When Giving People Money Isn't Enough

7/7/2022 8:09 am |

An acquaintance of mine, Zvi Mowshowitz, wrote a long post looking at a recent study that gave people around Chicago $500, $2000 or nothing, and compared the economic impacts for them. The results were fairly surprising in that it showed an overall negative impact.

The small size of the grants makes it very difficult to say that there is something structurally different going on in these two situations. It is highly plausible that in Chicago $2,000 simply wasn’t enough money to escape the poverty trap and allow investment, whereas $1,000 in Kenya often was enough. The PPP gap alone makes the grants in Kenya functionally bigger.

It is also quite plausible that financial engineering and the nature of debt makes a big difference here. It’s also less concentrated giving, so the recipients can’t serve as customers for each other, the people around you still have needs that fall upon you and there is no cultural expectation that you must ‘make something of’ this opportunity.

There is comparison with a study done in Kenya which gave people $1,000:

Comparing this grant to the one in Kenya by GiveWell, in Kenya the typical grant is $1,000, and median monthly income is $76, so that’s a little over a year’s income. The median income in Chicago is about $34,000, so $2,000 is good for about three weeks for the median earner, although the paper says it was actually more like two months. This was a poor group. I am still skeptical this is the right comparison, as the earnings in this group sound pretty depressed from normal.

One of the Chicago participants even responded to someone on Twitter and noted they were personally surprised by how not-impactful the $2000 ended up feeling, and in fact that they felt guilt over getting it.

As Zvi is giving his own analysis at the end he shared what was sticking out to him:

The thing that I couldn’t stop thinking about was the idea that getting resources increased scarcity because people ‘became more aware of all the needs they cannot address.’

This is an interesting insight which matches up with something I recently read about why Americans tend to be more unhappy, despite having (in general) more security (less likely to die of starvation, being housed, etc.) in life than those in many other countries. And the reason the author (whom I cannot remember or find at the moment) said was that it was because having that security meant we had come to focus on the intangible concerns in our lives. We became more focused on fear of events that could-be rather than events that are transpiring.

Zvi touches on the same thought:

This explains why people think things are so much worse in America today than ever, along dimensions where this plainly isn’t true. But it is true if you only consider the problem to be the gap between reality and expectations, or alternatively the gap between reality and what is considered acceptable.

The same things at work in the study and about happiness are, I believe, the things which drive the capitalist climb. As we make more money, we become aware of opportunities to spend it and "upgrade" our lives, which we now strive for and can (hopefully) attain. But in attaining them we now want more and to reach higher, etc.

My point is not to undercut or say I'm against UBI concepts. I think the study here shows that one time payments don't work as a tool for getting people out of poverty unless they are of significant size (perhaps on the scale of the Kenya study, a year's income) but even then - capitalism is a slippery slope and it is very easy to misappropriate the windfall for things which seem to be needed vs. what is actually needed.

The 2020 US Median income was $67,000. What would you do with it if you received it in a lump sum?

For me, someone who is thankfully in a decent position economically. I'd probably use it to pay off debt first off. My car, credit cards, etc. To pull numbers out of the air, let's say that leaves me with $40,000. The rational choice is to address other needs, health wise? Home repair? Etc. At what point do I save it, or even invest it? I could use a new computer... there's some larger house work that my wife and I want to do. The smart thing would be to invest it.

But, again, this is for me. I'm not fighting out of poverty. I have debt, but it is manageable and is not a looming threat.

So, then is the choice to make these larger contributions, but to mandate on how they can be spent? What if you had the $67,000 but it was mandated to only be spent on housing, debt relief, food, etc? Based on this study, I suspect that would cause a new level of awareness the other areas in your life that have needs. I've got this chunk of money, but I can't use it to pay for new clothes needed for an interview, etc.

Ultimately, it's a surprising result from the study, and it doesn't say that these payments are bad - it seems to say they are bad as a vehicle to create lasting change in the majority of participants.

Zvi's wrap up:

Mostly I conclude that small one-time transfers are likely to get offset due to a combination of poverty traps, including perception of need but centrally hyperbolic discounting. When you give a one-time payment or even simply have money in the bank at all, most cultural norms involve acting richer than you are, and heavy pressure to spend, usually not efficiently. There isn’t proper appreciation for how much that money will be worth to you when things get tough again, but then again that is only valuable to you to the extent you can resist the pressures to spend. Part of the trap is that once you’re in the trap trying and failing to get out of it doesn’t help you much, so traits that would help in abundance don’t have a hill they can climb.

Thus, one wants to focus on either giving people money continuously, in ways that don’t create a false wealth effect that causes overspending, or to give them enough at once to outright escape the trap. Either way seems plausible.