Tuesday, March 26, 2013

What happens when you try to give away money?

I did a short video on the costs of trying to give away money.  Some people were critical of the flippancy of the example.  But remember, I had only four minutes, and I was trying to address college students, so I was looking for something they had experience with.

But, okay, if you want examples, for class or conversation, of the grave damage that can be done if we try to give away money, here you go.  I am willing to admit, for the sake of argument, that these programs might be well intentioned, rather than just cheesy vote-buying schemes.  That makes them WORSE, if anything.  The government simply cannot give away money.

1.  Food stamps kill.  Rhode Island town shows futility of trying to "help" people by giving away money. Here is the WaPo story

2.  Amazingly honest NPR story about supplemental disability Social Security.  From now on, if anyone asks about the costs of rent-seeking, THIS is your go-to example.

But, even if one concedes that the intentions are good, the bad effects should be enough to make people realize, as Bill Clinton did, that the program is a bad one.  The problem is that Nancy Pelosi and Co. sincerely believe that the effects are POSITIVE.

Nod to WH.


Anonymous said...

I apologize if this question is naive and ignorant, but why do food stamp recipients spend most of the money at the beginning of the month? Why not spend it evenly over the 1 month period? Maybe I'm wrong, but I've heard that food stamps pay out pretty well these days.

A friend of a friend who's a med student in Mass. was getting $800 to 900 a month for his family of 4. Man, I'd like to have a food budget that big. There would be a lot more shrimp and bacon in my diet.

Anyway, I found a a Food Stamp calculator. Check out this incentive fail I discovered when I put $3,000 in savings in the calculator:

"We are sorry. You told us that you have more than $2,000.00 available to you. You have more assets than the Food Stamp Program allows. If your assets drop below $2,000.00, you may become eligible for food stamp benefits. You may be eligible for other food programs if you meet their income and/or age guidelines."

Christopher Z said...

Can you clarify for me how giving away money causes negative externalities?

It seems like your point is that poorly structured competitions can have greater costs than the value of the prize. In many cases the winners positive externalities may outweigh the deadweight loss caused by rent seeking behavior. Isn't this more of an argument about the structure of programs than it is about their viability?

I'm also not clear on how the individual winner in your scholarship example is not better off. They expended $120 of effort and recived $10,000 for a net gain of $9,880.

Anonymous said...

Hi Chis,
On the student scholarship, the point is to look at total welfare for society. Yes, it's a net gain for the one person who gets the scholarship, but how many other people also spent $120 trying to get the money? If it's more than 10,000/120 = 83 people, then they would have collectively spent more than the scholarship was worth. That's a net loss for society.

Laura said...

Hi Anonymous,

Chris's point stands that the video only addresses poorly structured competitions. What if the students all learned something important from the essays? What if writing those essays taught the students more than (let's be honest) watching youtube videos or tweeting during that time would have? Well-designed competitions eliminate the negative externalities.

Also, the man in the video clearly states that the winner's "net value is slightly less than $10,000, and she had to work so many hours to win it!" (As if that's a travesty...)

Videos like this appeal to those who don't reason very well...