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.

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. One thing I learned a long time ago is that you don’t have to like the people to whom you provide assistance. If finding someone agreeable were the basis on which charity were provided…oh, wait, we are at that place now.

  2. Donald, Care ethics says exactly what you deny. That you do (and should) place above average weight on those you like – those close to you. It’s why all people show greater charity towards their own children to those equally deserving children down the street. Its also why we have nations.

    My own view is that care ethics is right but needs to be supplemented by deontological ethics that applies to those more distant. Its still a fact that we will give more generously to those close to us who we “like”.

  3. > I’m here to learn, like I said.

    Sure. But we aren’t here to teach you.

    If you can learn, that’s fine. I don’t think anyone doesn’t want you to learn. But “oh maybe this other guy I don’t know can learn something” isn’t a big part of anybody’s motivations.

    [one thing it’d be good to think about: if a person’s acting in honest good faith any mistakes they make are a result of limitations on their knowledge and judgement. Until they’ve overcome their own internal limitations their mistaken conclusions will be the genuine best they can do. You cannot expect to understand why your mistakes are mistaken — or even that they are mistakes — until you’ve grown past them.

    When you have the skills and knowledge to avoid a particular mistake, you won’t have to force yourself to see it: that mistake — at least — will be obvious to you. Until then, trying to force yourself to see it, demanding that people show you where you’re wrong and struggling to see how, is futile and even counterproductive. Like playing musical pieces or attempting skateboard tricks your skills aren’t up to.]

  4. @hc
    Actually, I am consistent with Care ethics. I have stated that it is not a necessary condition that you like the people to whom you (ultimately) give charity. You may well rank the charity you provide on a basis of family ties, relationships important to you, and fanning out to the more abstract charity of aid for homeless people (who it isn’t necessary to like), unemployed people (who it isn’t necessary to like), etc.

    In not so many words, I was trying to convey that we shouldn’t only give charity to those we have a strong affinity for, or a bond or some kind; and in more words, just because we give someone (whom we might not like) charity, we shouldn’t expect their gratitude as a necessary condition for that charity. I can pay taxes with the reasonable expectation that some of it contributes to unemployment benefits—and sometimes, the people who get it might not appear amiable to me. I still want unemployment benefits to be there for people who require it.

    Admittedly, I was being flippant in the second sentence, but I was quite precise in the first sentence.

  5. @hc

    I don’t believe that “taking money by force from one person and giving to another” infringes any liberties. It might do if you assumed that property rights were somehow god given, but I think they are a social construct and are thus open to such rules as society chooses – including taking them.

    Of course my sort of thinking was popular in Australia in 1788.

  6. @hc

    You talk about belief and think of yourself as rational? Whatever.

    It is increasingly clear that you and people like rational liberal can’t or won’t understand motivated cognition; you seem to be in denial and can’t even see that it is quite clear to others who do understand the concept that your beliefs are based on your own individual self-serving preferences and are not rational.

    But I don’t think it matters any more because the people who have been foolishly voting for neo-liberalism are now waking up to the fact that they have been voting against their own interests.

    You won’t see this because you don’t get out enough.

    But here on the ground I see big changes taking place in the thinking of, and about the ‘poor’ people, and a more insightful realisation that they have given up things that are really important about life and living a good one and that it hasn’t make them happier.

    Those social climbing, money-grubbers who thought they were doing well, following all the rules for getting ahead, sacrificing their community involvement to send their kids to private schools, criticising the stupid and lazy who won’t budget efficiently, and feeling themselves to have superior genes and superior abilities, are falling apart now and finding that all those things have not brought them any happiness or satisfaction.

    The main thing that is challenging their beliefs and breaking their hearts, is that it has not been all worth it for their children who are not managing even to get a foot on the ladder despite all the sacrifices they have made in the name of the version of liberty that conceptualises taking responsibility for your society as being ‘forced’ to pay tax.

    Charity is an insult to a free human being; put yourself in that place and then tell me how it feels.

  7. @Julie Thomas

    I can offer some anecdotal evidence about all this. Firstly, I was educated in a state high school in Qld. Not THE Brisbane State High which is part of GPS (Great Public Schools). (NB. It’s pretty clear that GPS people think they are “Great” isn’t it? The correct useage would be “Greater Public Schools” which has a slightly different connotation though still somewhat elitist.)

    My ordinary state public school education in the late 1960s and early 1970s was excellent. My kids went to a state primary but then we became a bit worried about standards in the local state high (rightly or wrongly) so we sent our kids to a private school, though not a GPS school. Perhaps we deserve some criticism as class traitors, I admit this.

    However, my observation was that the education in my kids’ private high school was as good but no better than the education I got free at a public school. There was some information around to suggest that the standard public school education had declined somewhat (mainly because of starvation of funds and favoritism towards private schools).

    So, the final analysis is that I and my wife had to, or chose to, pay full private fees to get the same standard kids’ eduction for our kids that was obtainable public and free 40 to 50 years ago. This is what has happened. This is what neoliberalism has given us. Everything of a SOCIAL nature costs more (not cars, computers and TVs of course) than it did in the 1960s and 1970s but is NO better in quality. If this ain’t inflation and exploitation of working people then I don’t know what is.

    In terms of the changes you see, Julie, I unfortunately don’t see them yet. Maybe I am too insulated in my middle class enclave. All I can see still is that neo-liberalism getting worse and worse. I admit I am in a protected and cossetted class so it doesn’t hurt me too much yet. But poor people are hurting badly now.

    I can also see my twins now 21 (despite being ready to soon graduate with excellent profession qualifications) will struggle to get jobs. Graduate employment is getting harder and harder to get. And our economy is going into a nose-dive with the idiotic neoliberal austerity economics of Abbot and Hockey. My twins will also need my help (I feel) to pay of their HECs. It’s not fair they remain saddled with that when I and my wife got free tertiary educations. In addition, with house prices where they are, my twins can forget buying houses, flats or units for at least the first 10 years of their professional working lives. It will not be possible and would not be wise anyway. A crash has to come at some point.

    So all in all? “Things are crook in Tullarook,” as they say. The current young adult and youth cohort will have a tough row to hoe after the neo-liberals have destroyed and laid waste to much that was good about our economy, society and community. In the future, history will rightly revile the baby boomers (me included) as a most selfish, purblind and world-wrecking generation.

  8. @John Brookes

    I agree with the point you’re making but I suggest you might want to think a little more carefully about how you express it.

    To write ‘There are enough goods and services in the community’ is to suggest an unrealistically static view. Take just one example of a service: haircuts. Are there enough haircuts in the community? How many haircuts are in the community? Does the question make sense?

    I am confident you could modify your choice of words to avoid this unrealistic implication without impairing your general point.

  9. @Ikonoclast

    The changes I see are happening all around the town. The changes are small and all over the place and probably only I can see them although youngest son who still lives at home says he sees the same thing in his friends.

    I think I mentioned in a thread that he has this gun loving friend who used to hate the Greens until my son gave him some truthful info about the greens policies, and now he hates David Leyonhjelm instead.

    I’ve been here in town, long enough and I’ve done enough ‘good deeds’ to have earned some respect, despite not being a church goer and being one of those greenies. They can see that I am not a raving ratbag or a communist and that I don’t want to take their way of life away from them.

    So recently I have started to argue with them during craft group and if they disagree – often they just change the subject lol – I google things for them to prove my point. That doesn’t always work because they distrust academic knowledge and there is a general disrespect for what ‘they’ say.

    But at the same time they know that they are supposed to send their kids to uni if they want them to be part of the economy and get a job. They hate computers and yet they know their kids have to have that knowledge. There are some difficult decisions for kids in regional areas to make and no clear path for them to take.

    We also have a growing number of young couples who are moving out here because they want to raise their kids in a small town with a small school. They want to be part of the community and are coming to the craft group and it is when we women of all ages, talk about raising children, that we find we agree on a whole lot of really important foundational things for what a good society looks like.

    I also see changes in the young relatives I have on my fb page; they are part of a sub-culture of 20 somethings who have never registered to vote, being free range libertarians – perhaps some sort of anarcho-libertarians – who knows? They each have hundreds of fb friends!

    They hate Tony Abbott and the sort of man he is; they say they are registering to vote next election.

    I’m well aware that I may be delusional though. 🙂

  10. @J-D

    Are there enough haircuts in the community? Yes there are. Let your hair grow.

    And don’t criticise my profligate use of commas in the above.

  11. @David Irving (no relation)
    Thanks for your comment David. It seems you are agreeing that there is a class of people called the “undeserving poor” If this is correct, but what moral reason should anyone be forced by tax to support them if they are undeserving? You can if you like, but I’ll choose to give my money to those who really can’t help themselves.

  12. @hc
    Thanks for your thoughts HC. I too have struggled with the notion of whether the unfortunate would get the help they need under a true laissez faire capitalist system. I could be wrong, but I choose to believe that people in general are a compassionate bunch and they would be looked after. My only evidence for such a belief though it that even now, as we are heavily taxed, people are generally extraordinarily generous. This view of people as fundamentally good though is in direct contrast to the collectivist/socialist view of them as needing “guidance” from an all-knowing ruling elite who knows what is good for all of us.

  13. @J-D
    JD, in my original post I pointed out that forced distribution which is a cornerstone of the socialist ideology has resulted in a host of failed societies. The mechanism is a progressive loss of motivation/productivity of the population. You’re telling everyone here you can’t even have a go at rebutting that? Are you serious? Harden up and have a go! How embarrassed you must be. We’re not presenting and defending PhD’s here.

  14. @rational liberal

    Why have you ignored my request that you explain why charity is rational? Are you unable to start from this statement and construct an argument that leads to this conclusion?

    And tell me why a free person should be forced to accept charity rather than be able to make their own way in the world without having to suck up to stupid people who happen to have more money? How can we poor people be free from the impositions of the rich who convince themselves that charity, this monstrous way of taking liberty from ‘unfortunate’ people, is a good thing.

    Have you read Adam Smith’s book “The Theory of Moral Sentiments”?

    He says ‘Nature, when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his brethren. She taught him to feel pleasure in their favourable, and pain in their unfavourable regard.

    The reason poverty causes pain is not just because it can leave people feeling hungry, cold and sick, but because it is associated with unfavourable regard.’

    As he explains:

    ‘The poor man … is ashamed of his poverty. He feels that it either places him out of the sight of mankind, or, that if they take any notice of him, they have, however, scarce any fellow–feeling with the misery and distress which he suffers.

    He is mortified upon both accounts; for though to be overlooked, and to be disapproved of, are things entirely different, yet as obscurity covers us from the daylight of honour and approbation, to feel that we are taken no notice of, necessarily damps the most agreeable hope, and disappoints the most ardent desire, of human nature.

    The poor man goes out and comes in unheeded, and when in the midst of a crowd is in the same obscurity as if shut up in his own hovel.’

    Does Smith recognise that there are undeserving poor you think?

    In the Wealth of Nations he wrote:

    ‘A linen shirt, for example, is, strictly speaking, not a necessary of life.
    The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, nobody can well fall into without extreme bad conduct.’

    What would a linen shirt be today?

  15. @hc
    You know what “frugal comfort” means? It means you can afford to turn on the heater every second night in winter. It means you have somewhere to live, but you attempt to fix the leaking roof yourself and don’t do it well, because you’re scared that if you complain to the landlord he’ll evict you and you can’t afford a tradesman’s fees. It means jam tomorrow, but never jam today.

  16. @rational liberal
    Every Western country practices large scale forced (that is, through compulsory taxes) redistribution. We are also the most economically successful set of nations on the planet. QED.

  17. @Collin Street
    Thanks for your note Collin Street. I’ve asked nothing of anyone on this blog in relation to teaching me and I’ve in good faith tried to answer every polite challenge thrown to me. Your post therefore makes no sense. You make some good points, but they’re not relevant to the circumstances.

  18. @John Brookes
    Thanks for your note John.

    @Julie Thomas
    Ha ha…to an extent Julie, to an extent for sure. Comes from first hand experience and I see aspects of it in Australian politics and society. It concerns me greatly. Don’t forget how many tyrannies start….the population is offered something for nothing, get used to it and then naturally clamor for more….it never ends well and I would hate to see Australia move even a little down that path. Sure, we’re a long way away ATM, but the slide always starts somewhere…

  19. @Nevil Kingston-Brown
    We are Neville…and we’d be even stronger if we practiced forced distribution less. I see trend of bigger, more intrusive government. It’s making us progressively weaker.

  20. @rational liberal

    In your original comment you made a series of unsupported assertions. You’re telling everyone here you can’t even have a go at making an affirmative case for your conclusions? Are you serious? Harden up and have a go! How embarrassed you must be. We’re not presenting and defending PhDs here.

  21. @Julie Thomas
    But Julie, free human beings can choose how to respond to charity. They can choose to be grateful, insulted, motivated…your problem is YOU choose to believe it is insulting and that gives you the right to tell other people what to do…by force….Now THATS motivated cognition….hahahahaha!..BTW, I give to charity voluntarily because it makes me feel good and harms no one else – does life get any more rational than that? Last thing, I used the moniker “rational liberal” because i knew it would wind up certain types of people. I TRY to be rational, but don’t always succeed. Thanks for your posts. i enjoy them tremendously.

  22. hi All,
    Thanks for all your posts. I learned a lot. There’s evidence in the psych literature that although “conservatives/right wing” very rarely become “democrats/left wing”, the opposite happens under particular conditions quite readily. That is, when the chips are down, property and physical safety under threat, lefties turn into righties and see the value of competition, loyalty to the group/family and freedom to keep the fruits of their labor. They do that, or they don’t survive. Which one will you be? Let’s hope we never get there. Good-bye and good luck.

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