To Fight Poverty, Give Poor People More Money. Yes, It’s Really That Simple.

It is a comforting conceit  that the poor are different from the middle and upper income in a way that perpetuates their poverty. Perhaps they made bad decisions, like dropping out of high school or quitting a job. Maybe they developed an addiction or simply didn’t work very hard. Several poor people have doubtless made bad decisions, but then again, so have a great many wealthy ones. As it turns out, not so surprisingly, the main difference between the poor and the wealthy is that the poor don’t have very much money. This conceit about behavioral differences is a large part of the justification behind the paternalistic nature of most anti-poverty programs.

Instead of simply providing the poor with money we have a myriad of different programs. One will help with food (SNAP, or WIC), and another with housing (Section 8 vouchers). Yet another program helps with energy costs (LIHEAP) and there are others for health care (Medicaid and CHIP). In total, there are 122 anti-poverty programs run by the federal government, and more at the state and local levels. Meanwhile, the one program that does actually hand out cash (AFDC/TANF) has been shrinking ever since welfare reform in 1996, and essentially failed to respond to the 2008 recession.

Poverty and AFDCTANF

The good news is that since the not-so-surprising difference between the poor and the wealthy is that the poor don’t have much money, we don’t need a vast and complicated mess of anti-poverty programs. Instead, we can just give people money.

Study after study shows that direct cash transfers are more effective at alleviating poverty than a complicated bureaucratic and paternalistic system. Direct cash transfers have resulted in “lower crime rates, improved childhood nutrition and child health, lower child mortality, improved odds of kids being in school, and declines in early marriage and teenage pregnancy.”

Brazil’s cash transfer program, Bolsa Familia, covers 50 million people, making it the single largest anti-poverty program in the world. Between 2003 and 2009 it lifted a staggering 20 million people out of poverty and reduced the poverty rate from 22 percent to 7 percent.  In Mexico, where conditional cash transfers started in 1997, the results have been equally staggering:

In Mexico today, malnutrition, anemia and stunting have dropped, as have incidences of childhood and adult illnesses.  Maternal and infant deaths have been reduced.  Contraceptive use in rural areas has risen and teen pregnancy has declined.  But the most dramatic effects are visible in education.  Children in Oportunidades [Mexico’s Conditional Cash Transfer Program] repeat fewer grades and stay in school longer.  Child labor has dropped.  In rural areas, the percentage of children entering middle school has risen 42 percent.  High school inscription in rural areas has risen by a whopping 85 percent. The strongest effects on education are found in families where the mothers have the lowest schooling levels.  Indigenous Mexicans have particularly benefited, staying in school longer.

Based on the success of cash transfers in Mexico and Brazil similar programs are now being implemented in over 40 countries, and India is in the process of setting one up. It has even been started, in a small fashion, in New York City. New York’s Family Rewards program only started in 2007, and is the first cash transfer scheme to be tried in a ‘developed’ country. While it is still early, there is already some evidence that it is meeting its short-term goals:

During the early period covered by the report, Family Rewards reduced current poverty (its main short-term goal) and produced a range of positive effects on a variety of outcomes across all three human capital domains (children’s education, family health care, and parents’ work and training).

While a direct cash transfer is any time cash is directly given out, most of these programs are better known as Conditional Cash Transfers (CCTs). CCTs usually require recipients to meet certain conditions in three areas: education, health, and work. For example, school attendance, preventive health care, and sustaining full-time work or adult education are all required by New York’s Family Rewards. While some studies have indicated that unconditional cash transfers are just as effective as CCTs, most suggest that while both have strong, positive impacts, CCTs do better at improving the health and education outcomes of children. Of course, CCTs do have a strong paternalistic element, but they remain much less restrictive than our current mess of programs.

Economists also like direct cash transfers because they reduce economic distortions. If we give people money that  can only be used on food or only be used on education, over time the vendors of those goods and services raise their prices so that they can capture as much of the money as possible. Furthermore, since low-income individuals have fewer choices they can’t choose to save some money on food one month in order to buy school supplies. These restrictions on the market make it less effective at allowing buyers and sellers to make mutually beneficial trades and keeping prices down.

Non-profits have gotten in on direct cash transfer as well. Givewell is an organization that reviews thousands of charities. Unlike Charity Navigator and other charity watchdogs, which just look at low administrative overhead, Givewell actually attempts to rate charities based on their overall effectiveness in improving lives. This year, Givewell rated Give Directly as one of its three most effective charities at making each dollar donated do the most good.

It might be comforting to think that the plight of the poor is the result of their moral failures or other shortcomings, but the data doesn’t validate that conclusion. In general, given more money, poor people invest in the health and well-being of their children. Yes, some might use it for entertainment; but others use the capital as start-up funding for a small business or as savings to self-insure against unexpected expenses. Not all of it will spent in a ‘virtuous’ manner. But think about it, that’s basically exactly how everyone else spends their money. Direct cash transfer can deliver better results at a lower price. It can break the cycle of poverty by encouraging investments in the health and education of children. All we need to do is give up on our misplaced paternalism and start writing checks.

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6 thoughts on “To Fight Poverty, Give Poor People More Money. Yes, It’s Really That Simple.

  1. I was just thinking this morning on how this idea that most peaple have “earned” their wage level is just as ridiculous as the devine right of kings. “Why does King rule over us?” “because Kings are different.” No, they really aren’t. Neither are the superrich and the upper middle class. Our socieity uses the idea that poor people don’t “deserve” help or money all the while the large corporations take slow and steady actions to make sure more and more of us drop in to abject poverty. It’s cool that you magiclly popped up with some related data and talking points.

    • Thanks. I actually plan to post more directly on the degree to which success and failure are earned. I’ve been reading Daniel Kahneman’s “Thinking, Fast and Slow.” He points out (and brings a lot of evidence from experimental psychology with him) that we tend to systematically underestimate the role of luck and uncertainty in life. It makes a lot of sense, uncertainty is scary, but it also leads us to draw some inaccurate conclusions. Our mind tends to operate on a ‘What you see is all there is’ (WYSIATI) principle, so a small business start up focuses on what they are doing while mostly ignoring what their competitors are doing and how the macro economy will be performing in six months, etc. etc. In reality, unfortunately, the things that are out of our control tend to have a large impact on our lives.

      • I can’t wait to read it. It sounds like it makes sense. Col. Sanders and Roy Croc and the Walton’s aren’t actually super geniuses, they were in the right place at the right time and happened to have the right skills.

  2. Pingback: Poverty News Round Up | nccendpoverty

    • 1) Nothing in this post is either religious or argues for spending more money on poverty…the argument is solely that the money currently being spent on poverty should be spent differently. 2) My religiously-based (in the posts where they do appear) arguments are addressed only to those who share the same religious premises. The Bible has public policy implications, so if you claim to follow the Bible in some form one should investigate those implications. If, however, you don’t care what the Bible says, then it’s completely irrelevant to how you vote. WIthin the democratic process, citizens motivated to care (or not care) for the poor by religion can form an overlapping consensus with those who have secular motivations. More on that here: http://faithandpublicpolicy.wordpress.com/2013/02/08/religion-in-the-public-sphere/

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