Jonathan Brun

Economic Model Fallacy and Risks for Basic Income Movement

Preface

This short essay is a collection of thoughts on economic models in general and their utility for the advocacy of basic income. The subject of the economic impact of a Universal Basic Income (UBI) is perhaps covered elsewhere in the literature, if so I would be most interested in learning about it. 

In 2020, UBI Works, a Canadian non-profit organization for which I am an advisor commissioned an economic modelling report on the effects of basic income on the Canadian economy. This agent based model was developed and simulated by the Canadian Centre for Economic Analysis. The report models three possibilities: continuation of the status quo, the Ontario basic income pilot and the UBI Works proposal. The UBI Works proposal is for a universal 500$ a month dividend and a $1500 a month minimum income guarantee for all Canadians 18 years and older. This essay is a collection of my thoughts on the use of this report for advocacy, lobbying and organizing.

Let me be forthright and clearly state that I am somewhat prejudiced against economic modelling or modelling of human behaviour in general. My underlying suspicion is you can get a “model” to say many different things. When political opponents argue over the economic impact of taxes we are effectively arguing over an economic model. The fact that models can be twisted to say different things undermines credibility of the model in the eyes of non-believers and on the flip side, it gives a false sense of confidence to the believers of whatever the model claims to show. In addition to the fact that the underlying assumptions of a model can potentially change there is also the significant element of the potentially vast number of items that were left out of the modelling. For example, did the model account for labour market changes, impacts of tax changes, disincentive to work due to behavioural change on specific groups within the labour market? The possibilities are endless and with a generalized model of the entire economy it is near impossible to accurately predict the impacts of major policy changes that would affect everyone. 

The main places where I have been exposed to complex models have been in Life Cycle Analysis of products and services, in climate change and in modelling the stock market. In all three cases (but especially the latter two) these are models of human behaviour on a vast scale with innumerable underlying variables and assumptions. The issues I have seen with these models is that you can change a small set of variables and have a huge impact on the outcome of the model. This large variance in consequences based on changed inputs referred to as the butterfly effect where the wing flaps of a butterfly on one side of the world leads to a hurricane on the other. The underlying science of the butterfly effect is Chaos Theory which remains both fascinating and scientifically sound. When you affect change on the scale of a full UBI it is probably impossible to predict the effects across all the facets of society.

On the one hand, basing our arguments on economic growth allows us to confront UBI challengers’ criticisms that a UBI would bankrupt the country. On the other hand, using a complex model opens up to new fronts of opposition and criticism. It will also change the discussion from one about rights and freedoms to one about GDP and government debt. Which argument do we want to have and which argument can we win in the eyes of the policy makers of Canada and the Canadian public?

Is Basic Income an economic, a social or a political challenge?

To be fair, most big issues are a combination of social (philosophical), political and economic rights. These three are more often than not intertwined in a myriad of ways. However, it is critical to determine which type of challenge we are facing and adjust our strategy and tactics in accordance. 

A social problem is one that primarily affects relationships between groups of people based on features specific to those people and who they are. One such example could be LGBTQ rights. This group was discriminated against based on their sexual orientation and it took a social movement to change this. Generally speaking they did not experience political marginalization or economic repression due to their sexual orientation. They were however prevented from fully expressing themselves and being accepted as complete members of society. This has recently changed thanks to decades of arduous work. 

An economic problem is one where the primary issue is access to capital and revenues for a group of people. It can also be a situation where certain people are subject to more difficult economic situations and require additional support to excel and fully participate in society and the economy. One such example could be single mothers who require additional financial support from their ex-partners or from the state to raise their children such that their children are healthy and can access the same services as their peers. Another example of economic challenges could be the right to strike or form unions. This has political elements, but a worker who cannot strike is a worker who is bound to a job and has his economic opportunities repressed due to a lack of capital.

A political situation is one that is primarily about power. The distribution of powers between the federal government and the provinces is a political challenge. The distribution of power between the state and the individual is ultimately about politics. Women’s right to vote was a political problem when it was finally resolved in the 20th century. The relationship between voting groups on key issues such as taxes and other items is a political problem. Unlike a social problem, in a political problem you cannot make everyone happy and compromises must be made between the different groups. This last point is why so many political changes happen incrementally and not at once. Big changes upset too many people (sometimes bigger changes are better though).

In my opinion, basic income is primarily a political reform program. While a basic income will have a massive impact on the economy, it is first and foremost a political challenge because it is ultimately about a transfer of power from the state to the individual and from the wealthy to the poor. If you tax the wealthy and distribute the money through a basic income or if the government takes on debt (prints money) you will be reducing the political and economic influence of capital holders (this is currently happening in 2021). Both approaches to changing the economic balance have their pros and cons which must be carefully evaluated. No country can easily impose massive new taxes or print substantial amounts of money without significant internal and external political consequences. 

In general, political reform is enacted by those in power due to pressures from an organized political movement or through decisions by leadership. It is therefore critical that UBI advocates either gain the strong support from those in power for basic income, place our own advocates in power, build a wide scale political movement or a combination of these three approaches. The current Liberal government of Canada is potentially the most pro-UBI government in Canadian history. With Prime Minister Trudeau and Chrystia Freeland at the helm, there is a strong desire to help the least fortunate and neither the prime minister or the finance minister are fiscally conservative. Additionally, Jean-Yves Duclos is the president of the Treasury Board and a long time advocate of UBI. Lastly, the balance of power is currently held by the left leaning NDP who are sympathetic to UBI. The need to transition the economy through the COVID pandemic is yet another excuse to enact UBI. The current COVID crisis has conclusively shown that the government can dramatically increase debt and can act quickly when required – two key ingredients for the implementation of UBI. That being said, there remain massive political, historical and psychological hurdles to the implementation of a true UBI in Canada.

The most successful political reform is incremental in nature and not revolutionary. Very rarely do systems in established and developed countries radically change in peacetime. Attempts at major overhauls of systems inevitably come up against vested interests and inertia. One recent example is the controversial overhaul of the American Healthcare system. After numerous attempts and decades of effort by very powerful people, Obama was finally able to squeak in a program that kept insurers, companies, and many citizens happy. It also upset a lot of people and is currently being attacked by the right. In the case of Obamacare the vested interests of the healthcare industry are very powerful. These same forces are trying to overturn Obamacare and they may very well succeed. A true basic income, like the one UBI Works is proposing, is a reform of an even greater magnitude than Obamacare. Like that battle, we are facing very strong vested interests in the current non-basic income world. We would be fools to underestimate or dismiss the vested interests aligned against UBI.

Too many UBI advocates assume the locaI is clear and the evidence is overwhelming. When I ask UBI advocates why no country in the world has a true UBI, I get a variety of responses that could be summarized as “governments have just not seen the light”. Like many progressive initiatives, advocates make the fatal error of presuming that others will agree with them if only they had access to the same information. This presumption has sunk more progressive political movements than any other reason. The reason we do not have UBI anywhere in the world is not simply a question of inertia, ignorance or laziness. 

Politicians and power brokers have strong vested interests that will not be simply overcome with logical arguments and evidence. If it were that simple, we would be tackling climate change, offering free university tuition, higher minimum wages, free medical assistance and low cost housing. In Canada we are failing to do most of these things despite clear and compelling economic evidence that we should. To affect political change we need to do many things, but one critical element is to present our program in a new light that casts it as a different solution than traditional welfare solutions. We also need to demonstrate how UBI is an evolution of the current system and not a radical departure. These two seemingly opposites – novelty and continuity – are critical to obtaining establishment support and mobilizing new people.

The UBI model that allows us to achieve this balance of new and old is a basic income in the form of a dividend. A universal and unconditional return on our common assets is a new and innovative way of viewing government and citizenship without upsetting the elite. It also reflects our common understanding of the concept of shareholders in a corporation who receive dividends from the profits of an operating business. In my opinion the dividend model is the most politically viable option as it breaks the traditional welfare state program model without seeming too crazy. It is no longer about tax and spend, wealth transfers, government debt, or bureaucracy – it is about becoming a shareholder in our common future. A dividend form of UBI offers a new narrative and a new way of proposing basic income. UBI Works proposes such a model, but it does not specify that it has to be funded through common assets. This is a risky approach as the most powerful vector of attack on a UBI is its funding model. Due to the massive scale of a UBI program, you simply cannot separate the proposal from the funding model. Without a defined funding model we will be rightfully attacked as just another welfare program. Offering a “pick your own adventure” list of potential funding sources, as UBI Works has done, is appealing because it gives the impression that UBI can be supported by a wide base of people. However this path of vagueness will inevitably lead to internal conflict and battles as we approach our goal of a UBI. Instead of fighting over UBI, we will fight over funding models and that may very well sink the entire endeavour.

Nearly all debates are won or lost on the underlying assumptions that are snuck into a debate (see this excellent Youtube video). The way you frame an issue determines how people will think about it. When abortion is framed as “killing babies” you elicit a very different emotion than when it is framed as a health or women’s rights issue. If we frame UBI as an economic issue, people will rightfully question if UBI is the best way to improve the economy. 

Returning to the specific economic model commissioned by UBI works and conducted by CANCEA, we need to carefully analyze the frame that it sets up for our advocacy. Once the debate over UBI is framed in the minds of citizens and politicians, it will be very difficult to change. Once that is done and we are faced with options within that frame, it is near impossible to break free.The challenge I see with this economic model, beyond the challenges inherent in any large scale economic model, is that it is proposing a tax and spend model for basic income. The model seems to favour little to no government debt despite record low interest and the emergence of modern monetary theory (MMT). I am curious why the model comes to the conclusion that government debt is the bad way to go. Regardless of the reason, if we propose this economic model as the best economic policy option for UBI – this proposed model is in fact proposing the largest tax increase since 1940.

The model does show that the basic income program will create many new jobs and good GDP growth. While this seems like a good outcome, I would argue that there are lots of ways to spend 230 B additional dollars per year that will generate jobs and GDP growth. We could invest 230 Billion more in research and development, universities, startups, on export oriented activities, or myriad of other programs in place to distribute this type of investment. Yes, UBI will solve poverty and create economic growth. However I like to remind people that the government’s priority is not to eliminate poverty. If it were, we would have done it. Government priority will always be to create security and to increase economic productivity. Poverty is viewed as a nuisance or a cost of doing business. We do not need an economic model to show that UBI is better than nothing – we know that. We need a model to show that UBI is better than the alternatives with the same resources allocated to them. 

If an economic model is not that helpful for the UBI case due to the underlying variability in the model, the tax and spend approach or the lack of a comparison with a similar sized investment – we should carefully think if this advocacy tool will harm or help us. Can the economic model hurt our efforts for UBI? The model is likely to help convince a few people and most likely to be appreciated by people who are already firm believers in UBI. My biggest concern is that the model becomes a red herring that will distract us from the core mission of moving the voting population on the issue. 

At a broader level I do not think voters ever vote based on economic programs. Beyond taglines such as cutting government tape or improving medicare, how many people are mobilized by economic reform and GDP growth? We may think that policy makers and the government are mobilized by economic reports and to a certain extent they are. However, it is ultimately politics and votes that determine if a policy will be adopted by the government. Does UBI get the government votes or risk losing parts of the population? A government is supposed to guide the country towards prosperity. However the government must do so within the constraints and established interests of the donors and the electors and the mood of the day. They also typically do not have the time for massive overhauls of programs – if they did, we would have resolved many known problems with our welfare state by now. No one operates in a vacuum – least of all government.

When US civil rights leaders famously met with Franklin Delano Roosevelt and asked for political reform, FDR replied, “Make me.” Ultimately this is the task of the UBI movement – we must make the government put UBI in place. We should have no illusion – there are powerful forces aligned against UBI. To put it frankly, there is no way an increase in government spending of the magnitude required to fund a full UBI will appeal to fiscally conservative or wealthy people. Wealthy people (in which I include the top 10%), have one overriding interest – protect their assets. As cynical as this may seem it bears out time and time again. With the exception of inheritors, the majority of the wealthy class earned their money by being a professional. Their perception is very much that they deserve what they have. The wealthy are interested in policy changes, but only if it means little to no change to their status or way of life. If we propose UBI as a radical redistribution of wealth it will go nowhere. If we propose to take away RRSP and TFSA and other tax advantages there will be massive political push back and I doubt any serious politician would dare to propose that. If we print money at the rate we are doing now the lions of austerity will eventually rear their heads and roar with all their might. In short, it is extremely hard to take things away from people – especially powerful people.

My purpose is not to undermine the hard work and investment the basic income movement is making in this economic model. Hopefully some of the points above illustrate the risks of promoting the study that links 230 billion in new spending to theoretical jobs, growth and massive tax increases. Ultimately we need a clear strategy to advocate for UBI and the strategy cannot be “try to make everyone happy” because we all know that is not possible. The famous definition of strategy by Michael Porter is, “deliberately choosing a different set of activities to deliver a unique mix of value.”. How does this economic model define our strategy and establish the frame of the public debate? Will this economic model convert the unconvinced, bring in new allies or block attacks from opponents? We must carefully analyze the consequences of an economic argument for UBI – there are many – but the way we frame it will set the stage for the grand debate to come.

Tiny Reference

(NY Times)

Published on April 24, 2021

Management Principles

I began my company, Nimonik, in 2008. Since then I have learned a great deal about management, people, challenges and issues. There are already thousands of books on management and I recommend some on my Recommendations page. Whenever I think of management I think of the television show The Office (US Version). The main character in the show is a bumbling office manager with a big heard and a bit of a slow mind. Despite his gaps in competence and sometimes questionable judgment he turns out to be the best manager at the office. In one episode, he reveals that he is working on his very own management book. He has titled the book, “Somehow I Manage” and all the pages are blank. This is the best explanation of management I have ever heard.

In all seriousness, the few management principles that I have learned (the hard way) are as follows. This list is likely to change over time…

  1. Hire motivated people and do not demotivate them.
  2. You cannot manage people, you can only manage performance. Hold people to performance standards and ignore almost everything else.
  3. Different people want very different things in life. Figure out what the person wants (just ask them) and then give them that if you can.
  4. Hire people for the skill you need. Ignore all their other merits and defaults (up to a certain limit). Do not hire people for their overall skillset – hire them for JUST skill you need.
  5. Do not promote people who do not want to be promoted.
  6. Establish a pay scale that is clear and transparent for all. We have a scale with technical and management points that combine to determine your pay scale.
  7. If someone is creating negative energy in a work environment, remove that person or get them to stop creating negative energy.
  8. If you are a boss, do not try to be friends with your staff (this varies based on levels of seniority). If you are a business owner, do not try to be friends with your staff. Leave your staff space to have fun without you.
  9. Set the example.

This list will surely grow over time and these ideas and tips come from various people, experiences and books I have had the pleasure of meeting. I never took a management class in my life, except the class recommended by the great Michael Scott- the school of life!

Published on March 20, 2021

On Tesla, Electric Cars and Sustainability

The planet is in an ecological crisis. Global warming, pollution, plastic in the wild, wildlife extinction and many other environmental issues are the symptoms of a society that is living beyond its means. Generally speaking there are three main ways we can tackle this existential crisis. I would generally say that most people fit into three categories with regards to our environmental issues. The largest and most important set mostly ignores the crisis and keeps on living. Eventually something will break and civilization will no longer be able to maintain its current level of quality of life, but until then all is honkey dorey. The second and perhaps most vocal set of people are the degrowthers. This group believes that the solution is to consume less goods and services, live in smaller homes, eat organic and even have less children. This group is small as a percentage of the population but they often get the most media attention and draw the most ridicule from the first group of people. The third set are the technologists or high modernists who believe that technology can solve our problems. This set points to our transition away from whale oil, coal heating other outdated technologies to show that yes, we can make a transition to clean and efficient technology. This last group is probably the smallest, but has the most power to move society forward.

People are change averse. For a variety of biological and societal reasons most people lean towards conservative policies. I do not mean right wing policies, though the two can be conflated, but rather maintenance of the current system. The vast majority of the population looks at the way things were, the way things are and can extrapolate a bit – but they cannot see very far past a short term change. We have only to look at all the industries that have been upended in the last 20 years – digital cameras, music (iPod), retail stores (Amazon), cars (Tesla), movies (Netflix), to see that despite clear signs of potential applications of technology – most people and companies did not see these radical changes coming.

Not not only do people resist change, some people actively resist it. In the case of Tesla and electric cars it has completely blown my mind the levels of active resistance to electric vehicles. I have followed Tesla very closely since its inception in 2006. The resistance to Tesla, especially between 2006 – 2017, was ENORMOUS. I cannot stress this enough. Tesla was undercut by the media in a famous article in the NY Times as well as on the popular car television show Top Gear. These two articles (and others like it) were hit jobs on Tesla and aimed to destroy the credibility of Tesla and more generally, electric cars. I do not think they were in cahoots with the oil industry, but the authors certainly demonstrated active resistance and a desire to destroy an idea. In many ways, this hit job was reminiscent of what the media, public and government did to the first mass market electric car, the GM EV1. The death of that electric project was well documented in the film, “Who killed the electric car?“.

While the media was attacking Tesla an even greater foe tried to kill it. The finance industry took unprecedented short positions against Tesla. They sold Tesla stock without owning it in an attempt to crush it. I ask, what is more evil than crushing a sustainable future for our children using your financial power? I had numerous arguments with short sellers including friends and family who all bet and hoped that Tesla and electric cars would fail. It drove me completely insane. Who is against progress you ask? The culprits start with financial interests but extend to a more general conservative public. This aversion to change and lack of imagination is the primary force that has held up most of human progress.

To overcome these massive obstacles there were two options – government support and building a dramatically superior product with impeccable strategy. The only country that has taken an aggressive pro-EV position has been China. Many countries have offered a variety of tax credits,loans and subsidies to the electric car industry, but no country has done as much as China. Today, China has millions of EVs on its road and number is growing very fast. Their policy forces companies to produce and import EVs and local governments have strong incentives to deploy electric buses. In general, the EVs in China have not been of the quality of a Tesla, but they have produced much more – from scooters to articulated buses. That being said, companies such as Nio and BYD are fast catching up to Tesla. Tesla’s strategy was outlined very clearly in Elon’s ten year plan (original (2006), part 2 (2016)). Their plan to build high performance electric cars that were sexy and that had fast recharging stations has worked, but it is only just a start. The larger effect of Tesla is that it forced the biggest producer to commit to EV (Volkswagon) and has pushed others (GM, Ford, Hyundai) to head in that direction too. Tesla also encouraged a series of startup car companies with great promise (Rivian, Nio, and others). In short, China and Tesla are responsible for converting all transportation to electric vehicles. I believe that most new cars will be electric by 2035 and thank god/Elon/XiJiping for that.

Electric cars alone cannot save the planet (they will likely reduce greenhouse gas emissions by 14% and improve smog and respiratory issues in cities dramatically), but they are a key driver. We also need to switch energy production to clean energy (mostly solar + batteries) and improve conservation of wild spaces and wild life. We also need to make our food chain more sustainable (less meat) and convert our homes to the Passiv high energy efficiency standard. The broader point is that we need to develop technology to allow all humans to live sustainably with high quality of life.

Beyond greenhouse gas benefits, a shift to clean transport and energy would dramatically improve air quality and reduce respiratory illness. The World Health Organization estimates 7 million people die of air pollution related disease every year and millions more suffer respiratory illness – especially children. Despite the obvious benefits of switching transport and energy production to clean energy, it is has been remarkably difficult for the public to grasp this benefit. The battle to remove lead from gasoline was a agonizing fight by a small group of scientists. Lead causes brain damage in children. Despite overwhelming evidence that lead was being emitted on a massive scale by cars, the car manufacturers and oil industry and the government did not want to remove lead from gasoline. Only after a massive fight was this important environmental and human health milestone accomplished. It still boggles my mind how many obstructive cranks there are in positions of power (maybe it shouldn’t be a surprise).

The other proposed solution to our environmental problem is to reduce consumption and return to the earth. While we could do this – almost no one wants to. Civilization is cool. I personally enjoy the benefits of modern medicine, air travel, large well heated homes and all the other benefits of civilization. The hard truth is that humans want an continuously improving quality of life and any philosophy that goes against this will never take off with the general public. It is perhaps for this reason that the fight against climate change has struggled to take off – it is too often conflated with a reduction in our quality of life. Authors such as George Monbiot and Naomi Klein do not help. They highlight the problems and propose solutions such as population reduction, vegetarian diets and no air travel. That ain’t going to fly. The most poignant example of the lack of viability of such a strategy is the famous implosion of Jimmy Carter’s presidency when he implored Americans to put on a sweater during the Oil Crisis of the 1970. Instead of putting on a sweater, they massively voted him out.

The battle for human progress is long and painful. Tesla shows that is is possible to change one of the largest industries in the world – but it takes superhuman effort and a certain alignment of the stars. If Tesla did it for cars (and solar roofs and backup battery systems), then we can do it for the other areas that need to be made sustainable. To me at least, this is a deeply emotional challenge – we are genuinely talking about the future of humanity on planet Earth!

Published on March 14, 2021

False Positive PCR COVID-19 Test in Montreal, Quebec, Canada

I just wanted to share a small story of a false positive PCR Covid-19 test in the hopes it helps others understand what is possible. To be clear, I have no medical background and am not trying to make any comment on the accuracy of COVID-19 tests, which I believe to be highly accurate.

On December 9th, we were advised that there had been an outbreak of COVID-19 at our son’s daycare. Our son is 16 months old and his daycare has 10 children per group, with two instructors per group. At least one of the instructors was diagnosed with COVID-19 at that initial date. The groups were isolated (in theory) from the other children. There are a total of about 80 children at the daycare spread out over 6 groups or so. In general, the daycare seems very well run and attempts to meet all health recommendations with limitations on parents inside the daycare, hand washing and social distancing at all times.

On December 15th, the daycare was informed of other cases of COVID-19 in our son’s group and they closed our group and kept the rest of the daycare opened. The Quebec health authorities requested that my wife, son and I get tested. We kept our son at home and did not see anyone with the exception of some visits to grocery stores and essential services. We got tested for COVID-19th on December 18th at 16h. We received three negative results on December 21st at 8:30 AM. In Quebec, they administer the PCR test which is recognized as highly accurate.

On December 22nd at 5:30 PM we were advised by the daycare that there had been 7 adults related to the daycare and 1 child in our son’s group had tested positive for COVID-19. As such, we were asked by the health authorities to get another COVID-19 test and to stay isolated until we received test results. I was working on December 23rd, so my wife and son got tested the morning of December 23rd. We had planned to spend Christmas with my mother-in-law, who lives by herself. We kept with that plan as we had all tested negative and had no symptoms related to COVID-19.

On December 25th at 4PM we received a call from the health authorities that my wife had tested positive for COVID-19, but my son had tested negative. This greatly surprised us as we had no symptoms and my wife had obviously been in contact with my son. After a bit of discussion, I suspected a false positive and the article in the Lancet (PDF and another article) indicated false positives could be around 5% of PCR Tests. We decided to get retested. My mother-in-law (67 years old), my wife (32 years old) and I (37 years old) got retested on December 25th at 5:45 PM. A nice Christmas present!

On December 27th at 5PM we all received negative test results.

One interesting side note to this roller coaster was that we all found we had corona-virus related symptoms after the positive results. I had a mild headache and was tired, my mother-in-law had a headache and a runny nose, and my wife felt out of breath and a tight chest. Of course, this was just a case of projecting symptoms and imagining things. The human brain is a powerful organ. As soon as we got the negative results, we all suddenly felt fine!

As indicated above, I have faith and trust in the medical system and believe our healthcare workers are doing their best possible job. Mistakes happen in testing large samples and this is likely an outlying case. Throughout the process we endeavoured to respect the health guideline sand minimize our contacts and risks. As of December 28th, we all feel fine and are enjoying the remainder of our holidays!

Published on December 28, 2020

Modern Monetary Theory and China

There is no greater example of the progress human society can make than China. Most of us are familiar with the ascent of China and their accomplishments. The short version is that China has lifted hundreds of millions of people out of poverty and increased GDP per capita from about $250 to nearly $10,000.

There is a vast literature on how this was accomplished, but I wanted to highlight three key elements that reinforce the power of large scale government spending that targets productivity. The role of government is ultimately two-fold : provide security to citizens and increase productivity and wealth of the country. In this regard, China has done a amazing job.

To increase productivity in a sustainable and self reinforcing way is extremely challenging. You must do this in the face of political, economic and historical challenges. China did many things, but let me highlight three.

Iron Rice Bowl

At its inception, the Chinese Communist Party created numerous state owned enterprises that offered guaranteed jobs to hundreds of millions. Though low paid and often unproductive, these jobs created economic activity and circulated money through the economy while producing goods and services. In short everyone could have a job if they wanted one. This initiative helped China achieve 6% annual GDP growth under Mao Zedong. Though Mao is known for the disasters of the Cultural Revolution and The Great Leap forward, he did lead China out of the depths of abject poverty with a Federal Jobs Guarantee.

After Mao, Deng Xiaoping reformed many of these state owned enterprises and reduced the guarantees around jobs. Yet, even in 2006 when I worked in China we sill saw the reality of state owned enterprise job creation. A steel mill that I visited in 2006 employed over 7,000 workers while producing 6 million tonnes of steel a year. A similar plant in France where I also worked employed about 2,000 people to produce the same amount of steel at higher grades. This job creation program was critical to China’s growth and it still exists to varying degrees today.

Issuance of Capital

Thomas Picketty argues that the main problem with inequality is not so much inequality of income, but rather inequality of capital. Owning capital is the critical element to success in society. Without it you are subject to the labour market and economic growth. In his latest book, “Capital and Ideology” he advocates for the issuance of substantial capital to all adults. He proposes something along the lines of 150,000 Euros per person.

China never went quite that far, but they did issue capital in massive amounts. One of the first industries China tried to reform and make profit driven was the textile industry. To do this, Deng Xiaoping issued large amounts of capital to a variety of state, semi-state and private enterprises that allowed them to buy looms and machinery from overseas. He also pushed for these companies to make synthetic textiles as cotton was not produced in China at the time and they did not have the capital to import sufficient foreign cotton. The issuance of large amounts of capital or the printing of money allowed for the build up of productive capacity and the generation of profits that could be invested in further industrialization.

The second massive capital allocation to private individuals was the transfer of residential property from the state to the individual. This is well outlined by China Skinny (a weekly newsletter on economic trends in China)

China’s 2019 GDP per capita of $10,098 pales in comparison to the $65,111 in the US. Similarly, its average 2018 urban wages of around $12,000 are just a fraction of the $63,093 earned a year in the States. So why are so many brands banking on China’s structurally low GDP per capita and poorly-paid consumers to lead the global recovery? If we look under the hood, the economic metrics and drivers in China are unlike those in the West, and only paint part of the picture.

For the average consumer in China, the wages one earns influences spending less than it that it does in most other countries, simply because they have more wealth behind them. In fact, China’s median urban household net worth stood at $198,330 at the end of 2019, versus an estimated $104,000 in the US.

Many readers are likely to be scratching their heads wondering how they can be wealthier based on the GDP and income fundamentals above. Chinese may be known as strong savers (although the youth have been taking on consumer debt like no tomorrow over the past few years), but how could saving that relatively low income create a level of wealth double that of half of American households?

The main reason is property wealth. When China’s housing stock was privatised in the late 1990s, most Chinese families were able to buy their homes and apartments at rates that are a fraction of what they are today. As a result, 96% of urban Chinese own property versus just 64% in the US. Having bought their property for such a low price, their indebtedness is also much lower. 57% of Chinese households ‘officially’ have debt, versus 77% of American households. And Chinese ‘official’ debts account for just 16% of their assets, versus 36% in the US.

A whopping 31% of Chinese households own two apartments and 11% have three or more. When the average apartment costs over $1 million in many districts in Shanghai, for example, it means that there are a large number of very wealthy people in China who are fuelling everything from the global luxury market, to cosmetics, to cars, to milk.

Although consumers are not yet skipping through the shopping isles filling their carts with glee, the overall return to normalcy continues to track well based on spending trajectories. Chinese remain fundamentally wealthy. Parents continue to support their millennial offspring’s consumption habits in and many categories are seeing solid growth. With China’s $205 billion post-COVID fiscal spending focused on economy-building new industries such as technology, mass transport and power infrastructure, the wealth of the country as a whole is likely to continue to grow strongly over the long run, and with it, its importance as a consumer market.

Your perspective on the future is very different when you own capital or own your home (a form of capital). Though the Chinese government sold these state assets to citizens, they did so at a reduced rate with no attempt to profit or even make it financially sustainable for the government. However, the consequences of creating a capital owning class vastly outweighed the costs. No economy can be solely based on physical property and this is why China is putting all of its efforts behind the creation of growth engines based on technology. Put in another way, their efforts are focused entirely on creating higher levels of productivity on the back of a capital foundation with a certain amount of guaranteed jobs. This is modern monetary theory at work.

Published on October 25, 2020