Cash Isn't Going to Solve All the Poor's Problems

Bookmark

Right now, many ideas for helping lower-income Americans revolve around giving them cash. That includes Covid-19 relief checks, extended unemployment benefits and the dueling child tax-credit proposals by President Joe Biden and Senator Mitt Romney. But periodic cash can't solve all problems. There’s a strong argument for focusing on making sure that all Americans have long-term access to the basic physical necessities of life.

In a recent essay, economist Eli Dourado points out that those basics  — food, shelter, health care and utilities — make up a larger share of spending for the people at the bottom of the income distribution. Taking just the first three (since utilities are combined with other things in the data), it’s easy to see that lower-income people have to spend more of what they have on necessities:

Cash Isn't Going to Solve All the Poor's Problems

This is perfectly predictable, of course; being forced to spend the lion's share of your income on the things you need just to survive is almost the definition of being poor. But it underscores how large these items loom in the economic lives of the least advantaged Americans. Even just a quick contemplation of what it would be like to be unable to afford food, shelter or health care gives a sense of the economic peril that is constantly nipping at the heels of the people at the bottom of the ladder.

Cash can help. But there are two problems with the cash-based approach. First of all, it can push up the price of these essentials, canceling out some of the poor's increased purchasing power as it lines the pockets of landlords and vendors with taxpayer money. Second, because the U.S. can’t seem to produce many of these commodities efficiently, the amount of cash required to buy them is much larger, which makes the political battles required to shell out the requisite cash all the more arduous.

Thus, it makes sense to focus on finding ways to produce food, shelter and health care more cheaply. Dourado frames this as a problem of technological innovation and suggests putting more resources into research in areas like construction, health, and farming. But while that’s a good policy, innovation alone probably won’t solve the underlying cost issues.

Take shelter, for instance,  the costliest of the basic necessities. Households making more than $50,000 a year are very unlikely to be cost-burdened (defined as spending more than 30% of income on housing) in contrast to those making less than $50,000. Rent is crushing the working class and the poor.

But why? Construction costs have been increasing, but not because America is forgetting the technologies of house-building. Instead, researchers at the Brookings Institution point the finger at increased regulation — complex permitting processes, zoning, local labor requirements and so on. So-called affordable housing is often far more expensive to build than market-rate housing, thanks to more expensive and inconvenient land, as well as more stringent labor requirements. And of course, in many places, regulation limits the amount of housing that can be built close to commercial centers where the jobs are. That creates scarcity and drives up rents.

So making housing cheaper isn’t simply a matter of coming up with cool new construction techniques or less expensive materials — in fact, those things will only nibble at the edges of the cost problem. Instead, what’s required is a thorough, nationwide, relentless effort to reexamine the many arduous regulations that keep housing scarce and expensive to build.

Health care, too, is not the kind of problem where technology is likely to make things cheaper. Productivity improvements in health care are quite common, but they tend to increase quality rather than decrease cost; despite pouring tens of billions of dollars annually into medical research, the U.S. still has health-care costs about twice that of other advanced nations. As the legendary health economist Uwe Reinhardt showed, the problem in the U.S. is not technology, but rather prices; American consumers get gouged by health providers.

The best solution would be to do what countries like Japan and South Korea do, and have the government cover the bulk of people’s health care (leaving the rest to private insurance). Simply extend Medicare coverage to all Americans, and let the government health insurance behemoth bargain prices down.

Cash Isn't Going to Solve All the Poor's Problems

As for food, though it became less affordable for a while in the late 2000s and early 2010s, it's become more affordable for the median earner in recent years:

Cash Isn't Going to Solve All the Poor's Problems

So that’s an encouraging sign that food, at least, is not subject to the peculiarly American cost disease that plagues health care and construction. Better crops would help food be even more affordable, and increased Supplemental Nutrition Assistance Program (SNAP) payments would help as well.

But one additional problem is the low nutritional content of the foods that low-income people choose to buy. A number of economic studies have shown that improving poor people’s access to nutritious food — reducing so-called “food deserts” — has at best only a small impact on nutrition choices. In this case, the government might have to apply some paternalism, such as using the SNAP program to encourage healthier foods by increasing the program’s purchasing power for certain kinds of ingredients.

Note that in each of these three cases, the solution for getting low-income Americans the necessities of life is different — deregulation in the case of housing, increased government involvement in health care, and behavioral nudges and increased cash when it comes to food. In our quest to get all of our people access to the basics of survival, we have to be ideologically flexible, and use whatever tools are appropriate to the particular task.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.