This article has been supplied by the University of Auckland Business School*
The idea of a state giving away money to its citizens with no strings attached doesn't sound like a sustainable economic policy, but that is exactly what Finland began doing at the start of 2017. And Business School economist Dr Ryan Greenaway-McGrevy is a fan.
The 2,000 participants in Finland's radical experiment, randomly chosen from those on welfare, will each get 560 euros ($860) a month – and the payment will continue even if they get a job. The hope is that providing a basic income will offer recipients financial security and allow them to make life plans.
It is not the first time a universal basic income (UBI) has been trialled. Pilot schemes have been run in Namibia, Ontario, Manitoba, Utrecht and elsewhere. And, in recognition that technology is displacing jobs, Silicon Valley start-up accelerator Y Combinator has begun a basic income experiment in Oakland, California to provide what its president, Sam Altman, calls "a cushion and a smooth transition to the jobs of the future".
In 2016, the New Zealand Labour Party expressed interest in something similar, citing a scheme proposed by economist Gareth Morgan that would see every adult New Zealander given a basic income of $210 a week. The then Prime Minister John Key was quick to dismiss the concept as unaffordable and "barking mad".
Greenaway-McGrevy counters that the changing basis of economic prosperity demands a fundamental rethink of the way society is organised. A guaranteed income would challenge the notion that people are only valuable to society if they are in paid employment.
"Finding a job for life is likely to become increasingly difficult as technology advances and roles become automated, so we need to think hard about where self-worth really comes from," he says.
"The industrial revolution also caused massive disruption, but over the long term it led to an increase in everyone's standard of living. Technology is a good thing if everyone can share in its benefits."
Greenaway-McGrevy, says many of the proposals to redistribute wealth have strings attached that cause people to change their behaviour, so the assessment of any scheme needs to take account of the wider economic incentives and impacts.
For example, welfare for the unemployed, which is intended as a financial safety net, and which is only paid while a person is unemployed, can act as a disincentive for people to take low-paid or temporary work. A basic income, which is paid irrespective of other income, would remove that barrier.
"A UBI would be a one-shot welfare policy that would replace much of the complicated system we have now and would be far less costly to administer. But the cost of paying every citizen a basic income would be substantial, and so it would need to be implemented as part of a broader restructuring of the taxation system," he says.
Greenaway-McGrevy suggests that such a restructure might include implementing a proper capital gains tax or a land tax, and doing away with progressive income taxation which, at the other end of the pay scale, can encourage tax avoidance. In any case, he says, a flat income tax coupled with the UBI could be quite progressive, because the supplementary basic income would be tax free.
One of the possible side effects of a UBI could be to raise wages in low-paid jobs such as in supermarkets, fast food outlets and cleaning services as these became less attractive to job seekers. As a result, the price of many goods and services would rise, at least in the short term, says Greenaway-McGrevy.
"So, inflation is most likely to come through the wage channel."
He also stresses that many other welfare policies create disincentives for firms to hire people. Minimum wages, for example, can contribute to higher unemployment as firms that are reliant on lower-paid workers respond by reducing their workforces.
"If we agree that it is the State's job to help those who are less well off, let's do it directly, and not force firms to do it by default."
This article was first published in the March 2017 issue of UABS Insights, and is reproduced with the permission of the University of Auckland Business School.