Finland’s National Basic Income Proposal

Alternative to the MBI

I’ve discussed the possibility of a guaranteed minimum income several times. My general opinion is, with the rise in automation, there’s a reasonable chance that we’ll produce far more goods than we need using a small amount of human labor. Thus, there’s the risk that the people who control the production will live in luxury, while those who are no longer needed for their labor will be destitute.

When there’s a huge amount of excess in the world, it seems like a bad idea to leave some people in abject poverty. Even the wealthy should understand this point of view to a certain extent, since, if the differential between the rich and the poor becomes too great and the poor too numerous, the poor are likely to rise up and kill the rich.

One of the solutions to this conundrum is a guaranteed basic income, ensuring that everyone has a minimal living income to ensure a low standard of living. I don’t know if the idea will “work”, but I do think it is worthwhile trying to determine if it does. That’s why I’m particularly interested that Finland is now considering implementing a national basic income (NBI) of €800 per month.

The details

This national basic income would replace other benefit programs (i.e. unemployment insurance, welfare, old-age security) and would be provided tax free to all adult citizens. The program would be rolled out first as a pilot offering €550 per month.

Today, a euro is worth about 1.10 US dollars, so the full program would pay the equivalent of almost $900 US. Of course, that means nothing without understanding what that’ll buy in Finland.  To me, Finnish prices look roughly the same as USA, but in Euros rather than Dollars.

The average after-tax monthly salary is just under €2200. A one bedroom apartment in the city costs about €700, while in the suburbs it’s more like €550. A litre of milk costs about a euro, while a dozen eggs are €1.92. A pair of Levis costs about €83. A meal at McDonalds is €7. The living expenses for a student are around €800 per month.

Thus, by itself, this national basic income is enough money to survive. You won’t live in luxury, but you’ll have enough for food, shelter, and cheap entertainment.

Incentives for the unemployed

Of course, though this project sounds interesting, there are still potential problems. I’ll leave aside the irrational Puritanical concerns (e.g. “Work is good for the soul”, “Anyone who doesn’t work is a worthless bum”) because I think such arguments are inherently stupid. Instead, I’ll focus on the big concerns.

The biggest concern about guaranteed basic income is that it reduces the incentive to work. After all, if you can get paid not to work, why would you bother working?

Interestingly, some Finnish politicians are saying that the NBI could have the opposite effect, incentivizing people to work. Their argument is that right now, there’s no motivation for the unemployed to get off welfare to do a low-wage job because in doing so, people lose their welfare benefits. Their new income will only offset the loss of welfare benefits, not really putting them ahead

With the NBI replacing welfare, the income from work will no longer offset welfare. So, for any unemployed person, working will lead to incremental gains over not working. So the economic incentive for the unemployed to work should increase, assuming the tax rate on those incremental gains is reasonable. Thus, I buy this aspect of the politicians’ argument when it comes to the unemployed.

Incentives for the employed

That said, I think the politicians are missing the other side–people who are employed who may chose to become unemployed because the NBI is sufficient to meet their needs and decide that they’d rather not work. Without the stigma attached to welfare and employment insurance, this may be a bigger issue than the politicians realize.

While I believe this is a problem, I also think that in general, people like to earn more money and are often willing to work harder to do so. People seem to prefer a higher standard of living while working to a lower standard of living with not working. Or, stated another way, I think most people will trade some of their free time so that they can acquire better toys.

These beliefs makes me think that it’s possible that the incentives are aligned in a way that NBI might actually increase the employment rate relative to the current welfare system. I’m not certain, but it is conceivable to me.

Paying for it

Thus, if the NBI could a net benefit when it comes to employment, the biggest remaining concern is how to pay for it. Above €70K income, residents are paying marginal rates of 30% in state income taxes and over 20% in municipal income taxes. Today, pension and employment insurance can be another 5% on top of that. What’s more there’s also a 24% value added (sales) tax. So, if you live in Finland and are making a lot of money, you’re paying a lot of tax already.

Presumably, a significant chunk of the funding for such a proposal would come from the current pension and employment insurance taxes–in 2014 Finland was spending about €30B a year on social expenditures. However, the calculations that I’ve seen seem to imply that it would cost Finland €46.7B per year to implement the NBI, much more than the €30B.

The problem looks even worse when you consider that Finland’s Federal government will only bring in €49.2B in 2015. So, assuming the government wants to do something besides pay its citizens the NBI, there’s a significant gap that needs to be filled.

And to me, that’s a big problem that needs to be addressed. It might be difficult to increase taxes any further considering Finland’s already high tax rate. What’s more, tax increases will reduce the incentive for people to work–thereby lowering the tax base–and encourage both tax avoidance strategies and tax fraud.

The bottom line

So, to really understand whether this project can work, we need a better understanding of how it would be funded to see if the math actually works.

But despite this problem Finland’s national basic income is an interesting proposal. Every other experiment in guaranteed basic income seems to have been externally funded (i.e. not funded exclusively by the people who are in the GBI study). So, I’m curious to see how this would work on the scale of a country where it would have to be almost entirely internally funded.

Advertisements

9 thoughts on “Finland’s National Basic Income Proposal

  1. I’m all for some version of guaranteed annual income. A moral imperatif, first and foremost. The government’s duty is to attend to the wants and needs of its citizens. Infrastucture, transit, health, etc. And yet most government administered social programs keep people in poverty and leave them without enough money for decent shelter or to buy food, hence the growth of food banks, making it impossible to save for the future or pay for an education. And so in a rich country we have children raised in poverty with all the attendant stresses and so the cycle continues.
    I think it’s simplistic to assume that people only work for money. There are many different temperaments. Of course , exactly how to set it up is the dilemma. And would require some long, long range planning and a fundamental change in attitude. We would all be better off if kids didn’t grow up hungry.

    Like

    1. Yeah, I think you raise a good point about government programs keeping people in poverty. They’re typically enough to keep people close to alive, but no more. That’s one reason I like the GMI. If I recall, when it was tried in the USA, they only found that the incentive to work was reduced dramatically in the teenager/young adult population, and that was largely because those people were getting more education. To me, that’s a pretty good outcome.

      I agree that people don’t only work for money, but I do see a lot of people who are doing things they dislike because it puts food on the table. I think part of the problem is that we live in a specialist economy, and it’s difficult to do anything–no matter how much you love it–for 40 hours a week for months or years. So, I agree that it’s complex. Also starving kids=bad. 🙂

      Like

  2. It is likely absolutely cheaper to provide a guaranteed income. In looking at the homeless scenario the ‘costs’ of supervising the homeless is about double the cost of providing them with care. This needs to
    be examined to verify if this is really true.

    Need to look at the ‘more equal societies prosper’ Thomas Picketty?

    When the rich grab it all, revolution is ripe. French Revolution anyone?

    Like

    1. I concur. Studies have shown over and over that society benefits in many ways and not just financially when people are supported. These studies are overshsdowed by a misguided moral stigma, a myth really, (the evidence is so often anecdotal) that insists that people are responsible for the social conditions they inherit, not to mention their own innate abilities and disabilities.. Very convenient for us capitalists.

      Like

      1. On ‘Cross Country Checkup’ (24 Jan 2016) the guaranteed annual income issue was raised with stress on the incentive to do something useful within the society. The caller felt that no incentive would lead to many ‘gaming the system’ and choosing not to work toward anything. The caller’s solution was to require those on GAC to demonstrate that they were directly involved in educational upgrading or demonstrably working for the public good (volunteering?). ie. you have the GAC as long as you demonstrate that you are trying to improve life.

        Like

      2. There is an implicit assumption in that argument that those with earned incomes are, de facto, bettering society. Therefore, must we also assume that the higher the salary the greater benefit to society?

        Like

      3. I think that’s an interesting comment, Gillian, both because I think it’s true that humans in general tend to think that people who make more money have more value to society, and because I think in many cases, perhaps even the majority of cases, it isn’t actually true that money indicates value to society.

        For instance, assassins, mob enforcers, and high-frequency traders have negative value to society, but are probably highly compensated. Mother Teresa and Einstein likely had huge positive impact on society, but were poorly compensated. (And I’ve made a bunch of similar arguments in a couple blog posts, such as this one: https://rbgibbons.com/2015/08/31/the-most-underpaid-job/)

        In truth, I think income represents nothing more than the money you can make for yourself or others through your labor, and only reflects a limited component of your value to society, your economic value.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s