This is a guest post by Rahul Basu for The Indepentarian Blog. Welcome, Rahul.

Author: Rahul Basu

The Future We Need

This is a comment on Karl Widerquist’s excellent proposal for a People’s Endowment. I’m a member of The Future We Need (TFWN), a global campaign to make the intergenerational equity principle foundational for our civilization. Similar to Karl, the core idea is that we, the present generation, are simply custodians over what we inherit. We must ensure that future generations inherit what we did. Ideally, we would leave a bequest. Importantly, if we fail to follow this rule, then each successive generation becomes poorer with civilization collapse and human extinction as the final result. And it is clear that our current civilization has been consuming its capital base, bringing these possibilities into fruition.

Capital vs revenue

We make a critical distinction between capital (the corpus of our inheritance) and revenue – the surplus after we ensure the corpus is kept whole. Minerals, being non-renewable, are purely capital in nature. Broadcast spectrum, regenerated each instant, is purely revenue in nature. If minerals are extracted and sold, then the entire proceeds must only be used to create new intergenerational assets so that the endowment corpus is kept whole. In the case of minerals, we insist that the proceeds only be saved in a future-generations fund (FGF) as Karl also suggests.

Only the real income from the endowment, ie, the income after compensating for inflation, may be used or distributed. By contrast, the fees for the broadcast spectrum could be used as it is a renewable resource without first saving it in a future generations fund. Reasoning from property rights logic, we insist that all such recurring income from public endowments must be distributed only as a citizen’s dividend. A diversion of the recurring income to the budget is effectively imposing a per head tax. Of course the government may tax the people, even the dividend, through explicit legislation, thereby strengthening the social contract.

Defending the commons

If we reason from Ostrom’s principles for long lived commons, an important aspect is that the commoners must benefit directly from the commons. In the absence of this direct benefit, there is little reason to defend the commons, and it will be lost. Alaska’s famous Permanent Fund Dividend was explicitly designed to link Alaskans to their Permanent Fund and to help defend it for future generations of Alaska. The endowment income and especially its capital are a great political temptation. As long as the income is absolutely equally distributed, it affords no help in creating a winning electoral coalition.

Unlike Karl, who suggests a 50:50 split of the income between a dividend and the budget, we insist that the only distribution from the endowment be as a Citizen’s Dividend. The primary reason is that any other division between the dividend and the budget is fundamentally arbitrary. Even if only 1% is currently diverted to the budget, through budget crises, politicians will attempt to capture more until nothing is left. Only a rule that distributions must only be through a dividend can be defended against political attack. And without the dividend, even the fund will come under attack. While protecting the endowment for future generations is the principal reason behind our rules, our posts Why income distribution only as Citizen’s Dividend and Why 100% to Permanent Fund deal with other common objections to this austere but logical structure.

Henry George

Sweden

Henry George argued that increases in property prices have the impact of reducing wages as low as possible. He also argued that property values increase due to society. While a piece of land in Central London is worth much more than equivalent land in a remote area, the increase in value is due to society creating London, not due to the acts of the property owner. Henry George argued that a land value tax would compensate society for its contribution, while reducing incentives for keeping land idle.

In a similar vein, Dag Detter, the former president of Statsföretag, a Swedish government holding company and national wealth fund, created to centralize and consolidate state ownership of public commercial assets, argues that there are many idle assets on government balance sheets that if better utilised can conservatively provide $2.7 trillion a year. In fact, it turns out that most governments do not even know what real estate assets they own.

Norway

In the public sphere, Norway’s management of its North Sea oil endowment, in particular its rule of saving all the proceeds from selling its oil in an intergenerational fund, is considered one of the leading examples for nations to emulate. There is an interesting back story. Norway separated from Sweden in 1905. One of the first issues was to deal with hydro power plants that had just been set up by foreign companies. The then Minister for Justice, Johan Castberg, was influenced by Henry George and the US progressive movement (usually thought to start with the publication of Henry George’s Progress and Poverty in 1879). He put in place laws that permitted the hydro power plants to run, but that they would revert to public ownership after 60 years. Today, this is called a BOT – Build-Operate-Transfer.

The laws were called “waterfall” laws. The name actually refers to the idea that the hydro plants “fall back” to public ownership, the legal doctrine of escheat. There is also a connection to Intellectual Property rights regimes, where the IP reverts to public ownership after a period of time. Conceptually, this seems to indicate that private ownership of property is at the sufferance of the commoners, and all private property could be required to revert to the commons over time.

Returning to Norway. These hydro plants were returning to public ownership in the late 1960s. Norway’s first oil field, Ekofisk, was discovered in 1969, with this experience fresh. Apparently, this influenced a number of aspects of how Norway managed its oil for the benefit of the people first but in partnership with private enterprise.

Singapore

Karl suggest that the fund corpus be managed such that it grows and we leave a bequest for future generations. This is something that TFWN supports as well. Temasek, one of Singapore’s two large SWFs, follows a more challenging rule that its corpus must remain constant as a share of Singapore GDP. In effect, this implies reinvesting not just to keep pace with inflation, but to keep pace with the growth of the economy. Consequentially, only the return in excess of the economy growth rate can be distributed. This rule has the effect of keeping the endowment proportionate to the overall economy. If the rule of distributing income above inflation is followed, the endowment would remain static while private property would increase, making the endowment less and less relevant. As a corollary, it also puts a very high hurdle rate for investments from the fund. It is worth noting that Singapore’s model for management of its land (90% still in public ownership, 80% living in public housing) fits well with the ideas of Henry George. And interestingly, Singapore also occasionally pays a bonus to its citizen’s when the budget is in surplus.

Framing is crucial

Karl’s article contains a couple of seemingly minor terminology issues that actually have very significant consequences.

Erroneous government accounting incentivizes extraction

There is an important framing error in the use of terms such as “windfall revenue”, “income” or “earning” in connection with the proceeds from selling oil. Selling the crop of the family farm generates revenue. However, the proceeds from selling the family farm is capital, not revenue. The use of “windfall revenue” hides the true nature of the oil sale. The origins are in government accounting and reporting. Governments worldwide, following IMF’s Global Financial Statistics Manual 2014, erroneously treat the proceeds of selling their shared mineral endowment as “revenue”. More extraction = more revenue = good. Hence the enthusiasm to open the Arctic Refuge to oil exploration and the opening of Pebble mine in Bristol Bay, both in Alaska.

If minerals are seen as a shared inheritance, then different questions arise. Why is the mineral endowment being sold instead of keeping them for the use of future generations (who may have less environmentally destructive practices)? Why now? Will Alaska achieve zero loss or will some of the value be captured by the extractive companies by changing terms in their favor through political contributions, lobbying and bribes?

As Karl has pointed out, it is apparent that Alaska is selling its oil for lower than its true value. (Note that the losses due to under-recovery of the oil value is effectively a per head tax on inherited wealth – the value of the endowment reduces and everyone loses equally.) Proper accounting would require these losses to be made good. Seen clearly, more extraction of this nature = larger losses = bad.

Further questions arise. Will the entire proceeds be saved in the Alaska Permanent Fund? Will the only distribution of the income be through the Permanent Fund Dividend? Nothing less will ensure that future generations receive their rightful inheritance.

As Karl points out, Alaska saves less than 20% of the proceeds from selling their oil wealth in their Permanent Fund. And recently, a bill has been enacted providing for the use by government of a part of the income of the fund. They are consuming their shared mineral inheritance, cheating all future generations of Alaskans. If ordinary Alaskans understood this, surely both the Arctic Refuge and the Pebble mine decisions would be questioned.

What should be called a tax?

A related important framing issue plays an important role in the Alaskan struggle to protect their Permanent Fund and Dividend. Revenues, income and earnings imply something has been provided in exchange. Taxes are unrequited payments, ie, payments without any directly reciprocal consideration. Grover Norquist’s Americans for Tax Reform’s Taxpayer Protection Pledge is signed by most US Republicans and requires voting against any new taxes or tax increases. As a consequence, elected Republicans only vote for tax reductions.

Alaska has four broad choices in balancing its budget: (a) reducing spending, (b) reducing its losses from selling its oil (though ideally this should go to the Fund), (c) imposing an income tax or increasing the sales tax rate, and finally (d) diverting the income of the Permanent Fund to balance the budget.

As we have seen, income and sales taxes are opposed. The consideration for selling oil is often called an “oil tax”. However, calling them a tax means Republicans adamantly oppose increases, even when all evidence points to massive unrecognized losses. Any diversion of the PF earnings to the budget is in effect a per head tax (or a negative basic income). But since the diversion to the budget isn’t called a tax, Republicans are happy to support it. So the only options seem to be to cut spending or divert the Permanent Fund earnings.

If the terminology changed – we used “price for selling our oil endowment” instead of “oil taxes”, and “a per head tax” instead of an unremarked budget appropriation, then incentives for the Republican politicians change. Since spending cuts alone cannot balance the budget, increasing the price of the oil (ideally it should all go to the Permanent Fund) or explicitly imposing a tax are the only feasible options.

All of this is hidden by the terminology we use, underpinned by the error in government accounting. The IMF must amend its GFSM 2014 to treat the proceeds of selling mineral wealth as capital received in exchange, not “revenue”. And every single individual must change the terminology used to reflect the correct situation. Without this, the incentives to extract and consume our natural resource endowment will inevitably lead to civilization collapse, perhaps even human extinction.

Conclusion

The idea of a people’s endowment is extremely powerful. It hides behind the success of nations such as Norway, Sweden and Switzerland. It is important that ordinary people share in the benefits of the endowment to ensure its protection. Unfortunately, even the language we use, underpinned by a crucial accounting error, is a significant contributor to the increasingly likely end of our civilization.

About the Author

Rahul Basu is the Research Director of Goa Foundation, an environmental NGO in India. The Future We Need is a global movement asking for natural resources to be viewed as a shared inheritance we hold as custodians for future generations. This work is based on the practical work of the Goa Foundation. Whose Mine Is It Anyway is a campaign to make government finances and national income statistics treat mining as the sale of minerals. Read Mitigating the Resource Curse by improving Government Accounting and Government Accounting and the Resource Curse — Response to FAQs. IPSASB has started on a new International Public Sector Accounting Standard for natural resources. The Goenchi Mati Movement is advocating these principles for all mining in Goa, India. A joint campaign has successfully asked for these principles to be part of India’s National Mineral Policy.