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.


Katherine

Here's a few feel-goo suggestions:
What is education really worth?
(I know you've already hit on this.. but extrapulate. I'm a teacher and never get tired of that)
Which charities do the most good?
I'll let you define the parameters of each. :p

Thought Experiment

Hmm ... This story raised a lot of questions for me.

I could imagine a lot of contextual factors that could explain why being given land in the 19th century in a place newly opened up for development would not be linked to your children being more likely to be educated, or with those persons becoming more well off than their neighbors in that period.

For example, I would imagine that the children who's parents were given the grants would be more likely to be working on that land/farm rather than going to school - probably a smart move as turning the land into wealth would require a big investment of labor, and ostensibly farming or working the land somehow could be the children's future.

And how available was education for all these people in that area at that time? Spread out over all these acres of land?

Beyond that, even today, being a successful farmer is complex - very capital intensive - requiring many additional upfront investments from the farmer (especially at that time) in terms of labor, seeds, stock, etc. that cannot be recouped if the project fails (i.e. weather, etc.). And if a whole lot of land was given away to development in the same region at the same time, perhaps it creates a glut in the market for the products coming from that land? And all the landowners would face the same events and pressures at the same time - meaning that the same events would effect them all in similar ways - driving prices for supplies and land values down in the same moments?

To the degree that there would be benefits from development, wouldn't the whole community of people benefit from the development of that land? Not just the land owners - meaning that the land giftees would not be so much better off than others in their community?

For example, perhaps those who are less tied to such an un-liquid gift - their neighbors who instead were selling the tools and seeds to farmers, lumber people, etc. would be better off in the end - just as likely to be successful, or more. Just as likely to send their kids to school (or not) - that is, at the degree to which education was perceived - or even had anything to do with social mobility at that time.

I wonder if there is data on people who sold the land soon versus those who held it? Though here again, the value of the land might have been deflated by the sudden increase in people with land to sell at that moment.

It feels like the research might be taking a 21st century lens - where education is strongly linked to social mobility, where land itself is an easily trade able commodity, where investment resources that can be used to turn land into wealth are easily attainable, and where landowners aren't trapped by extremely local market forces - and applying it to a very different period.

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Cathy

I am wondering how this jibes with the recent podcast suggesting that the solution to charity was to give cash directly?

Manuel Perez

Excellent presentation, guys!
How about looking at the results of the 1960 and on programs and projects that helped young teenagers start their own businesses? I don't remember all the details, but they were even promoted on TV... Was there a difference in success rates from other entrepreneurs of their own age? Did these programs have any long term effects?

Thank you!............. Manuel Perez

Dan D'Errico

In a similar vein, I have heard that the poor cannot manage money and this is one of the reasons they are poor in the first place. This may seem self-evident. But let's you only have $200 this week. You need to decide whether to use that money for medicine, food, the electric bill, subway fare, etc. This is a very intense balancing act that borders on a survival skill. And think of the stress! I would like to see a rich guy count his pennies like this. Of course, if the poor person wins the lottery, all of the penny-pinching may go out the window. But even if the poor person spends all of his money, at least he is stimulating the economy for others!

Barbara

I must have missed something here. I suppose some of these winners had capital and farming experience and no local responsibilities so they could pack up, move to the country and start breaking the land. But if it happened to me, I wouldn't know how to begin. Could your average lottery winner buy a mule and a wagon and a plow and enough food to get through to the next harvest, and port it way out there? What about his little children and his elderly, dependent parents - would they get loaded in with the plow and provisions and the seed and come along?

I don't know- to me, this study leaves out some important stuff about the nature of a gift. I think the better study would be about modern prize winners given cash without unreasonable requirements for taking advantage of the money. (As I understand it that has no better outcome.)

It would be good to see a study of the long-term effects of small third-world loans such as Kiva provides - maybe in another generation that can be done.

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tb917

Poverty cannot be entirely explained by economics; there are other sociological factors at work, which is why most charities don't just focus on giving away money to end poverty. Instead they raise money to offer social services, such as the educational opportunities for children, job training for parents, and efforts to educate entire communities about sound financial planning. To the extent that they do give families money, it's only to ensure that their children are going to school with a full stomach, that their parents have appropriate clothing for a job interview, or that the heat stays on while the family is working to get back on its feet. Giving away money does actually work if it is translated into services for the poor rather than a simple gift of cash. This is why social services organizations exist and why donating to them is not a waste of money—just in case people are thinking is all is lost after listening to this interview. It really doesn't tell the whole story about the work being done to lift people out of poverty in America and around the world.

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Bryan

A recent podcast from This American Life (#503: I was just trying to help) dealt with this exact subject.
From the episode details,
"Act One - Money for Nothing and Your Cows for Free
Planet Money reporters David Kestenbaum and Jacob Goldstein went to Kenya to see the work of a charity called GiveDirectly in action. Instead of funding schools or wells or livestock, GiveDirectly has decided to just give money directly to the poor people who need it, and let them decide how to spend it. David and Jacob explain whether this method of charity works, and why some people think it's a terrible idea."

mannyv

Don't give it to someone who lives in a city. That's ridiculous. Give it to someone stuck in a small town somewhere, itching to get out.

But the really interesting finding is here:

"The results are also inconsistent with a wealth-based “poverty trap” for human capital. The observed intergenerational links are consistent instead with the presence of underlying characteristics that are passed down along family lines and are associated with better outcomes."

You pass down culture, not money.

John K. Lunde

If anything I would expect these land lottery winners to fare incrementally better (although maybe only slightly) than modern day lottery winners - if only because the modern day lottery is self selected based on uneconomic behavior of gambling on a lottery ticket with expected return < price paid.

Bill Watts

You asked for some positive economic ideas - if you want a long podcast, try doing one on quality of life in comparison to medicine. Just look at life expectancy over the last 100 years with the medicines that have been approved then get into how some countries (EU) require quality of life be tied to price.

You could probably have other science related topics that have "improved our lives" and look at the cost/benefits of those.

Thanks.

Tommy Schouw

The presence of immediate wealth without the means to invest it gainfully will most likely result in a rapid increase in personal consumption until you've spent all your gains. I have a friend with poor financial skills who managed to gain a ~$50.000 inheritance and waste it all in a matter of months, simply because they didn't see any way to re-invest it gainfully.

Personally, if I inherited $50.000 I'd simply throw them at my mortgage, to shave a few years off the repayment plan. In my case it would make sense for the first $50-60k representing the most expensive bits of housing debt, but after that I'd probably be better off putting them in some sort of retirement fund.

Still, neither of these would do much to increase my socio-economic status.

Tom Rist

You should do a story on the Evans Scholarship...a privately funded four year, full tuition and housing scholarship awarded to ~225 hardworking caddies (many of who did not have the means to attend college otherwise or would be in massive debt). With today's college costs, it equates to around $60k at a state university. As an alum myself , I think you would see dramatic increases in the quality of life and trajectory of the future for the majority of families.

Tom Cronin

There seemed to be a concern in the study that those who received the land did not turn it into "human capital", namely education. There was another massive random occurrence in our nation's history, the WWII draft. Many who served and returned home took advantage of both cash and educational benefits provided by the GI Bill. Others did not. Has there been a study of whether those who took the human capital educational benefits passed on more wealth or opportunity to their children, now 3 or even 4 generations later, than those who did not avail themselves of it? And how much does this account for the post-war economic boom (if it can be teased out from the effects of the direct capital investment in manufacturing and technology that also took place)?