The Swiss Plan to Throw Money at People

by Benjamin Studebaker

The Swiss are apparently going to hold a vote on a rather radical proposition–giving every Swiss citizen a universal monthly income of 2,500 francs (about $2,750), for an annual income of 30,000 francs (about $33,000). For perspective, this amounts to about twice what an American working for the federal minimum wage would earn annually if he were to work 40 hours a week every week without any breaks. I very much doubt that the Swiss will vote for this proposal due to how very radical it is, but I’d like to discuss the implications it would have for Switzerland if they were to do so and contemplate what a similar program would do in the United States.

Firstly, can the Swiss government pay for this? The legislation calls for all Swiss adults to receive the payment. Switzerland has a total population of 8 million of which approximately 6.3 million are eligible. This means that the Swiss government would need 189 billion francs (about $208 billion) per year to pull this off. Switzerland’s current GDP is about $632 billion, so this program would require about 33% of Swiss GDP. At present, Swiss revenues currently only account for about 10.4% of GDP, so revenues would need to triple. Assuming (rather unrealistically) that Switzerland would pay for this program entirely through revenue increases with no cuts to current spending, Swiss revenues would need to account for around 43% of GDP. It’s more likely there would be some cuts to state spending elsewhere, but in any case, Switzerland would almost certainly see its revenues increase to Scandinavian levels.

How would this look in the states? About 226 million Americans would be eligible for this program, so it would cost about $7.4 trillion per year. This is about 47% of US GDP.  It’s more costly for the United States because the the US has a lower per capita income than Switzerland. At present, US revenues only account for 10.1% of GDP, so revenues would need to quintuple. The United States could certainly make some reductions in spending to offset these costs–for instance, it wouldn’t need social security if it had a universal basic income, but next to this system, social security is small potatoes–it only paid out $713 billion in 2010, a tiny fraction of the cost of a universal basic income. As such, a UBI system in the United States would likely pay out much less than $33,000 a year. To make the burden comparable to the one the Swiss are considering, we’d need to make our hypothetical payout proportionate to the size of our per capita GDP. By my calculations, the United States could pay a universal basic income of about $20,000 per year while facing a similarly sized fiscal burden. This would still be about 33% larger than what an American working for the minimum wage earns if he works 40 hours a week every week of the year without stopping.

So the obvious observation is that this kind of program requires redistribution, and lots more of it than we presently have. Needless to say, wealthier portions of the population would very likely oppose a UBI program strongly, and for that reason I very much doubt that any state will create one. Nonetheless, it’s still interesting to ask what would happen if a state were to provide this kind of large universal free lunch through a redistributive system. The biggest difference is that by doing this, the state would eliminate a significant distortion in the labor market. At present in the United States and many other countries, potential workers are at a significant disadvantage when negotiating wages and salaries with employers. Workers are under significant societal compulsion to work–if they choose not to work in perpetuity, they will eventually experience an extraordinary level of hardship. The state will eventually refuse to extend unemployment benefits to them, and they will be on the street. This gives employers a significant negotiating advantage over workers. In effect, workers are negotiating under the threat of a kind of economic violence.

Generally, we do not consider agreements binding if they are made under coercion. That is to say, in order for an agreement to be meaningful, an individual must have a credible alternative to acceptance. If I demand to have sex with you and credibly threaten to beat you senseless if you do not comply, I am in a very important sense raping you, even if you comply to avoid the beating. At present, workers do not have credible alternatives to taking a job, because the consequences of prolonged joblessness are acute physical sufferings–lack of food, lack of housing, and so on. As a result, the job market is a coercive institution. A universal basic income that provides people with an alternative option eliminates that coercive element and puts the worker on a level playing field with the employer.

The fear is that if we put workers on a level playing field, it would be impossible to persuade many of them to work. This is quite interesting–those who hold this view believe that we need a system of coercion in order to get people to perform labor, that no other incentive aside from the threat of acute physical misery will suffice. In other words, without making workers dependent on their wages for survival, they will not value wages enough to take them, at least not at the previous rate. This causes me to recall the argument made by southern plantation owners in the 19th century, who argued that their system of forced labor was not morally different from the wage system used in northern factories, because in both cases the worker only labored in order to avoid physical penalties. They called the northerners’ system “wage slavery”.

I have no doubt that some number of people would decline to work, or at the very least, would demand a larger wage. It is also reasonably likely that they would demand different, more satisfying work. That said, limited experimentation with universal basic incomes on the local level has indicated that declines in work are typically not very large. A Canadian town gave the system a shot and found that men worked an estimated 1% less, wives 3% less, and unmarried women 5% less. These relatively modest reductions in work reflect a tendency among human beings to be ultimately dissatisfied with whatever level of wealth they achieve. $20,000 or $30,000 is enough to avoid disaster, but citizens still find themselves wanting more and more out of life, and correspondingly still find themselves desiring employment.

Nonetheless, it is likely that if this system were implemented, businesses would need to adapt. Instead of hiring large numbers of workers at very low wages, businesses would hire fewer workers at higher wages and increase the rate at which they used automation to replace jobs they no longer wished to pay the wages to fill. All stores would fill with automatic check-out machines, all phones would be answered by robots, and so on. In the short-term, this would likely increase their costs and push up prices. In the long run, however, it would lead to increases in productivity.

I’m struck by another thought about all of this. So long as the total amount paid out by the state in basic incomes exceeds the amount of money that citizens fail to earn through not working (and with only a 1 to 5% reduction in work hours on average, this would presumably be the case), poor citizens would have more funds available for immediate consumption. The redistribution necessary to achieve this would of course simultaneously leave the rich with less money available for private investment. This creates an interesting shift in how private businesses acquire funds. Instead of attempting to please and satisfy investors, a universal basic income leaves businesses with an incentive to first and foremost appease consumers, who would now control a much larger portion of available funds. It would also cause businesses to fund themselves less by borrowing and more by making sales. With stronger consumption, sales would increase, and businesses would consequently be able to fund expansion with less reliance on credit markets. This introduces a somewhat stabilizing force into the economy. It not only reduces private sector investment, it reduces the need for private sector investment, putting the power of success and failure more firmly in the hands of the purchasers themselves, whose purchasing power is quite literally greater.

In sum, a universal basic income would eliminate one of the last bastions of serious, heavy-handed coercion we have in developed states. It would also stabilize the economy by making it more reliant on consumer purchases and less reliant on debts and borrowing. That said, it would be quite costly. It would require a lot of redistribution, and in so doing it would marginalize the wealthy, not merely by reducing their wealth, but by reducing their capacity to use their wealth to influence the economy via investing. In aggregate, I think societies might well be better off with a universal basic income, but I certainly would not expect the rich to endorse such a system. In the long-run, the economy as a whole might grow faster and with greater stability, and the population might well be happier and more contented, but the rich would see a reduction in their relative wealth and power (even if their absolute wealth might, in the long-run, rise). That would understandably make them quite uncomfortable, and so they are likely to use their considerable influence to ensure that such a system does not come into being in Switzerland or elsewhere.