Tag Archives: Poverty

Universal Basic Dorms

Poor people have too little money. So why don’t we just give them more money, instead of giving them many specific things? The main theory in the literature is paternalism:

The traditional justification for in-kind transfers has been “paternalism.” … If members of society care about the consumption patterns of the poorest rather than their utility, then the unconstrained choices of the poor may create negative externalities for those who care about them. … while income inequality per se may be acceptable, all individuals should receive adequate food, medical service, and housing. … Parents may not take full account of the utility of their children when making decisions, or they may neglect to factor in externalities. … attempt to redistribute from parents to children within the family. … a sense that the poor cannot be trusted with cash. … it is hard to escape the conclusion that paternalism remains a fundamental underlying rationale for in-kind transfers. (more)

You may not be surprised to hear I have an elaboration of this account based on signaling and status. Let’s start with this result:

[A] 2010 paper … makes a strong case that in fact the outcome of life satisfaction depends on the incomes of others only via income rank. (Two followup papers find the same result for outcomes of psychological distress and nine measures of health.) They looked at 87,000 Brits, and found that while income rank strongly predicted outcomes, neither individual (log) income nor an average (log) income of their reference group predicted outcomes, after controlling for rank (and also for age, gender, education, marital status, children, housing ownership, labor-force status, and disabilities). (more)

So if satisfaction and preference go simply as income rank, then there is simply no way to to use income redistribution to help with such things. Whatever you give to some comes at the expense of others, for no net gain. You can still want to help the poor, but that requires that your concern about their lives not be mediated directly by their satisfaction or preferences. That is, what you want regarding them can’t equal what they want or what makes them happy.

For example, compared to the poor, you might put less weight on their desires to signal, and to rise in status via positional goods (like winning a sporting contest). Because you can see the negative externalities associated with such things. That is, you might put more weight than they do on the remainder of their preferences, which we might call their “direct welfare”.

If there are diminishing returns to direct welfare, then you can want to reduce the overall variance of direct welfare, by giving more of it to the poor, at the expense of the non-poor. But you can reasonably fear that if you just give them cash they will spend too much of that on the kinds of non-direct welfare that have negative externalities. So you can want to constrain their choices, to better ensure that it is direct welfare that you are giving them.

The big problem here is: how to distinguish the goods, i.e., products and services, that put more weight on signaling and status, relative to those that put more weight on direct welfare. The usual political equilibrium is to give the poor the sorts of goods that people tend to praise and admire, at least for others. Like jobs, medicine, education, libraries, art, churches, and fresh vegetables. And to withhold from the poor goods that people tend to criticize and dislike, at least for others. Like parties, drugs, sex, fast food, social media, movies, and video games.

But alas, typical admired goods don’t obviously have smaller positional components, nor do they obviously contribute less to signaling. For example, both education and medicine, widely given to the poor, have huge signaling and status components, plausibly even larger than for most goods. If we cannot in practice distinguish the goods that do more to promote direct welfare, we should give up on in-kind transfers and just give the poor cash. And then only to the extent that we think direct welfare has strongly diminishing returns in terms of cash.

I have a (perhaps not original) idea. We have good reasons to think that in general most product and service variety emphasizes signaling and status, relative to standard goods that can achieve large scale economies. So if we can make especially cheap cars, homes, clothes, food, etc. via mass production with a small range of variety, then we should prefer to spend our budget on helping the poor via such standard goods.

That is, assume that we the non-poor have a budget that we are willing to spend on helping the poor. We have two reasons to prefer to spend this budget on standard goods. First, standard goods can be provided much more cheaply, allowing us to give more to each person, or to help more people. Second, because these goods have a lower signaling and status components, the poor who consume them hurt the rest of us less via making us look worse by comparison, and rising in status relative to us. We should thus be wiling to increase the budget that we spend on the poor, in compensation.

Of course the poor may resent this policy, even if it results in larger budgets. Exactly because we choose these standard goods to have lower signaling and positional components, the poor will know that others who see that they are using such standard goods designed for the poor may think less of them as a result. That may not be quite the same as a “stigma” assigned to such goods, but it may have a similar effect. Even so, this looks like an efficient arrangment.

So how exactly can we give standard goods to the poor? There’s an obvious risk that the government, or a charity, managing such poverty assistance might overly micromanage the specific standard goods offered, inducing their design, variations, production, and maintenance. Resulting in greatly increased costs and lower quality, as we’ve often seen with public housing.
So it seems better to just offer the poor credits that they could spend at any competing private supplier of standard goods packages.

That is, let us offer to pay qualifying private “dorms” a fixed budget per resident served per day. Each dorm would give its residents its standard package of a bed, clothes, food, and services for transport, entertainment, schooling, and medicine. Then the qualified poor could choose the dorms they see as offering the best combination of location, other residents, and standard services. If there were many competing dorms, and if residents could change dorms frequently (say at least once a year), competition should force dorms to offer efficient and relatively attractive packages. (We may also need to change zoning and regulation to allow such dorms to be offered.)

History seems to suggest that direct welfare can often be provided more cheaply and reliably via dorm-like living. Such as we’ve seen in colleges, the military, orphanages, hospitals, prisons, and retirement homes. So it doesn’t seem a crazy idea to help the poor live cheaply via dorms as well. But I do see a few complications.

Limiting Variety – If not constrained by some rules, competing private dorms won’t necessarily offer standard goods, instead of more varied goods of a lower quality. After all, that is what the poor seem to choose in the market today. So there would have to be some rules enforcing a degree of standardization of the goods offered. Thus there would be limits on the variety that dorms offer in their rooms, clothes, food etc. I don’t have specific proposals regarding these rules to offer now.

Unusual Variety – Some of the poor will actually be unusually different from the others, and thus need unusually different services. Such as some disabled folks, or parents with young children. These might be offered something different than the standard options proposed here.

Added Variety – Even if we push for less variety and more standardization in what we give the poor, there’s no need to go to extremes on this. Internet connections would offer the usual immense variety of outside sites to which one could connect. And some fraction of the budget paid to dorms might be paid directly to the poor as “allowances,” from which residents could pay for unusual expenses and added variety, such as for some food or clothing occasionally bought outside the dorm. Perhaps the poor who insist on more variety than this dorm system offers could be offered a cash budget to spend on their own, a substantially lower amount than the budget offered to qualified dorms to host them.

Transitions – It is probably more expensive for dorms to deal with residents who come and go, relative to residents who stay. So it would probably be better if dorms were paid some extra amount for resident changes. Residents might have a limited budget of such changes, or maybe they’d have to pay for change fees out of an allowance.

Universal Offer – I see no reason not to allow dorms to let the non-poor to pay to be residents. In addition, some may argue for paying dorms the same budgets to let anyone stay there, not just the qualified poor. Then anyone could choose to live in these dorms, and save on living expenses. This would be “Universal Basic Dorms” instead of a “Universal Basic Income”. It would be much cheaper than U.B.I., as fewer ordinary people would be willing to stay in such dorms.

Valuing Neighbors – If these dorms only housed the qualified poor, then such poor may have a worse pool of associates and role models. Thus it might make sense to pay dorms some added amount per non-poor residents who mingle with their poor residents. This makes sense not only in terms of benefits to the poor, but also in terms of compensating such non-poor residents for the status hit they take by moving to such dorms.

Crime – My understanding is that crime is the other big thing that tended to go very wrong with public housing, in addition to mismanagement. So things might go very wrong if dorms were not allowed to reject residents they deem too likely to cause problems. In addition, things would probably go even better with a crime voucher system. Offer each resident a budget to pay a voucher to cover all the crime they may commit as a resident. If they can’t get a voucher to agree at that price, no matter what the other contract terms, such a resident does not qualify for dorm living. This might be a good test environment for a crime voucher system.

And that’s my proposal. Offer to pay dorms per resident who stays there, with rules to encourage less-varied more-standard dorm goods which achieve scale economies. Residents would then get more direct welfare, even if they’d gain less status and send less attractive signals. That lower status should make the rest of us more willing to increase dorm budgets well over the cash budget we might offer the poor to live outside dorms.

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The Persistence of Poverty

On Bryan Caplan’s recommendation, I just read The Persistence of Poverty, by Charles Karelis (2007). Karelis seeks to explain these patterns:

Five patterns that have been common among the poor in many times and places, then, and that played a role in keeping them poor or making them poorer, are: 1. not working much for pay; 2. not getting much education; 3. not saving for a rainy day; 4. abusing alcohol; and 5. taking risks with the law. … [And] having children early and out of wedlock … is doubtless a big factor in poverty in the United States today.

His explanation is that often we experience diminishing returns for “relievers” that reduce our pain. Which actually gives us increasing, not diminishing returns for getting “more” in that area. For example:

Consider housing. Suppose we take the perspective of a couple whose house has a bedroom for them and each of their six children, plus adequate room for entertaining and other functions besides. Clearly they are consuming or using housing in the more-than-sufficient range. Their house is a source of positive experience. As each child leaves for college (let us say), the amount of space available for the use of the couple goes up by roughly equal amounts, but probably their enjoyment of the house goes up by smaller and smaller amounts. …

Now imagine a couple whose dwelling is a one-bedroom house that is barely adequate for themselves. If a child arrives, then given the crowded conditions, the couple’s privacy is much reduced, their peace and quiet is disturbed, and they may have to start sleeping in shifts. Whatever the compensating joys of parenthood may be, these are impressive deteriorations in their physical comfort. By the time child number six arrives, the couple may hardly notice the further deterioration in their situation that occurs as a result. One more voice outside the bedroom door when you cannot sleep anyway on account of the five that are already audible probably will not make much difference.

That is, you don’t notice as much of a difference between very and mildly crowded, as you do between mildly and not at all crowded. Karelis further claims (though without sufficient support in my opinion) that this sort of things happens much more often for people who are poor relative to their culture:

Whether something is functioning as a reliever for a given consumer is relative. It is only partly a question of objective economic circumstances, because it depends too upon how the consumer sees those circumstances. … A more anthropological view responds that the difference lies in neither discipline nor opportunity but in the values of the various sub-cultures. … No one doubts that different cultural groups within the United States have different histories, and that these different histories create different economic norms and expectations. For instance, having come from much poorer countries, Asian immigrants to the United States often have relatively low norms and expectations. By contrast, African-Americans, who are closely acquainted with the lifestyles of middle-class whites, and who have long been exposed to “the American dream” and all it implies, often have relatively high norms, if not exactly expectations. … this … predicts that the felt relief of the marginal dollar will be greater for poor Asian immigrants than the felt relief of the marginal dollar for similarly poor African-Americans.

Karelis first published this idea in 1986, and he notes that similar ideas were published by van Praag in 1968 and Friedman & Savage in 1948. I find the idea coherent and mildly plausible, but just based on Karelis’ arguments, I wouldn’t put it much above other common poverty explanations, such as stupidity, sickness, impatience, impulsiveness, and lack of self-control.

However, I gave more weight to this account after I realized that it is implied by my usual favorite account of income status: utility linear in income rank. As income is usually distributed lognormally, the function relating rank to log income must be convex below and concave above median income. This implies diminishing returns in income above median income, and a range below median income with increasing returns to income. When you have increasing returns to income, you value each unit of income more when you have more of it, rather than the usual diminishing returns case, where you value each unit of income less, the more income you have.

Karelis suggests some policy implications:

Seeing that the income effect and the substitution effect of strategies to make work pay will be mutually reinforcing, making work pay [via increased wages] is a double-barreled anti-poverty approach. By contrast, no-strings assistance is a single-barreled approach, since it lacks a positive substitution effect. …

Thirty-five years ago the speeches and writings of American civil rights leaders often framed or interpreted the circumstances of their audiences by “comparing them up”—measuring them against the circumstances of the middle-classes and the upper-middle classes, or even against the images of the good life found within the American Dream. This was openly done for the sake of energizing audiences with discontent. The goal was reasonable enough, but according to our theory, the strategy was probably counterproductive. …

Increasing the differential between the income from crime and the income from honest work—by raising the odds of punishment, lengthening sentences, or making (honest) work pay better—is likelier to be effective than strategies built on the assumption that criminals are dysfunctional and hence unresponsive to sticks and carrots of this kind; and it is likelier to be effective than strategies built on the assumption of atypical preferences. …

Our utility function could [correctly] be used to justify putting the least poor people ahead of the very poorest people in distributing assistance.

Though Karelis didn’t mention it, the same logic says to allow and even promote more gambling among the poor; within the convex region gambles look like a net gain. For the same reason, it would be good to promote inequality among the poor.

However, all these policy recommendations are based on assuming that the preferences of other poor people don’t change when you help one poor person move up their utility function. But if the transition from convex to concave utility, and other aspects of the utility of money, result from the actual distribution of income in one’s reference culture, then helping one person changes the distribution against which others compare themselves.

For example, if utility is linear in rank, the help you give one person is exactly cancelled by the hurt you thereby inflict on the others who this one person has jumped over in rank. Yes, with some other functional form, the help might outweigh the hurt, but with other forms the hurt might outweigh the help. This effect of changing the reference distribution is not small, and shouldn’t be ignored as Karelis does.

Finally, Karelis focuses entirely on immediate choices, rather than on long-term strategies. Young poor people who care about the long run should focus on trying to dig their way out of poverty, and so much less display the six patterns of poverty that Karelis tries to explain. So to predict typical poor behaviors, we need to add a substantial degree of impatience or lack of self-control to Karelis’ account.

Added 4p: Karelis responded to my email, and asked me to post this comment:

Thank you for blogging so thoughtfully about my book. One comment. The hypothesis of the book can fairly easily be extended to the putative fact that impulsiveness, impatience, and lack of self-control are commoner among the poor by introducing the idea that overcoming these weaknesses is a kind of work. The idea would be that this “will-work” will have less appeal when the material gain produced yields a smaller rather than larger addition to utility, as (the hypothesis contends) is the case in the lower income ranges. As I recall, Andrew Sullivan, Ezra Klein, and Ta-nehisi Coates all noted this extrapolation of my theory around the time the book appeared. The amendment was made possible, really, by research into the nature of willpower subsequent to the publication of my book.

This story can work re efforts to make small gains while poor, but doesn’t work re making big gambles or long-term efforts to dig oneself out of poverty. Those should be seen as large gains, even for someone who can’t find sufficient motivation to work for small gains. So to explain a poor person uninterested in either of those, we need to add something else to our story.

Added 6p: Karelis further responds:

Yes, we need to add something else to our story, but maybe not too much. My hypothesis says that medium-sized  additions to the consumption of someone at the low end of the income scale (additions that leave them shy of sufficiency) will raise and not lower their marginal utility for the good in question, and thereby increase their motivation to secure more of that good. You are right to see that these medium additions need not come from an external source. Self-help can be as effective as exogenous help in raising marginal utility in this way. For instance, if you have ten unwashed dishes in the sink, and someone washes eight of them, the psychological benefit you will get from washing the last two will be more than you would have gotten from washing the first two, and it doesn’t matter whether that “someone” is you or a friend.

So why don’t poor people perform this kind of self-help more often? They may have internalized the law of diminishing marginal utility, just like the policy folks who resist helping the poor for fear of undermining their motivation for self-help. More likely, none of us, rich or poor, is very good at self-gaming, i.e. figuring out and acting upon the likely impact of possible actions on what will seem rational to us when we have completed those actions.
One might plausibly argue that no one ever really makes long term plans. People who seem to be doing so, such as students going to college, are really just executing standard cultural plans, doing “what you are supposed to do”. Then the “extra” we’d need to add, to explain why the poor don’t seem to have long term plans to dig them out of poverty, is to say that the cultures of poor people often don’t have standard cultural plans that induce them to so dig.
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US laissez-faire serves a greater global good

Liberals across the developed world are very concerned by inequality within the United States, as demonstrated by global interest in the Occupy Wall Street movement. This is peculiar because poverty within the United States is less common, and less severe, than it is in most countries around the world. The US does have a high level of inequality for a developed country, but it is not extreme by global standards Unfortunately, this disproportionate concern for Americans leads to attempts to narrow income inequality that may increase poverty and inequality worldwide. [1] I’ll explain how.

The US has long been one of the most innovative countries in the world, and exports the technologies it develops everywhere it can. This is, at least in part, due to its relatively cut-throat culture and laissez-faire economic system. Low taxes and ungenerous welfare mean the benefits of working hard, taking risks and making it big, are higher in the US than most other developed countries. More importantly, weaker regulation in the US means incumbents are less protected from competition, and talented people can more easily start new firms and overturn the status quo. Conversely, daring entrepreneurs are less rewarded in countries which redistribute a great deal of wealth to the poor, or build thickets of regulation that unintentionally (or intentionally) slow down disruptive businesses and technologies. While tempering the ravages of the market may on balance improve the welfare of current Americans, doing so is likely to lead to less experimentation in science, equipment, software, art, business models and so on.

Such innovation generates enormous and enduring positive externalities because the successes are copied at low cost across the world and enrich everyone’s lives. Economic theory would predict that coordinating to stimulate more of these costly but invaluable innovations would be a major concern in international diplomacy. But for some reason it is not, and so it is up to individual countries and the people within them to take these risks on behalf of us all.

Miserly social security and weak regulation in America at most harm 0.3 billion people as long as such policies persist; any resulting innovation spillovers help the remaining, poorer 6.7 billion for centuries to come because improvements in technology persist and compound over time. We all continue to benefit from the hard work of those who developed the telephone and prompted the development of an ever-growing number of related products.

This is not to say that the Occupy movement does not have some important points; it is crucial to oppose the US’s many ‘crony capitalist’ policies which enrich the wealthy while also stifling competition and creative destruction. [2] Nor would the ideal necessarily be a minimal government; there is a prima facie case that government investment in education, R&D, natural-monopoly infrastructure, and so on, can spur technological change. Unfortunately, a higher and higher share of US government spending is going to the opposite: the military, Medicare, Medicaid, unemployment benefits and pensions. These programs are not investments in the future, and generate few if any positive spillovers for future Americans and the rest of the world. And because these programs are funded by taxes on the hard-working and successful, they blunt the incentives to invent things that help the whole of humanity.

Anyone who cares about lowering poverty and inequality, and doesn’t believe that American citizens are dramatically more important than everyone else, should think carefully before encouraging the US to follow the European economic model. If the US were go even further and slip into the sclerotic ‘extractive‘ economic model found in most of the developing world and some of southern Europe, it would be a global catastrophe. Resisting any movement in this direction is one way that heartless US conservatives are inadvertently more compassionate than they look.

Update: Turn out I’m I’m not the first person to notice this problem!

Update 2: Many people below doubt whether the US is more laissez-faire, and whether a laissez-faire model does as a general rule foster innovation. If you doubt these things, at least take away the point that whichever policies you think do stifle innovation, whichever countries they are found in, are much more harmful than they first seem. I will research and write up more on the topic of which broad economic settings lead to the most innovation in the future.

[1] The effect on wealth inequality is unclear, but the effect on ‘welfare inequality’ is likely to be negative.

[2] Though perversely, lousy healthcare policies have led to very high prices for medicine in the US, which has driven investments in new procedures and drugs, which have been borrowed by other countries. My guess is that effort probably would have been better directed at other industries.

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