Would a Big Bucket of Cash Really Change Your Life? A New Freakonomics Radio Podcast

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(Photo: epSos .de)

(Photo: epSos .de)

Why does poverty persist? Is economic mobility still a real part of the American dream? And if you gave every poor family a big bucket of cash, would it substantially change the trajectory of its future?

Those are some of the questions we ask in our latest podcast, “Would a Big Bucket of Cash Really Change Your Life?” (You can subscribe at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

It attempts to answer an e-mail we received from a reader named Thomas Appleton:

What would be the socioeconomic effects if the 50 wealthiest Americans each gave $50,000 to 50 different American families, repeating this practice annually with new beneficiaries? How about if these families were targeted in a limited area; say, across some of the poorest neighborhoods in Brooklyn?

As we explain in the podcast, even if we could get 50 wealthy people to give $50,000 to 50 families every year, we’d have to wait a long time to measure the long-term effects. So wouldn’t it be great if, somewhere in history, something like this already happened – that there’d been a huge cash giveaway that produced a magical dataset that some scholars could analyze in order to answer these questions?

Enter Hoyt Bleakley and Joseph Ferrie, economists at, respectively, the University of Chicago and Northwestern. They are the authors of a fascinating new paper called “Shocking Behavior: Random Wealth in Antebellum Georgia and Human Capital Across Generations.” In the podcast, you’ll hear Bleakley describe an 1832 land lottery in Georgia that randomly rewarded roughly 20 percent of its participants with a big, valuable tract of land. Pairing this data with U.S. Census data, Bleakley and Ferrie were able to see what happened to these newly wealthy families — if, for instance, their children became more educated, and were more successful down the road.

So what happened? I’d tell you the answer right here but I know how much you love to be surprised. Also: you guys are so sharp that I’m guessing you’ve already guessed the answer by now. If you need a hint: think about what happens to modern lottery winners.

While the Georgia land lottery happened a long time ago, the research findings could hardly be more timely. Income inequality is a huge concern these days, as is the question of whether cash transfers —  conditional and/or unconditional — are a viable means of lifting poor families out of poverty. I cannot say this podcast will necessarily change your mind if you have a deep-set opinion about the wisdom of cash transfers, but it is certainly good to hear about the long-term evidence from such a large-scale intervention.

Feedback welcome, as always. And thanks, Thomas, for kicking off a good conversation.


JPB

The illustrious ecophilosopher Chris Rock does a great bit on this.

It comes down to the difference between being rich and having wealth.

Wealth takes time to build. Rich can be fleeting.

steve cebalt

So true, JPB. "Rich can be fleeting." I am reminded of the great economist W.C. Fields, whose view on allocating a monetary windfall was this:

“I spent half my money on gambling, alcohol and wild women. The other half I wasted.”

Good topic, good podcast.

Sam_L

I was surprised to not see mentioned any consideration of the impact of the war 30 years later on multi-generational outcomes. Those who won the lottery may not have been able to follow an upward trajectory because of disruptions in the economic system that they knew.

James

Even beyond this, consider the impact of later westward migration.

I'm also more than a little curious as to whether there is in fact sufficient data to accurately track what happened to the following generations. Say Joe Lotterywinner has four kids starting in 1832. In 1849 there's the California Gold Rush, so the most ambitious kid heads west, and we lose track of him. Maybe he parlays the few nuggets he found into a grocery store, or railroad shares, moves to a mansion on Nob Hill, and forgets about the poor relatives back home. A few years later, another one goes off to homestead in Montana or Oregon, and we lose track of him too... Do his descendents still (like some of the families hereabout) hold thousands of acres of land? How on earth could anyone possibly track this sort of thing accurately enough to create usable data?

Christine

Long term gains have to be more important to people who acquire money who aren't used to having it.

Red

My house has been through 4 natural disasters in the past 3.5 years:
A massive flood in 2010
Hurricane Irene in 2011
Hurricane Sandy in 2012
Supermegablizzard Nemo in 2013 (including a fire in the house due to a faulty candy.)

We weren't poor before, but we certainly are now. $50,000 wouldn't change are lives, but it would definitely do a lot to bring us back up to where we were before.

Daryle

$50,000? Sure. That ought to be enough to get one person an associates degree. And once you have that, the money just starts flowing in.

JimFive

I think it is interesting to consider the same scenario today. You are randomly given $100,000 (~10 acres) of land. What do you do with it? Does it change your life and that of your descendants forever? Probably not, because, truly, that isn't enough to change your life. If you are not already in the top half of the wealth distribution you're not going to quit your job and move to your new parcel. Because there's now a lot of land sellers and few buyers, your land isn't even really worth the face value so you get maybe 80%. You might sell the land and pay down some debt, buy some stuff, and invest whatever is left, but it isn't really that much unless you get lucky again.

Additionally, since the outcomes being measured are based on children's education and success, are there even schools available? If you move to the newly distributed parcels then there aren't any schools there. How many schools were available in rural Georgia (and what was the wealth distribution between rural and urban Georgia)? Keep in mind that travel to school is on foot, and boarding school is expensive.

Even if someone wanted to keep their land, do they have the resources to exploit it?
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JimFive

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C R Steven

What about the aggregate demand increase to raise all boats and increase opportunities? It would seem that influx of money in a community would increase wealth across the board. Reminds me of the small Texas town that half the people won the lottery. Not sure how that turned out in the long run.

Brad

Perhaps I'm misunderstanding some of the facts discussed in this podcast, but I heard a number of notable flaws in the reasoning used in this study/discussion.

To begin with, having a physical commodity (land) worth a certain value of capital ($) is not equal to actually having that value of capital. Being gifted a large tract of land may represent a significant economic boon to an individual, but it doesn't quite directly equate with a gift of direct liquid capital (the "bucket of cash").

The researcher places great value on continued education and upward generational mobility. He points out that there was a clear link between a college education and multigenerational success at the time. He doesn't explain whether this link to education and success was commonly understood and valued enough to be considered important by the winning families. Given the relatively small percentages of the US population to receive university educations into even much of the 20th Century, I question whether this "common knowledge" of contemporary society and a data expert would necessarily have been even known to the winners. Compulsory education for primary and secondary school did not even become law in Georgia until 1916.

My assumption while listening to this was that the gifted properties were primarily intended for farming use. In that case, a lot of land could mean a reliable and steady profession for an individual and their descendants... eliminating the need for an advanced education to ensure a stable life for future generations. Even if these families did understand and value educational opportunities for their children, the complete lack of liquid capital as part of this significant financial gift means that using the gift to better educate their children would require having to liquidate at least some of the gifted commodity. In other words, selling off land to finance this education. Which could mean at least a short term loss of regular income.

And finally, as another commenter already mentioned, the economic impact of the Civil War on the rural communities of the South should also be considered. It's entirely likely that the winning families and the control group had similar levels of financial success over time because all of their cumulative wealth was reduced to near zero following the war. So any gains made by the winning families in the 1-3 generations following the land gift might have been negated by the devastation of the Southern economy.

Overall an incredibly interesting study and discussion. But given these potential fallacies, I question whether the findings support the generalized conclusions suggested as concern the role of large cash gifts on improving lives.

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Ryan

Yeah, I'm wondering if these people had to pay taxes on this land. Maybe that was mentioned when I was distracted.

Steve Gibson

A wise man once related to me : If all the wealth in the country was seized and distributed evenly amongst all the inhabitants it would take about 20 years before it wound up in the same hands as it did before the redistribution. Equal Opportunity does not result in equal outcome. You can't redistribute a work ethic.

Morgan

An idea for a "Good News" podcast: the Early Retirement Extreme movement, wherein average americans are retiring after as little as 5 years of employment. These concepts are described on the blog by the same name, as well as the blog Mr. Money Money Mustache, and the classic book "Your Money or Your Life"

JFD

Could it be the satisfaction of pent up demand? For instance, if you give someone $50k who has been living below their needs isn't it likely that a large portion of the $50k would go to 'righting the ship'? If so, the true societal benefit would have already been materialized at the time of the distribution. In order for an experiment like this to show improvement it would seem to me that the money would have to be distributed to participants who were already able to meet their needs prior to the distribution.

As far a question for future podcasts. I'd like to know what is the 'magic value' that would be necessary to set a doctor/hospital visit so that the people who had a legitimate need would go but wouldn't deter those who could not afford it not to go. For instance, would the system hit its 'right setting' if everyone who accessed the system was charge $452 every time they accessed the system? (Every doctor visit, every hospital visit - etc.)

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Alex

Related to Brad's comment about the difference between winning a thing and winning money, is there any evidence that lottery winners could actually extract any value from the land they won? I assume people could really only do one of two things if they won a plot: farm on the land to make money from it, or sell the land to someone who could. Some (most?) winners wouldn't be able to start a farm from scratch, and who knows what kind of value they could get by turning around and selling the land.

David

So, how does this story square with the recent Planet Money article on giving direct cash to families in Africa.....that seemed to have a positive impact

http://www.npr.org/blogs/money/2013/08/16/212645252/episode-480-the-charity-that-just-gives-people-money

Caleb b

Given that modern lottery players are overwelmingly poor and uneducated, it does not surprise me at all that a sudden windfall of cash does not actually help them all that much. 1) being poor means you probably have poor friends/family that want/need part of that win 2) you have, as one person already put it, pent up demand to right the ship 3) if you are like most Americans, you are financially illiterate, so you might make very bad choices of savings/investing/purchasing 4) people with more education will probably scheme a way to rip you off 5) you have "dream" wants that are probably expensive, like a flashy car that you pay the asking price for bc you want it right that minute

One other note, given that taxes and the time value of money, you really usually only get about 25% of your prize money....so for many wins, that really cuts down on the whole transfer.

Lew

You can do that study right now. According to a Cato Institute study recently quoted in Forbes, if you meet certain requirements in Hawaii or D.C., you can get government benefits exceeding $50,000 per year. Go find some of those people and see how it's working out for them. I am fully aware that those type of benefits are not something you can get for a lifetime, but I would bet you can find some families that have benefitted for generations and are in the same boat now as two or three generations ago. One of the things we really need to teach people in this country is how to spend their money.

Sue

Only those with money say it doesn't matter

Brad C

What about looking at a set of highly paid professional athletes that rose out of poverty? Seems that would be a good place to find relevant data.