A Bird’s-eye View on Cash Transfers: The War on Poverty’s Future?
The role and scope of the U.S. government in providing a social safety net is an evergreen debate among experts. While both federal and state governments have an array of social safety-net programs, the majority of federal programs provide conditional or indirect, non-monetary benefits. In recent years, however, a number of smaller-scale pilot programs using direct cash transfers—effectively, cash without strings attached—to combat poverty have sparked interest in whether scaling this model to replace indirect or non-monetary benefits could better address long-term poverty. Childhood poverty in particular has lifelong negative effects on health, education, and income. To that end, it is worth examining whether cash transfers can have lasting positive effects on poverty and help create a more sustainable welfare system in the United States.
Cash transfers as an anti-poverty tool
Cash transfers are not a novel concept. Some federal programs already employ this mechanism to combat poverty—refundable tax credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) boost post-tax income, programs like the Supplemental Nutrition Assistance Program provide (albeit conditional) dollars for food, and others like Temporary Assistance for Needy Families provide short-term income for impoverished families with children. Including indirect benefits, roughly 70 federal programs currently supplement individual/household income.
The pandemic played a major role in the relative popularity of unconditional cash transfers. Direct stimulus checks, a temporarily expanded CTC and EITC, and other programs under the Coronavirus Aid, Relief, and Economic Security Act provided cash as a way to temporarily offset the economic hit taken by so many Americans. While this natural experiment led to historic job loss, overall poverty temporarily declined in the United States due to the boost from temporary assistance programs. Of course, maintaining COVID-19-era safety-net spending is unsustainable and undesirable in the long term—and the sheer cost of safety-net spending during the pandemic plus concerns over the future solvency of federal programs are just two reasons why. However, this particular shift toward cash assistance and its result on economic well-being prompts a look at evidence that suggests cash is king when it comes to the safety net. Are cash transfers a more effective (and perhaps even more efficient) way to address poverty?
Effects on key health and economic metrics
Research on the effects of cash-transfer experiments shows intriguing results. First, the impact on childhood development in less-rich countries is consistently positive. In the United States, results are more modest but still important. Parents in low-income households receiving cash transfers have more money to spend on better food, quality housing, and healthcare. As a result, their children can be more likely to attend and finish school and experience positive economic outcomes well into adulthood. The effects on childhood developmental metrics, however, are less clear and warrant additional research—for example, although fresh food consumption increased with cash transfers, overall health and sleep did not improve.
The evidence on changes to labor participation—namely, whether people leave the workforce when given more income via the government—is slightly more mixed, yet large effects in either direction are less demonstrable. One study on households in Spain found that labor participation decreased by about 20 percent in households receiving cash transfers; yet, these results were concentrated in households with children and/or higher caregiving responsibilities compared to those without. This suggests that cash transfers enabled families to trade labor hours for caregiving. Other studies show a slight decline in labor force participation, but nowhere near a 1:1 tradeoff. Further, in some cases, the effects on long-term labor force participation are likely minimal and may allow more individuals to take on entrepreneurial endeavors.
Finally, we must examine whether cash transfers can lead to greater long-term economic mobility for children. The old trope of “welfare queens”—those who stay on government assistance over the course of their lives—is a far cry from most who receive income assistance at some point in their lives. Research shows that welfare program recipients churn somewhat frequently, but there is also a relationship between receiving assistance while young and frequently returning to it. However, programs like the EITC seem to have positive long-term economic outcomes for children. Ultimately, educational and job prospects at a young age lead to less reliance on perpetual government assistance.
Designing an effective social safety net
The evidence of cash transfers—particularly unconditional ones—alleviating long-term poverty and boosting child well-being must inform the future of safety-net spending in the United States. Given the research landscape, the evidence that cash transfers work is most convincing in 1) less-developed countries, 2) children in the United States, and 3) meeting basic household needs for families. As a result, cash transfers targeting the latter two are perhaps most likely to be worth their costs at scale. In the United States, for example, refundable tax credits like the CTC, which is predicated on having children in the home, seem to carry their weight in benefits to families. This is particularly true for the poorest families on the lower end of the CTC-eligible income spectrum.
As for economic mobility, the federal government still plays a role beyond income assistance. Rolling back policies that hinder individual opportunity, entrepreneurship, and professional development are ways to increase prosperity.
Conclusion
The American war on poverty has waged on for 60 years and has continually grown in spending without proportionate results in alleviating true poverty. Safety-net programs help keep people afloat in times of need—the basic underpinning of a social safety net—but more research is needed to understand how programs can actually foster greater economic mobility. The pandemic brought a boom in using cash transfers to fight poverty, and existing evidence is perhaps most promising on childhood effects that translate into adulthood. Investing in children’s economic well-being when it clearly improves their future prospects is one of the greatest outcomes a social safety net can have, yet the relatively limited track record of scaling cash transfers is enough reason to remain humble in the future of welfare spending. The government’s role in fostering well-being is just as much about what it decides not to do as what it decides to do. Perhaps a combination of cash transfers targeting childhood poverty, as well as fewer burdens placed on those trying to grow their economic prospects, is a winning equation.