Monday, January 31, 2011

Follow-up: Economists Would Prefer to Just Give Cash to the Poor

Following up on one of my earlier posts on the topic, I just wanted to highlight the fact that most economists think that giving cash directly to the poor would be far more efficient than our current system of providing food stamps, health care, housing subsidies, and the like:
Is it better to give people for whom one has compassion goods or services they ought to have (what we call benefits in kind), or is it better simply to give them the equivalent in cash, letting the recipients of our largess decide how best to spend it to maximize their happiness? 

Economists believe to have found a clear answer to this question, and most textbooks in economics proffer it, sometimes with impressive graphs. Giving cash is superior.
Alas, the rest of the world – especially politicians – has studiously brushed aside the economists’ powerful insight, as I lament in an Econ 100 lecture, “Why Economists are Lousy Lovers: The Political Economy of Benefits in Kind.”
Of course, there's a difference between "economic efficiency" and desirability as defined by outcomes or public policy - for example, it might make some people happier to spend money on cigarettes or lottery tickets than on fruits and vegetables, but that doesn't mean that the government should provide money for cigarettes and lottery tickets as opposed to fruits or vegetables. And no politician could be seen as supporting the expenditure of tax dollars on things like cigarettes and lottery tickets - so we are stuck with an inefficient system, even though there is ample evidence that the poor spend their money as wisely or more wisely than wealthier people.

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