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Matthew Yglesias posted a blog with a similar title, without the exclamation which I express for this idea. Here’s Matt, channeling his inner William Easterly:
Alternatively, one under-discussed possibility is for a guy who has a lot of money and a desire to help poor people to just identify some poor people and give them some money. 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. It’s tempting to believe that you’re on the [v]erge of some major conceptual breakthrough in the field of philanthropy. But give some consideration to the possibility that you’re not. Perhaps if you have a special talent for anything, it’s a talent for making money. It’s not very hard to identify some people who might need money more than you do. Maybe you should just give them some, and then go back to making money.
Indeed, I think that Matt discounts the effectiveness of making simple transfers of cold hard cash (or digital numbers) from one section of society to another. Here’s me:
This tendency [to fiddle with wages] is called the “just price fallacy“, and it is very popular in politics…and unfortunately, seems to be human nature to decry prices we don’t deem to be “just”. Going all the way back to Diocletian, we can find examples of people verily condemning “price gouging” or “profiteering”. Of course, as we know from economic theory (and experience) setting price floors causes unemployment, and setting price ceilings causes shortages.
In (nearly?) all cases, simply giving poor people money is much better anti-poverty measure. Ironically, Milton Friedman, widely regarded as a “conservative economist” was one of the strongest backers of the negative income tax — a policy deemed “too liberal”! Why the tepid response to things like the Earned Income Tax Credit from the non-economist left (we know the right do it to simply score political points with constituents)? Well, it seems that it stems from what I like to call the “Barbara Ehrenreich theory of value[1]“. For those of you who do not know who Ehrenreich is, she pretty much built the industry of authors working undercover doing low-paying jobs, with the intent on writing a normative essay about the experience. Of course, the common conclusions are that we should treat these people nicer (which is fairly uncontroversial), and we should pay them more based on the humility that they face. By giving money directly to the poor, it seems that we are “justifying” employers that profit from “slave labor”. Of course, this is wrong and wrong-headed, but the view persists.
I’m guessing that I have a much weaker paternal instinct than Matthew, such that once it was identified the socially optimal level of transfer, then I say just simply give people money — which is the cheapest thing to do from a deadweight loss perspective. I am guessing that Matthew would much prefer a system of voucher payments, in order to exert more control over how poor people spend money. At least this is a tacit acknowledgement that hyperbolic discounting is a major problem for poor people. This is one of the big criticisms that I have for “solutions” politicians dream up. As I outlined in this article:
There is a very high correlation between poverty and hyperbolic discounting. Because this is true, many of the left simply deny that the fact that it exists, or worse — even if they acquiesce to the fact that poor people tend to heavily discount the future, they claim that we need better education, more information, etc., to battle the problem. The traditional hard-line right wing (not Hayek, yes Rothbard) is Mathus’ and Franklin’s prescription; let them suffer.
Why these strategies are wrong is that they both exaggerate the problem. Education is the perfect example of something that people who heavily discount the future will not tolerate. The whole problem with extreme hyperbolic discounting is that it makes people unwilling to tolerate short-term deprivation in order to receive exponential long-term benefits. The right’s preferred solution does the exact same thing. Making alcoholics ineligible for liver transplants, or not paying for cigarette smokers’ chemotherapy so that they have to suffer financially isn’t going to deter anyone, because the punishment is so far off that it is effectively discounted to zero. There is no use in kicking people after they’re down, in the same way that it is unconstructive to repeatedly tell people how badly they are screwing up.
I’m not personally all that interested in how poorly people spend their money. However, it is relatively straightforward to design incentive systems that take hyperbolic discounting into account.
Interestingly this is an area where I sort of disagree with Arnold Kling, who bills himself as a ‘civil societarian’. He believes that voluntary donation to public services will provide a superior outcome in gaining high-quality public services. I’m skeptical of this, as there are search costs, and information asymmetries inherent in judging the quality and efficacy of the vast amount of public services. I think it would simply lead to the most visible services getting all the money, with the less visible services suffering…independent of the value they create for society. For example, it is a monumentally large task to maintain records of property rights. It’s easier now, but historically it has been so difficult that possession became “9/10ths of the law”, simply because records were so poorly kept. This service creates an immense amount of value for society, but it is nearly invisible. It would probably get shafted in a voluntary donation drive in competition with Food Stamps, Medicaid, and Welfare. I think that government has important economies of scale in distribution that would be hard to match with private institutions. The problem is dealing with the inefficiencies of our institutional arrangements.
It is definitely in everybody’s interest that everybody becomes as rich as possible. To that end, we should provide poor people with the means and (possibly) the incentives to make choices that increase their wealth over time (and most importantly, increase intergenerational wealth). To that end, simply giving poor people money that is phased out slowly over the course of an income quintile is much more efficient than the hodge-podge of a safety net we currently have.
Addendum: Before I had a chance to peruse Kevin Drum’s blog, I see he commented on the same thing, taking roughly the opposite view. Although I’m confused by this statement: “The generosity of the American taxpayer is not exactly legendary, after all.” Is that taken to mean that people don’t voluntarily pay more to the government, or that Americans aren’t charitable in general?
In the comments on my previous post contrasting minimum wage and prostitution, Sister Y argues that prostitution in fact has an externality. Some individuals find prostitution morally objectionable, and so they suffer mental costs when someone else hires a prostitute. The idea that we have preferences over each others actions, and that this can lead to conflicts between welfare analysis and various notions of liberty, is a longstanding issue in economics that owes much to Amartya Sen. However, I think the prostitution-as-externality argument is fairly easily resolved and doesn’t generate any conflicts between liberty and welfare analysis.
To illustrate, allow me to use characters from HBO’s Hung, which stars Tom Jane as middle-class, suburbanite, male prostitute Ray Drecker.
Say Ray’s friend Lenore wants to purchase Ray’s prostitution services and she values them at $400. But when Lenore does this it bothers Ray’s other friend Tonya. If the negative utility Tonya experiences is worth more than $400, then the market provides a mechanism for Tonya to satisfy her wants: she can pay Ray $401 not to sleep with Lenore.
You might argue that contracts aren’t complete enough to guarantee that Ray won’t sleep with Lenore anyway the moment Tonya turns her back. But what Tonya can buy from Ray for $401 is only an hour of not sleeping with Lenore, because that is what one hour of his time is worth. If she wants to pay Ray to never sleep with Lenore she has to pay the net present value of all of the future services.
For those who morally object when Ray sells himself to anyone, not just Lenore, this is a moot point because there are other clients anyway, so paying to not sleep with Lenore doesn’t accomplish much less prostitution. The point is that because prostitutes offer a flow of services Tonya has to pay Ray not to sleep with all of his potential clients if she wants him to not be a prostitute. Essentially she has to buy the entire flow of services.
This makes contracting much less simple: if you don’t like prostitution then you can hire the prostitute to do something else. In this way the presence of lots of people who object for any reason, moral or otherwise, to prostitution can drive down the quantity of prostitution services by bidding up their price. What this means is that markets are fully capable of internalizing the mental costs borne by those who dislike prostitution.
People will probably object that this is unbelievable, and that even if it happened once in a while, in the real world this would never be enough objectors to affect the quantity of prostitution. I think this is correct. After all, the objectors would have to value preventing prostitution at more than average rate of $300 an hour in order to outbid the existing buyers. But what this tells you is that the marginal utility gained from prostitution by consumers would vastly exceeds the marginal disutility to objectors.
I think objectors know. After all, market based solutions are possible and yet you never hear objectors push for anything but prohibition. This tells me that their willingness to pay is pretty low, and therefore so is their disutility.
Millenocket, ME. has the right idea. Matthew Yglesias has apparently been to Millenocket, and finds what they are doing funny. I’ve never been there, but as the article points out, it’s a pretty dead town, with horrible weather…so it seems out of place:
Never mind that Millinocket is an hour’s drive from the nearest mall or movie theater, or that it gets an average 93 inches of snow a year. Kenneth Smith, the schools superintendent, is so certain that Chinese students will eventually arrive by the dozen — paying $27,000 a year in tuition, room and board — that he is scouting vacant properties to convert to dormitories.
There are three ways in which I’d like to analyze this development; from an economic standpoint, a human welfare standpoint, and a social standpoint. I will argue that all three a net benefits to the US and the world, and we should make a long-term policy commitment to this type development around the country (and, indeed, other countries should imitate it).
The economics of importing capital through education are fairly straightforward. The long run growth of an economy, given money neutrality, is a function of an economy’s real capital stock. Ceterus paribus, increasing the efficiency of capital increases the ability of an economy to grow in the long run. If the $27,000 spent on educating a Chinese child is more productive than any other investment, which means the real returns to a US education are higher than any other investment available to them (something that is almost surely the case), then this results in an increase in the marginal efficiency of capital. Whether these Chinese immigrants remain in the US, or return to China, the effect on world growth will for the better. Literally everyone will be better off due to the rising of the world Wicksellian equilibrium interest rate as China and other countries become more productive (and thus, richer).
The US is arguably much more efficient at education than the Chinese, so why not export education?
From a human welfare standpoint, consider this analysis from the World Bank:
This volume asks a key question: Where is the Wealth of Nations? Answering this question yields important insights into the prospects for sustainable development in countries around the world. The estimates of total wealth–including produced, natural, and human and institutional capital–suggest that human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.
[…]
Growth is essential if developing countries are to meet the Millennium Development Goals by 2015. Growth, however, will be illusory if it is based on mining soils and depleting fisheries and forests. This report provides the indicators needed to manage the total portfolio of assets upon which development depends. Armed with this information, decision makers can direct the development process toward sustainable outcomes.
This analysis looks at the levels of “intangible wealth” that is embedded within human and institutional capital. The US is found to have $418,009 in intangible wealth per capita (comprising 80% of our real capital stock). That means, simply by stepping within the borders of the United States, human productivity is enhanced by this massive stock of wealth embedded in our people and our societal institutions. By contrast, China has just $4,208 per capita (comprising 55% of the total wealth stock).
Now, despite the obvious material living standards present in the United States, access to intangible capital totaling more than 99 times the amount available in China, comprises a vast gain in human welfare for each and every person who comes to the United States to live and be educated.
Finally, from a societal standpoint, having more immigrant workers increases the real wage rate for most people in the US. Not only that, but it because of the increase in marginal productivity of the Chinese worker (assuming that a non-trivial sum of people will return to China), this will increase the wages of Chinese workers — which, in turn, will increase the demand from China for US-produced goods and services. A greater supply of future labor is very important to the future of the wealth creation (and thus, the welfare state), as is evident by Japan’s aging population.
So, let’s overcome this roadblock…
There is one hitch. Under State Department rules, foreign students can attend public high school in the United States for only a year, a system that Dr. Smith considers unfair, given that they can attend private high schools for four years.
…and make a real Pareto improvement in the lives of people around the world. Most of all, the lives of these prospective Chinese immigrants.
To end, a quote from Terry Given, an English teacher:
“I don’t want to sound flip,” Ms. Given said, “but why not? We won’t know until we get the opportunity to know them and give them the opportunity to know us. There’s something to be said for putting ourselves out there to see if we can be the prize that’s claimed.”
Amen.
Michael Bloomberg and David Paterson announced a proposal yesterday to ban the purchase of soda with food stamps. It is sure to be controversial, but is it a good thing?
At the very least, if the government is determined to try and reduce decrease public expenditures on health care by reducing soda consumption, than this is a preferrable approach to a soda or sugar tax. A first best approach would be to tax individuals who a) are drinking enough soda that it increases their risk of illness, and b) with some probability part of their health care costs will be born by public.
Since foods stamp recipients seem like a likely target for b), this at least meets one criteria. In contrast a general soda tax falls on everyone, and meet neither criteria. Even with the more targeted food stamp approach, people whose soda consumption is at safe levels or who have private insurance will be inefficiently restricted by this.
I have not looked at the data myself, but the conventional wisdom and the contention of the proposed law is that a) is very much true.
The whole discussion of course presumes that the law actually reduces soda consumption. For one thing, if individuals are paying some non-soda food costs with cash they can just shift to spending that cash on soda. There are also ways to trade around this: I buy $10 worth of soda with cash, you buy $8 worth of food with food stamps, and we trade. In either case though, transaction costs have been raised, although in the former the amount may be very slight.
Another problem is that individuals may respond to the lower calories by simply consuming more calories. While researching the health effects of soda for my recent defense of diet soda, the literature appeared mixed as to whether switching from regular to diet soda caused weight loss because of the calorie substitution problem. Perhaps Karl will chime in on this; he is much more knowledgeable about all things obesity.
The final question to ask is whether this policy is simply too paternalistic? I have to say I don’t think it is. Food stamps by themselves are already highly paternalistic. Essentially they tell low-income people that on average they will not spend cash in a way that best benefits them and their family. The government defines a subset of goods and tells them “you will be better off if you stick to these goods instead of buying what you want”. The marginal paternalism of reducing the size of the goods the government allows is slight compared to the paternalism food stamp recipients are already enduring. If your significant other tells you that you have to go to bed between 9:30 and 10 that is highly paternalistic. If they further refine that and decide it has to be between 9:40 and 10 it’s not that much more paternalistic. Perhaps this graph will help:
Another issue that you are free to reject, as it just reflects my diet soda bias and my love of delicious aspartame, is that I suspect much of the continued preference for regular soda over diet soda despite the health advantages is motivated by a lack of understanding of the safety of diet soda. Fear not New Yorkers, despite the email chain letters and urban legends, diet soda is not bad for you.
Overall though we should be weary of this kind of paternalism, and the desirability depends on how effective it would actually be. However, given the high level of paternalism in food stamps already I don’t consider this marginal paternalism to be that troubling.
Modeled Behavior 