To help poor people, give them money

The Oz (no link) is touting a campaign by Andrew Forrest to introduce an Australian version of the US “food stamps” system, replacing cash payments with a card that can only be used to buy an approved list of items. This is yet another step in the abandonment of economic rationalism by the political right. I’d be surprised if Forrest could get the support of any economist for this (though the recent performances of the IPA crew give me some pause). Free market advocates, following Milton Friedman, have long sought the replacement of in-kind benefits with cash. To those on the left, even where enthusiasm for markets is more qualified, the conclusion is reinforced by the obvious class warfare involved here. At best, someone like Forrest can be seen as a paternalist, hoping to protect the poor from themselves. But it’s obvious that the Murdoch press, and its target audience, want to punish the poor, not protect them.

As it happens, my slowly-progressing book has a section on just this issue, presenting the standard arguments of Friedman and others as part of the case for why markets work so well (when they do)

To help poor people, give them money

The problem of poverty is huge, in rich and poor countries alike. Around the world, nearly a billion people live in extreme poverty, living on less than $US1.50 a day. Even in the US, on most measures the wealthiest country in the world, the Dept of Agriculture estimates that 14.5 per cent of the population experience food insecurity, defined as being ‘uncertain of having, or unable to acquire, enough food to meet the needs of all their members because they had insufficient money or other resources for food.’

Faced with images of the hunger and suffering caused by famines and extreme poverty, a natural and intuitive reaction is to send food. This reaction is often politically appealing in countries that happen to have large stockpiles of food, either because of unforeseen declines in market demand, or because of government policies such as price supports for farmers.

On the other hand, many advocates of development aid dismiss food aid as a short-term ‘band-aid’, and argue that the aim of aid should be to provide the ‘right’ kind of assistance, as measured by subsequent economic growth. Advocates of aid initially focused on economic infrastructure and industrial development, and have more recently turned their attention to health and education.

Which of these approaches is right? Much of the time, neither. While support for health and education has a better track record than food aid, there is a growing body of evidence to say that, in both poor countries and rich ones, the best way to help people is to give them money.

To see why this should be so, ask: What would a desperately poor family do with some extra money? They might use to stave off immediate disaster, buying urgently needed food or medical attention for sick children.

On they other hand, they could put the towards school fees for the children, or save up a piece of capital like a sewing machine or mobile phone that would increase the family’s earning power.

So, the poor family is faced with the reality of opportunity cost. Improved living standards in the future come at the cost of present suffering, perhaps even starvation and death. Whether or not their judgements are the same as we would make, they are surely in the best possible position to make them.

Experimental evidence supports this conclusion

Exactly the same points apply in rich countries. Giving poor people assistance in kind, such as food stamps and subsidised housing, has a lot of political appeal. Not only does it meet an apparent need, but it appears to reduce the chance that the recipients will waste their extra income on luxuries, or on alcohol and tobacco. In addition, as in the case of the US food stamps program, it may also be possible to form a political coalition with producer interests, in this case the farm lobby.

Thinking in terms of opportunity cost, however, we can see that aid in kind almost inevitably results in waste. The opportunity cost of subsidised housing is the low rent paid for the house, while the opportunity cost of moving usually includes going to the back of the line. So having secured subsidised housing, people will stay there even if the house no longer suits their needs, because it is too big, too small, or far away from a new job.

The same kinds of problems come up with food stamps. Families poor enough to get food stamps face all kinds of problems. They might, for example, be faced with eviction if they don’t make a rent payment, or with a need for urgent medical or dental care.

Most of the time food stamps cover only part of a family’s food budget, so they are really just like cash. Families can meet some of their food bills with stamps, then use the money they save to meet other needs. The opportunity cost of spending more on food is the alternative that can’t be afforded.

But it’s precisely when people need money most, to the point where they are prepared to live on a restricted diet, that the limits of food stamps start to bite. If poor families were given money, they could choose to pay the rent bill even if it meant living on rice and beans. That’s a hard choice, but it might be the best one available.

Unsurprisingly, then, poor people often try to change some of their food stamps for money. This is denounced as ‘fraud’ and used as a reason for cutting food stamps even further.

It is market prices that determine the opportunity costs of goods and services for individuals and families. So, when people choose how to spend additional money, the opportunity cost of one choice is the alternative that could be bought for the same amount.

The idea that poor people don’t understand this is patronising and wrong. The tighter are the constraints on your budget, the more important it is to pay attention to them. Poor people often have less access to markets of all kinds, including supermarkets basic financial markets such as bank accounts and face complex and variable prices as a result. Nevertheless, many of them manage to find highly creative ways of stretching a limited budget to meet their needs. Additional constraints, in the form of payments that can only be spent in particular places and on particular goods, are the last thing they need.

87 thoughts on “To help poor people, give them money

  1. @BilB
    BilB, I believe your idea has much more merit than mine, simply because it involves the disposal of a lot fewer drains on the economy. Efficiency should always be our priority.

  2. According to the ABS, there are about 146,000 jobs vacant[1], and about 740,000 unemployed people[2]. Assuming all those jobs will be filled from the pool of unemployed, that leaves about 594,000 people who can’t get a job, even if they want one.

    Given that there are no actual jobs to be filled by the 594,000 people, this raises the difficult question of what proportion of those people are actually dole bludgers. It’s difficult to quantify because there are no jobs for them to avoid. But let’s set the figure at say 1 in 10 people – 10% (which I think is very high).

    NewStart expenditure for 2014 is estimated at around $9.5 billion[3]. Assuming the unemployment and vacancy rate stays steady then that’s about $12,000 per unemployed person per year, bringing the total cost of the “dole bludger” component of unemployment benefits to about $762 million – a per-capita rate of about $35 per year[4].

    Commonwealth per-capita tax is about $15,000[5], making the magnitude of dole bludgers in the order of 0.2% of total commonwealth taxation per capita, .

    In fact, you have to get up to almost 45% of people being dole bludgers before the tax burden reaches even 1%.

    I know that these numbers are fast and loose – but the point is that the burden of the people being explicitly targeted is ridiculously small. The cost of these bad actors to employed people is far less than the cost of the proposed policies to active job seekers. I suspect that the cost of paying unemployment benefits to bad actors may actually be less than the increased cost of property insurance due to crime and other flow-on effects of these proposed policies.

    For my part, for the cost of one good cup of coffee PER MONTH, I’d rather put up with the dole bludgers and give everyone else a bit of dignity and respect.

    As an aside, as a small business owner I would also like to be able to fire people without the burden that I’m about to send them bankrupt. There is no aspect of this policy that makes sense. If anything, it’s probably just going to make me avoid hiring young people.


    [4] Anecdotally, the number of taxpayers in Australia is about 11,000,000, or 50% of the total population. But if you double the numbers, they’re still very small. And, of course, they are even smaller for the majority of taxpayers.

  3. Twiggy Forest’s card would not mandate specific expenditures. It is basically a debit card that cannot be used to pay for alcohol or gambling. Do you really have a problem with that John?

  4. @Chris Lloyd

    Do you have an argument in favour of it? If somebody suggested replacing all money with debit cards that couldn’t be used to pay for alcohol or gambling, would you be in favour of that, and if not, why not?

  5. @J-D I do not accept the onus of proof. The government gives money to those who have insufficient income to support themselves. They (i.e. we) believe that spending it on drink or gambling will not improve their long term prospects. Your question about replacing all money with restricted debit cards is somehow equates spending MY OWN money with spending TAXPAYER money.

    Quiggin and others have made the point that people might subvert the alcohol restrictions, for instance by buying allowed goods for someone else and getting cash in return. I guess if the card owner had to pay a commission on this transaction, that would be an reason against. That is at least an economic argument. It depends on how much this would happen, which is an empirical question.

  6. What has been missed in ALL the commentary is the pernicious effects of alcohol and gambling. I have first hand knowledge of the effects of alcohol having lost two family members. They manifestly did NOT know what was good for them, and I hope all readers would accept that I was not remiss (and was in fact proudly paternalistic) in trying to stop them from drinking. Now consider a remote dysfunctional community where there is no real economy, and a history of alcohol abuse. The meta-being of the community is an alcoholic, if you will. How does giving them money to buy booze help anybody?

    Part of the problem here is that Twiggy talks about rolling out the system to everyone, just to not look racists. But not all unemployed are the same. A depressed middle aged aboriginal former stockman in Wadeye is not the same as a recent law graduate in the city who is waiting for the right offer. Restriction might help the former, or at least a lack of restrictions might hurt him. The law graduate just needs money to tide her over.

  7. Money I am entitled to, after paying taxes all my life. Money that is given out, to create a civil society. Money I spend, that keeps others in work. In fact I even pay taxes out of that money.

  8. If I spend it on grog, it is I that goes without other things. Grog is still legal. Still helps to keep people in jobs.,Has a high tax built into it.

    Howe does that hurt anyone else.

    PS Do not spend mine on grog. I like a roof over my head and food more. That is my choice
    I wish people would get off their high horse, taking their moral outrage elsewhere,

    Now if I have children that are going without, one does not punish all. No that is picked up by the agencies, charged with protecting kids. If I am a drug addict, or alcoholic out of control, that is a health matter.

    The money I receive is not yours, never has been. You have no idea of the taxes I have paid over a lifetime.

  9. I agree that alcohol and gambling do have very pernicious effects. My attitude is so strong many would call me a wowser. However, I do not agree with prohibition nor do I agree with food stamps or in-kind benefits. If we want to educate and assist people to look after themselves, paternalism is a step in the wrong direction.

    Chris Loyd’s argument is “A depressed middle aged aboriginal former stockman in Wadeye is not the same as a recent law graduate in the city who is waiting for the right offer.” I would suggest you can’t generalise like that. I can recall a few high profile cases over the years where high-paid lawyers became addicted to heroin or cocaine. Some also buy high powered cars which they then go and kill themselves in. Perhaps we should only pay lawyers in kind since they can’t be trusted to know how to spend their money.

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