Vol.5 No.23, 21 October 2005

Regular Income for the Poor will Make the Market Work

By Margaret Legum

Thank you for Paul Malherbe’s powerful analysis of the essential failure of our economy – its failure to create enough buying power. It is obvious that poverty co-existing with over-supply of goods and services is about failure to give people the means to buy what they need and others can produce. That is, failure to get buying power into the hands of poor people.

As Malherbe points out, governments can always pull a nation out of poverty and joblessness by going to war and creating the money to employ people to do that. So why shouldn’t governments create enough buying power without then spending it on destruction. All governments have the responsibility for creating as much money as the economy needs. The question is how to create the money and get buying power into the hands of people - by employing them to produce, and not destroy.

Where I might part company with Malherbe is his suggestion that economic expansion is most likely if poor people are given a lump sum rather than a regular income. His suggestion assumes that all poor people are both thrifty and entrepreneurial, which would encourage and enable them to grow a lump sum by developing small business. Is that credible?

Moreover, the sum he suggests – R10,000 – is capable of very little in terms of capital investment, and could well be lost very quickly.

More important, it is the fact of an ongoing stream of income that makes the difference between careful planning and splurging. If a person knows that every month they will receive a small income they can plan for survival and then for the future. The one-off payment could be an invitation to recklessness.

The fact that soldiers are paid regularly is the reason why their employment boosts the economy. Their wages provide the market, lack of which holds back the economy. One off payments could have unpredictable, erratic and inflationary effects, compared to regular income.

I would be interested to know where Malherbe gets his total of nearly a trillion rand as the cost of a Basic Income Grant over 15 years – a figure that persuades him the BIG is not feasible, but one that far outstrips the objective calculations I have seen. In any case, if he accepts that putting buying power into the economy will grow it considerably, that figure is far from prohibitive when spread over 15 years when tax takes are increasing.

Nevertheless, Malherbe’s clear-sighted understanding should create a focus on getting money – actual cash, notes and coins – into poor people’s hands. Where there is over-supply - under-utilisation of existing capacity, there is no risk of inflation – only a benign expansion of economic activity, and a reduction in the pain of poverty.

That being so, government can create money also for upgrading the quality and quantity of the public service, the need for which is a concern of many of your correspondents. Once we give up the clearly mistaken idea that money is a limited commodity like land, government can create, in peace-time, the means to employ people, as it does in war-time. And thereby create a market for our frustrated entrepreneurs.

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