The poor need more than a safety net

A helping hand - just cash or also values?

What could be worse than a losing lottery ticket? Almost certainly, according to one study: a winning one.

In a 2009 paper published in the Review of Economics and Statistics, economists from the University of Kentucky, University of Pittsburgh, and Vanderbilt University attempted to determine what happens when people in financial straits are given large lump payments. “The Ticket to Easy Street? The Financial consequences of Winning the Lottery” aimed to assess the most basic approach used by policymakers to assist those in financial trouble – giving hefty cash transfers.

The longitudinal study utilized a large, linked database of Florida lottery winners and bankruptcy records. The findings were stunning – big winners (those receiving $50,000 to $150,000), while less likely to go bankrupt than small winners within  two years, were actually more likely to file three to five years later. In other words, the large infusion of cash had no lasting effect, and, in fact, a corrosive one. This in spite of the fact that the median prize ($65,000) was larger than the average unsecured debt ($49,000) owed by the player: these winners should have had a fresh financial start.

Is this a significant finding to policymakers fighting intransigent poverty? Does it suggest that cash transfers are ineffective, or perhaps even an example of pathological altruism (well meaning but harmful policies)? It is often said that the lottery is a tax on those who are bad at math, so perhaps this sample is biased to select those with poor financial skills.

Wouldn’t it be great if we could conduct an experiment where a large group of people were randomly endowed with significant wealth. There would be no sample bias and those not selected would act as a control group, and they could all be observed over many years to determine multigenerational effects. A very expensive experiment to be conducted over a fifty year time frame seems extremely unlikely.

Almost unbelievably, that experiment has been done.

In 1832, the state of Georgia conducted the Cherokee Land Lottery in which winners received 160 acres of land with no strings attached. It could be farmed or sold or traded. The value received was close to the extant median level of wealth (roughly $50,000 in today’s dollars), vaulting winners immediately into a higher wealth strata. The study, “Shocking Behavior: Random Wealth in Antebellum Georgia and Human Capital Across Generations,” was performed by economists Hoyt Bleakley, University of Chicago, and Joseph P. Ferrie of Northwestern University, published in the National Bureau of Economic Research in 2010 (updated in 2013).

(“Shocking” is not used in a horror movie sense, but meaning that the economic impact of winning was a shock to the winner’s financial status, bouncing them to a new level.)

Bleakley and Ferrie’s findings were surprising: “Although winners had slightly more children than non-winners, they did not send them to school more. Sons of winners have no better adult outcomes (wealth, income, literacy) than the sons of non-winners, and winners’ grandchildren do not have higher literacy or school attendance than non-winners’ grandchildren.”

From a policymaking point of view, this is highly disappointing. Large infusions of wealth to families did not “catch fire” but rather petered out. This brings us to a key question: what is more important to enabling social mobility: financial constraints or the household’s culture and values? How can we most effectively address multigenerational stagnation?

Bleakley and Ferrie refer to a 2007 study published by Gregory Clark in which he found that the “characteristics associated with better economic outcomes – patience, hard work, ingenuity, innovativeness, education – persisted and spread within family lines…” The family’s characteristics, or values  infrastructure, is more likely to be passed on from generation to generation and is more highly correlated to mobility and success than is wealth alone. Apparently, wealth accretes from values and not vice versa.

According to the Congressional Research Service, the cash equivalent of federal means-tested spending on households in poverty is over $60,000 per year. There is no doubt that this money is useful to support these families and their children. But is it enough? Will it engender social mobility and multigenerational change? The sad truth from the aforementioned studies is that, most likely, it is not.

So, it seems, as we prescribe programs to help our poor, to enable them to rise to and through the middle class dream of America, we must pay equal mind to cultural values as we do to cash. For without these, the effects of gifted cash alone are ephemeral and, perhaps, even harmful.

There is enough harm in the world without us adding to it, however well intended.