions with their noses pressed up against ment or meddling would be affirmed. province for social-welfare-related pro- the window of a society they cannot What of the argument that such a grams (excluding health and education) afford to join. We can end the poverty program would produce disincentives could be reduced accordingly. Provinces line for millions in urban and rural to work? Critics who make that argu- could reduce welfare programs, as could Canada, and say to all our fellow citi- ment level the same charge against the cities, not to mention — over time, with zens, we know the cost of food, shelter, current system, with its plethora of attrition and demographics — winding heat, clothes and can ensure that none employment insurance, welfare and down bureaucracies. among us will have less than what is income supplement programs. respectably necessary. And with this For some in government and acad- f governments in the Western world great, productive, efficient step ahead — eme, a basic income floor is too trouble- I have made a core mistake since the we can underline our society’s values, some, too bold a stroke and Second World War, it has been in our our decency, our small-c Christian insufficiently deferential to all that has propensity to design a programmatic respect for the human condition, our come before. But we live in an age solution to every challenge, in our embrace of Disraeli’s view that, whether where economic, technological and desire to over-intellectualize and over- rich or poor, we are all one economic industrial policy is changing at precise- design micro-interventions in people’s family — organically linked to one ly that rate and in that way. There is no lives. It is a well-intentioned mistake another. The old solution, the old reason that policies that address the made by Labour, Republican, pathology, the old demeaning approach- dignity and self-respect of all people, Conservative, Gaullist, Socialist, es are not good enough anymore. regardless of age, sex, ability, health or Democratic, Progressive Conservative, walk of life, should fail to keep pace. Liberal and Christian Democratic gov- modern, productive and economi- The mechanics of a GAI adminis- ernments alike — each in different A cally value-added country requires tered through a negative income tax ways, and all with positive intent. a clear, efficient, sustainable and direct need not be rocket science. We currently A negative income tax embraces means of bridging citizens who fall have the needed system in place — it the simple solution that if a tax filer has behind; on a company’s profits and loss- could, like the GST tax credit, be auto- insufficient income to live above the es, losses can be written off and capital matic upon filing your tax return. The poverty line — which may differ by cir- investments can be used to add produc- gap between living respectably above the cumstance, region and context, accord- tivity, increase profit and avail oneself of poverty line and what anybody would ing to numbers that we already have in legitimate capital cost allowances. The call ”beneath the poverty line” would be our databases — he or she is topped up human side of an economy and society deposited by the Canada Revenue over that line. No massive program; no should be treated at least as well. When Agency automatically in folks’ accounts massive intervention; no public means potentially, actually or previously pro- as the GST tax credit is now. The GST tax test or interrogation at the welfare ductive citizens fall behind, they must credit could be renamed the “negative office; no embarrassment; less fraud; have a bridge — a passageway, a “life- income tax credit” and funded with part more dignity and self-respect. cost” allowance which sees them of the EI surplus to prime the pump. through the rough spots. Incentives to file would go up. Privacy of overty is, as I said at the outset, about The GAI/negative income tax recipients would be guaranteed and in P money: health care systems, univer- would and could do just that — and fact protected by law. Integrity of filings sal access, education for all — these help we should not dither on making it a would be underlined by the existing at the causal and symptomatic ends of real policy choice. fraud penalties in the tax act — which the spectrum. A negative income tax are serious. Ottawa could administer the helps at the actual point in life when Former IRPP president Hugh Segal is a program easily through the Canada help is most needed. Education is about member of the Senate of Canada. Revenue Agency, with agreement from the future; health care is about dealing Adapted from a presentation to the the provinces, just as it collects taxes for with the results of prior and ongoing Fraser Institute’s Luncheon Series in nine provinces and three territories poverty; a negative income tax would Montreal, March 11, 2008.

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