Eyes of the Fleet

Eyes of the Fleet

Tuesday, October 13, 2015

Fighting Poverty - Cash Preferred?

Interesting read at Foreign Affairs, Worth Every Cent: To Help the Poor, Give Them Cash where authors Michael Faye, Paul Niehaus, and Christopher Blattman write:
In a Foreign Affairs article last year, we wrote what we hoped would be a provocative argument: “Cash grants to the poor are as good as or better than many traditional forms of aid when it comes to reducing poverty.” Cash grants are cheaper to administer and effective at giving recipients what they want, rather than what experts think they need.

That argument seems less radical by the day. Experimental impact evaluations continue to show strong results for cash grants large or small. In August, David McKenzie of the World Bank reported results from a study of grants of $50,000 on average to entrepreneurs in Nigeria that showed large positive impacts on business creation, survival, profits, sales, and employment, including an increase of more than 20 percent in the likelihood of a firm having more than ten employees. Also this year, Chris Blattman and Stefan Dercon, the chief economist at the United Kingdom’s Department for International Development, found that $300 grants to young men and women in Ethiopia led them to start small enterprises, raised their incomes by one-third, and lowered by half the likelihood of them taking sweatshop jobs harmful to their health. With more research the scale of these impacts will become clearer. But for now the bottom line is clear: more cash is needed.
But the deeper challenge involves the way the development sector funds aid to begin with. Cash fits everywhere and nowhere within the current system. For example, USAID receives funds from Congress that are earmarked for use toward specific outcomes, such as health or education. To justify delivering as cash a dollar earmarked for health, for example, USAID has to argue that it would have meaningful health benefits even though the recipients will almost certainly spend a large share of it on other, equally valuable things. The humanitarian system is similarly organized around “clusters” for nutrition, health, shelter, and so on. When donors use cash as a tool within these individual silos, chaos can result—as, for example, in the case of Syrian refugees, who have been targeted with as many as 30 distinct programs offering cash for children’s winter clothes, for legal assistance, for hygiene kits, and so on. To achieve more sensible outcomes, we need budgeting that puts the recipients at the center and holds implementing organizations responsible not for specific needs, but for helping specific people. That will take time.
At the UN General Assembly last week, Pope Francis called on the assembled nations to do more to help the millions of impoverished people worldwide: “To enable these real men and women to escape from extreme poverty, we must allow them to be dignified agents of their own destiny.” Cash transfers provide an opportunity to do this more effectively than ever. Enough talk, more action.
Yes, there are issues, but there is also a great deal of logic in just letting the poor decide how best to help themselves out of the poverty trap.

Related -Why Can’t They Just Leave Us Alone?:
It’s time to recognize that individuals acting in their own self interest do better for themselves than a government bureaucrat creating a one size fits all solution. Today, they gave the Economic Nobel Prize to Angus Deaton for his research on consumption, poverty and welfare. Guess what? He doesn’t agree with Thomas Piketty who got so much play in the chattering class.

Deaton developed the Almost Ideal Demand System – a flexible, yet simple, way of estimating how the demand for each good depends on the prices of all goods and on individual incomes. Again and again, what we find in economics is that it depends on the individual. This means that the more power and choice policy gives to the individual, the better off everyone will be.

That means that instead of some broad based education spending, giving vouchers to individuals would work better. It means instead of a bloated Obamacare program, setting up individual health savings accounts would be better.

Here is what he says about global poverty,

Mr Deaton’s most recent book, “The Great Escape” was published in 2013. In it he argues that foreign aid from western government’s has done more harm than good to developing nations, saying that it has helped prop up corrupt governments and rarely reaches the poor.

“The idea that global poverty could be eliminated if only rich people or rich countries were to give more money to poor people or to poor countries, however appealing, is wrong.”

Should the U.S. being getting out of the "poverty bureaucracy" business and giving cash to the poor? I think so. See One more thing on poverty in America and National Security and Poverty: Part 1.

In fact, the "prebate" part of the Fair Tax Plan is one of the many reasons I like it (in addition to taking all that power away from the IRS, which as we have sen recently can be misused for political purposes). See here:
4. The prebate is not a “handout”. It is the refund of taxes paid (albeit, in advance). The FairTax has no exemptions so the prebate funds the tax on spending up to the poverty up front.

5. According to the GAO, the current tax system doles out $800 billion in what are called tax expenditures (tax exemptions, deductions, preferences, loopholes, etc.). In stark contrast to the current system, and in concert with the constitutional concept of uniformity of taxation across all citizens, the FairTax treats all taxpayers equally compared to the way the current system rewards ‘friends’ with its $800 billion.

6. The FairTax prebate is estimated to be about $450 billion which would be distributed to all legal residents in an equal manner; so much per adult and child in each household. Unlike the current system, it has no marriage penalty so a couple gets double of what a single person gets, and they both get the same amount for each child.
In other words, those who now have no homeowner deduction or other tax preferences will get a monthly cash prebate that they can choose to spend as they see fit, not as some welfare monitor dictates.

Eliminating deductions and other tax preferences takes the power out of the hands of Congress to reward friends and punish enemies by adding or eliminating tax benefits from the Tax Code. But it also means the poor among us are on an equal footing with the wealthy as far as government taxation goes. In fact the Fair Tax is progressive as is discussed in the above links, so that the poor are not punished for being poor.

Under the current system it seems as if we believe that the poor a too stupid to know their own best interests.

I refuse to believe that.

Cash is freedom.

1 comment:

  1. If you want to increase the "velocity of money" give it to the poor. No one will spend it faster.