The next BIG idea

The next BIG idea
bne IntelliNews looks at how the Basic Income Guarantee might look in CEE.
By Nicholas Watson in Prague February 1, 2016

It’s often said that policies are like houses: if one’s been on the market for a long time, then there’s probably something wrong with it. The idea of a basic income guarantee has been around since the 18th century, proposed in a variety of forms from a motley crew of thinkers from across the political spectrum, but so far to little avail.

However, with the prospect of mass technological unemployment becoming more plausible by the day and industrialised societies struggling under the weight of complex welfare systems seemingly at once too complex to reform, yet too unwieldy to manage and too costly to sustain, trial schemes looking into how a basic income might work are popping up across the globe. bne IntelliNews examines how such a policy might look in Central and Eastern Europe.

Pained expression

One of the first to propose something like a basic income was Thomas Paine, the English-American political theorist, most notably in his 1797 pamphlet “Agrarian Justice”. Paine’s politics were complex and changed over time, but by the time he wrote the pamphlet he was concerned with how to compensate the landless for the deprivation of their natural inheritance and to relieve the growing poverty especially in rural areas. Specifically, he proposed to pay a single lump sum of £15 to every person on attaining adulthood (then defined as 21 years of age), and an annual pension of £10 to the blind and lame as well as to everyone aged over 50.

“It is proposed the payments, as already stated, be made to every person, rich or poor. It is best to make it so, to prevent invidious distinctions. It is also right it should be so, because it is in lieu of the natural inheritance, which, as a right, belongs to every man, over and above the property he may have created, or inherited from those who did. Such persons as do not choose to receive it can throw it into the common fund,” Paine wrote.

It’s probably no coincidence that Paine began advocating for a basic income in the 1790s, which like today was a period of great turbulence. The final decades of the 18th century were marked by a rapid economic transformation in Britain, but one that saw the benefits trickle down only very slowly to the poor. Though real wages were rising, employment was precarious. Against this backdrop was the political crisis of the age, the French Revolution. This had asserted the universal rights of man, and in an age of extreme inequality was fomenting republicanism, democracy and egalitarianism across the world as people questioned how the right to property could be reconciled with the ‘right to life’, ie. a decent minimum standard of living.

“These were the profound issues that confronted Paine… and an entire generation of radical thinkers. Underneath them, of course, lay even deeper questions about social and economic justice in a rapidly expanding capitalist market economy, and the connection between economic progress and political and social democracy,” write J. E. King of La Trobe University Department of Economics and Finance, and John Marangos of Colorado State University Department of Economics in an academic paper on Paine.

Such questions have been taken up by generations of economists and political theorists since, with the basic income finding enthusiastic backers on the right (Friedrich Hayek) and left (John Kenneth Galbraith). But perhaps never more so than today is the basic income being talked about so seriously, given the concentration of wealth in modern economies is approaching levels last seen before World War I (as identified by Thomas Piketty in his 2013 “Capital in the Twenty-First Century”), while current welfare systems are creaking under the strain of their complexity and cost.

For people like Hayek and others, the basic income would act as a “floor below which nobody need fall even when he is unable to provide for himself… [and is] a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born”.

Supporters also claim that by eliminating other benefits such as housing and unemployment as well as pensions, it would end the mess of means testing, fraud and the colossal bureaucracy needed to administer such complex systems. It would also arguably end the welfare trap, since any job – full time or otherwise – would not replace the basic income but merely supplement it, so people on benefits would never be worse off taking employment.

Perhaps the biggest driver for such a policy is the growing acknowledgement that rapid progress in artificial intelligence (AI) and robotics is bringing the era of mass unemployment closer to reality much sooner than predicted.

Of course, the idea of robots has been around since the Czech writer Karel Čapek first coined the word to denote a fictional humanoid in his 1921 play “R.U.R.” But what is accelerating the shift from science fiction into the everyday world is the process of machine learning, whereby computers assimilate more information about us from the internet and other big data sources, and begin drawing their own meanings from it so they begin ‘learning’ like a human.

A vast array of technology companies are already trying to commercialize AI, from Google to Baidu, focusing on creating algorithms that roughly model the way neurons and synapses in the brain change as they are exposed to new information and experiences. Many of these algorithms, such as those used for Apple’s Siri smartphone assistant, are already affecting our lives, but most people are unaware they are all forms of robotic intelligence. “We can already talk to them in a primitive way, but we can’t have conversations with them,” Zoubin Ghahramani, a professor of information engineering at the University of Cambridge, pointed out to The Times. “By 2025 we will, and they’ll be much more natural.”

In 2015, NPR commissioned a helpful study of the job market over the next 20 years to see whether “your job will be done by a machine” – you can try it here. It makes for grim reading for telemarketers, cashiers, tellers and drivers; better for occupational therapists, dentists and surgeons (and editors, huzzah!).

“Throughout our economy and society, machines are gradually undergoing a fundamental transition: they are evolving beyond their historical role as tools and, in many cases, becoming autonomous workers,” writes Martin Ford, author of “The Rise of the Robots: Technology and the Threat of Mass Unemployment”. “If we accept the idea that ever more investment in education and training is unlikely to solve our problems, while calls to somehow halt the rise of job automation are unrealistic, then we are ultimately forced to look beyond conventional policy prescriptions. In my view, the most effective solution is likely to be some form of basic income guarantee.”

Trial by error

The idea of the basic income became headline news in December when it was reported (erroneously, as it turned out) that Finland intended to soon introduce one for all working-age citizens, set at a level of €800 a month – which is probably about just enough to live on unless you like a drink.

This was later denied by Kela – an independent social insurance institution supervised by Finland’s parliament – which clarified that it had only launched a preliminary study in October to look at various different models of how the government can “find ways to reshape the social security system in response to changes in the labour market”. An analysis of experimental models and study designs will be produced in the second half of 2016, while a form of the “basic income experiment is planned to be launched in 2017”.

Finland is far from alone: limited trials of basic incomes have already been held in places such as India and the US, and in 2016 new ones are being planned by the Netherlands and Canada, while Switzerland is set to have a referendum on the issue.

Utrecht, one of the largest cities in the Netherlands, and 19 other Dutch municipalities will this year take a “small step” towards a basic income, Utrecht councillor Heleen de Boer told The Guardian, by allowing small groups of benefit claimants to be paid €900 a month or €1,300 for a couple/family, and keep any earnings they make from work on top of that. The outcome of the trial will be analysed by economist Loek Groot, a professor at the University of Utrecht, to see whether it should be expanded to cover the entire city of 330,000 residents.

Emerging systems

bne IntelliNews has looked how a similar basic income might look across the Central and Eastern European region.

Taking Finland’s €800 a month as the base level, we worked out how that figure compares with the average monthly salary in the Scandinavian country, in this case 32%. Applying that to average salaries across the region gave basic income amounts ranging from €165 (Romania) to €426 (Slovenia).

Multiplying this by the adult population (15 years old and above), we arrived at a total annual figure for how much the basic income would cost each country. This was then compared with current level social spending (including housing, child and unemployment benefits as well as state pensions) to find out how much more or less expensive the introduction of such a policy would be.

The first thing that jumps out is that the outliers of countries where the cost of introducing of a basic income would far exceed the current social spending bill are of course those that in percentage terms spend the least on welfare. Russia, Kazakhstan and to a lesser extent Turkey spend far below the average for OECD countries of 21.6% in 2014. For Russia and Kazakhstan it would cost a full 10 percentage points (pp) of GDP extra to current social spending to introduce such a basic income.

On the other side are more developed Emerging European countries where the level of social spending – especially on pensions – has risen to a such a degree that introducing our basic income would be cheaper. A basic income in Slovenia would cost 5.5pp of GDP less that the current social spending bill, Hungary (-5.3pp), Czech Republic (-4.6pp), Slovakia (-2.3pp) and Poland (-0.2pp).

There are then a bunch of countries – the Baltic states and Romania – where the basic income would cost marginally more than the current social spending system.

There are, of course, other reasons than cost why the basic income might not be the panacea that its supporters claim.

The biggest risk is that unconditional payments would encourage some households to drift into long-term joblessness – a situation associated with poorer outcomes in later life. Conditionality to claim benefits has been proved to be an important part of preventing this. But if the basic income were subject to conditionality, much of what it aims to eliminate would reappear: fraud, means testing, work-capability assessments and the bureaucracy needed to administer all that.

Then there is the political difficulty of pushing though a policy that will, inevitably, result in losers. The basic assessment pension in the Czech Republic is just CZK2,400 per month, well below the CZK7,826 that bne IntelliNews’ basic income works out as. However, the average state pension in the country in 2013 was CZK10,740 a month, implying that many pensioners would lose out.

Then there is the probability that the idea of the basic income will become increasingly economically unfeasible in light of the current European policy of taking in large numbers of migrants from outside of the EU to fill jobs that won’t exist in a few decades. Rather than commentators’ alarmist rhetoric about a demographic crisis in Europe, the continent is arguably naturally preparing itself for a new age of mass unemployment. Taking in millions of refugees who typically have large families would undermine this.

“Immigration policy is another area that would obviously need to be adjusted in the wake of the implementation of a guaranteed income. It seems likely that immigration as well as any subsequent path to citizenship and eligibility for the income would have to restricted… All this would, of course add even more complexity and uncertainty to a political issue that is already intensely polarizing,” writes Martin Ford.

For many reasons, therefore, don’t expect any country to take the plunge and sweep away decades of social spending policy with a basic income. However, trial schemes will no doubt continue and the subject remain a focus as societies across Europe grapple with the modern day problems of aging populations, rising unemployment, uncontrolled immigration and stagnant or slow economic growth.

Declan Gaffney, a social policy expert who has written extensively on the subject, says it might be better to think of the various basic income proposals “as thought experiments, allowing us to test our intuitions about subjects such as fairness, inequality, property, markets and risk”.

“Outside the confines of the thought experiment, [the basic income] needs to be made much more like existing social security to be feasible. But the thought experiment might also lead us to conclude that existing social security systems need to be much more like [the basic income] to be equitable and efficient,” Gaffney says.