Update: check here for a crucial numerial correction.
One of the things Scandinavian countries get right is a guaranteed minimum income. The US has a welfare system whose primary goal is to humiliate the poor by enforcing puritan restrictions on their lives – for example, single mothers are required to name a father before receiving TANF benefits; Sweden has a welfare system whose primary goal is to alleviate poverty.
The basic idea of guaranteed minimum income is that you pass some means test, which is usually having less than X income, and then get your income supplemented to X. Sweden doesn’t even have a statutory minimum wage, but the guaranteed minimum income is something like $14,000 per year (link to data; warning: there’s no inflation adjustment), which means that anyone who doesn’t pay significantly more than that won’t get any employees.
A German-style welfare system, where recipients have to prove they’re looking for employment, could work, but only if the requirements are lax enough to avoid government-side abuses. However chic it is in certain circles to make fun of welfare queens, any half-decent system has few enough infractions that stopping them won’t make a dent in government spending; on the other hand, abusive governmental restrictions on who can receive welfare make the lives of millions miserable.
The American poverty rate is $9,800 for one person plus $3,400 per additional person. A decent level of guaranteed minimum income needs to be at least that. In practice, it’s possible to tweak it to be a little more sensitive to such things as daycare costs (which should be fully state-funded anyway) or the fact that the first child has the highest marginal cost. Without tweaking, the easiest thing to do is to have a guaranteed minimum income at the poverty line for the size of household.
In Sweden, the guaranteed minimum income is given to individuals, so a couple gets twice as much as a single person; this is not a good idea, because it screws single people. A non-puritan alternative to handing out welfare based on marital status is considering actual household size, i.e. the practice rather than the legalese. For example, a woman who leaves an abusive husband to live on her own should immediately be considered single as she lives without her husband.
This also takes care of one of the standard criticisms of minimum wage increases. Since many minimum wage workers are young, the argument goes, increasing the minimum wage will increase at least youth unemployment, even if it won’t make much difference in the general unemployment rate. Supplementing a family of four’s annual income to $20,000 ensures that unless both parents can find a job simultaneously, which usually doesn’t happen, they’ll have no incetive to take jobs that don’t pay significantly more than $10/hour. Meanwhile, young people, who tend to be single with no dependents, will get only $10,000 and so are likely to take a job that pays, say, $7.50/hour.
Assuming that household income is independent of household size, the average payout will be about $15,500, unless people continue working jobs that pay less than that. If the entire bottom quintile takes advantage of that, the cost will be just under 8% of GDP.
To cut costs, there are two possible tweaks. One is to dole out money based on weeks or days rather than years. If the actual payout to a single parent is not $13,200 per year but $255 per week, it’s likely the parent will take a temporary low-wage job instead, as long as it pays significantly more than $255/week; increasing the minimum wage to even $7.50 is likely to produce such jobs.
The other tweak is to phase out the payment continuously as a household gets richer. For example, instead of supplementing the income of everyone to the poverty level, the government can supplement the income of everyone who makes less than 150% of poverty to 100% of poverty plus a third of the level of income. Although the payout will not decrease for any individual, it’ll encourage staying employed somewhat, which will only reduce the total payout.
If both tweaks together gets rid of the problem of voluntary unemployment, then under the same assumptions, the total payout will be about 4.5% of GDP. They won’t, but the weekly dole will probably eliminate it for people who make a decent amount of money per hour but can’t find a full-time year-round job, and the continuous phaseout will at least make a serious dent in it.
One of the problems in some European countries, including Sweden and Germany, is that free tuition plus welfare cause people to stay in school for many years just for the money. The quickest way to ensure it won’t happen in the US is to limit free tuition to four or five years.