Trials are underway within the U.S. and elsewhere to understand the effects of cash transfer programs like universal basic income to provide people with basic sustenance — where the government sends out a regular stipend to everyone regardless of income or employment status. Interest is rising following concerns that technological innovations would lead to massive unemployment as more work is automated.
Since 2017, Finland has been experimenting with a partial basic income program, a variant of universal basic income, given only to the unemployed. Alaska has had a royalty payment program since 1982 in which every resident, including children, gets $1,000 to $2,000 a year. (The U.S. state does not call it a universal basic income but it’s a similar cash transfer program.)
Finland’s basic income trial will end next year and for now the government has no plans to expand it pending results from the study. However, many in Finland reportedly did not like the idea of cash handouts without requiring work and some worried that young people would just stay home and play computer games.
“The main idea … was to see if people who are unemployed, if they would be able to keep their unemployment compensation, would they be more keen to look for work?” says Heikki Hiilamo, professor of social policy at the University of Helsinki in Finland.
But while Finland seems to have hit a roadblock, a study of Alaska’s oil royalty program shows a very different picture. “One of the concerns is … if you give people money for nothing, why should they work?” says Ioana Marinescu, a professor at the Penn School of Social Policy & Practice. “What we found was astonishing — which is that on average Alaskans work at the same rate as comparable states” such as Utah and Wyoming.
That’s because when people get extra cash, they tend to spend it, Marinescu said. Surrounding businesses, such as the neighborhood café or boutique, see increased sales as a result and then hire more employees to handle the boom. “The two put together end up seeing no effect on employment,” she said. “That’s very interesting to us to see that when this is applied on a big scale, … if a whole state would implement this, this can have interesting and important effects on the economy.”
“One of the concerns is … if you give people money for nothing, why should they work?”–Ioana Marinescu
Marinescu and Hiilamo discussed the pros and cons of universal basic income programs on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Alaska vs. Finland
In Alaska’s oil royalty program, every resident gets an annual dividend generally between $1,000 and $2,000 from the Alaska Permanent Fund, which earns revenues from oil and mining leases. The amount varies as oil prices fluctuate. For 2017, the government announced a dividend of $1,100 per person including children. So a family of five could have gotten $5,500 last year.
According to Marinescu’s research paper on Alaska’s program, co-authored by University of Chicago professor Damon Jones, “the dividend had no effect on employment, and increased part-time work by 1.8 percentage points.” Further, they found that “receiving this basic income tends to increase education among the most disadvantaged youth.” They stay longer in school when they receive a basic income, she explained.
In Finland’s trial, a group of jobless people received 560 euros each month for two years irrespective of what they earn on top of that and without restrictions on how they spend it. “We’ve gained so much international attention because of this trial. It’s telling me that there is genuine interest in experimenting with new ideas to deliver basic social security, says Hiilamo. However, he thinks it is unlikely that the program will be expanded to cover a larger number of Finland’s population.
Could It Work in the U.S.?
According to Marinescu, a universal basic income program “could potentially work” in the U.S., so long as it is financed. While Alaska has revenues from oil and mineral mining rights, other states that want to implement similar programs would need to either cut some existing benefits and perhaps even consider raising revenue from other sources.
Marinescu recommended a carbon tax as one such revenue source. “You want to tax activities that you want to reduce and we want to reduce carbon use,” she said. She did not expect firms to necessarily view states that levy such carbon taxes as unfriendly to business and relocate elsewhere. Many states tack on value-added taxes or have relatively higher sales taxes, and firms continue to operate there because of offsetting benefits such as access to markets or labor supply, she said.
Taxpayers would be less resistant to higher taxes if they know that some of that money finds its way back to residents in the form of cash transfers, said Marinescu. “If you are valuing what the state provides you out of your taxes, then the negative effect that taxes can have is much less profound.”
Nordic countries like Finland, which have high personal tax rates, also have broad social safety nets, which the U.S. does not have, said Marinescu. For 2018, the personal tax rate in Finland is 51.6%, and the corporate tax rate is 20%, according to data tracked by Trading Economics. Sales tax stands at 24%.
“There is genuine interest in experimenting with new ideas to deliver basic social security.”–Heikki Hiilamo
For the U.S. to implement a similar program, it would need to raise taxes or replace some existing social benefits, according to experts. Economists would prefer that the government to use any extra revenues on the poor, elderly and disabled. They have also argued that a universal basic income would act as a disincentive for people to work.
There is considerable skepticism in Finland on extending the cash transfer program across the population, says Hiilamo. If “young people who are not in education, employment or training were to get a basic income without any strings [attached], we’re concerned that would somehow prevent them from participating in society and lead to an exclusion from the labor market,” he adds.
Moreover, skeptics worry that if mothers with small children were to get the basic income, they would stay at home and not join the labor force for long periods. “Our model is based on very high [labor] participation rates,” Hiilamo says. “Everybody is paying something through income taxes and everybody’s benefiting from the system. Universal basic income would exclude part of the population from the labor market. That will somehow undermine our whole system, our whole model.”
Marinescu said the disincentive to work is always a concern with cash transfer programs. However, research has shown that such an outcome has a “zero or very small” possibility. In Alaska, her research found that more women join the labor force because they are able to invest in cars and so forth to go to work. “If you’re going to only work part-time, it may not be worth it to go to work,” she said. “But if you have some money that relaxes your constraint, say you can buy a car or whatever it is that you need to do, then you might be able to work.”
Another effect is that because everybody benefits from a universal basic income, it would also remove the so-called “welfare stigma” associated with programs like the unemployment dole.
Two U.S. trials
Hiilamo pointed to two experiments underway targeting the low-income — one in Ontario, Canada and another launched by startup accelerator firm Y Combinator in Silicon Valley. Ontario’s basic income pilot program, with 4,000 beneficiaries at last count, pays about $17,000 a year for qualifying individuals and $24,000 for a couple, adjusted for any income they earn outside. The program’s objective is “to test a growing view at home and abroad that basic income could provide a new approach to reducing poverty in a sustainable way.”
In the Y Combinator study, individuals randomly selected in two U.S. states will receive $1,000 monthly for five years. It aims to track how that basic income influences “how individuals spend their time and money, indicators of mental and physical health, and effects on children and social networks.” Several basic income programs are being trialed at other locations within the U.S. and elsewhere, according to a Business Insider report.
But more research is needed to study the effects of cash transfer programs. “Maybe we’ll find out that it doesn’t work and that’s why experimentation is so valuable,” said Marinescu.