Finland has announced that it is conducting a social policy “experiment” which deserves closer examination. Through 2017 and 2018, Finland will provide a guaranteed basic income of 560 euros to 2,000 randomly selected welfare recipients. This benefit will be subtracted from other, currently existing welfare benefits that participants may be receiving, and, crucially, the payments will continue regardless of any other income that is earned. If a participant of this program finds a job, the government will continue to pay them the 560 euros in addition to any other income.
The Finnish government hopes — and many believe — that this program will help to alleviate poverty as well as make inroads in reducing the country’s current 8.1 percent unemployment rate. This test trial is supposed to prove it, potentially opening the door for a full implementation of a universal basic income (UBI).
Why People Support a Universal Basic Income
The universal basic income is being considered as a partial or complete replacement to the current means-tested system of welfare. Under the current system, welfare recipients’ benefits taper off and eventually stop, completely, based upon how much income individuals independently earn. Naturally, this creates a disincentive to rejoin the labor force, because people fear a reduction in total income as welfare benefits are removed or if they believe the added income from a job isn’t worth the labor. Demonstrated very simply, if someone is currently receiving a total income of $1,100 through a means-tested welfare program, many will be less likely to seek a job which will result in similar income levels, as most prefer leisure to labor.
Supposedly, the UBI’s main innovation is that it manages to largely avoid this long standing failure. Since everyone would receive the established basic income regardless of other income earned, proponents believe that people would still have strong income based incentives to work. Some have gone even further, suggesting that the program will be a positive for employment because the financial cushion provided by a UBI will help people in the transition from unemployment to employment. For instance, a struggling entrepreneur or artist could, in part, rely on it while building support.
For these reasons, the UBI has gained support from the entire political spectrum, including libertarian-leaning think tanks like the Niskanen Center.
Where UBI Proponents Go Wrong
A universal basic income is not the god-sent welfare policy that it initially seems to be. It does not create incentive to work. It won’t help solve unemployment, and it will not alleviate poverty. The truth is that a UBI will exaggerate all of these factors in comparison to what would exist in a more unhampered market. There is even reason to think that it would be worse in the long run than traditional, means-tested welfare systems.
First, UBI does not eliminate the disincentives to work that are inherent in welfare programs; it simply moves them around. This program must be financed after all, and any welfare system, including the UBI, is necessarily a wealth redistribution scheme. Wealth must be forced from those who have it to those who do not. This means that at some point on the income ladder, people must go from being net receivers of benefits to being net payers of benefits.
The progressive taxation that is necessary to finance a UBI means that the more a person earns, the higher percentage of their wealth will be taken from them. The work disincentives are therefore still very much present in the tax system. They’ve simply been transferred onto different, higher income groups of people.
UBI Diminishes the Power of Consumers in Directing the Marketplace
The universal basic income shares another problem with traditional welfare systems. Far from promoting the unemployed from searching for work the market rewards, it actually subsidizes non-productive activities. The struggling entrepreneurs and artists mentioned earlier are struggling for a reason. For whatever reason, the market has deemed the goods they are providing to be insufficiently valuable. Their work simply isn’t productive according to those who would potentially consume the goods or services in question. In a functioning marketplace, producers of goods the consumers don’t want would quickly have to abandon such endeavors and focus their efforts into productive areas of the economy. The universal basic income, however, allows them to continue their less-valued endeavors with the money of those who have actually produced value, which gets to the ultimate problem of all government welfare programs.
In the marketplace, wealth is earned by generating value. When someone buys a good, they’ve earned the money they are spending by having produced something else. This is not so with welfare programs like a universal basic income. Money is forcibly taken from those who have produced enough to earn it, and given to those who haven’t. This allows for people who aren’t producing wealth to continue to consume scarce goods. Eventually, all government welfare leads to the consumption of wealth, or, at the very least, a reduction in the amount of wealth that would have been accumulated otherwise. When entrepreneurs have less need to respond to the needs and desires of their customers, consumers will find themselves with fewer choices and with lower-quality choices.This means that overall welfare makes everyone poorer than they would have been in a free market.
How Finland Really Can Reduce Poverty
If Finland (or anywhere else) wishes to help alleviate poverty and unemployment, the best steps to take are in the directions of reducing the cost of living and creating conditions favorable to plentiful employment.
Charles Hugh Smith recently outlined the basics:
This may seem obvious, but the conditions required for work to be abundant and the cost of living to be low are not so obvious. For work to be abundant:
- It must be easy to start a business.
- It must be easy to operate the new business.
- It must be easy to make a profit so the business can survive the first few years and,
- It must be easy to hire employees.
All these factors require an environment of low-cost compliance with regulations, low tax rates, low costs of transactions, reasonable transport costs, reasonable cost of money (but not near-zero), reasonable availability of capital for small enterprises, local and national governments that actively seek to smooth the path of new enterprises and existing enterprises seeking to expand, and a transparent marketplace that isn’t dominated by politically dominant cartels and subservient-to-cartels government agencies.
This matters because the number one cause of the high cost of living is artificial scarcity created and maintained by monopolies, cartels, and the government that serves their interests. Artificial scarcity imposed by cartels and a servile state is the primary cause of soaring costs in a variety of sectors.
In Scandinavia, as in most countries, its is becoming increasingly difficult to open and sustain businesses. In Scandinavia especially, labor unions exercise immense power over private business, pushing up costs and raising barriers to entrepreneurship and creating new businesses.
As has always been the case, it is necessary to create wealth before it is possible to redistribute it, and policies that encourage movement toward less productive types of work will fail to produce the wealth that government planners would like to spread around.
(For a discussion of the ethical case against a UBI, see David Gordon’s article, A “Libertarian” Argument for the Welfare State.)
