Finland has recently announced that it’s going to be experimenting with “basic income” as part of its social welfare state. The general idea with basic income is: you just give everyone a set income from the state. Rich or poor. Whatever. Everyone gets it, every month, presumably in their bank account.

Finland’s Experiment

For the Finnish story in particular, and how they’re going to try it out (on a sample of 8,000 people), have a look at this BBC article.

Personally, I’m a bit skeptical – but strangely, not so much about the concept as I am about the experiment. Mainly because: there is a difference between giving the entire population a monthly income, and giving 8,000 citizens a monthly income. A massive difference that is the entire population of Finland (seeing as 8,000 persons is a rounding error in a population of 5.4 million).

The math:

1. The macro impact of giving 8,000 people an extra €400 is €3.2 million per month, or €38.4 million per year. As a percentage of Finnish GDP (which is about €300 billion), we’re talking about a 0.01% of GDP impact.
2. The macro impact of giving 5.4 million people an extra €400 is over €2 billion per month, or about €26 billion per year, which is about 9% of GDP.
3. That is: a program that is 900 times larger than the experiment.

VERY DIFFERENT THINGS.

And consider that even on a personal level. Let’s say that someone wanted to work out what you’d do if you were given a lump-sum payout of R100,000. So they decide to test your reaction first by giving you a 900th of that, which is R110.

I mean, give me an extra R110 and I might spend that on a beer and pizza. Give me R100,000, and I’m not going to go and drop that R100,000 on more beer and pizza. At that scale, I’d invest the money. Except for R110, which I might well spend on a celebratory beer and pizza.

That said, I do quite like the idea of basic income. I’ve written about it before (back when Switzerland was planning a basic income referendum), but let me lift some of the key points:

So What Is Unconditional Basic Income?

At the risk of repeating myself: it’s a cash payment into your bank account, every month, without any need to justify why you should be getting it.

Why It’s Different

Most welfare states operate on the premise that only the poor need the welfare benefits. And in order to prevent free-riders that will live off the system indefinitely, you have to create strangleholds and disincentives to try and persuade people off welfare.

The Arguments Against Unconditional Basic Income

• People on welfare are lazy and free-load.
• They must get enough to survive, but not enough to live, and it must not be easy to get it.
• If you just give people money, then they have a really good reason not to work.
• So rather create requirements and programs for very specific welfare benefits (like “assisted housing”, “food stamps”, and “government hospitals”).
• Also, it would be very expensive to do too much of it.
• And if everyone has more money, it would simply be inflationary, and everyone would just reach the same point as before.

The Arguments in Favour of Unconditional Basic Income

• Is much like the argument of direct cash distributions for charity (I wrote about it here: Charity: Do It Directly. In Cash.)
• It is far too broad a generalisation to self-righteously declare that most people on welfare want to be on welfare. You’re more likely to find that most welfare recipients would choose to work if they could – and are better placed to make decisions as to how they can escape their welfare trap than the government officials that make the decisions for them.
• And actually, a lot of money is wasted by government departments that attempt to administrate the myriad of welfare programs.
• So why not just give the cash directly, and let the market itself manage the process?
• Also, the process would not be inflationary to the point of leaving everyone as they were before. The money that goes to the lower-income classes would be spent, agreed – but the money that goes to the upper-income classes would just go back into their bank accounts.
• What you’re really doing is returning purchasing power to those that lack the power to purchase – not encouraging extra purchasing amongst those that already choose not to.

If I’m honest, I quite like the idea of giving more purchasing power directly back to consumers. And I think I say that as a capitalist – because if the earning-base of the companies I invest in is shrinking due to less purchasing power amongst the lower and middle classes, then I’m earning lower returns. But if that money is flowing back to them through a direct transfer mechanism, then I’m earning higher returns.

Perhaps that’s an illusion.

But what isn’t?

And at least this way, the rich get to stay rich (because the money keeps flowing back into their coffers), and also feel rich, and also live without the fear of revolution?

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.