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.
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.