Milton Friedman’s complaints about rent control and the minimum wage are cliche. These programs hurt the people they’re intended to help. Unintended negative consequences are the first things I look for when I think about a policy intended to help the poor. I just took their existence as an empirical fact.
Poverty policy might hurt the poor because:
- Poor people pay more for it than they get. E.g. poor people live shorter lives suggesting they get less social security benefits and social security taxes are regressive.
- There may be inter- or intra- family externalities. E.g. a welfare program may make a dad better off by leaving his family but his absence may make the rest of the family worse off.
- Poor folks are lead to make bad decisions (where bad is relative to a neoclassical norm) for themselves because of the program. E.g. affirmative action leads minority students to choose “higher ranked” schools whereas they would have had better outcomes if they choose less prestigious schools.
The point of the paper is to show that the third possibility is untenable in the neoclassical framework (where expanding a person’s choice set can only make them better off) but it becomes tenable if results from behavioral economics are taken seriously. Plus, deviations from rational expectations may be especially pronounced among the poor.