Money for Nothing: Switzerland Eyes a Basic Income Guarantee

Occupy Wall Street may be on to something.

Corporate profit margins are hitting record highs, while the little guy suffers, earning paychecks so small that one Walmart (WMT) store recently felt compelled to solicit food donations on behalf of its own employees.

Clearly, something is not quite right with how our economy is working, but what's the solution?

Last month, we wrote about Allan Sheahen, author of a book on the Basic Income Guarantee (BIG) -- a plan to have the federal government guarantee a "basic income" to every adult U.S. citizen, ensuring that every one of them has at least enough money to live on -- by handing it out, in cash, to every citizen, no questions asked. Such a law, proponents argue, would eliminate poverty at the stroke of a pen. It would simplify America's social safety net, eliminating housing assistance programs, social security, food stamps, and dozens of other high-cost social programs -- replacing them with a single blanket guarantee that everyone gets enough money to pay for their most basic needs.

Sound too good to be true? It may soon happen -- in Switzerland.

As Reuters reports, last month the Swiss government received a petition signed by more than 100,000 citizens, calling for a nationwide referendum to establish a basic income guarantee. Specifically, the proposal would pay every adult citizen $2,800 per month, or about 42 percent of the average per capita income in Switzerland, no strings attached. That's even more generous than what BIG advocates here suggest. A U.S. BIG equivalent in generosity would work out to about $1,750 per month.

Government Support and the Work Ethic

Critics naturally warn that giving people money regardless of whether they work or not may result in -- spoiler alert! -- people choosing not to work. That's one risk the Swiss will have to decide whether they want to take. But it may not be a huge risk they're taking. Studies suggest that most people like to do something useful with their lives, and will continue to work even if they don't necessarily need to.

Trial runs of BIG-like programs, conducted here in the U.S. in the 1960s and 1970s, showed a drop of only 1 percent in hours worked in at least one sample population -- despite workers having that baseline income guaranteed whether they worked or not.

In general, working mothers were the group found most likely (upwards of 7 percent) to cut back on work after receiving a BIG grant. But even there, studies showed that most of the women spending less time at the office did so not because they were lazy, but because they wanted to work somewhere else -- at home, raising their kids.

Other objections to the program range from worries that it would be unaffordable (Sheahen's book lays out the math proving that BIG could be paid for with a 35 percent flat tax, plus replacing the current system of wasteful, expensive-to-oversee social programs with a blanket income grant) to fears that it would be ineffective (because, critics assert, poor folk are incapable of managing their money, and will blow any grant money they receive on drugs, alcohol, and lottery tickets).

What's really needed, therefore, is a modern-day experiment to see how BIG might work in practice.

What Really Happens When You Give Poor Households Money

And as it turns out, we actually have some of that data.

Just a few weeks back, The Economist reported on a charity project called "Give Directly," which is funded in part by corporate do-gooder donors Google (GOOG) and Facebook (FB).

Give Directly targets poor households in Kenya, giving select recipients $1,000 each to spend as they like -- then tracks what happens next. The aim is to see whether poor households given a sum of money spend it wisely, or waste it immediately. (Or as The Economist puts it, whether the money "pulls people out of poverty," or whether they take the money and "blow it on booze and brothels.")

In one particular success story, a poor household in Kenya was given $1,000, then left alone to see how the money was spent. Half -- $500 -- was immediately invested in home improvements such as the installation of a new metal roof -- an investment that pays for itself in less than six-and-a-half years by eliminating the need to spend $80 a year replacing a thatch roof. The remaining $500 went into an even better investment: creating two businesses, one selling lumber, a second raising chickens and eggs for resale.

The two businesses now generate profits of more than $1,000 annually -- more than the value of the initial Give Directly grant.

Caveats and Provisos Abound

As The Economist reports, not all Give Directly grants were such runaway success stories, and there's some data to suggest that making grants conditional on the recipient following certain rules (e.g., ensuring kids go to school, getting regular medical care) may generate better results than are seen from unconditional grants. But on average, Kenyan households receiving no-strings-attached grants from Give Directly saw their annual incomes rise by 25 percent, childhood malnutrition rates fall more than 33 percent, and livestock holdings (income-producing assets, in U.S. terms) increase by 50 percent.

Similar experiments in Uganda, Vietnam, and other developing nations have generated statistics ranging from 20-percentage-point declines in poverty to 50 percent gains in income as recipients used their grant money to invest in tools, livestock, and education, and have been characterized as "wildly successful."

Looking around at the state of the U.S. economy today, you have to wonder if we could use a little bit of that wild success here, as well. Maybe, just maybe, if it works as well in Switzerland as it did in Kenya, the U.S. will decide to follow their lead.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook and Google.