Perhaps the most insidious effect of welfare is its usurpation of the role of provider. In States where payments are highest, for instance, public assistance for a single mother can amount to much more than the usable income of a minimum wage job. In other words, it can pay for her to quit work. Many families are eligible for substantially higher benefits when the father is not present. What must it do to a man to know that his own children will be better off if he is never legally recognized as their father? Under existing welfare rules, a teenage girl who becomes pregnant can make herself eligible for welfare benefits that will set her up in an apartment of her own, provide medical care, and feed and clothe her. She only has to fulfill one condition—not marry or identify the father… The welfare tragedy has gone on too long. It’s time to reshape our welfare system so that it can be judged by how many Americans it makes independent of welfare.15
These ominous claims do not withstand scrutiny. One could line many long bookshelves with studies on the impact of welfare on fertility and family structure. The overwhelming conclusion of this literature is that those effects, if they are there at all, are very small.16 Reagan’s fears were unfounded.
But despite this overwhelming evidence, the idea that welfare causes poverty, and the tropes of “dependency,” “welfare cultures,” “crisis of family values,” and the implicit association with race or ethnicity, is pervasive across different times and places. In June 2018, French president Emmanuel Macron taped himself preparing for a speech on his proposed reforms of the anti-poverty programs. The tape was made public by the administration as a candid “behind the curtains” view of the president, a window into his real style and unvarnished opinions. We see him, despite all the differences between the two, adopting very much a Reagan-like tone, repeating over and over that the current system is failing, and managing to talk about the need to make the poor more responsible six times in the space of a few minutes.17
In the United States, this spirit turned into action in 1996 when President Clinton passed, with bipartisan support, the Personal Responsibility and Work Opportunity Reconciliation Act. It replaced the Aid to Families with Dependent Children (AFDC) program with Temporary Assistance for Needy Families (TANF), which imposed new work requirements on the beneficiaries. Clinton also expanded the earned income tax credit (EITC), which supplements earnings for poor workers (making government assistance conditional on already having some work). In 2018, President Trump’s Council of Economic Advisers issued a report advocating a work requirement as a condition of eligibility for the three major noncash assistance programs: Medicaid, SNAP (food stamps), and rental assistance.18 In June of 2018, Arkansas became the first state to implement a work requirement for Medicaid adults. Interestingly, the Council of Economic Advisers’ main argument was no longer that the war on poverty had failed but, on the contrary, that “our war on poverty is largely over and a success.” The report argued that “the safety net—including government tax and [both cash and non-cash] transfer policies—has contributed to a dramatic reduction in poverty [correctly measured] in the United States. However, the policies have been accompanied by a decline in self-sufficiency [in terms of receipt of welfare benefits] among non-disabled working-age adults. Expanding work requirements in these non-cash welfare programs would improve self-sufficiency, with little risk of substantially reversing progress in addressing material hardship.” In other words, people had to be made to work for their supper, so they were not cheated of “the American work ethic, the motivation that drives Americans to work longer hours each week and more weeks each year than any of our economic peers [which] is a long-standing contributor to America’s success.” Sure, it might cause some pain, but it was worth it to prevent a large number of poor people from succumbing to sloth, one of the seven deadly sins. The Puritans would have applauded.
GIVE US THIS DAY OUR DAILY BREAD
The Puritans would have also agreed with the reluctance to hand over cash, a reticence historically shared by the left and the right. In India, one of the more successful recent efforts by the left was the demand for a national food security act. Passed in 2013, it promises five kilos of subsidized food-grains every month to almost two-thirds of Indians, over seven hundred million people.19 In Egypt, the food subsidy program cost 85 billion Egyptian pounds in 2017–2018 ($4.95 billion, or 2 percent of GDP).20 Indonesia has Rastra (formerly called Raskin), which distributes subsidized rice to over thirty-three million households.21
Distributing grains is complicated and costly. The government has to buy the grains, store them, and transport them, often across many hundreds of miles. In India, the estimate is that transport and storage add 30 percent to the cost of the program. Moreover, there is the challenge of making sure the intended recipient gets the grains at the intended price. In 2012, eligible households received only a third of the amount they were due under the Indonesian Raskin program, and paid 40 percent more than the official price.22
In India, the government is now considering moving to what it calls direct benefit transfers, sending money to people’s bank accounts rather than giving them food (or other material benefits), on the grounds that it would be much cheaper and less subject to corruption. However, there is considerable opposition, led mostly by left-wing intellectuals. One of them interviewed twelve hundred households throughout India about their preferences for cash versus food. Overall two-thirds of the households preferred food transfers to cash. In states where the food distribution system worked well (mainly in South India), this preference was even stronger. When asked why, 13 percent of households mentioned transaction costs (the bank and market are far, so it’s hard to turn cash into food). But one-third of the households who prefer food argued that getting foodstuff protects them against the temptation to misuse cash. In Dharmapuri in Tamil Nadu, one respondent said, “Food is much safer. Money gets spent easily.” Another said, “Even if you give ten times the amount I will prefer the ration shop since the goods cannot be frittered away.”23
SHORT-SELLING THEMSELVES
And yet there is nothing in the data to suggest they are right to be so worried. As of 2014, 119 developing countries had implemented some kind of unconditional cash assistance program and 52 countries had conditional cash transfer programs for poor households. Together, one billion people in developing countries participated in at least one of these.24 The initial phase of many of these programs was implemented as an experiment. What is very clear from all these experiments is that there is no support in the data for the view that the poor just blow the money on desires rather than needs. If anything, those who get these transfers raise the share of their total expenses that go to food (i.e., it is not just that they spend more on food when they have more money, but they might even spend so much more that the fraction of food spending goes up); nutrition improves and so does expenditure on schooling and health.25 There is also no evidence that cash transfers lead to greater spending on tobacco and alcohol.26 And cash transfers generally increase food expenditures as much as food rations.27
Even men do not seem to waste the money; when the transfers are given at random to either a man or a woman, there is no difference in how much is spent on food versus, say, alcohol or tobacco.28 We are still in favor of giving the money to the woman, because it restores a little of the balance of power within the family and might allow her to do what she deems important (including working outside of the home29), but not so much because we think that the man will drink it up.
AVOIDING THE SNAKE PIT
There is no evidence that cash transfers make people work less.30 Economists find this surprising—why would you work if you did not need the money to survive? What about the temptation of sloth, for which the biblical punishment is being thrown in a snake pit in hell?
It seems plausible that many (perhaps most) people genuinely aspire to do something with their lives, but the exigencies of surviving on very little paralyze them. Perhaps getting the extra cash encourages them to work harder and
/or try new things. In Ghana, Abhijit and his colleagues carried out an experiment. Beneficiaries were offered a chance to make bags, which the experimenters then bought from them at very generous prices. Some of the women workers (chosen at random) were also part of a program that gave them a productive asset, most often goats, along with some training in how to make best use of the asset and some confidence boosting (these were very poor women, who did not necessarily believe they could be successful at anything). Despite the fact that tending the goats added to their workload (and also gave them some income, so that they were less desperately in need of extra cash), the women who got into the program produced more bags and earned more from them than those who were not included in the asset giveaway. Most interestingly, the big difference between those with and without an asset became evident when a bag had a complex design. Asset beneficiaries worked faster, yet met the necessary quality standards. The most plausible explanation is that getting the gift of the asset freed them up from worries of survival, giving them the bandwidth and the energy to focus on their work.31
It is also true that the typical poor person in the developing world cannot get a loan (or can only get one at some astronomical interest rate) and has no one to bail them out if their venture fails. Both these conditions make it much harder for them to start the business of their dreams. A cash transfer that goes on for some years both provides some extra finance and backstops consumption if the enterprise fails. Perhaps a guaranteed income would make the poor willing to go somewhere else to look for a better job, to learn a new skill, or to start a new business.
But maybe all of this applies only in developing countries, where the poor are very poor indeed and the cash actually enables them to work. Perhaps in the United States things are very different since everyone, however poor, is usually able to find work. Is it possible that the sloth effect dominates there? As it turns out, there is also evidence, going back to the 1960s, suggesting that sloth should not be a major concern in the US. In fact, the first-ever large-scale randomized experiment in the social sciences, the New Jersey Income Maintenance Experiment, was devised precisely to determine the impact of the “negative income tax.” A negative income tax (NIT) implements the idea that the system of income taxation should be designed so everyone is guaranteed to receive at least a minimum income. The poor should pay negative taxes so they get paid more than they earn, but as they get richer they will get less in transfers until at some point they start paying into the system.
This is different from a UBI, because for people near the tipping point between being takers from and payers into the system, there is potentially a strong disincentive to work. In other words, in addition to the income effect (I do not need to work if I have enough money to survive on already) that most policy makers worry about, such schemes can have a substitution effect (working is less valuable since what I make in extra income is taken out as reduced welfare payments).
Many scholars and policy makers, in both political parties, were in favor of a negative income tax. On the left, the US Office of Economic Opportunity under Democrat president Lyndon Johnson heralded the idea and set forth a plan for replacing traditional welfare with an NIT. On the right, Milton Friedman advocated replacing most existing transfer programs with a single NIT. Republican president Richard Nixon proposed it in 1971 as part of his package of welfare reform, but Congress did not approve it. A key concern at the time was that beneficiaries would work less as a result of the program, and thus the government would end up paying people who would otherwise have earned their own living.
It was then that Heather Ross, a PhD student in economics at MIT, came up, arguably for the first time in economics, with the idea of an experiment to settle this issue. Ross was frustrated that politicians used anecdotes to justify economic policy, and that there was no factual basis to establish whether low-income people would stop working if they received help from this kind of program. In 1967, she submitted a proposal to the US Office of Economic Opportunity for an RCT. This was ultimately funded and, as Ross put it, she ended up with a “$5 million thesis.”32
The outcome of this inspired proposal would be not just a New Jersey NIT experiment, but also a series of others. In the early 1970s, Donald Rumsfeld (yes, the same one) steered the NIT away from full implementation and toward a series of experiments. The first experiment took place in urban areas in New Jersey and Pennsylvania (1968–1972), with subsequent experiments in rural areas of Iowa and North Carolina (1969–1973), in Gary, Indiana (1971–1974), and the largest one, the Seattle-Denver Income Maintenance Experiment (SIME/DIME) experiment, in Seattle, Washington, and Denver, Colorado (1971–1982, covering forty-eight hundred households).33
The NIT experiments convincingly established the feasibility and usefulness of running RCTs for policy making. It would be decades before comparably intellectually ambitious projects would take center stage again in social policy. That said, these being the first experiments in the social sciences, it is not surprising their design and implementation were far from perfect. Participants were lost, samples were too small to get precise results, and, most worryingly, data collection was contaminated.34 Moreover, because the experiment was short lived and small scale, it was also not easy to extrapolate what would happen in response to a more permanent and more universal program.
Nevertheless, taken together, the results suggest the NIT program did reduce labor supply a bit, but not nearly as much as was feared. On average, the reduction in time worked was only between two and four weeks of full-time employment over a year.35 In the largest experiment (SIME/DIME), husbands who received the NIT reduced their hours of work by only 9 percent compared to those who did not, although wives who received the NIT reduced their hours by 20 percent.36 Overall, the official conclusion of the study was that the income maintenance program did not have large effects on the propensity for people, particularly the prime earners in the family, to work.37
There are also examples of local unconditional transfer programs, from various parts of the United States. The Alaska Permanent Fund has distributed, since 1982, a yearly dividend of $2,000 per person per year. It seems to have no adverse impact on employment.38 Of course, the Alaska Permanent Fund, while universal and permanent (as its name indicates), is also quite small compared to the proposed UBI. If it had been sufficient to live off, people might have stopped working. A more UBI-like program is the payment of casino dividends on Cherokee lands to the members of the tribe. The transfers, about $4,000 per adult per year, represent a large boost in income, since the per capita household income for Native Americans is about $8,000. Comparing eligible and ineligible families in the Smoky Mountains before and after the payments, one study found no effect on work in the family, but large positive impacts on the education of the adolescents.39
UUBI (UNIVERSAL ULTRA BASIC INCOME)
So, there is no evidence that unconditional cash transfers lead to a life of dissolution. What does that tell us about the design of welfare policy?
In developing countries, where lots of people are at risk of finding themselves destitute from time to time, and where the safety nets, however imperfect, that exist in rich countries (emergency rooms, shelters, food banks) are missing, the value of having an assured fallback option like UBI could be enormous, both in dealing with bad luck and in making it easier to try something new.
One of the most common ways in which people safeguard themselves against income risk in many parts of the developing world is by holding on to land. We discussed the reluctance to migrate in chapter 2, and one reason is that those who migrate risk losing their land rights. Interestingly, for example, these days most rural land-owning households in India get a majority of their income from something other than agriculture. But land ownership is still valuable because it comes with the assurance that if all else fails, they can grow their own living.
This has the consequence that areas with a large fraction of small-holders tend to find it difficult to industrialize.
This is partly due to the design of land reform; when the poor are given land rights, it is often inheritable but not saleable. But there is also a strong resistance to sell among the farmers themselves. In the Indian state of West Bengal, when the communists came to power after winning the 1977 elections, their first priority was to give the tenant farmers permanent rights on the land they tilled. The right could be inherited, but not sold. Thirty years later, the same communist government, conscious of the lack of industrial development in the state, tried to buy out the farmers (including the tenant farmers). That met with such furious resistance that the plans were shelved. The communists ended up getting booted out of power after massive protests against the land expulsions, and the bloody repression they were met with.
The one thing the farmers in West Bengal wanted in compensation for giving up their land was the promise of a job, a stable source of income. Perhaps if there had been some kind of UBI to provide this income, the resistance might have been much less and it might have been easier to move arable land into industrial use. In chapter 5, we mentioned poor use of land is a major source of misallocation in India, probably responsible for a significant loss of economic growth. If UBI alleviated the need to stick to your land at all costs, it would reduce this misallocation. It might also reduce labor misallocation by making it more palatable for the landed to sell their land and move where there are better labor market opportunities.
India, however, does not have anything like UBI right now. The current scheme proposed by the government applies only to farmers and is nowhere near a living. The minimum income guarantee proposed by the opposition is more akin to the negative income tax credit. The plan is that it should be targeted to the poor and progressively taxed away as incomes grow. In fact, very few countries have anything like a UBI, which is guaranteed to everyone and is not taxed away. If they have anything, they have transfers targeted to the poor that can be conditional or unconditional. But targeting the right people in the developing world tends to be especially difficult because most people work in agriculture or on tiny firms. It is almost impossible for the government to know how much they earn, making it very hard to isolate the poor and target them with the extra income.40
Good Economics for Hard Times Page 35