Money for Nothing: Switzerland Eyes a Basic Income Guarantee

BJH215 Uncle Sam. Image shot 2010. Exact date unknown.
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.

The Poorest Suburbs In America
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Money for Nothing: Switzerland Eyes a Basic Income Guarantee

The U.S. poverty rate in 2010 was 13.2%. As expected, a number of urban areas have a much higher poverty rate than the national average. What may be surprising is the increasing poverty rates in a few suburban areas, a trend which has been way for some time. In an attempt to better understand this trend, 24/7 Wall St. analyzed the ten metropolitan areas with the highest rates of poverty in their suburbs, as ranked by the Brookings Institute.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 13.6%
> City poverty rate: 15%
> Number of suburban poor: 43,449

Although Albuquerque has a number industries that have remained economically healthy throughout the past decade, it has high rates of both city and suburban poverty. Albuquerque has faced difficult times in the last few years compared to the rest of New Mexico. From 2009 to 2010, the metropolitan area's unemployment rate increased from 7.6% to 8.6%. The emergence of a number of manufacturers of green technologies in the area has improved conditions to an extent in the area since. Meanwhile, the housing market in the state remains one of the worst in the nation.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 14.0%
> City poverty rate: 24.1%
> Number of suburban poor: 46,202

Augusta-Richmond County is the second largest metropolitan area in Georgia, behind Atlanta. The city and surrounding area lost many jobs during the recession. Some of these losses were the result of budget-tightening in the public sector. Georgia Health Sciences University has laid off hundreds of employees. The city has also privatized a number of public services, such as its bus service and its municipal golf course, also resulting in a drop in public sector jobs.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 14.0%
> City poverty rate: 26.9%
> Number of suburban poor: 49,016

The Jackson metropolitan area is centered around the capital city of Mississippi. As of 2008, the area's suburbs had just under 50,000 residents living below the poverty line. In 2000 the suburbs had less than 40,000 impoverished people. The poverty rate is even higher in the city. Poverty is a major issue throughout Mississippi. According to local news source WLBT, one in every four to five Mississippi residents live in poverty.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 14.2%
> City poverty rate: 18.6%
> Number of suburban poor: 68,291

Although the unemployment rate for Little Rock is significantly lower than the national average -- 7.5% compared to 9.3% -- the city's suburbs have an above-average percentage of people living below the poverty line. The poverty rate in Little Rock's suburbs has increased 3.1 percentage points in the last decade. According to non-profit organization Arkansas Advocates for Children and Families, the number of male workers settling for part-time instead of full-time work has doubled since 1995. Additionally, "the demand for public benefits such as unemployment, food and child care assistance has skyrocketed," the organization reports.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 14.6%
> City poverty rate: 13.5%
> Number of suburban poor: 43,645

Modesto is the first metropolitan area on this list where the suburban poverty rate is higher than that of the city. This is largely due to the area being one of the worst hit by the housing bubble. Stanislaus County, which is included in the Modesto metropolitan area, continues to have one of the highest foreclosure rates in the country. In July 2011, one in every 140 housing units in the county received a foreclosure filing, according to RealtyTrac. The rate for California was 1 in every 239, and the national rate was 1 in every 611.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 15.8%
> City poverty rate: 13.3%
> Number of suburban poor: 75,075

From 2000 to 2008 the poverty rate among the Lakeland metropolitan area's suburbs increased 3.2 percentage points. The city poverty rate decreased by 1.7 points. The number of impoverished people in the suburbs, which consist primarily of Polk County, increased from under 50,000 people to over 75,000. According to an April 2011 article in local newspaper, The Ledger, community leaders claim "Polk is on the verge of an economic boom that will lift wages and create more jobs." As of June, however, unemployment in Polk County was at 11.7%.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 18.8%
> City poverty rate: 25.5%
> Number of suburban poor: 79,359
Fresno's economy primarily relies on agriculture. Unfortunately, field workers receive very little pay. They perform a job that is low-wage, and seasonal positions are largely filled by immigrants. In addition to this, Fresno was another metropolitan area that was hit exceptionally hard by the housing crash. From 2007 to 2009, home prices dropped 44%, according to S&P Case-Shiller national home-price index.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 24.2%
> City poverty rate: 16.7%
> Number of suburban poor: 105,030

Poverty in the entire Bakersfield metropolitan area rose 23% from 2007 to 2009. The suburban portion of the metro has been affected to a far greater extent. Bakersfield's two main industries, oil and agriculture, require a large amount of manpower. Much of this is supplied by immigrants, who often, especially with regards to agricultural jobs, do not make enough money to lift them out of poverty. As of 2009, 29.1% of people below the poverty line in Bakersfield were born outside the U.S. -- one of the highest rates in the country, according to Brookings.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 31.0%
> City poverty rate: 24.3%
> Number of suburban poor: 41,059

El Paso is located on the U.S.-Mexico border across from Ciudad Juarez. Despite being home to branches of a number of large manufacturers, including Boeing, Hoover, Eureka, and Delphi, the city has an extremely high overall poverty rate. The metropolitan area's poverty rate was at 23.7% in 2009, compared to Texas' overall rate of 17.1% in the same year. Things are especially bad outside of the city. The suburban poverty rate was 31% in 2008. El Paso's economic situation has gotten somewhat better with the recent expansion of military base, Fort Bliss, which is now one of the largest in the country. However, unemployment is still at 10.9% -- almost 17% higher than the national average.

Source: 24/7 Wall St. & Brookings Institute

> Suburban poverty rate: 36.7%
> City poverty rate: 28.3%
> Number of suburban poor: 217,736

McAllen is another border town, located on the southern tip of Texas. In 2008, over 85% of the poor in McAllen lived in the suburbs. According to Brookings, 35.4% of McAllen's suburban poor are born outside of the U.S., as of 2009. The metropolitan area's economy has grown rapidly in the last few years, thanks largely to job growth in government, education, and health care. Unemployment in McAllen remains an issue, however. In June 2011, unemployment increased to 13%, up from 11.9% the month before. The city also has the lowest median household income in the country.

Source: 24/7 Wall St. & Brookings Institute

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