To help poor people, give them money (Draft excerpt from Economics in Two Lessons)

Here’s another draft excerpt from my book in progress, Economics in Two Lessons. To recap, the idea of the book is to begin with the idea that market prices represent opportunity costs for the households and business who face them (Lesson 1), and then go on to explain why market prices won’t in general equal opportunity costs for society as whole (Lesson 2). A lot of the book will be applications of the two lessons, and this section is an application of Lesson 1.

As before, all kinds of comment and criticism, from editorial points to critiques of the entire strategy are welcome.

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 United States, on many 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.

Similar debates have played out in the United States. The Supplemental Nutrition Assistance Program (SNAP), better known as food stamps, has played a central role in US programs to assist low-income households since it was introduced in 1964. With cuts in other welfare programs, its importance has increased over time.

On the other hand, as with international food aid, the SNAP program is regularly derided as a bandaid approach. Liberals frequently point to education as the way to provide real opportunities for the poor.

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 in the best possible position to make them.

This is a straightforward application of Lesson 1. Market prices reflect (and determine) the opportunity costs faced by consumers and producers.

Exactly the same points apply in rich countries. Giving poor people assistance in kind, such as food stamps and subsidized 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, represented by 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 subsidized 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 subsidized housing, people will stay there even if the house no longer suits their needs, because it is too big, too small, or too 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, need urgent medical or dental care, or be faced with eviction if they don’t make a rent payment.

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 patronizing 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.

These arguments have been going on for many years, but resolving them has proved difficult, since there are usually many different factors that determine good or bad outcomes for poor families. In recent years, however, a combination of improved statistical techniques and careful studies of experimental program pilots have allowed an assessment of the evidence to emerge. Overwhelmingly, it supports the view that giving people money is more effective than most, if not all, forms of tied assistance in improving wellbeing and life outcomes.

http://www.thebaffler.com/blog/blaming-parents/

If the best way to help the poor is to give them money, what is the best way of doing that? In a market economy there are two possible answers. The one that has been discussed most is redistribution; that is, using the taxation and welfare systems to transfer some market income from the rich to the poor. More difficult, but arguably more effective is to change the structure of markets and property rights to produce a less unequal distribution of market income — this is sometimes called ‘predistribution’. We will come back to this issue later.

97 thoughts on “To help poor people, give them money (Draft excerpt from Economics in Two Lessons)

  1. @rational liberal
    No, I don’t believe there’s such a thing as the undeserving poor. (Clearly your irony detector is broken.)

    I do, however, believe that there’s such a thing as the undeserving rich.

  2. @rational liberal

    Oh he’s gone!

    So many questions and so few answers from rational liberals. Sigh.

    Never mind, I’ll keep talking to you, rational liberal, and asking questions because I am going to print out this exchange and post it on the notice board at the local pub and the post office and I can’t see any of my neighbours being impressed with your rationality or your liberality.

    All you’ve got is all ideological stuff and it doesn’t make sense to them any more because we the people are seeing what small government really means and it is affecting those people who have been so irrationally angry about government taxing rich people and so foolishly voted against their own interests.

    You may want to comfort yourself that there are only right and left but this is not so, there is a large centre and they are looking back to the vibe that was happening – 🙂 – in the 60’s and ’70’s and Tony’s tradies and Howard’s battlers now have kids who are not doing as well as they ‘should’ be.

    It is very clear now that small government means fewer services and that it will make life more difficult not only for the poor, but for the poorer.

    Just one example.

    A service that provided support for new mums who do not have any family support handy, had it’s funding cut. If we all had a mum available, as I did when I had my first baby, funding for services such as this would not be required. But when people have to move to get a job, they leave behind grandma’s and aunties and all sorts of family support that is not provided by charity or that invisible hand in which you seem to place such blind faith.

    Do you think that all mothers come hard-wired to look after their babies ‘properly’ and that children just naturally grow up to become good adults who take responsibility for themselves if they make the right choices or poor people if they make the wrong choices?

    And actually when the chips are down, people who are part of a cohesive, diverse, community will have the best chance of survival.

  3. An evil capitalist and a compassionate leftie are walking down the street when they come across a homeless man. The evil capitalist gives him 5 dollars and tells him to come and see him about a job. The compassionate leftie pickpockets $10 from the evil capitalist, gives it to the homeless man and tells him where to find the dole office

  4. Julie/JD …..I imagined you two would be the only few here with no sense of humour….

    JD, your lame attempt at return humour (dreams?) makes you a double loser. No prizes for second in the real world. But you could pat yourself on the back and tell yourself it doesn’t matter.

  5. @rational liberal

    What was the funny thing you did?

    I took you seriously and went to the trouble of writing this for you.

    Why would your capitalist pick a homeless person? Is this your idea of *good* charity?
    Lots of people who do have a home or a rental property want a job.

    You’d need to give most homeless people a lot more than $5 to get them ‘job-ready’ as they call it in the industry. Very few homeless or long term unemployed are ‘normal’ or capable of working and living in a way that would make them good employees; it takes a lot of years of abuse about being lazy and stupid to turn people, mostly men, into a homeless poor you know.

    Let’s take just one example of the many things that need fixing in people who have not been able to construct their ‘self’ into a respectable individual or managed to fit into a respectable community; teeth. If you look closely at a homeless person and I’m sure that is something that you are not motivated to do, you will not see a lot of nice white teeth or in fact many teeth at all.

    Often the teeth that are there are rotting and the person lives with constant pain and the consequent quite serious health problems that come from having rotting teeth and bad gums. Drugs, particularly alcohol which is the cheapest drug and makes a lot of money for those who sell it, dulls the pain, physical and emotional and existential.

    Do you know much does a dentist cost? Do you think poor families just neglect their kids teeth or is that they don’t have the money to send them to the orthodontist. Schools used to provide basic dental care but apparently those rational liberals with a tax fetish don’t think this is worth spending public money on.

    But if you came across a younger homeless person, they are more likely to still have more teeth although they won’t be white and straight. The younger homeless person will be more likely to be an ice user so they will have bad skin, probably sores from picking themselves and will need some support to be able to manage the cognitive problems that are created by ice.

    What jobs do you think there are for young people with no references from a well connected family, no contacts or experience, no idea how to behave ‘properly’ because they have never interacted with a functional family, never mind the sort of superior family that a ‘rational liberal’ would be part of.

    This young person will possibly be mal nourished, probably from early childhood because the fake food that has made so many people so fat is so cheap and easily available. The mother of that family or the loose collection of people who live together in rental properties that never are homes, is ignorant of the need to choose ‘good’ food and desperate to try and provide her family with the things the things and experiences that everybody else seems to have. So she buys what they like and what is the cheapest.

    And so it goes…..

    What did I do to make my previous comment into a link?

  6. No one objects to your values Julie. Indeed some endorse them. I think that people dislike having them forced down our throat simply on the grounds that you think they are a good idea. You can paint such critics as heartless liberals but some may think of you as a fanatic who has the view that the only reasonable transfer to the poor is one that is set by the tax code.

    I’d be interested to know whether you ever voluntarily give much to help the poor. Or are your principles only strong when others are forced to abide by them because you think they are a good idea? Honesty appreciated.

  7. How are they forced down your throat hc?

    I don’t think you aright wing people are heartless. I think you are ignorant; deliberately ignorant and so blinded by your faith in your ideology that you cannot see your hypocrisy.

    I’d say that you significantly misunderstand leftie psychology because you think everyone has motivations that you can understand. Perhaps though, leftie psychology is something that you are not currently qualified to understand because your current fundamental assumptions about human nature are wrong?

    Honestly, hc I am one of the poor. I am on a disability pension and I live in a regional area that has one of the lowest income levels in Australia. Most other people who live in this small town that is so small it doesn’t even have a postal delivery, are also over 50 and are on a pension.

    I certainly do give to the poor. Youngest son has been living with me for a couple of years while looking for a job and to run a car needed to get into town for interviews and for work if he ever gets one, newstart is not enough to live on so I give him what I can.

    I am appreciated in my community despite it being known that I am sucking at the teat of the taxpayer and forcing good free people to pay tax and even worse it is known that I am a greenie.

    In fact, I am so much appreciated that I have received invites to the Mayor’s breakfast – the mayor is in the next larger town – we don’t have a mayor – for my services to the community. I’m currently working on getting computer lessons for the old people in town who need to contact centrelink.

    We could do these groups at the local hall; that would help the hall which needs repairs but we need the council to pay for the internet connection an d councils have no money when we get small government. I point that out all the time at the PO and the pub.

    It is a good thing that we have to pick our mail up at the PO because that is the way we get to know each other. And these days I walk into the PO and talk to my also poor right wing voting neighbours and make fun of the people they voted for.

    And you know what? They laugh too now instead of being grumpy.

    That do it for you?

  8. I wonder how many homeless people have been given jobs by employers who happened on them by chance in the street. It would make an interesting research project.

  9. Before this thread closes I just wanted to note Marcia Langton’s recent essay in The Monthly, I am not sure whether I agree or not, but she certainly gives reasons to not rush to condemn the idea of limitations on what can be purchased and limitations on cash for vulnerable people, including but not limited to Indigenous people:

    “Recently, I was driven to comment that the Greens prefer their Aborigines “drunk and stupid”. One of the party’s senators, Rachel Siewert, had frothed in the media that the government was planning to “force” Aboriginal communities “into using an authoritarian cashless welfare card”. She elaborated on this with more fear-mongering: “The Healthy Welfare Card is income management on steroids, authoritarian action has not worked in the past and will not work in the future.”
    ….
    What solutions do the Greens and inner-city progressive “luvvies” have, apart from arrogantly and heartlessly accusing these leaders of being “assimilationist”? The simple answer is none.

    They have never encountered scenes like this, a regular occurrence at ATMs in poorly policed towns (that is, most in rural and remote Australia that have large Aboriginal populations):

    A woman goes to withdraw cash and is met by a line of male “relations” who threaten and intimidate her for money. This is the only ATM in town, so in order to obtain some cash for shopping, the woman pays an amount to each man. The men promptly head to the pub, and the woman is down one or two hundred dollars. Her children and other dependants will go hungry before the end of the fortnightly payment cycle.

    “Those who object and say that special circumstances apply to first Australians,” Forrest concludes, “are in fact applying their own soft bigotry of low expectations.”

    The cost of enforcing compliance would be enormous, and moreover largely ineffective. In these circumstances, the smart card approach makes good sense. It gives people the power to help themselves.”

    http://www.themonthly.com.au/issue/2015/may/1430402400/marcia-langton/health-and-welfare

  10. Ivor :
    @P.M.Lawrence
    This makes no sense.
    What is your point?

    Sorry for the delay replying.

    Taking those in reverse order:-

    – My point was to back up my original assertions that those people typically live on other resources as well as their small cash income. I did this by showing that the material you offered in rebuttal not only doesn’t rebut it, it actually supports it (apart from also misusing “living on” their small cash income to misdescribe “living with” it).

    – If that doesn’t make sense to you, I regret that, but it is actually quite logical. Perhaps a concrete historical example from our own under-developed world past might help clarify it. Consider the better off Irish peasants of two centuries ago who owned their own land (my maternal ancestors were probably among these). It was practical for them to live off their own cabbages, potatoes, cow’s milk and pigs, while raising and selling a small amount of cash crops to provide for needs supplied from outside. Contrast that with the lot of those even poorer, who had to pay rent to landlords: they survived in much the same way, although with less as they had to work on the landlord’s land to work off the rent or had to grow more cash crops to sell to pay it (cottiers and gombeen men mediated that then in arendator fashion, much like tax farmers who organised cash advances and putting out work as well as collections); those even poorer people notionally had even higher incomes, just not higher disposable incomes, and scarcely used any of that to live on at all; the slightly better off were better off with lower incomes but lower burdens overall.

    To end, some years ago in the Spectator Petronella Wyatt cited a Hungarian curse she had heard through her mother’s family: “may you live off bread bought in the market”. The significance was that it was wishing that the accursed would have to eat through their savings by not being able to grow their own food and having to pay cash for it instead. That illustrates the norm in places that aren’t fully cash economies. (If all else fails, think back to the very recent tradition of chooks in the Australian back yard.)

    Ivor :
    @P.M.Lawrence
    This makes no sense.
    What is your point?

    Trying again.

    Sorry for the delay replying.

    Taking those in reverse order:-

    – My point was to back up my original assertions that those people typically live on other resources as well as their small cash income. I did this by showing that the material you offered in rebuttal not only doesn’t rebut it, it actually supports it (apart from also misusing “living on” their small cash income to misdescribe “living with” it).

    – If that doesn’t make sense to you, I regret that, but it is actually quite logical. Perhaps a concrete historical example from our own under-developed world past might help clarify it. Consider the better off Irish peasants of two centuries ago who owned their own land (my maternal ancestors were probably among these). It was practical for them to live off their own cabbages, potatoes, cow’s milk and pigs, while raising and selling a small amount of cash crops to provide for needs supplied from outside. Contrast that with the lot of those even poorer, who had to pay rent to landlords: they survived in much the same way, although with less as they had to work on the landlord’s land to work off the rent or had to grow more cash crops to sell to pay it (cottiers and gombeen men mediated that then in arendator fashion, much like tax farmers who organised cash advances and putting out work as well as collections); those even poorer people notionally had even higher incomes, just not higher disposable incomes, and scarcely used any of that to live on at all; the slightly better off were better off with lower incomes but lower burdens overall.

    To end, some years ago in the Spectator Petronella Wyatt cited a Hungarian curse she had heard through her mother’s family: “may you live off bread bought in the market”. The significance was that it was wishing that the accursed would have to eat through their savings by not being able to grow their own food and having to pay cash for it instead. That illustrates the norm in places that aren’t fully cash economies. (If all else fails, think back to the very recent tradition of chooks in the Australian back yard.)

  11. @ZM

    If people choose the welfare card; there is no problem; if it is forced on them, it will make life more difficult.

    Humbugging is only one of the problems in those very diverse communities where the traditional respect for women and the traditional laws that governed men’s behaviour are no longer enforced and white men have not provided any alternative way to live than this male dominated hierarchical individualistic selfish and greedy economy.

    Marcia Langton has made quite a few changes in the way she thinks about how her people can survive our ‘settlement’. I expect she has a long way to go yet.

    I read the monthly article until I read this: “Forrest advises that the card would need to be introduced sensitively and that individuals with “existing addictions to alcohol, drugs or gambling would require professional support”.

    And then I just cracked up at the thought of Forrest understanding ‘sensitively’. Have you every listened to this mean and fully understood how lacking in sensitivity he is, or is it that he lacks the ability to understand that his idea of sensitivity is the same sort of faux concern that guided the early Australian racists as they sought to smooth the pillow of the dying race.

    Where are all these sensitive psychologists, social workers to come from?

    They lost a society; what they need is to construct a society and a way of life that can incorporate the essential spiritual beliefs of their traditional culture and provide them with something meaningful to do with their lives.

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