Basic income & entrepreneurship

(A slightly adapted version of this piece is published in the Cord Community Edition on November 11, 2013:  http://www.community.thecord.ca/community-conversations-time-for-bold-ideas/)

What if tomorrow someone walked up and handed you a cheque that covered your monthly living expenses ? And next month, and the month after, they did the same?

In theory, you’d never have to work. You could stay home, watch Jerry Springer, and live on the fringes with little effort.

But would you?

This question, and competing perspectives on it, are at the heart of a debate on the appropriateness and effectiveness of a basic annual income (or guaranteed annual income). The concept would see every individual in a jurisdiction receive a guaranteed payment from the government. At its most basic, the income paid would be sufficient to meet basic needs but insufficient to alter the incentives that drive an individual to look for work and to improve their personal welfare.

Doing so would replace other social transfers (EI, Social Assistance etc), in a potentially more effective and less costly manner.  Those whose incomes lay above a certain threshold would pay taxes over and above that income, those whose incomes fall below would not. There’s no doubt that some would lie back and enjoy the fruits of my tax payments. But they’re the same, ultra-small minority that does so today.

For most, according to the five guaranteed income experiments run in North America, the result will be little to no economic change, with vastly improved health outcomes for those at the bottom of the socio-economic ladder.

The only Canadian experience with a BAI is well documented by Evelyn Forget on the 1974 to 1979 income experiment in Manitoba. She notes, “We found a significant reduction in hospitalization, especially for admissions related to mental health and to accidents and injuries, relative to the matched comparison group. Physician contacts for mental health diagnoses fell relative to the comparison group. A greater proportion of high school students continued on to grade 12. We found no increase in fertility, no increase in family dissolution rates and no improvement in birth outcomes. Our results … demonstrate that a relatively modest GAI can improve population health suggesting the possibility of health system savings. See http://public.econ.duke.edu/~erw/197/forget-cea%20(2).pdf for more. Moreover, the experiment found no change in employment or hours worked.

Alicia Munnell, former SVP and Director Research at the Federal Reserve Bank of Boston, provides an overview of the four “income maintenance” experiments run in the United States in the same period. New Jersey and Pennsylvania hosted a first experiment between 1968 and 1972 across 1357 households. Iowa and North Carolina conducted a second experiment from 1969 to 1973 involving 809 households. A third experiment was run in Gary, Indiana between 1971 and 1974 involving 1,780 households. And a final experiment, the largest involving 4,800 families, was run in Seattle and Denver from 1971 to 1982.  Her team finds that “Generally, the experiments caused moderate reductions in work effort. The responses were greater among women than among men (17 vs. 7 % ).” The reductions, however, are in the form of hours worked and not exits from the workforce, and are not found to be significant enough to detract from the potential value of the exercise. See http://www.bostonfed.org/economic/conf/conf30/conf30a.pdf for more.

The social benefits alone seen in the five above example should justify significant attention to the topic. Yet for the most part, attention to the topic is relegated to tangential policy circles and has so far failed to gain mainstream credence. (On an optimistic note, across the pond in central Europe, Swiss voters will soon have a chance to vote on a similar initiative . Perhaps they’re onto something. )

The explicit health and educational outcomes, however, have been unable to sway political favour towards this initiative. Perhaps more focus on an economic analysis will. For a guaranteed income might do one of three things to the economic incentives presented to individuals within a jurisdiction that implements it:

A)     Nothing: For those whose income is more than the basic income payment, their behaviour won’t change given it does nothing to alter their personal incentives.

B)      Something ambiguous: Another group will use the payment as a means of justifying personal choices to invest in their education, families or other activity. Measuring the long-term value of these choices is difficult as it involves the net benefit between reduced work hours and a more less immediately measureable social and personal return (and thus I’m leaving them as ambiguous, albeit likely positive).

C)      Something good/entrepreneurial: Others, and this is what I’m most interested in, will see the BAI as a means of providing a safety blanket for entrepreneurial risks.  I’ve found no research on this save for a similar hypothesis posed by a European professor in the mid-80s. It’s possible that this is for good reason, notably that there is no change in entrepreneurial activity owing to the basic income. However as youth employment, as well as other forms of participation in the economy, stagnate and decline, I think this bears revisiting.

Given ongoing difficulties related to employment experienced by young, old and middle-aged male labour participants, would a minimum income (supplemented by business training) provide them with a cushion with which to launch new entrepreneurial initiatives?

The structural shift away from mass employment that has accompanied post-1980s cut backs in both private and public sector employment makes it is clear that we need to build a nation of dynamic entrepreneurs, willing where appropriate to take risks in bringing new product and services to the market, be it here or abroad. I write more on this here. Yet according to an Ernst and Young report on global entrepreneurship, “Canada scores below average on perceptions of entrepreneurship as a viable career choice, a result the firm notes doesn’t bode well for the general ecosystem with relatively low self-employment figures.”

And thus while many choose the path of regular employment because it provides stability – would more choose an entrepreneurial route if they were provided an alternate form of stability?

I realize calling for a study on everything isn’t the most popular, nor immediate, route. However it would seem to me that the significant challenges we face regarding youth employment, as well as underlying issues related to poverty, necessitate a concerted and evidence-driven approach to this topic. Moreover, if we want to make decisions on the back of sound evidence, we have to be willing to invest, where appropriate, in the development of evidence and data. And we have to be willing to accept that such evidence may rule out what we hypothesize as good ideas.

Ultimately, if you’re interested in the concept of a basic income, check out http://www.basicincomepilot.ca/about . They’re advocating for the development of a pilot project to further study the effects of a basic or minimum income. I’m in full support, notably if it focuses on the effect on entrepreneurship and self-employment.


More on Chinese innovation

Having just returned from a few days in Guangzhou, China I thought I’d post an update on my previous writing on Chinese innovation and the rapid pace of change underway there.

The city of Guangzhou and the Guangdong Province are particularly interesting as they were at the heart of the economic reforms led by Deng Xiaoping in the late 1970s and served as the country’s springboard into a more ambiguous/capitalist form of socialism. In 1979, the city (and its broader Guangdong province) were established as the first special export zone (SEZ) in the country, and the first host for foreign direct investment. Its early success in low-value manufacturing and industry saw the region (according to Ezra Vogel) become the “de facto archetype for how to advance modernization” across the country.

Fast forward three decades and Guangzhou is a fascinating example of the new China, and may serve as the archetype for a subsequent phase of modernization, this one focused on high-value technological innovation.

I first visited the city in 2002 and, at the time, saw it as a rather sleepy, low-rise, industrial city, then with a population of about 6 million. Today it’s home to over 12 million, and has transformed itself from a centre for cheap labour and low-value manufacturing into a (still evolving) modern centre for retail, industry and science. I walked out of the trilingual subway into a rather impressive financial district replete with dozens of sky scrapers and architecture that would be the envy of most cities.

A significant element of this transformation is a heavy focus on science and technology. Guangzhou is home to a series of targeted public investments aimed at developing a “Guangdong Development District”. These include Guangzhou Science City, Guangzhou High-Technology Industrial Development Zone, the Guangzhou Economic and Technological Development District, the Guangzhou Free Trade Zone, the Guangzhou Export Processing Zone, and Guangzhou International Biological Island.

The goal of these economic investments is to “spur transformation” of the local economy away from low-value manufacturing and industry to so called high-value, high-tech fields. All together they form part of the City’s “Master Plan for Building a National Innovation City.” This plan seeks to develop three “strategic and emerging industries” with revenues of approximately $20 billion each, 1500 high tech companies, and a science-based output of over 350 invention patents per million people. An analysis by the Rand Corporation of existing companies (over 300 as of 2012) in this district found that two-thirds are either ICT or biotech companies, both industries defined as emerging by the Country’s latest five-year plan.

All together this evolution of the Chinese and the Guangdong economy is fascinating and it speaks to the significant competitive pressures in high-tech that are, and increasingly will, come from this region.

To be sure, this evolution isn’t smooth. The same Rand report notes that while the district is impressive, it faces significant challenges related to access to expertise and financial capital, and ultimately, the quality of the innovations and patents that result. This issue of quality is increasingly present in conversations about Chinese innovation. China’s National Patent Development Strategy states a goal of 2 million annual patent fillings by 2014, and China’s State Council released a notice in 2011 which noted a goal of tripling the number of international patent applications in strategic emerging industries compared to a 2010 baseline. These quantitative goals, however, belie the fact that quality seems to growing far slower. For example, a recent report from the European Union Chamber of Commerce disputes the China-innovation-hype by noting “while patents are exploding in China and certain innovation is also on the rise, patent quality has not proportionately kept up and in fact the overall strength of China’s actual innovation appears overhyped.”

Overhyped.  I’m not so sure about that.

That a lag exists between patent output and patent quality is understandable in a country that a decade ago was a net development aid recipient and whose per capita income is still less than a quarter of Canada’s. The evolution of quality in Japan and South Korea, for example, highlight a similar lag between initial replication and eventual original design and innovation. And thus the fact that China still rates as a rather middling “innovation economy” according to rankings produced by the World Economic Forum (31st), the INSEAD Global Innovation Index (35th), and even the Chinese Academy of Science and Technology (21st) shouldn’t obscure the country’s dramatic push into high-value, high-tech industries.

So sure, there are real questions as to whether China can develop the right incentives to become a top-tier innovator. However as the world’s 2nd largest aggregate spender on research and development, and one that is increasingly seeking to attract top foreign thinkers and scientists (in addition to returnees), I’m rather bullish on the country’s chances.

In 1980 Guangzhou’s provided the first signs of China’s economic awakening. The city’s impact on global manufacturing and related employment, for example here in Canada, were profound. Three decades later, the city’s foray into high-value, high-tech industries, the same industries that we’re still trying to establish leadership in here in Canada, may portend a similarly impactful, though perhaps not immediate, competitive challenge.

I’ll address what I think this means here in Canada in a subsequent post.