Reduce poverty through jobs & reduce inequality through education

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Dr Dioné Harley | Freelance Consultant, Writer and Educator | Free Market Foundationmail me |


Oxfam is at it again. With their latest report we are back to the same old mantra: wealth inequality is on the rise and the only solution is to tax the hell out of the rich.

Further reflection reveals that the solution isn’t that simple. But first, some relevant distinctions.

Wealth and income

Wealth and income inequality are not synonymous.

Wealth refers to a stock of valuable possessions – cash, shares and bonds, a house, a car. It’s also notoriously difficult to measure: property shares could be held in trusts, making it tricky to link them to individuals, and the prices of assests can fluctuate, or only be determinable once the item is sold.

Income refers to a flow of money indivduals receive, such as wages from employment.

Wealth is arguably the more significant indicator of wellbeing. This is because wealth is a means of generating further income – stocks and shares pay out dividends and capital gains, while bonds and savings generate interest. Oxfam’s recommendation for combating wealth inequality is for countries to increase taxes, specifically those for the upper echelons of society. But why is inequality a problem?

The risks of inequality

If our democracy is to live up to the value of equality of opportunity, then factors over which the individual has no control at birth should not impair basic opportunities. Currently, household income strongly impacts life opportunities along racial lines.

Also, as Jordan Peterson has pointed out, inequality ‘constitutes an ever-present threat to the stability of society’. If we look at the World Inequality Report (2017) we see that the most unequal societies are indeed some of the most volatile: Sub-Saharan Africa, India, and the Middle East.

Why higher taxes won’t work in principle

In Capital in the 21st Century, Thomas Piketty maintains that inequality is the inevitable consequence of capitalism.

His central claim is that the returns on capital always exceed economic growth. In other words, the earnings from owning capital grow faster than the earnings of labour, thus increasing inequality.

Piketty’s solution is signifcantly higher marginal income tax rates for the rich in addition to a global wealth tax. The thinking is that without taxing wealth, inequality cannot be addressed because the wealthy can simply hide their actual income. The tax must be global to block the wealthy from relocating their assets.

However, as the economist Gavin Keeton has pointed out, this strategy won’t work. The highly mobile nature of wealth will only give countries an incentive to break ranks by failing to impose a wealth tax. In so doing, this country would then benefit from incoming wealth at the expense of other countries’ efforts to combat inequality.

Here we bump up against the standard problem with socialism: it only works when everyone lacks self-interest. But we are self-interested beings – and rightly so – which means that there will always be those who rig the system to rise to the top of the hierarchy. Ironically, the very system supposedly aimed at the destruction of hierarchies creates ideal conditions for rotten ones to be born: more regulations means more government control, opening up space for corruption to flourish.

The question, as Peterson has often clarified, is not whether you have a hierarchy but which kind of hierarchy you have – a corrupt or a competent one?

Larry Summers also takes issue with Piketty’s claim that the rich always save and reinvest most of the income they receive from their wealth. Thomas Sowell has made a similar point – the top 1% of society is not a fixed layer. According to the Forbes list of the 400 wealthiest Americans in 1982 and 2012, less than one tenth of those on the list in 1982 were still there in 2012. But let’s entertain this solution for the sake of argument. Would it solve South Africa’s problems?

Why higher taxes won’t work in practice

Keeton plays out this hypothetical scenario, and the answer is a resounding ‘no’.

Income inequality has hardly changed despite extensive social transfers that, since 2014, reach approximately 16 million poor South Africans. This transfer system provides only for children from poor households, the elderly and the disabled – not the unemployed.

Inequality in South Africa is high due to high wage inequalities within the workplace as well as between the employed and unemployed.

Even more punitive marginal tax rates on the rich will not provide the government with much more by way of social transfers. In 2010, only 2.3% of South African taxpayers earned more than R750,000 per annum. These taxpayers earned 17.8% of taxable income and paid 30.3% of personal tax. If their taxes were raised to 46%, it would bring in a further R16.0 billion. In 2010, R84.8 billion was spent on existing social grants, so the additional funds would be negligible.

The way forward

The answer to poverty – which purely concerns the ability to secure basic necessities for oneself – starts with job creation.

No matter how low paying these jobs may be, without the bottom half of society earning some sort of income, poverty cannot be alleviated. However, van der Berg has shown that while employment would target poverty, it wouldn’t address inequality because of the high degree of inequality within the workplace.

To remedy this, the unemployed must gain the mobility to move into higher wage jobs. And this requires decent education. A report by Statistics South Africa makes it clear that qualitative changes to education are just as important as quantitative changes. Standards are the issue: we need highly trained, competent teachers at the basic, secondary, and teriary level, which requires proper standards of excellence across the board. Throwing more money at institutions while continuously lowering pass requirements and bumping up marks is only worsening the problem.

Evidently, a bottom-up rather than a top-down approach to combating poverty and inequality is the only way forward for South Africa. Minimum wage laws are preventing low-skilled workers from entering the market, worsening poverty. Poor education is blocking workers from earning better-paying jobs, increasing inequality. And in South Africa there aren’t enough rich people who are rich enough to take the money from.

Oxfam seriously needs to start singing a different tune – one of fewer labour laws and improved education.


 

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3 COMMENTS

  1. The argument and point is well said. The problem is that the target group is already “converted or informed”. Our energy should be to communicate in understandable language to people who do not have access to convenient media. It is a jungle out there with many competitive views and unfortunately some questionable arguments/views.
    We need to communicate realistic and credible messages to broader audiences. These messages should appeal to the logic that everybody experience. This is difficult because sophisticated messages are not sufficiently translated and is rejected as the language of the privileged. Unfortunately communicators of unrealistic messages are not exposed, nor are leaders held accountable for what they communicate.

  2. This is a typical neo-lib economic argument operating on a false premise, i.e. taxes must go in order to pay for more.better public services. Modern Monetary Theory points out that central banks create money to pay for wars, crises such as the 2007/8 banking crisis, for which the Bank of England over a £trillion virtually overnight.
    Taxes balance the wage economy more fairly, allowing, in Marshallian terms, an increase in the velocity of money circulating. The lower income folk spend all their income, while the top 1% hoard it. The USA’s most economically most fruitful period was in the fifties when the top tax rate was 91% – high growth, low unemployment and a well-off middle class.
    South Africa (and Oxfam) is on the right track, except for corruption and terrible state management at every level. Fix that and you can afford the kind of education that will bring greater quality of life longer term .

  3. To get to grips to why the ANC will not adopt mass manufacturing and farming development to alleviate poverty, the two most effective methods to do so, we must look at the problem from a number of perspectives, first.
    1. In 1987 and in response to a request from General Motors to President Botha, just before GM left SA, one of the responses from PW’s officials to a plan to address unemployment on a large scale especially in squatter camps, was that the ANC would never support this plan. Officials said in order for the ANC to stay in power they needed social development so they can buy votes at election time. The plan that the PE car and tyre manufacturers provided prevented this from happening.

    2. In 1962 the Verwoerd government wanting to create local industry from the US automobile industry and as Ford and GM controlled around 60% of the local market, senior management from the manufacturers finance and engineering departments, advised government on policy formulation. This engineering led policy initiated the most rapid expansion in manufacturing development ever to occur in SA. Through the product engineering offices at mainly Ford, GM, and SAAMAD (VW and Studebaker), manufacturing expanded so rapidly that by 1968 there was not enough white labour to operate the factories and government had to relax a key Apartheid Policy, Job Reservation and allow black people to work alongside whites in factories. By the early 1970’s in defiance of the weakened Job Reservation Policy, SKF, GM, and Ford were the first company’s in SA to recognise black registered trade union members.

    This rapid industrial expansion also placed PE in a competitive position with Germany, the UK and the USA in planning, designing and manufacturing new cars and by the 70’s the PE harbour was changed to accommodate special roll on- roll off ships to transport locally designed and manufactured pick-up trucks to the UK.

    3. In 1994 all of this changed. The RDP office in the Presidency issued a statement that engineers were elitists with no part to play in SA’s future and prevented funds from the US entering SA to develop the plans that the US industries in PE developed in the 80’s. Sociologists and economists took over industrial development and excluded engineering from policy formulation. This prevented government from creating the policies that SA needed to develop and grow industries and it prevented importing skills SA needed to expand manufacturing as the Apartheid government allowed Ford and GM to do in the 60’s

    Replacing engineers with sociologists and economists meant that by 1995 government had no policy that could support the practical development of industries that could support labour intensive job creation. Premier Sexwale reported to Minister Manuel in July 1995 by and a 1996 a letter from the dti indicated that there was still no such policy. In an attempt to kill of white engineers from providing solutions to poverty and joblessness, the dti embarked on a plan to discredit engineering and the PE manufacturers who started this plan in 1984.

    The basis of the industrial plan proposed was standard manufacturing design and development procedures used at Ford’s and other car manufacturers design offices for nearly 100 years. To kill this project, which obviously did not suit the ANC, the dti requested the Sociology of Work Unit at Wits – SWOP, without any science and technology to evaluate the engineering plan. As predicted, without science and technology, SWOP admitted that they could not understand the plan, instead rejected it because they “felt” that it could not work. Even though Ford, Consulting Engineers and a report from the CSIR demonstrated that SWOP was incompetent, the dti preferred SWOP’s feelings to the science and technology underpinning industrial development.

    The dti rejected the engineering counter insisting that sociologists were the experts in manufacturing development. Social feelings did not create the industrial world.

    In the same year Dr Motlana chair of New Africa Investments, invited me to meet hic CEO, Cyril Ramaphosa. Motlana undertook his medical internship at Livingston Hospital in PE and held a clinic at KwaFord, a car packing case (like steel containers but in wood) township squatter camp that Ford provide a few hundred wooden packing cases for people to live in during a cold winter in the early 50’s. In the mid 80’s we used young men and women from KwaFord to demonstrate to the PE car and tyre manufacturers that the industrial plan would work. Motlana wanted me to meet and tell Ramaphosa that there was no policy in government to address unemployment practically. I heard Ramaphosa say to Motlana not to bother him with this matter. Although I stood next to Motlana at Ramaphosa’s door, he was not interested in meeting.

    During the 90’s White engineers in management positions at Eskom were replaced by non-technical people starting the decline of Eskom as a world-class electricity producer. In 1997 at a meeting with Minister Erwin to discuss implement economic development plans and point out the devastating effect the impractical GEAR policy and other policies would have on industry. Erwin informed us that, he knew more about manufacturing d development than we did. Erwin then proceeded to implement policy destroying large section of SA’s manufacturing industries as predicted causing the loss of over 500 000 jobs.

    Economist and sociologists now dominate industrial policy formulation and without engineering can only provide social, not commercial industrial development. By 2003, Kevin Wakeford new CEO at SACOB could not believe that sociologists knew more about manufacturing development, as the dti claimed. He requested a presentation. After the presentation, they approached the Presidency through Prof Nkuhlu. He agreed that the manufacturing plans would revolutionise governments thinking on how to address poverty and unemployment. However, the bureaucracy manipulated him so he changed his mind, now convinced that sociologists were the experts in manufacturing development as his letter implied.

    In reply to this letter, I asked Prof Nkuhlu did he really believe that SWOP and the dti knew more about manufacturing development than Ford, GM, Goodyear, and Siemens, the initiators of the plans. He did not and wrote, stating that he instructed the National Advisory Council on Innovation to evaluate the plans and report to the Presidency. An official in the Professors office phoned and informed that NACI was to be rigged to finally kill this plan. It took 18 months for the NACI organisers to get rid of the NACI Chair Prof Marcus a supporter of this plan. The new NACI chair, the rector of Pretoria University and his advisors, had no manufacturing experience and one of the US motor manufacturers wrote to NACI stating that the plan was viable. NACI rejected this report but refused to provide a written report. Instead secretly stating to the presidency the plan could not work. Four years later the Science & Technology Portfolio Committee asked the CSIR to advise the Committee on the viability of the plan. Their positive report forced officials in the Presidency and dti to retract their fictitious reports since 1996.

    Davies appears not to support the CSIR’s report, for in 2005 he rejected all scientific reports and reports from the PE manufacturers, including the 2004 Report from one of the car manufacturers, the 2008 CSIR report, and a co-report on how to recreate SA’s manufacturing industry from NAAMSA and myself. In 2011, he forced an EU funded proof demonstrating the plans viability to close after it had demonstrated that it could have prevented government-wasting R50billion. The dti then, ignored requests from the EU to refund the project with EU money that the dti held. Davies also misled parliament and MP on a few occasions on this plan, including promises he made but did not keep to the beneficiaries of the EU funding, Zandspruit squatter camp.

    Pressurised by engineering to produce a policy that actually supported engineering led industrial development, requested by DP Ramaphosa, Davies arranged a dti meeting in 2017. At that meeting the dti official admitted that there was no such policy and had never been such a policy. The Presidency showed no interest when this was reported.
    Therefore, by excluding engineers from development since 1994 as the ANC government has done it is not possible for them to address poverty and unemployment practically. Therefore, this will never happen under ANC leadership as PW’s officials predicted in 1987
    The simple fact of the matter is that the ANC never intended to address unemployment and the fact that they do not have suitable engineering led policies as the Verwoerd government implemented to develop the local automobile industry, it has provided only social development policies that cannot create industries. This confirms that since coming into power they never intended to address poverty.

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