The Real Economy

Growth impetus

Hector McNeill¹
SEEL

Much of the feedback I receive on the articles on this site concern Price Performance Policy (PPP) concentrating on the mechanisms of PPR (see "The price performance ratio") and PPL (see "The price performance levy") in terms of unit prices. However, the direct impact of PPP on disposable nominal incomes tends to be ignored. Disposable incomes under the conventional policy Aggregate Demand Model (ADM) of the economy sees income as the "demand side" of the equation. PPP however makes use of the Production, Accessibility and Consumption Model (PACM) where the reduction of PPLs results in direct augmentation in disposable incomes making real incomes and the resulting consumption an entirely supply side generated phenomenon.

It is this dual impact of PPP that provides the impetus for growth. This article explains how this operates.

One of the most difficult maneuvers under conventional policies is to manage growth. First of all there is the issue of starting growth off and then once it starts the issue becomes that of moderating prices to avoid inflation. Indeed after quantitative easing and low interest rates and the increased commitments of many to extended debt there as an assujmption that this "recovery" would be associated with inflation. Essentially no recovery occurred in the supply side production part of the economy because consierable amounts of funds ended up in assets so the expected inflation came but it is largely confied to asset markets. There has therefore been a lack of positive controls over real growth and prices in the transactional consumption markets as the result of this top-down Keynesian, monetarist and supply side policies that have proven incapable of responding to the specific conditions in each economic unit and work group.

The Real Incomes Approach concentrates on a the single indicator of real incomes as the basis for managing the economy. The Price Performance Policy option operates in the following manner:

The PPL (price perfromance levy) discourages companies from raising unit prices

Managers use the PPR (proce performance ratio) to moderate output prices and to lower the PPL to zero if possible

The degree to which the PPL is reduced has two effects:

unit prices are moderated against input costs

all associated with the company receive the reduction in PPL amount as bonuses thereby augmenting their nominal incomes

All associated with the company secure higher disposable real incomes and therefore propensity to consume

Since prices are moderated the increase in nominal incomes translates, in most cases, to an increase in real incomes in the economy

The result is economic growth based on lower unit prices and a rise in real incomes

Notice that the augmentation in real incomes and distribution of incomes occurs at the level of the economic unit and is not something that is primarily of concern to macroeconomic policies of the conventional kinds. The growth impetus, it should be noted, comes from the supply side manipulations in terms of unit prices and distribution of incomes within economic units and the impact of increased disposable real incomes can be measured by the real growth multiplier (see "The Real Growth multiplier").

Bonus payments

The degree to which a company achieves price moderation can be measured by the price performance ratio (PPR). The PPR value achieved by any economic unit is established directly by management decisions and actions. Rather than bear down on companies with centrally-established rate for interest and taxation these instruments can be substituted by a positive productivity incentive in the form of a Price Performance Levy (PPL). This can be applied by selecting from a very large range of optional formulae. By way of example a power function can be used where the main variable that determines the value of the Levy is the PPR. Thus the PPL can be of the following form:

PPL=L(PPR)² . . . . . (1)

Where:
PPL is the levy applied to the company
L is the base rate Levy,
PPR is the price performance ratio.

Assuming a base rate Levy of 20%, Table 1 shows the range of values of the PPL according to the PPR achieved by a company.

Table 1

Price Performance Levies associated with different Price Performance Ratios

PPR	Base rate Levy	PPL	Bonus
l.00	20%	20.00%	0.00%
0.75	20%	11.25%	8.75%
0.50	20%	5.00%	15.00%
0.25	20%	0.63%	19.37%
0.00	20%	0.00%	20.00%

As can be seen under a fixed policy-related base rate Levy of 20%, management can allocate resources so as to come up with the PPR they desire and thereby pay a Levy varying from 20% to zero. Naturally managers will try and avoid paying the Levy and the only way to do this is lower their PPR by improving demonstrable productivity. Companies can easily manage their PPR values by carrying out incremental investments in technology and human resources which will raise unit costs in addition to any rises associated with purchased unit input variables. However, the resulting gains in efficiency must be recorded in the form of moderated unit output prices. In other words the benefit to the economy becomes real and demonstrable. The amount of PPL avoided that is based on increased productivity and sales is a bonus category

Source: The Real Incomes Approach - The main theoretical principles & policy options

As can be appreciated, this growth impetus which is also counter-inflationary, does not require monopolistic state centrally imposed changes in money volumes, interest rates, taxation, government expenditure or debt. There is no subsidy since the funds that are affected by the PPL come from the corporate revenue cash flow.

One of the most important aspects of a coherent real incomes growth policy is the form of contractual agreements that exist at the level of the firm to ensure equitable compensatory distribution of real incomes between owners, shareholders, managers and wage earners. Naturally, the "solution" is related to well-designed "productivity agreements". However, such agreements depend upon a better understanding of the real distributions of benefits from corporate activities and these have always been associated with extreme sensitivity. This sensitivity arises from the profit paradox and the legal frameworks governing the regulations for accountancy and audit supporting government revenue-seeking. However, under the Real Incomes Approach the profit accountancy classification is replaced by investment in technology and human resources and the returns to investment are measured in terms of real incomes of owners, shareholders and employees and there is no corporation tax. This restructuring helps add transparency to corporate affairs by removing the strong incentives for secrecy. PPP operates on the basis of more transparency bringing advantages in terms of helping raise returns to investment while satisfying real income distribution needs. It is also possible to increase market shares simultaneously.

In the environment of the profit motive and aggressive government revenue-seeking, this whole topic is dominated by politicized views encouraged by partisan philosophical positions on the part of those who should be collaborating to their mutual benefit and to the benefit of the nation.

Productivity agreements

Productivity agreements are basically contracts that establish a productivity objectives which if attained will justify the promised basis of payment of a workforce. Therefore workforce payments will be based on the ability to pay from cash flow arising from corporate revenue. Under PPP there are two categories of payment:

basic salary
bonus

Basic salary

Basic salaries would be based upon a career salary path that relates payment to function, individual qualifications and experience as well as specific capabilities. A career salary path is a comprehensive profile of expected income associated with age, qualifications, experience and capabilities across time from employment entry at a young age through to the age when people decide to stop work (retirement). Therefore the basic salary that someone receives will depend upon their status with respect to their age, time in work, specific experience and capabilities (skill in applying specific relevant techniques). At the lower end of the income scales where the so-called "minimum salary" is an entry level payment, there needs to be an independent assessment of what constitutes a reasonable minimum salary. The current discussions relating to the "living wage" as a minimum salary are relevant.

Government revenue

Government revenue would come from personal income tax on salaries. Therefore the minimum salaries through to the highest should contain a sum for the payment of income tax, over and above the basic salary. Rather than organize personal income tax on the basis of annual returns, tax would be paid on the basis of pay as you earn (PAYE) for all firms who employ more than a specific number of workers. The tax sum distributions would be set according to tax authority requirements on an incremental scale in line with current practice of slight increases in payment for those receiving higher incomes.

Bonus

Bonus payments under PPP are essentially a transfer from the difference between the PPL value at the maximum level with a PPR of unity (1.00) and the actual PPR achieved by the company (see box on right). The bonus would be paid in proportion to the basic salary of each person. In the case of owners and shareholders who do not work in a company but whose capital is held or invested in the company, the bonus will be paid in proportion to their share of capital as a proportion of the total real incomes budget. The total real incomes budget is the weighted basic salaries of the workforce plus the total investment held by shareholders and owners. Owners who work in the company and own shares would receive their basic salary plus their share on bonuses on their salary and on their shareholding. In principle, bonuses could be tax free to provide incentive for collaboration on productivity deals or schemes could be developed where personal tax sums are reduced in the corporate pay packets with bonuses being used to pay off the rest of the personal tax owed in any specific period.

¹ Hector McNeill is the director of SEEL-Systems Engineering Economics Lab.