The Prudence of the Poor
Ari Fleisher in the WSJ:
Given how deep the problem of poverty is, taking even more money from
one citizen and handing it to another will only diminish one while doing
very little to help the other. A better and more compassionate policy
to fight income inequality would be helping the poor realize that the
most important decision they can make is to stay in school, get married
and have children–in that order.
John Cochrane demurs:
“[H]elping the poor to realize” is pretty hopeless as a policy
prescription. They poor are smart, and huge single parenthood rates do
not happen because people are just too dumb to realize the consequences,
which the see all around them.
But why on earth should we believe that the poor are “smart”? There is overwhelming evidence that the poor have substantially below-average IQs. And even without these empirics, it would be very surprising if low cognitive ability failed to sharply reduce income in high-tech societies.
Cochrane would have been on much firmer ground if he’d said, “While the poor do have below-average IQs, they have more than enough brains to see the consequences of single parenthood.” If he said that, I’d agree. But this revised position still neglects the possibility that people who foresee bad consequences of their behavior will fail to exercise self-control. As a result, they predictably make imprudent decisions when their choices have pleasant short-run effects – even if the long-run results are predictably awful.
The empirics on the poor’s lack of self-control are not as abundant as the empirics on the poor’s low IQ. But the empirics are out there. And even if there were no empirics at all, it would be very surprising if low self-control failed to sharply reduce income in a high-tech society.
Does this undermine Cochrane’s claim that “[H]elping the poor to realize” is pretty hopeless as a policy
prescription”? At first glance, no. When someone has low intelligence, it’s hard to make him realize stuff; when someone has low self-control, it’s hard to make him act on what he realizes.
On further reflection, though, there are multiple ways to make people “realize.” The most popular – and, I suspect, the one Cochrane dismisses – is publicly-funded nagging. An alternative route to realization, though, is simply cutting government subsidies for imprudent behavior.
Such cuts have two effects. First, cutting subsidies for imprudent behavior makes the imprudence even more blatant than it already was. Second, cutting subsidies for imprudent behavior makes the behavior’s unpleasant consequences happen sooner, potentially deterring even the highly impulsive. As Scott Beaulier and I put it:
What do these behavioral findings have to do with the poor? Take the case of single mothers. On the road to single motherhood, there are many points where judgmental biases plausibly play a role. At the outset, women may underestimate their probability of pregnancy from unprotected sex. After becoming pregnant, they might underestimate the difficulty of raising a child on one’s own, or overestimate the ease of juggling family and career. Policies that make it easier to become a single mother may perversely lead more women to make a choice they are going to regret.
A simple numerical example can illustrate the link between helping the poor and harming them. Suppose that in the absence of government assistance, the true net benefit of having a child out-of-wedlock is -$25,000, but a teenage girl with self-serving bias believes it is only -$5000. Since she still sees the net benefits as negative she chooses to wait. But suppose the government offers $10,000 in assistance to unwed mothers. Then the perceived benefits rise to $5000, the teenage girl opts to have the baby, and ex post experiences a net benefit of -$25,000 + $10,000 = -$15,000.
As far as poverty policy goes, I suspect that Cochrane and I are on the same austerian page. My fear is that he’s discrediting the correct conclusion with implausible justifications. The Chicago descriptive view that everyone is “smart” has little to do with the Chicago prescriptive view that government is way too big. Indeed, as Donald Wittman has shown, it’s hard to argue that government is way too big unless you’re willing to insult the intelligence of a great many people. I’m happy to bite that bullet. Cochrane should do the same.