September 9, 2016 1:35PM

Iceland Could Be the Next Site for a Basic Income Experiment

By Charles Hughes

Iceland will hold early elections in October following the resignation of former Prime Minister Gunnlaugsson. One aggregation of polls has the upstart Pirate Party in the lead by four percentage points, and the party may be in prime position to form Iceland’s next government. They have an eclectic suite of policies in their party platform, some of them interesting and not all of them desirable. In a narrow sense, their elevation could lead to the development of a basic income experiment due to the shortcomings they perceive in Iceland’s current welfare system. Another pilot program for a basic income could help find more answers to the many questions that still surround the idea.

Last year the party’s MPs introduced a proposal calling for the government to form a working group to investigate the feasibility of shifting to a basic income that would “replace, or at least simplify” their current system. As with most discussions about the desirability of such a shift, the details are incredibly important, and to a large extent these proposals cannot be evaluated until more elements of the plan are decided.

If this is an unconditional income that is grafted onto the current framework, it would likely end up being unaffordable without addressing the work disincentives and other problems currently in place. If, however, it replaces the patchwork of programs with a simplified benefit going directly to people instead of being transmitted through a series of in-kind or specified programs, it could potentially be an improvement over the status quo.

One thing that is certain, the current system can deter work for low-income households in those programs and ultimately make it harder for them to prosper. A single parent with two children who transitions from inactivity to a full-time job paying two-thirds of the country’s average wage faces a rate of 73 percent, so she would lose almost three quarters of each dollar of earnings to lower benefits and higher taxes. This makes work a less attractive option. It’s not just moving from inactivity to work, as low-income workers face a similar trap. A single parent with two children faces a 54 percent rate if they move from a low wage job paying one-third of the average wage to one paying two-thirds. This trap has gotten worse recently, as this rate is up significantly from 46 percent in 2002. Moving to a form of basic income could reduce these work disincentives in the right framework, but much of this depends on the details in the plan and how it is implemented.

Last year’s proposal cited the experience in Finland, where researchers recently announced they will be moving forward with a limited trial where a randomly selected group of two to three thousand people already unemployed will begin to receive a basic income of about $600 each month for a period of two years. The new cash grant will replace their existing benefits, and researchers will assess the impact of the change on poverty, employment rates, and bureaucracy. The Finnish experiment will be more limited in scope than some initial reports, so a potentially more expansive experiment in Iceland could help to test other aspects, like what community wide effects would be where a meaningful portion of the residents are in this regime instead of the existing framework.

Even something along these lines will leave some fundamental questions surrounding a basic income unanswered: concerns about affordability, sustainability and work impact for a program that is permanent instead of limited to a two year period. Scaling up an unconditional benefit to the entire country would present funding concerns not present with a limited pilot program. A later generation that grew up with a basic income framework in existence could have significantly different responses in terms of work effort than one that shifted after they were already well into their working lives.

Getting more information about how these other models compare to current welfare systems along these metrics is crucially important for countries considering reform. The many flaws of the current system are well-known and past work at Cato has delved into them at length. It is not yet clear whether these new systems will fall prey to some of the same problems as the old framework when they are implemented, or even be practically feasible. Until we know much more about the ramifications of such a shift, it is much too early to consider large-scale adoption of anything along these lines. These experiments and demonstrations are necessary because they will help us get more data to try to find answers to some of these questions. We may be getting another test case in Iceland soon.