The High Cost of Free Money

Have Pandemic Stimulus Payments Hurt Lower-Income Americans? That’s the implication of a new study by social scientists at Harvard and the University of Exeter.

Liberals argue that non-binding handouts encourage better financial decisions and healthier lifestyles. The theory goes that when people on low incomes have less stress trying to make ends meet, they become more forward-thinking. The Harvard study tested this hypothesis and found the opposite.

During a randomized study conducted from July 2020 to May 2021, researchers assigned 2,073 low-income participants a one-time unconditional cash transfer of either $500 or $2,000. Another 3,170 people with similar financial, demographic, and socioeconomic characteristics served as a control group. The study was funded by an anonymous non-profit organization.

Participants earned an average of about $950 per month and had $530 in unearned income (eg, food stamps). About 80% had children and 55% were unemployed. Over a period of 15 weeks, they were asked about their physical, mental and financial well-being. 43 percent also agreed to allow researchers to view their bank balances and financial transactions.

The main finding: Handouts increased spending for a few weeks — an average of $26 per day in the $500 group and $82 per day in the $2,000 group — but had no discernible positive effect on individual outcomes. Current account fees, reminder fees and cash advances were just as common among the cash recipients as in the control group.

Handout recipients underperformed in most survey results. They reported lower earned income and liquidity, lower job performance and job satisfaction, more financial stress, better sleep quality and physical health, and higher levels of loneliness and anxiety than the control group. There was no difference between the two cash groups.

These results contradicted the predictions of 477 social scientists and policymakers interviewed by the researchers. That’s not surprising. Most liberal academics and politicians believe that government handouts are the solution to all problems. If transfer payments were a ticket to the middle class, the war on poverty would have been successful long ago.

The researchers posited that the cash payments may not have been generous enough to produce a positive outcome. “Having received some but not enough money may have made their needs — and the gap between their resources and needs — clearer, which in turn may have made them feel desperate,” they write.

“Needs” is a subjective term. The theory goes that low-income people receiving handouts became more stressed when they realized they still couldn’t afford everything they “needed” or, more likely, wanted. If that’s true, then just giving people more money would certainly lead to the same problem.

More plausibly, the payments made work less rewarding, which reduced personal well-being. Recipients reported lower wages and felt worse about their jobs. It’s no surprise that people who got a large portion of their monthly income from doing nothing were less motivated to work and less satisfied with their jobs. Earning a paycheck can give workers a sense of personal agency that encourages them to make better financial and health decisions. Receiving a handout can do the opposite.

In terms of financial outcomes, poor people often have trouble managing money and this is one of the reasons why many remain poor despite receiving ample government assistance. Just giving people more money doesn’t make them better stewards, the study found. In some cases, people spend more than they take in and get overwhelmed.

The roots of poverty are complex, but the study is not unique as it documents a link between transfer payments and poorer outcomes. A 2018 study in the Journal of the American Medical Association examined the diet quality of food stamp beneficiaries from 2003 to 2014, a period in which average benefits increased by more than 50%. Similarly, low-income people who did not receive food stamps ate healthier foods than those who did. The non-food stamp group consumed significantly fewer sugar-sweetened beverages and their diet improved more over time.

Transfer payments skyrocketed during the pandemic as Democrats argued they were necessary to prevent millions of Americans from falling into poverty. Republicans in Congress offered little resistance, at least during Donald Trump’s presidency. Congress spent a total of $800 billion on stimulus checks alone during the pandemic.

The handouts encouraged people to spend more and also reduced the incentive to work, fueling inflation. Now there is evidence that the payments may have affected personal well-being as well. A tome could be written about all the government blunders during the pandemic. One lesson for Congress seems clear: never send cash with no strings attached again.

Ms. Finley is a member of the Journal’s editorial board.

Journal Editorial Report: Democrats are losing touch with their base. Images: AP/AFP via Getty Images Composite: Mark Kelly

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https://www.wsj.com/articles/the-high-cost-of-free-money-harvard-exeter-study-stimulus-handout-low-income-well-being-health-personal-agency-poverty-covid-11658166372 The High Cost of Free Money

Alley Einstein

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