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Matt Yglesias echoes my general take on poverty in the developed world
Poor people, by definition, don’t have much money. And lack of money leads to a lot of problems. Oftentimes, these problems are best attacked at the source.
He then repeats the story of a British program in which the homeless were simply asked what they wanted and then those things were bought for them The average cost of their requests was $1277.
lots of people might like $1,277 worth of stuff. I, for example, got a notice in the mail today from the Internal Revenue Service suggesting that I owe approximately that much in back taxes due to some improper filing in the past. So why should that money go to homeless people when I could use it too? Current spending on the homeless is already much higher than that, but it overwhelmingly consists of the in-kind provision of services—shelter beds, addiction treatment, incarceration, frostbite relief—that most of us don’t actually want. From a rationalist perspective we can see that helping people in cheaper but more dignity-respecting ways will ultimately end up with all of us having more money in our pockets. But to get there you need to move past the impulse toward scolding moralizing.
A lot of the intellectual push back I get against redistribution is based on the idea that there are lots of unfair advantages in the world and there is no particular reason to focus on a lack of money. For example, we don’t try to redistribute beauty, athletic talent or height.
Yet, one of the insights of economics is that money is special. Money allows us to direct resources towards our most acute needs. Conversely when people don’t have money acute needs can pinch in really dramatic ways.
There can be enormous gains in human welfare from giving people who are short on cash the means to address the acute needs that they see for themselves.
Will some people abuse this, of course.
The question, however, is does it do more good than harm. We aren’t going to find the program that works perfectly, has no abuse and solves all social ills. We can try to reduce human suffering bit by bit where we find it.
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“. 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?
A couple days ago, Reihan Salam put forth the question of why the United States is so great. Which means how has the US economy performed so well over the last century? Karl answers with what he deemed a “conventional answer”, and FreeExchange grapples with the question, concluding a mix of market size and the influx of talent to America (read: immigration).
I agree that market size has a lot to do with the wealth that the US generates. The most important thing to note is that the US is a free trade area. Capital and labor are free to migrate easily and efficiently across the borders of states in the US. This advantage, the comparative advantage of trade, has allowed the US to innovate in ways that having trade barriers would not allow. The most striking example comes from (I believe) David Friedman, when he noted that there are two ways to make automobiles; you can erect a factory and build them with steel, or you can plant a field and build them with agriculture…or, presumably, you could erect a tower, and build them with finance. The easy with which this division of labor can manifest itself within the United States is definitely a key to the prosperity we enjoy. Although I believe that the advantage of market size has run its course, it has still been very important.
I want to touch on an element that fell out of favor among researchers in the 60’s, but has since seen a tepid renaissance. That is, culture matters.
Conveniently, that is the title of a book that was put out after a Harvard international studies conference headed by Lawrence Harrison and Samuel Huntington. To begin, I’d like to turn to Robert Putnam, from his book, Making Democracy Work, in which Putnam describes his visit to the government offices of the poor Puglia region of Italy:
In the dingy anteroom loll several indolent functionaries, though they are likely to be present on an hour or two each day and be unresponsive even then. The persistent visitor might discover that the offices beyond stand only ghostly rows of empty desks. One mayor, frustrated at his inability to get action from the region’s bureaucrats exploded to us, “They don’t answer the mail, they don’t even answer the telephone!”
Putnam then contrasts that experience with the experience of the government offices in the rich Emilia-Romangna region in the north:
Visiting the glass-walled regional headquarters is like entering a modern, high-tech firm. A brisk, courteous receptionist directs the visitors to the appropriate office, where as likely as not, the relevant official will call up a computerized database on regional problems and policies…A legislative pioneer in many fields, the Emilian government has progressed from words to deeds, its effectiveness measured by dozens of daycare centers and industrial parks, repertory theaters adn vocational training sites scattered throughout the region.
These two regions stand but 400 miles away from eachother, but they may well be worlds apart. The curious question is, why? They are both populated by Italian people who share the history of Italy. Putnam concludes that the source of this disparity is low trust leading to an inability to achieve large-scale cooperation. He argues that the differing histories is the source, tracing all the way back to medieval times. While the south was traditionally monarchist, hierarchical, closed, and dominated by the church; the north was more egalitarian, communal, and open to trade. Later, the north was influenced by the ideas of the enlightenment.
The idea is that while the south was discouraging networks from forming, as they presented challenges to the hierarchy (and especially the church), the north embraced the formation of social networks, which allowed it to form valuable human (and social) capital.
In their book, Harrison and Huntington present data regarding trust and economic performance (measured in PPP per capita GNP). Not surprisingly, there is a strong correlation between the percentage of people who “trust people in general”, and GNP per capita (sorry I don’t have a link, but if I find suitable data, I’ll reconstruct). The question is, why? Argentinean scholar Mariano Grondona has proposed typological rules. These rules fall into three broad categories.
- The first category are norms related to individual behavior. These include norms that support a strong work ethic, individual accountability, and a belief that you are the protagonist of your own life and not at the whim of mystical powers or “powerful leaders”.
- The second category are norms related to cooperative behavior. Foremost is a belief that life is a non-zero-sum game and that there are payoffs to cooperating in a larger group. Societies that believe in a fixed pie of wealth have a difficult time creating social capital, and are often characterized by looting and cheating.
- The third category are norms related to innovation. Cultures that look to rational scientific explanations of the world tend to be more innovative. It is also very important that a culture be tolerant of heresy and experimentation. Orthodoxy stifles innovation. It is also important that a culture welcome competition and celebrate achievement. Overly egalitarian societies reduce the incentives for risk-taking.
Not surprisingly, those cultural traits are also the key to well-functioning organizations, including businesses, charities, and governments. A final norm, and one that is possibly the most important, is how people view time. As Eric Bienhocker states:
Cultures that live for today (or, conversely, are mired in the past) have problems across the board, ranging from low work ethic, to inability to engage in complex coordination and low levels of investment in innovation. Why work hard, and invest in cooperation and innovation if tomorrow doesn’t matter? In contrast, cultures that have an ethic of investing for tomorrow tend to value work, have high intergeneration savings rates, demonstrate a willingness to sacrifice short-term pleasures for long-term gain, and enjoy high levels of cooperation.
Trust also affects the intangible wealth of nations. Bryan Caplan is fond of touting the fact that poor immigrants are extremely productive, as long as they work in America. The amount of physical capital (A, k, L in Cobb-Douglas) in the US certainly tells part of the story, but as the World Bank has pointed out, it can’t come anywhere near telling the whole story. In fact, our institutions contribute 80% to the US’ capital stock. Contrast that with the poorest nation on earth, the Democratic Republic of Congo, whose intangible capital actually depresses the total wealth of the country.
William Easterly has pointed out that in the last half-century, the developed world has provided more than $1 trillion in economic assistance to the developing world. Yet poverty in places like Africa and South America still persists. Africa even regressed (until recently). The lesson? It is important not to ignore the cultural basis of economic growth.
The Origin of Wealth, Eric Bienhocker. I’d like to thank Bienhocker as well, for providing a guide to much of my analysis of culture.
Just wanted to let you know that that is one of my very favorite TED speeches. It is incredibly inspiring.