By: ASGHAR ADELZADEH
See original post here.
Daan Steenkamp, Hylton Hollander and Roy Havemann’s article criticising the recent IEJ-ADRS research on Basic Income Grant (BIG) pathway scenarios refers (“When BIG is neither bigger nor better”, March 14).
As the person responsible for the ADRS (Applied Development Research Solutions) modelling input and someone familiar with the BIG debate, I will respond by first fact-checking their article. Unfortunately, it begins with an exaggerated account of the cost of the IEJ-ADRS scenarios. The authors assert that IEJ-ADRS proposes three BIG scenarios at a cost of R275bn, R375bn and R500n a year [sic]. This is simply incorrect. They then focus solely on figures for the High Ambition scenario, and only on the estimated cost for 2030, the last year of the forecast.
The deliberateness of this misrepresentation is further apparent in their comments on the funding strategy for the scenarios, focusing again solely on the High Ambition scenario. They say the proposed funding for this scenario “would require a 1% annual wealth tax and a 4% social security tax, which amounts to a huge increase in the amount of tax for the average taxpayer”. This is also incorrect. The IEJ-ADRS presentation does indeed discuss the financing needs of each scenario and how they can be met. This includes an introduction of a 0.5% (Low Ambition scenario) and 1% (Medium and High Ambition scenarios) annual wealth tax on the top quintile. The authors disregard this important feature of the proposed wealth tax, then go on to deliberately and wrongly conclude that the average teacher or nurse “would face additional tax on any wealth they might have accumulated” when we all know that “the average teacher or nurse” is not in the top quintile. Fear-mongering, anyone?
Their assertion that the full cost of the BIG scenario will fall on taxpayers through a ‘huge increase in the amount of tax for the average taxpayer’ is simply false.
Despite our presentation to the contrary, the authors of the article make no mention that the IEJ-ADRS proposed Social Security Tax (SST) is unnecessary in the Low Ambition scenario, and will be 3% and 4% for the Medium and High Ambition scenarios respectively, only from 2028. They want their audience to believe that the proposed tax would be implemented from 2023, the first year of the scenario. Moreover, they assert that the High Ambition scenario “would require a 1% wealth tax and a 4% social security tax, which amounts to a huge increase in the amount of tax for the average taxpayer”. Again, contrary to their unfounded comments, the “average taxpayer” is not in the top quintile and would not pay wealth tax.
Finally, in keeping with the rest of their comments, the writers fail to recognise that more than a third of the required funding for the scenario is attained through increases in VAT revenue from the positive impact of the scenario on the Gross Domestic Expenditure (GDE). Their assertion that the full cost of the BIG scenario will fall on taxpayers through a “huge increase in the amount of tax for the average taxpayer” is simply false.
They state that government sufficiently prioritises social grants by spending more than 10% of expenditure on grants. Actually, despite the extent of poverty, unemployment and inequality in SA, government spending on social benefits, including social grants, relative to GDP has significantly and consistently lagged behind peer countries during the last 25 years.
Cultivating opposition through misinformation
These misrepresentations of facts appear to be less of an attempt to accurately inform the public and more of an attempt to cultivate opposition to BIG through misinformation. Beyond their biased depiction of cost and finances in the IEJ-ADRS BIG scenarios, the authors dismiss the scenarios’ dynamic impacts, which expand both aggregate demand and aggregate supply. Moreover, the scenarios yield three important findings: (1) BIG is undoubtedly a pro-poor social policy programme; (2) the scenarios have tangible positive impacts on growth and employment; and (3) the combination of a relatively small wealth tax and social security tax can provide the necessary complementary resources that enable government to introduce and sustain the programme over time.
There is no excuse for a team of economists claiming strong numerical skills to intentionally misrepresent and/or obfuscate economic data.
Though these are significant findings, rather than engage with them the authors of the article fixate on their own conclusion that a BIG policy “would ultimately lead to job losses and lower growth, because it would require higher taxes and debt”, as previously voiced for the Treasury. Their opinion is typical of economic thinking that emanates from Dynamic Stochastic General Equilibrium (DSGE) modelling. They lament that researchers who are involved in the BIG debate have not acknowledged their use of DSGE modelling to examine BIG for the Treasury.
The public’s lack of interest may reflect the view that “DSGE has nothing useful to say” as Robert Solow, 1987 Nobel laureate in economics, said. Solow went on to explain “why it has failed and is bound to fail”.
“I don’t think that the currently popular DSGE models … pass the smell test. They take it for granted that the whole economy can be thought of as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way … And the protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behaviour; but I really think that this claim is generally phoney. The advocates believe what they say, there is no doubt, but they seem to have stopped sniffing or to have lost their sense of smell altogether.” (Solow, 2010.
There is no excuse for a team of economists claiming strong numerical skills to intentionally misrepresent and/or obfuscate economic data. It seems that their overzealous pursuit to reject any BIG programme for SA got the better of them. BIG is a means of enabling limited redistribution to the poorest. It should be no surprise that the richer citizens will need to pay their fair share. What is surprising is that the misinterpretation of the so-called analysis belies the collection of years of economic training among the authors.
About the Author:
Dr Adelzadeh is director and chief economic modeller at Applied Development Research Solutions.