Is a Basic Income Inflationary?

[Dreadnaught]

While in principle I like the idea of simplifying welfare programs, I can't avoid the thought that a Basic Income (which has been an obsession of the Berliners for as long as I've known them) would be quite inflationary for many people, especially at the lower end who don't have income beyond the Basic. If I'm supplying a necessary/relatively inelastic good, I know that all my customers have at least a certain amount of income.

Is there a different take on the inflation issue? Am I missing something?

Finland is considering giving every citizen €800 a month
Proposals for a national basic income are intended to simplify the social security system and encourage more unemployed people to take on temporary work

Authorities in Finland are considering giving every citizen a tax-free payout of €800 (£576) each month.

Under proposals being draw up by the Finnish Social Insurance Institution (Kela), this national basic income would replace all other benefit payments, and would be paid to all adults regardless of whether or not they receive any other income.

Unemployment in Finland is currently at record levels, and the basic income is intended to encourage more people back to work. At present, many unemployed people would be worse off if they took on low-paid temporary jobs due to loss of welfare payments.

More than 10 per cent of Finland's workforce is currently unemployed, rising to 22.7 per cent among younger workers.

According to research commissioned by Kela, close to 69 per cent of the Finnish population favours the idea of a national basic income.

Detractors caution that a basic income would remove people's incentive to work and lead to higher unemployment. Those in favour point to previous experiments where a basic income has been successfully trialed. The Canadian town of Dauphin experimented with a basic income guarantee in the 1970s and the results - both social and economic - were largely positive.

Finnish Prime Minister Juha Sipilä supports the idea, saying: “For me, a basic income means simplifying the social security system.”

The basic income will cost Finland roughly €46.7 billion per year if fully implemented. Kela's proposals are due to be submitted in November 2016.

The Dutch city of Utrecht is also planning to introduce a basic income, albeit solely for welfare recipients. From next month more than 250 unemployed residents of the city will be given a monthly sum to live on, with researchers monitoring the outcome to determine what effect it has on employment.

Switzerland is also considering introducing a national basic income. In September the Swiss parliament voted, with a large majority, for a motion calling on the Swiss people to reject the Popular Initiative for Unconditional Basic Income. However, a nationwide referendum on the issue is slated for 2016 and, according to a recent online poll, 49% of the Swiss would currently vote in favour of its introduction.

http://www.telegraph.co.uk/news/worl...0-a-month.html

[Lewkowski]

I don't see inflation being a concern as long as total $ provided with basic income is equivalent to what they would get through current benefits.

That being said... basic income offends me deeply. If you are healthy in body/mind (and don't give me shit about bi-polar, depression, anxiety disorder, etc) and CAN work I despise the idea of the government allowing parasites to subsist.

[wiggin]

Dread, I think the question is what this system is replacing. A (relatively low) income floor that replaces most welfare payments might have similar effects with fewer unintended consequences. If you could scrap some of the thicket of overlapping welfare schemes extant in most countries and focus on a single, simple number, you'll probably reap some overall benefits and it wouldn't be all that inflationary - likely even the opposite, since unconditional basic incomes are fungible instead of, say, food stamps or housing vouchers, which fix demand for a good. If, on the other hand, this is added to an already complex welfare system, it's probably a bad idea from a number of perspectives.

I'm not convinced it would be inflationary, though. There are a number of places with some form of a basic income - for example, the 'dividend' given to every Alaskan, currently about $2k pa. That's rather less than the Finnish plan, but it gives us a nice set of data to play with. I haven't looked at this in any level of detail, but I don't believe the APF has led to rampant inflation in Alaska. I do wonder if they have had some form of the 'Dutch disease', though, but it's unimportant to your question.

The biggest concern I would have would be the effects on labor markets. Presumably minimum wages would be able to be scrapped or decreased in a world with a basic income, but that might mean that the marginal value for additional low-paid work would be quite low, disincentivizing work (theoretically, cleverly designed but complex welfare systems like the EITC mitigate this problem, but a basic income would not). On the other hand, you might imagine that low-skills workers would be able to leverage the option of not working into securing better pay at jobs that can't be readily automated. If the latter happened, I could see it feeding through into inflation. The former wouldn't be as likely to be inflationary, but it wouldn't be all that good for the economy, either. The rose-tinted scenario is that the freedom from immediate economic needs would spur entrepreneurial activity (and hence growth/employment), but I question whether that effect would really be felt among the low-skills population.

I think you're also assuming that too many of these basic goods are 'inelastic'. Most goods have a fair degree of elasticity of demand, given sufficiently elastic supply. This includes food, especially with substitution effects. The fungibility of cash, as mentioned above, helps with this a lot. The big wrinkle I'd see would be housing. Housing supply is heavily regulated and an enormous mess - not to mention being quite slow to respond to changes in demand. Would a universal bump in incomes (albeit with an increased, heavily progressive, tax rate) feed into driving up housing costs? It's entirely possible. I would imagine that a basic income scheme would need to simultaneously open up some markets (like housing supply) to demand pressures in order to keep a lid on some types of inflation.

I haven't thought through this problem with any rigor - for example, one could imagine that the velocity of money running through the economy might increase - but I think it really depends on how it is implemented. If done thoughtfully, it might be better than our current welfare system. If not, it could easily be a disaster.

That being said, the much higher Swiss number (over $2k/month IIRC?) is probably unworkable - I'd assume that would leave to massive disincentivization to work.

[Flixy]

I don't see inflation being a concern as long as total $ provided with basic income is equivalent to what they would get through current benefits.

That being said... basic income offends me deeply. If you are healthy in body/mind (and don't give me shit about bi-polar, depression, anxiety disorder, etc) and CAN work I despite the idea of the government allowing parasites to subsist.

That's not entirely true though. I have a number of friends who want to work, can work, and are actively looking. But they just get temp jobs, part time, minimum wage (which is a fair bit higher here I think). They get by, just, but they don't have families or anything. If they did, no way they could get by with no regular job or fulltime work. And it's not for lack of trying. Not to mention people who are unemployed and are rejected for being unemployed for too long.. It simply isn't that easy to work enough hours to make a substantial income.

[Loki]

Europe has fewer full-time jobs because it's much harder and more expensive to fire full-time workers. So you can at least partially blame the government for that.

[Lewkowski]

That's not entirely true though. I have a number of friends who want to work, can work, and are actively looking. But they just get temp jobs, part time, minimum wage (which is a fair bit higher here I think). They get by, just, but they don't have families or anything. If they did, no way they could get by with no regular job or fulltime work. And it's not for lack of trying. Not to mention people who are unemployed and are rejected for being unemployed for too long.. It simply isn't that easy to work enough hours to make a substantial income.

And there are number of individuals who would gladly never work again if they could. In general work is often available for those who seek it. Now what type of work is another question all together. We've seen that in America in the IT sector where you've got highly educated people who could work but resist getting jobs 'beneath' them until they don't have any other option.

[Loki]

The problem with "settling" for a lower job is that it drains you of the time and motivation to get the one you are qualified.

[Dreadnaught]

Dread, I think the question is what this system is replacing. A (relatively low) income floor that replaces most welfare payments might have similar effects with fewer unintended consequences. If you could scrap some of the thicket of overlapping welfare schemes extant in most countries and focus on a single, simple number, you'll probably reap some overall benefits and it wouldn't be all that inflationary - likely even the opposite, since unconditional basic incomes are fungible instead of, say, food stamps or housing vouchers, which fix demand for a good. If, on the other hand, this is added to an already complex welfare system, it's probably a bad idea from a number of perspectives.

I'm not convinced it would be inflationary, though. There are a number of places with some form of a basic income - for example, the 'dividend' given to every Alaskan, currently about $2k pa. That's rather less than the Finnish plan, but it gives us a nice set of data to play with. I haven't looked at this in any level of detail, but I don't believe the APF has led to rampant inflation in Alaska. I do wonder if they have had some form of the 'Dutch disease', though, but it's unimportant to your question.

The biggest concern I would have would be the effects on labor markets. Presumably minimum wages would be able to be scrapped or decreased in a world with a basic income, but that might mean that the marginal value for additional low-paid work would be quite low, disincentivizing work (theoretically, cleverly designed but complex welfare systems like the EITC mitigate this problem, but a basic income would not). On the other hand, you might imagine that low-skills workers would be able to leverage the option of not working into securing better pay at jobs that can't be readily automated. If the latter happened, I could see it feeding through into inflation. The former wouldn't be as likely to be inflationary, but it wouldn't be all that good for the economy, either. The rose-tinted scenario is that the freedom from immediate economic needs would spur entrepreneurial activity (and hence growth/employment), but I question whether that effect would really be felt among the low-skills population.

I think you're also assuming that too many of these basic goods are 'inelastic'. Most goods have a fair degree of elasticity of demand, given sufficiently elastic supply. This includes food, especially with substitution effects. The fungibility of cash, as mentioned above, helps with this a lot. The big wrinkle I'd see would be housing. Housing supply is heavily regulated and an enormous mess - not to mention being quite slow to respond to changes in demand. Would a universal bump in incomes (albeit with an increased, heavily progressive, tax rate) feed into driving up housing costs? It's entirely possible. I would imagine that a basic income scheme would need to simultaneously open up some markets (like housing supply) to demand pressures in order to keep a lid on some types of inflation.

I haven't thought through this problem with any rigor - for example, one could imagine that the velocity of money running through the economy might increase - but I think it really depends on how it is implemented. If done thoughtfully, it might be better than our current welfare system. If not, it could easily be a disaster.

That being said, the much higher Swiss number (over $2k/month IIRC?) is probably unworkable - I'd assume that would leave to massive disincentivization to work.

Overall good points, it matters in context. And clearly the Suomi proposal aims to specifically reduce the complexities of the welfare distribution side of the equation. But the contours of the labor/housing/food markets clearly do matter, though I'm not convinced liberalization would alone would help in the long run.

Now that I think about it, I worry having the entire population focused on a single form of welfare creates an entrenched political entitlement that is impossible to reform because it impacts everyone.

[GGT]

The cost of living is inflationary. Basis health care is inflationary. Globalization is inflationary. So what are you really worried about? That "free markets and free trade" can't live up to its ideal?

[Loki]

Globalization is actually deflationary. That's one of its main benefits.

[GGT]

Depends on how it's framed. "Income" is like a mixed metaphor to most people.

[Lewkowski]

The cost of living is inflationary. Basis health care is inflationary. Globalization is inflationary. So what are you really worried about? That "free markets and free trade" can't live up to its ideal?

GGT do you just hear/read words and then use them without properly understanding how they function?

[Loki]

Depends on how it's framed. "Income" is like a mixed metaphor to most people.

No, it really isn't. Globalization sharply cut down on inflation.

[Khendraja'aro]

By the way, Finland is not "considering anything".

http://www.kela.fi/web/en/news-archi...ct=%2Fweb%2Fen

[earthJoker]

Considering == some politician in some irrelevant party of said country suggested something

[GGT]

Aren't basic costs of living "inflationary" in a globally-connected world?