Sunday, December 19, 2010

Cash Transfers, Poverty, and Paternalism

Many monetary transfers* from the wealthy/middle class to the poor involve distinct policy bias and outcomes. For a variety of reasons most countries have decided to target assistance to the poor through specific programs rather than cash transfers. For example, in the United States we recognize that an advanced society shouldn't have "hungry" citizens so we provide foot stamps (SNAP) to qualifying families. Likewise, we understand that we want to limit the number of people on the streets so we subsidize rent (e.g., Section 8) and heating bills (LIHEAP). We do this because we want to make sure our "money" is being spent on the intended policy outcome. This policy of targeted assistance leads to significant costs for our government and the people receiving the assistance (deadweight loss).

If we wanted to be much more economically efficient we would institute a policy of strict cash transfers. Thus, rather than giving $100 in vouchers the government would give $100 in greenbacks (and save on government overhead). As Matthew Yglesias states:
It sounds banal when you say it, but one of the main obstacles to people being less poor is that they don’t have enough money. If you give them money, they’ll have more of it. Will this be optimal in all cases? Of course not. But in the vast majority of cases, you’ll do some good. 
I agree with Yglesias that cash transfers are better and think that individuals are better at making decisions than the government, however, he and others have failed to highlight the one significant problem with cash transfers--living with the consequences.

Could we actually live with the consequences of program that though more efficient leads to "some" people make really bad choices and publicly suffering the consequences? Would we be able to say, "Well, he had his money, but decided to spend it on something else?" I don't think so (and to be fair I don't think Yglesias thinks so either). We want to talk tough, but like many things in the policy world, decisions are hard and all have consequences--foreseen or otherwise.

1 comment:

  1. This is a serious post and all, but you said that we provide "foot stamps" to the hungry.
    I laughed, picturing John Q. Moneybags stomping on the feet of the poor. Then got sad, thinking, well, that's not terribly unrealistic.

    Anyway. I think the cash transfer issue makes more sense after the programs with intended policy outcomes, rather than instead of.