It's almost-Christmas in Finland
The news that Finland will be granting 800 euro to everyone every month has circled around the world media. It smacked of social revolution, at least at a first reading. Once the dust had settled, what shaped out was something like the end of that old Swedish movie, which turned out to be a Soviet movie. In fact, Santa's homeland is not preparing gifts for everyone, but it may've started exploring the possibility if it wouldn't be better to introduce the so called Basic Income, which is essentially a guaranteed income, regardless of the recipient's wealth. In return, Finland could partially or even completely stop all payments on any welfare programs - social aid for unemployment, maternity leave, pensions. This could then grow into a two-year experiment involving 100 thousand people. After all is done, the government should decide if and how it should change the social system of the country. Which means the actual change won't happen until 2019.
Although there's still a lot of time until then, the plan has already raised quite a few questions. Like, who's gonna pay for all that? And does "everyone" include children and pensioners, or just people at a working age? And, would the immigrants be included as well? What about foreigners from other EU countries? What about the Finns living abroad, many of whom have fled unemployment in their country? While still at an early stage, the initiative is curious - if for anything, at least because it's the largest basic income experiment in decades. And if Finland decides to adopt it in some form, it could become the first country in that respect. Many other countries which have also been trying to make their welfare systems more efficient and save them from bankruptcy, are watching with great interest.
The research is authored by Olli Kangas, chairman of the center for scientific research at the Finnish Social Welfare Institute (KELA). Kangas has assembled a team of researchers from several government and scientific institutions, and they've come up with four possible models of the experiment. The first one involves Basic income that should completely substitute almost all social payments that the government is currently making. The amount should be "relatively high", as the presentation goes. Kangas says this is slightly more than the country's base pension, 754 euro. The thing is, this model is difficult to apply, because the unions are participating in the management of the unemployment funds. Whichever government attempts such an approach, would instantaneously lose the unions' support, and they're quite influential.
The second model involves a partial Basic income of about 550 euro, which is the minumum social aid for unemployment in the country. It'd also remove some fundamental social protection schemes like pension and health insurance, but would retain unemployment aid, home aid, and maternity leave.
The third scenario would have the government help the poorer citizens by directing money to them through the annual taxes. That's the negative tax system. It would result in aid diminishing by 50% for every 10,000 euro of income, which means a household with an annual income below that threshold would get 10K from the government instead of paying any taxes. If it earns 10K, it'd get 50% less, i.e. 5K. If it earns 20K, there'll be no government aid.
The fourth model is a mixture of all preceding ones. In that scenario, the monthly payment would substitute some existing programs - like minimum guaranteed aid for unemployment, hospital aid, maternity leave, etc. Some money will be added to the amount, allowing the recipient to do some side work like voluntary community service, or looking after a relative. This model, unlike some of the others, and unlike some older experiments in other countries, is more focused on the economically active people, not the welfare recipients.
Kangas' team should present more details on their research in March, and the final conclusions in December 2016. If the country is still being ruled by Juha Sipilä's coalition by then, they'll have to choose one of the four models. Until then, the 800 euro that the media has been talking about, could turn out to be a different amount, or maybe several separate amounts. And the additional stipulations could change, depending on the conclusions.
The whole thing should begin to work in early 2017, then proceed for 2 years, and involve 100,000 people. Finland has put aside 20 billion euro for that project. The problem is how to select the people. The Finnish constitution stipulates complete equality. This means it'd be difficult to bring Basic income to random people in a workers neighborhood in Helsinki for example, and refuse the same to their neighbors. So, in order to get more detailed results, the research team wants to include whole towns in the project, and measure the consequences on the whole community.
Such an experiment has been done in the US in the 70s, but only involving the negative-taxation model, and only for a group which had already been receiving welfare anyway. Kangas recognizes that as a mistake. Next year the town of Utrecht in Holland is about to repeat that mistake by assigning 1100 euro per month to 300 people, who've already been receiving welfare. The goal is to check if and how that would change their behavior. Critics have argued it would only incentivize people to do nothing.
Another textbook example of an experiment conducted in a wrong way is Dauphin, Canada, a town where in the 70s the then prime minister Pierre Trudeau decided to include all residents in a project called MINCOME, which has become famous both for its innovation and its failure. It was canceled due to exceeding the assigned 20 million dollar budget because of the unforeseen global oil crisis. After its termination, the results were never analyzed, and all the documentation mysteriously vanished.
Kangas is now saying Finland is taking all previous failures in consideration, which is why it's proposing several models, and planning to dissect them all in great detail. What he's somehow omitting to comment on, though, is the reasons that have brought Finland to the decision to embark on such an endeavor.
Still, these reasons become pretty evident when we look at the context of the Finnish economy. If in the US case we're talking of an empirical test of a Friedman theory, and in MINCOME's case it was an ideological experiment by the center-left politician Trudeau, in Finland's case, we're talking of pure pragmatism. Very typically Finnish indeed. See, for the last three years the Finnish economy has been steadily shrinking, and the expectation is that it'll only recover from stagnation in 2016. Still, Finland's GDP keeps being 5% short of its pre-2008 levels. Since then, unemployment has been growing, now reaching 8.7% in October. The Finnish central bank has described the situation as "difficult", and has commented that the reason for this predicament is a combination of four negative factors: Nokia's decline, the downfall of the paper industry, the baby-boom generation going into retirement (which affects the country's competitiveness), and the Russia-EU crisis (sanctions, disrupted trade, etc).
The solution, therefore, is to consolidate the public finance, because right now the country has lower GDP, while the welfare expenses haven't gone down. This is the main argument of the ruling coalition. What's more, PM Sipilä's party Finnish Center has won the April election exactly because of their promise for "broader social experiments" aiming at optimizing the country's economy. And Olli Kangas' experiment is one of those. Another is planning to introduce a set of budget cuts worth 10 billion euro for the next five years. While the former experiment will produce an academical result that could then give suggestions for solving problems that are important for all of Europe (like reforming the pension system, optimizing labor expenses, and stimulating the waning labor force), the latter will likely directly affect the Finnish economy.
And, in case anyone is wondering if the Finns do have the discipline to carry out the former experiment in synchron, and the tenacity to bear the latter with dignity, I should probably remind of the words of the 64 year old central bank governor Erkki Liikanen: "Last December I ran for 4 hours and 35 minutes". So, there.
Although there's still a lot of time until then, the plan has already raised quite a few questions. Like, who's gonna pay for all that? And does "everyone" include children and pensioners, or just people at a working age? And, would the immigrants be included as well? What about foreigners from other EU countries? What about the Finns living abroad, many of whom have fled unemployment in their country? While still at an early stage, the initiative is curious - if for anything, at least because it's the largest basic income experiment in decades. And if Finland decides to adopt it in some form, it could become the first country in that respect. Many other countries which have also been trying to make their welfare systems more efficient and save them from bankruptcy, are watching with great interest.
The research is authored by Olli Kangas, chairman of the center for scientific research at the Finnish Social Welfare Institute (KELA). Kangas has assembled a team of researchers from several government and scientific institutions, and they've come up with four possible models of the experiment. The first one involves Basic income that should completely substitute almost all social payments that the government is currently making. The amount should be "relatively high", as the presentation goes. Kangas says this is slightly more than the country's base pension, 754 euro. The thing is, this model is difficult to apply, because the unions are participating in the management of the unemployment funds. Whichever government attempts such an approach, would instantaneously lose the unions' support, and they're quite influential.
The second model involves a partial Basic income of about 550 euro, which is the minumum social aid for unemployment in the country. It'd also remove some fundamental social protection schemes like pension and health insurance, but would retain unemployment aid, home aid, and maternity leave.
The third scenario would have the government help the poorer citizens by directing money to them through the annual taxes. That's the negative tax system. It would result in aid diminishing by 50% for every 10,000 euro of income, which means a household with an annual income below that threshold would get 10K from the government instead of paying any taxes. If it earns 10K, it'd get 50% less, i.e. 5K. If it earns 20K, there'll be no government aid.
The fourth model is a mixture of all preceding ones. In that scenario, the monthly payment would substitute some existing programs - like minimum guaranteed aid for unemployment, hospital aid, maternity leave, etc. Some money will be added to the amount, allowing the recipient to do some side work like voluntary community service, or looking after a relative. This model, unlike some of the others, and unlike some older experiments in other countries, is more focused on the economically active people, not the welfare recipients.
Kangas' team should present more details on their research in March, and the final conclusions in December 2016. If the country is still being ruled by Juha Sipilä's coalition by then, they'll have to choose one of the four models. Until then, the 800 euro that the media has been talking about, could turn out to be a different amount, or maybe several separate amounts. And the additional stipulations could change, depending on the conclusions.
The whole thing should begin to work in early 2017, then proceed for 2 years, and involve 100,000 people. Finland has put aside 20 billion euro for that project. The problem is how to select the people. The Finnish constitution stipulates complete equality. This means it'd be difficult to bring Basic income to random people in a workers neighborhood in Helsinki for example, and refuse the same to their neighbors. So, in order to get more detailed results, the research team wants to include whole towns in the project, and measure the consequences on the whole community.
Such an experiment has been done in the US in the 70s, but only involving the negative-taxation model, and only for a group which had already been receiving welfare anyway. Kangas recognizes that as a mistake. Next year the town of Utrecht in Holland is about to repeat that mistake by assigning 1100 euro per month to 300 people, who've already been receiving welfare. The goal is to check if and how that would change their behavior. Critics have argued it would only incentivize people to do nothing.
Another textbook example of an experiment conducted in a wrong way is Dauphin, Canada, a town where in the 70s the then prime minister Pierre Trudeau decided to include all residents in a project called MINCOME, which has become famous both for its innovation and its failure. It was canceled due to exceeding the assigned 20 million dollar budget because of the unforeseen global oil crisis. After its termination, the results were never analyzed, and all the documentation mysteriously vanished.
Kangas is now saying Finland is taking all previous failures in consideration, which is why it's proposing several models, and planning to dissect them all in great detail. What he's somehow omitting to comment on, though, is the reasons that have brought Finland to the decision to embark on such an endeavor.
Still, these reasons become pretty evident when we look at the context of the Finnish economy. If in the US case we're talking of an empirical test of a Friedman theory, and in MINCOME's case it was an ideological experiment by the center-left politician Trudeau, in Finland's case, we're talking of pure pragmatism. Very typically Finnish indeed. See, for the last three years the Finnish economy has been steadily shrinking, and the expectation is that it'll only recover from stagnation in 2016. Still, Finland's GDP keeps being 5% short of its pre-2008 levels. Since then, unemployment has been growing, now reaching 8.7% in October. The Finnish central bank has described the situation as "difficult", and has commented that the reason for this predicament is a combination of four negative factors: Nokia's decline, the downfall of the paper industry, the baby-boom generation going into retirement (which affects the country's competitiveness), and the Russia-EU crisis (sanctions, disrupted trade, etc).
The solution, therefore, is to consolidate the public finance, because right now the country has lower GDP, while the welfare expenses haven't gone down. This is the main argument of the ruling coalition. What's more, PM Sipilä's party Finnish Center has won the April election exactly because of their promise for "broader social experiments" aiming at optimizing the country's economy. And Olli Kangas' experiment is one of those. Another is planning to introduce a set of budget cuts worth 10 billion euro for the next five years. While the former experiment will produce an academical result that could then give suggestions for solving problems that are important for all of Europe (like reforming the pension system, optimizing labor expenses, and stimulating the waning labor force), the latter will likely directly affect the Finnish economy.
And, in case anyone is wondering if the Finns do have the discipline to carry out the former experiment in synchron, and the tenacity to bear the latter with dignity, I should probably remind of the words of the 64 year old central bank governor Erkki Liikanen: "Last December I ran for 4 hours and 35 minutes". So, there.