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The logic of the Baby Bond Samuel Brittan: Prospect 08/03 Review of Equal Shares? Building a Progressive and Coherent Asset-Based Welfare Policy, Will Paxton (Ed), Institute for Public Policy Research, £8.95 The 19th Century French anarchist socialist. Pierre-Joseph Proudhon, achieved fame with his dictum "property is theft". This has been one underlying socialist theme ever since. Karl Marx, who had contempt for Proudhon in everything else, took over the idea and envisaged that problems of poverty and maldistribution would be solved by some form of collective ownership of the means of production.  Karl Marx may have been right in focusing on the ownership of capital and the unearned income deriving from it, but his diagnosis was wrong. The trouble with capital assets and investment income is not that they exist but that too few of us have them. The traditional European upper middle classes derived enormous benefits from not being complete wage slaves and having a nest egg to fall back upon. This was useful not only in virtuous activities such as providing collateral for home loans or starting or extending a small business. It was also helpful for people who wanted to opt out for a while from the rat race, perhaps to try to become creative artists, work at tasks with low market rates of pay, pursue good causes, or just to enjoy an extra bit of leisure or riotous living.
These aspects help explain an alternative radical tradition based on distributing assets more widely. The Old Testament decreed that every 50th year should be a Jubilee in which all land would be returned to its original owners, debts cancelled, slaves set free, the land left fallow and transactions in the preceding half century annulled. There is no evidence that anything of this kind was ever attempted. But the injunction at least showed a recognition that capital ownership should not depend entirely on the accidents of heredity and past transfers. The Peruvian, Hernando de Soto, has recently attracted attention by proposing for the Third World a form of popular capitalism based on granting full property rights to the many forms of de facto property, such as extra legal small businesses and property owned by the poor in shanty towns (1). There are not so many hidden assets of this kind in the industrial West. Property ownership for most people takes the form of home ownership and/or pension rights whether in state or private schemes. Indeed the cheap sale of council houses was probably the most popular measure enacted by the Thatcher government, even though it was distributionally skewed and, as Paxton reminds us, did little to increase the wealth of those at the lower end. One problem with home ownership is that, despite equity withdrawal, houses are there basically for people to live in and do not become available as a nest egg or reserve unless or until the owner moves down the market in late middle age when his children have moved away and he trades down. Similarly, pension rights are not usually tradeable except at a substantial discount and are also a resource needed for later life. The benefits of individual property ownership have been sung by writers throughout the ages. Such ownership was regarded by Greek and Roman classical authors as a precondition of good citizenship. But they did not investigate the problems of those who had no assets - they took it for granted that many people, including slaves and foreigners, could not be citizens. The debate in its modern form goes back at least to the late 17th century English philosopher John Locke. His vindication of the rights of property depended on the belief that men had "mixed their labour" with it. I do not know how he would have replied to the observation that many of his fellow citizens did not have the opportunity to mix their labour with anything other than the crudest raw materials. My impression from his Treatises on Government is that his main concern was not with the distribution of property ownership but with laying a foundation for personal rights which despotic governments had no right to abrogate. It was in America that the small stakeholder movement first took root. Jeffersonian democracy - notoriously to subsequent generations who lived in industrial society - was based on the concept of small proprietors, mostly owner-farmers for whose benefit the nation's affairs should be run. Around the time of the French Revolution such ideas took a more radical form in the Old World, for instance in the writings of Thomas Paine. Later on in the 19th century the Gladstone supported an amendment to the 1886 Queen's Speech which advocated the goal of "three acres and a cow" to help landless labourers. The slogan came from Joseph Chamberlain's "unofficial programme" and was probably adopted by the Liberal leader as an expedient to vote the Salisbury Tory Government out of office, which it temporarily succeeded in doing. Widespread citizen ownership was more seriously espoused by the political philosopher John Stuart Mill, who advocated an inheritance tax of a progressive kind, based on the size of the legacy rather than the wealth of the deceased. The object was to encourage people to spread their wealth on death as widely as possible. This proposal has since been backed by innumerable respectable political economists, including the late Lionel Robbins, whom no-one could have called a hellfire revolutionary. Yet even this modest change in tax and inheritance law has still to be made. The 20 century political economist Friedrich Hayek believed that the advantages of unearned income were so great that if no other method existed, one in a hundred persons should be given substantial sums by lot. The question now arises whether advanced western countries are now affluent enough to spread some of the benefits of property ownership to all inhabitants rather than to rely on inheritance or the luck of the draw alone. The Conservative Prime Minister, Anthony Eden, best known for the Suez debacle, spoke about a "property owning democracy". But the Tory governments of the 1950's and 60's did little to promote it, apart from tax reliefs for mortgages and private pensions, which distorted the property market and the general economy far more than they effectively redistributed wealth. Left wing thinkers have woken up very late in the day to the fact that property ownership is far more concentrated than earned income; and that it makes little sense to inveigh against corporate "fat cats", or impose high marginal rates of tax on executives and professionals, when these people's wealth is trivial compared with the sums that still pass on at death in the face of estate duties which still remain a voluntary tax for those who take legal advice in time or trust their descendants. Recently, the idea of a citizen stake has attracted radicals across the political spectrum. Two US authors, Bruce Ackerman and Anne Alstott had espoused it in their widely discussed book The Stakeholder Society (3). It has also been espoused by Julian Le Grand of the London School of Economics. David Owen canvassed it for the Social Democrats as early as 1984 and David Willetts, the current Conservative social security spokesman, has promoted it under the title Asset Based Welfare. The natural home for asset based welfare is surely, however, the "radical centre". This was a name invented decades ago by The Economist journal to describe those political moderates who were not content to split the difference between extremes but were interested in more innovative ideas than either left or right felt comfortable with. It is against this impressive, but not yet mainstream, advocacy that Gordon Brown's scheme for a Child Trust Fund, introduced in the 2003 Budget, needs to be viewed. The media assumption was that this was a gimmick to disguise the fact that the Chancellor could afford few goodies in this particular Budget. What the pygmy commentators failed to notice was that for the first time a British government was committed to distribution of capital to citizens as distinct from welfare in kind, or social security payments. It was a first stab at distributing ownership of assets other than housing and pensions more widely. Asset distribution proposals were incorporated in the 2001 Labour election manifesto. But as they did not have the backing of any powerful lobby, it would have been easy for the Chancellor to have postponed the project indefinitely; and it is to his credit that he has not done so. It is now government policy that each new born infant should be provided with a small capital sum - £500 for the poorest third of families, falling to £250 for the rest - that would be invested in the financial markets and which bearers would be free to draw from the age of 18. The Treasury suggested that with further modest contributions from the Exchequer at a later stage and a five per cent real return on equity, the capital stake could eventually be worth some £1,600 per head. The annual Exchequer cost of the scheme is put at £230m - less than a tenth of the additional sums provided for the Iraq War. Moreover it will not be a substantial drain on resources until the bonds become encashable in 18 years. Since the Budget the case for these baby bonds - and extending the idea much further - has been elaborated by Will Paxton and other authors in an IPPR paperback, Equal Shares?. They consider the arguments for the idea and also how to finance its enlargement and extension. It is not surprising that they are more successful in the former than the latter. The beauty of the "baby bond", as they explain is that in contrast to pensions or outright home ownership, they come in at the young end of the adult age group when people may be healthy and optimistic enough to enjoy them. The IPPR authors cite the usual statistics which exaggerate the concentration of wealth. For example the top one per cent of the population is said, on the basis of Inland Revenue figures, to hold over 20 per cent of all personal wealth. The weakness of such figures is that they are snapshot rather than lifetime comparisons. Suppose that lifetime wealth was equally distributed among all households. Many of them would still tend to start off with little wealth, or even net debts, but would gradually build up assets in the course of their working lives. They would then run them down in retirement, even if they left something over to bequeath to their children. It would thus be desirable to have some estimates of the distribution of wealth taking into account lifetime and other complications. Impartial analyses of distributional issues were indeed carried out by the Diamond Commission which was set up by the 1974-79 Wilson and Callaghan governments. It had as its senior economist a highly respected egalitarian scholar, the late Henry Phelps-Brown, who carried conviction when he explained how little there was then to be gained at that time from the traditional Labour policy of soaking the rich. He concentrated mainly on income, but such a Commission today could carry out a very useful job in examining the distribution of wealth. The Thatcher government made a big mistake in abolishing this Commission, as did the Blair government in not reinstating it. I do not want to exaggerate. The Office of National Statistics states that "wealth is considerably less evenly distributed than income"; and a substantial proportion of the population is asset poor even allowing for the normal accumulation of debt for house purchase and the start of a career. But a good case can only be made better if supported by more sophisticated and less tendentious estimates. Paxton provides four reasons for what he calls "progressive asset based welfare":
The fourth of his objectives is more problematic. The case for wider asset ownership is not helped by being so much entangled in the savings drive. Some Treasury draftsmen are inclined to treat baby bonds as simply one aspect of savings encouragement. But even without bringing in Keynesian considerations of the dangers of oversaving in recession, the appropriate attitude to savings versus consumption should be one of liberal neutrality. In fact one of the great advantages of baby bonds in enabling young people to "do their own thing" for a few years would be associated with dissaving - i.e. drawing on both baby bonds and some of their own savings. A large part of the first chapter of the IPPR book is taken up by schemes for converting the tax incentives of existing savings schemes into tax credits which would be of greater value to non or low taxpayers. This brings up the broader issue of whether taxation should be based on expenditure or income. There are at the moment so many separate and complex schemes to exempt from tax the income from various approved holdings, such as ISAs, that it seems tempting to go the whole hog and exempt the income from any form of savings. And if we ever had a comprehensive expenditure tax some other measures would be required to offset any regressive effects. In practice however legislators are never going to go the whole way either towards a comprehensive expenditure tax or a comprehensive income-based system. Thus I find myself somewhat reluctantly drawn to support the changes the IPPR advocates in savings incentives. Asset distribution is of course only one way of topping up the resources of the poor. The other approach is that of a basic income (not minimum wage) to ensure that everyone has a source of income outside the market and is definitely better off in moving from the dole to low paid jobs. Gordon Brown's integrated child credit and employment tax credit come close to providing a basic income subject to a "willing to work" test. There has unfortunately been something of a civil war between advocates of state-paid income top-ups on the one hand and asset distribution on the other. An advantage of asset distribution is that it is politically easier to introduce without the work test still insisted upon in income supplementation schemes. In some kinds of rational and far sighted worlds a regular basic income and popular capital endowment amount to the same thing. Lifetime basic income payments discounted at the appropriate interest rate are equivalent to a capital sum. And anyone who receives this sum on achieving adult status would be able either to enjoy the income from his or her capital at a steady rate or borrow on the strength of it. So on libertarian grounds a capital stake is to be preferred. But obviously not everyone has access to credit markets at prime rates. Moreover what do we propose to do about the prodigal son who spends his endowment at an early age and is not subsequently able to earn a market wage below the poverty level? It is most unlikely that a civilised society would let him starve. So both approaches will be required; and they are both so far outside conventional left-right arguments between advocates of tax cuts and of social services in kind that we need to move forward wherever there is a chink of light. The IPPR authors correctly point out how modest Gordon Brown's present proposals are, compared with for instance, Fabian proposals to provide every 18-year-old with £10,000 worth of assets or with the Ackerman plan for $80,000 per head. The weakness of the Brown proposals is that they are to be financed entirely from revenue. If such ideas are to make a big contribution to a wider distribution of wealth some other sources of funds, preferably of a capital nature, needs to be found. I originally proposed in the late 1970s that state revenue from North Sea oil should be earmarked for citizen dividends which could be capitalised on the stock market. No political party took the slightest interest. Another missed opportunity was the Conservative decision to sell privatisation shares at bargain prices rather than distribute them freely to everyone - a proposal incidentally supported by Milton Friedman. Yet another missed chance was the capital receipts from the sale of mobile telephone licences which were unimaginatively devoted towards repaying the National Debt. Some experiments have been made in some of the former communist countries in distributing shares in privatised companies as a nominal price. But the lack of a capitalist culture has made these countries difficult soil. The allotments to citizens have sometimes fallen prey to Mafia financiers who have bought them up cheaply. Alaska has been much more successful in distributing to its inhabitants state income from oil extraction. There will be other opportunities if only policymakers would look for them. An obvious one staring us in the face is the increment of land value resulting either from planning permission or the extension of public facilities, such as the Jubilee Line in London. Not far from the Financial Times in Southwark, South London, a property developer named Don Riley has an office which looks out over a site that was available for purchase in 1980 for £100,000. In January 2000 it was sold for £2.6m. The gain was "money in the bank" for the owners but nothing was contributed to the general welfare" (4). Land taxation has the advantage over other forms that it is in principle based on pure space and need not be a disincentive to either capital or labour. This was noticed as long ago in the early 19th century by the classical economist David Ricardo. Towards the end of that century the American social reformer Henry George advocated a Single Tax on land ownership as the main source of government revenue. The Attlee government attempted to nationalise development values, but its plans floundered in a morass of legal and political complication. These matters will all need to be looked at again. But as a very simple practical proposal, why not auction planning permission? Many local authorities have approached this piecemeal by making such permission conditional on the provision of services such as leisure centres, approach roads and so on. Why not however return this windfall to the taxpayer in the form of asset distribution and let citizens decide how to spend it? Meanwhile anything which shifts public discussion from endless obsession with state delivery of services in kind to ways in which people could provide for themselves is highly welcome. 1) The Mystery of Capital, Bantam Press, 2000 2) The Stakeholder Society, Yale University Press, 199 3) Reprinted in Capitalism with a Human Face, Fontana 1996. 4) Taken for a Ride, Centre for Land Policy Studies, 7 Kings Road, Teddington TW11 0QB.
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