Finnish politicians are discussing a drastic economic policy: paying every citizen a monthly income. Could it work?by / December 30, 2015 / Leave a comment
The Finnish Centre Right Prime Minister has proposed replacing all its means tested welfare programmes with a Basic Income Guarantee giving every citizen 800 euros a month. Although the details still remain to be worked out and the plan is far from certain, over 68 per cent of Finns already support the idea.
Forty-six years since Richard Nixon proposed it to Congress (it passed the House, but died in committee in the Senate), the Basic Income Guarantee is back in the news. Last year, over 130,000 Swiss signed a petition demanding a Basic Income Guarantee that would grant every citizen 2,500 Swiss Francs a month (£21,000 a year). According to a recent poll 49 per cent of the Swiss support the programme and a referendum on Basic Income will be on the ballot in Switzerland within the year.
Although it comes in a variety of flavours, the essential principle is straightforward. A Basic Income Guarantee replaces all means tested benefits with a simple monthly cash payment to all citizens. Everybody gets it: you don’t have to be deserving, or unemployed, or even poor.
Supporters for the idea of a basic income come from both left and right. Milton Friedman and Friedrich Hayek both were fans. Conservatives like it because it fights poverty without enlarging the nanny state. It also avoids the distortion to incentives inevitable with most means tested programmes. Sam Bowman of the Adam Smith Institute notes that the current welfare system creates “situations where people are better off out of work or taking fewer hours of work. The Basic Income Guarantee eliminates most of those perverse incentives while still providing a safety net for the poor.”
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Community organiser and Basic Income advocate Barb Jacobson agrees. “The marginal tax rate for benefits ranges from 75-98 per cent, which is where the poverty trap originates—it is often not worth getting a job.” She adds, “Conservatives like the idea of getting rid of the Byzantine bureaucracy of most state benefit systems, progressives like the prospect of ending poverty, and the shame of means-testing. Both, I think, are attracted to the prospect of freedom which Basic Income holds for most people.”
Opponents of Basic Income fear that it will destroy incentives to work. Jacobson doesn’t think so. “People need money in order to be able to work. If you haven’t food, a stable place to live, clothes, transport—and, increasingly, access to the Internet—it is impossible either to find or hold down a job.” A recent experiment in rural India suggests she might be right. In eight villages, every inhabitant was given 200 rupees a month (around £2) for 18 months. Compared to the control group, both economic growth and paid employment increased. Childhood nutrition and school attendance also improved. Money in their pocket liberated villagers, giving them the freedom to find better paying work.
Bowman suggests the difference between conservative and progressive advocates of Basic Income is in the size of the grant. “The left typically [wants] it to be high enough for someone to be able to live on it reasonably comfortably, the right typically [wants] it to be low enough that people can survive on it but are still going to find work attractive. What we need to do is find the optimal level where people are able to survive when they’re out of work and to live decently when they’re in low-paid work.”
All well and good but can we afford it? When the Green Party advocated a BIG of £72 a week during the last general election, its leader Natalie Bennett stumbled badly when asked how she planned to pay for it. She should have done better. The Citizens Income Trust has shown that by eliminating all welfare payments and the personal tax exemption, a Basic Income Guarantee can be made close to revenue neutral. But making Basic Income revenue neutral might obviate one of its most profound benefits. Since the financial crisis, central banks have tried to stimulate the economy mostly by creating money and giving it to banks, hoping that would entice them to lend. So far, the results have been mediocre. The Basic Income would instead “helicopter drop” money straight into individual’s bank accounts, thus enabling them to spend.
Conservatives generally favour stimulating the economy through tax cuts. Although they often don’t like to admit it, this is textbook Keynesianism. If government spending remains the same, a tax cut puts money in consumers’ pockets and so stimulates demand. The problem with tax cuts is they disproportionally benefit the richest among us and rich people are as likely to save their tax cut as spend it. From a stimulative perspective, the Basic Income Guarantee can be thought of as a tax cut given to those most likely to spend it, giving the economy the demand it craves.
Traditionally, progressives have focused on stimulating employment and raising wages. But automation and software today are job killers. The “Rise of the Robots” threatens to destroy up to 47 per cent of all existing jobs within the next two decades. A robot may be able to build an iPhone but it cannot buy one. A Basic Income Guarantee will eliminate poverty, lessen inequality, destroy bureaucracy, and empower the most vulnerable among us but perhaps even more important, it would solve capitalism’s most basic and growing problem, lack of demand.