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. “The rich are different from you and me”. That famous line might do at a dinner party to answer the rather obvious but humbugish suggestion that all sorts of government mediated benefactions from the taxpayer should be equally subject to control. Instead of going into a case by case detailed refutation of such proposals let ne just offer the suggestion that the rich and merely prosperous be allowed to buy their way out of supervision by a flat rate fee (cp. the UK’s non-dom tax) or a higher rate of tax? But isn’t that the way it works already? Not a bad rule of thumb really that those who have been paying the bill as taxpayers should be presumed not to need supervision and entitled not to be supervised? Obviously untrue of many OAPs but if they kill themselves with fags and booze it’s not likely to affect children and doesn’t damage GDP. (OK there are a couple of quibblers who might raise the case of the long term healthcare costs of some elderly people living unhealthy lifestyles but not dying quickly. Even in those cases it can be answered that the damage was probably done while they were still in the workforce paying income tax. That’s why we are justified in imposing a heavy excise on booze and cigarettes to top up what we get from the working smiking boozer’s income tax).

    In short it’s not even a smart debating point to try and generalise income management to the rich and/or capable.

  2. Midrash: 5 comments in a row is far too much. Until further notice, 1 comment per thread per day, except in sandpits.

  3. Julie Thomas @ #15 ranted:

    “As the saying goes, “beggars can’t be choosers”. Or as the other saying goes, “You live under my roof, you live by my rules”.”

    I suppose that is why so many blackfellas kill themselves; it is the only way to avoid the hell that comes from living under your roof…Living under your roof has become increasingly intolerable for some white people also or have you not noticed that rates of anxiety and depression and suicide and other health problems are increasing in poor people?,,,But really you might want to consider an alternative scenario; that it just isn’t worth living if all there is to living is to work in the jobs you are offering.

    Oh puh-leese, try to dial the hysteria down to 11. Income management, sumptuary regulation and work-for-the-dole are not the cause of depression and suicide amongst indigenous people, the poor or any one else for that matter. If any thing self-harm is usually associated with too little intervention, rather than too much. Read Durkheim on anomie in his classic “Suicide”.

    I am arguing for democratic accountability and mutual obligation in the distribution of tax-payer funded benefits for all welfare dependents whether they be black, white or brindle. The people want to get value for money by ensuring that benefits are spent as they are intended, to provide the means of subsistence for dependent households. Conversely, paternalism is also better for the dependent households who are not, contra Quiggin, always the best judges of their own welfare.

    The principle of mutual obligation is fundamental and foundational to the welfare state, indeed to the state as a whole. That is the reason why TDT and Current Affair programs that focus on welfare fraud, waste and inefficiency are such regular high-raters. There is a yawning black hole in the middle of liberal utilitarian ethics and economics is no where near big enough to fill it.

  4. @jack strocchi
    “ranted”, eh? but that’s not my brief. you want to reach back to durkheim, i’ll reach back to huxley. why not just feed ’em soma in their synth gin & let ’em watch feelies all day? -a.v.

  5. A few points. $1.50 a day – this is not $US, it is $US PPP. It is an appallingly low figure. Note that it is per person, so a household of 6 gets the princely sum of $9 US purchasing power parity per day. It is an income figure. So PW Lawrence’s story is irrelevant.

    Twiggy is, I believe, genuinely concerned. His Walk Free anti slavery campaign was founded out of a revulsion for slavery and not to gain access to mineral wealth. He consulted with government agencies on the best and most effective way to work.

    That said, I think his report starts from a poor assumption, that of a fixed level of benefits for the poor. To address poverty, give money. To better address it, give more money. And while you’re at it, don’t set up punitive poverty traps through the tax and benefits system.

  6. One further point about exempting age-pensioners from income management – there will be considerable scope for elder abuse in families where only those receiving age-pensions have access to cash, and everybody else is reliant on “welfare cards” which limit spending in certain areas. I understand that some (I have no idea how many) elderly people in remote areas were happy to be put on income management as it allowed them to refuse requests for cash from family and friends.

  7. lol puhlease! Me rant? Whatever.

    You are saying nothing that my grandfather used to say back in the ’70’s and it was patriarchal conservative nonsense back then.

    It is you who needs to get up to speed with your reading and being to realise how not stupid and quite capable of making reasonable choices poor ‘dependent’ people are, given a decent society in which reciprocity is the norm.

    You need to get out more and see how many of us are realising that conservatism has only ever offered a poor substitute for an egalitarian society and besides that it has never worked well.

    So offering us more domination by aggressive hierarchical men who force themselves and their wants – in many ways – on those less powerful is a bit stupid, no?

    And ….did you notice that you attributed things to me that I didn’t say? Is that one of the ways you dominate people and force things to be the way you want them to be?

    Of course it is not income management that is or will lead to increasing suicide rates.

    Are you denying that all these problems have increased? Do you have an explanation?

  8. @Brett

    It’s called setting socially acceptable conditions under which the market is allowed to operate, something that happens in all economies.

    Wrong again. Germany, Denmark, Italy, Austria, Finland, Sweden, Iceland, Norway and Switzerland do not have a statutory minimum wage. Capitalist hell-holes all.

    Whether the low-paid and low-skilled get a fair consideration from unions in collective bargaining given these unions will be driven by majority rule – by the median voter/union member who is older, senior and of high job tenure – is a question worth exploring.

    The evidence is not good. In the Finnish depression in the early 1990s, the unions refused to agree to nominal wage cuts despite 20% unemployment – the worst since the 1930s. They protect those that still had a job.

    Most European labour markets are dual labour markets. Unions and employment protection laws ensure that they are made up of two-tier systems with ultra-secure permanent jobs with the rest on temporary contracts.

  9. 2 tanners :
    A few points. $1.50 a day – this is not $US, it is $US PPP. It is an appallingly low figure. Note that it is per person, so a household of 6 gets the princely sum of $9 US purchasing power parity per day. It is an income figure. So PW Lawrence’s story is irrelevant.

    How is it irrelevant? The figure cited was given in cash terms, and the whole point I was bringing out was that it doesn’t give a full picture and to show what was missing. Pointing out that it is only an income figure and that purchasing power parity is more informative is accurate, and it also highlights that cash figures aren’t enough information, which rather goes to show that it was worth my while bringing out that incompleteness. But even looking at purchasing power parity is still incomplete as it doesn’t bring out the fact that it is still not enough per person by itself, so the other resources do remain important and drawing people’s attention to that is still worth doing – which makes it all very relevant.

    By the way, you have got my name wrong.

  10. When has buying tobacco and Alcohol illegal. Agree both are not good for health, but what right has another to tell one what they can and not have, simply because they are unemployed. They are the ones that go without. If kids do, that is a matter not for Abbott, but state child protection agencies.

  11. “Easy to agree that neither government, nor the church nor Centrelink specifically are likely to be much good at anything complex let alone assessing the behaviour of individuals – or families – but that’s not to say they shouldn’t at least try and apply some rules about what you call “their money” when that money comes from resentful – or even generous and undemanding taxpayers.

    Why should they try? Replicating what already occurs. If they have concerns, all that needs to be done, is make referrals to appropriate agency. In fact, they should be doing that now.

  12. What percentage of unemployed or those on welfare, do many here think abuse the system, abuse and neglect their families? Does the number you believe, justify all being treated as low life.

  13. @Jim Rose

    “Germany” might not be on your list shortly according to BBC:

    The German parliament has approved the country’s first minimum wage, in a vote in the Bundestag on Thursday.

    The wage will be set at 8.50 euros (£6.80) per hour, which is higher than the equivalent in the US and UK.

    Angela Merkel’s Christian Democrats approved the new policy as part of a power-sharing deal with the Social Democratic Party (SPD).

    Germany has previously relied on trade unions and business groups to fix minimum pay instead.

    At the moment, the country is one of seven in the 28-nation EU without a minimum wage level.

    Although… “the wage does not cover minors, interns, trainees or long-term unemployed people for their first six months at work.”

  14. I think dole bludgers should be thanked for consistently allowing those who are more needy to have the few jobs as they become available .A new type of Australia day award could be created to recognise the best of the best in this field.

    On The Drum Twiggy said the problem is we have given them (Aboriginals) too much money ,and that we should now spend that $ on infrastructure instead. His view doesnt account for dispossession and cultural differences – massive omissions.

  15. sunshine :
    On The Drum Twiggy said the problem is we have given them (Aboriginals) too much money ,.

    Too much money ? From Adele Furguson’s “Gina Rinehart”, pg 416:

    Simon Hawkins, the chief executive of the Yamatji Mrlpa Aboriginal Corporation, argues that when Hancock (Lang) negotiated the deal with Rio he did not own the land: “He had no title property right, he had no tenement and [Gina] is now printing money, the traditional owners get 0.05%. There is a big disparity between that and the 2.5% royalty she gets”

    The Aboriginal people have been severely ripped off ever since white settlement.

  16. Take cigarettes. I have a mentally ill relative who, like most mentally ill people, smokes. If her pension was delivered as food stamps, she would swap them for cigarettes. She lives in supported accommodation with plenty of other people with varying degrees of mental illness. They don’t pester each other for food, but those who’ve run out of cigarettes pester those who have still have some.

    The manager of the facility actually takes about $70 per week from their pensions, and uses it to buy cigarettes for them, which he dispenses daily – 15 of them. It really is a bit like “cigarette stamps”, isn’t it? Without this daily allowance, the conflict over lack of cigarettes would be much worse.

    I don’t know why I bring this up, except to illustrate a different reality to that most of us experience.

  17. And I will add one more thing about welfare. In my ideal world, everybody would get a basic subsistence payment every week, regardless of our income or other circumstances. It would be about the size of the pension. Taxes would increase to cover the extra cost.

    Then if you became unemployed, you would make your own decisions about how long you wanted to be poor for, and what steps you wanted to take to increase your income.

    Because I loathe the welfare system. The jumping through hoops to survive. The penalties for failing to cope adequately. The welfare mentality where instead of considering your future, you are bound up in your interaction with the bureaucracy of welfare.

  18. You lot are disgraceful. Where’s the humility and gratitude to Twiggy Forrest? Do you understand the opportunity cost to him of taking time off from wealth creation to address the problem of what to do with the whining and indigent, the impecunious and downright shiftless? Personally, I’m with the good Reverend Malthus. The poor are surplus to requirements and should be left to their own fates and graves. The poor are a visual blight in their exhausted tracky dacks and thongs; they block up the entrances to Bi-Lo, smoking and hacking away like extras from a Dickens mini-series. So what if they spend all of their money in the very local economy just scrabbling by? Who needs em? Twiggy is too soft by half. He actually wants to feed them and keep them healthy which will only extend their lives and sense of entitlement. We need Hockey to have a real crack at them.

  19. Is it just me, or have others noted that some of ‘our’ attitude to ‘leaners’ has changed along with the wording/naming, from social security to welfare?

  20. I wonder it the landlord and others will take food stamps. Bills do not disappear, when the job does.

  21. @jungney
    I agree. We’ve been tiptoeing around the subject for way too long. Time to take some meaningful action.
    My modest proposal is that poverty be made a capital crime. Probably best to set the mark at those whose taxable income is beneath that required to pay the Medicare levy. On this basis we’d have to execute most age pensioners and probably a few billionaires, but to make an omelet you have to break a few eggs. Am I right, or am I right?

  22. Here’s an off the wall idea, zoot. Following your thinking, it occurred to me that if excessive wealth were to be made a capital crime, culprits would be disposed of and their assets redistributed eliminating the poor, raising the overall level of contentment, spreading airline seats further apart, reducing resource consumption, reducing energy consumption, and reducing CO2 emission levels, all while eliminating far fewer individuals.

  23. Thinking about this some more, Zoot, both of these approaches have been tried in the past, and, again even today. I wonder which has been the most successful overall?

  24. @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.

  25. 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.

  26. 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?

  27. @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?

  28. I have an argument with any governments, that directs how I spend my money.

  29. @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.

  30. 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.

  31. 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.

  32. 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.

  33. 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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