Does the Welfare State screw the poor?

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.

But I never really thought about the structure of these unintended consequences. So I second Karl Smith’s recommendation to read Beaulier and Caplan’s paper on the subject.

Poverty policy might hurt the poor because:

  1. 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.
  2. 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.
  3. 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.

3 thoughts on “Does the Welfare State screw the poor?”

  1. Yeah, that’s one thing that bugged me about Caplan’s paper. They don’t address the effect size issue and leap directly from the possible to the probable.

    In any case, this question is paramount.

  2. Absolutely they are “probable”, work as a caseworker determining eligibility for welfare programs and you know it within your first week. Expanding a person’s choice, includes expansion to poorer choices which often are the choices of least effort.

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