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.

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.

Nate Kratzer
Senior Data Scientist

My research interests include poverty, inequality, and data science.

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