It's come to my attention that many of our readers believe that if you give anything more than a modest sum of money to a poor person, that person will just go out and waste the money on impulse purchases. Allow me to point out that this is false.
Yesterday, I floated the idea of giving $25,000 per person to the poorest 100 million Americans as a sort of reparation. I do not want to re-argue that entire proposal; if you would like to do so, please visit that post. What I would like to do is to briefly address a very common objection that was raised in the comment section again and again: the idea that a primary downfall of this plan would be that poor people would waste their money on dumb things, instead of putting it to wise financial use.
Now: it is certainly true that Americans could use more education in the area of financial literacy. It is a mistake, however, to assume that this applies only to poor people. Financial illiteracy in America applies to the entire income spectrum! The financial advisory business and the investment management business and the mutual fund industry and many other businesses that actively soak the rich almost exclusively would not exist in its current form if wealthy people were not just as financially illiterate as anyone else.
Still, the perception remains that poor people are prone to just stupidly blowing money. But just because your cousin who won the lottery spent all his money on new cars, or you saw a movie where a person parties away a windfall, does not mean that in the real world giving money directly to poor people is a bad idea overall. In fact, there is prominent charity that does just that. It's called GiveDirectly, and it transfers donor money directly to poor residents of Kenya using their cell phones. It keeps transaction costs low, and avoids the possibility of the money getting skimmed off by middlemen en route.
GiveDirectly's methods have been subjected to study. One major study examined a group of poor households that received the equivalent of about two year's income (not so different from the reparations proposal). Its findings:
Households who received transfers experienced on average a 33 percent increase in incomes coming from sources such as livestock and non-agricultural businesses and increased the value of their household assets by 53 percent, largely in the forms of livestock and improvements to their homes. The money also reduced the number of days children went without food by 42 percent.
According to economist Jeremy Shapiro, one of the study's authors, "These findings are significant because they question the assumptions many aid programs are based on – that the poor might spend cash on things like alcohol or tobacco, or that they don't have opportunities to help themselves. We find that if you just give the poor cash, they use it to build assets, buy food and make investments in their livelihoods."
To put this in plain English: poor people tend to use money on their basic pressing needs, and then use money in some wealth-building ways. Which is the same way that you, the person very concerned about the profligate spending tendencies of the poor, would probably use it. It's almost as if "poor people" are just people like everyone else and tend to behave, like humans do, by addressing their own needs and trying to figure out ways to provide for their families—things that are infinitely easier to do if one has a base of wealth to help accomplish them.
The popular image of the "Welfare Queen" is one that is seared in the mind of many Americans. No big surprise, since countless millions of political advertising dollars were used to put it there. Nevertheless, evidence shows that the welfare state in the US, to the extent that we have one, works—that giving poor people tax breaks, and social welfare, and, yes, cash aid helps to bring people out of poverty and allows them to lead more bearable lives. Likewise, you might be interested in this story about a Canadian experiment with providing citizens of one town with a guaranteed minimum income, which was a big success, and did not produce any extra laziness in the populace.
I will politely refrain from addressing the racist overtones of the "poor people are lazy and stupid" position because they should not need lengthy explanations to debunk.
Poor people are not perfect. Nor are middle class people, or rich people. Wasting money is a possibility, among humans. But generally speaking, it appears that people know what their needs are in life and if you give them some means, they will provide for themselves in a relatively effective manner. So it would be nice if we could lay this particular objection to rest. Thank you.