The following is a short article reviewing a study of what happens when poor people get supplemental incomes and how that income is distributed. It takes place in Kenya, so as I will annotate, the conclusions may require some thought when one attempts to apply them in the first world.
Large sections of my brain that could contain useful knowledge are instead filled up with dumb tweets I saw years ago. One of my absolute favorites was someone identifying himself only as “Side Hustle King,” who would ask his followers, “Would you rather get paid $1,000,000 right now or $50 every month for the rest of your life? I’ll take Option B. That’s what passive income is.”
There truly is an educational crisis in our country if this advice is taken to heart……
To save you some arithmetic: Unless you plan to live at least another 1,667 years (which is what it would take to make $1 million in $50 monthly increments) and do not care about inflation, Side Hustle King is mistaken. Option A is far better. It’s a case in point that, sometimes, you should take the lump sum, not regular payments.
GiveDirectly, a charitable nonprofit that sends cash directly to low-income households, has identified another such case, one where the answer was a little less obvious. For years now, GiveDirectly has been conducting the world’s largest test of basic income: It is giving around 6,000 people in rural Kenya a little more than $20 a month, every month, starting in 2016 and going until 2028. Tens of thousands more people are getting shorter-term or differently structured payments.
Not uncommonly, when I bring up how things are done in third world countries, a look of puzzlement comes over the face of whomever I am speaking with—even the non evangelical believe we ie the United States are set apart, different, and special, making such an analogy irrelevant: “‘Who care how they do it in Kenya? What has that got to do with us?"
One of the big questions GiveDirectly is trying to answer is how to direct cash to low-income households. “Just give cash” is a fun thing to say, but it elides some important operational details. It matters whether someone gets $20 a month for two years or $480 all at once. Those add up to the same amount of money; this isn’t a Side Hustle King situation. But how you get the money still matters. A certain $20 every month can help you budget and take care of regular expenses, while $480 all at once can give you enough capital to start a business or another big project.
The case for giving all the money upfront:
The latest research on the GiveDirectly pilot, done by MIT economists Tavneet Suri and Nobel Prize winner Abhijit Banerjee, compares three groups: short-term basic income recipients (who got the $20 payments for two years), long-term basic income recipients (who get the money for the full 12 years), and lump sum recipients, who got $500 all at once, or roughly the same amount as the short-term basic income group. The paper is still being finalized, but Suri and Banerjee shared some results on a call with reporters this week.
By almost every financial metric, the lump sum group did better than the monthly payment group. Suri and Banerjee found that the lump sum group earned more, started more businesses, and spent more on education than the monthly group. “You end up seeing a doubling of net revenues” — or profits from small businesses — in the lump sum group, Suri said. The effects were about half that for the short-term $20-a-month group.
The explanation they arrived at was that the big $500 all at once provided valuable startup capital for new businesses and farms, which the $20 a month group would need to very conscientiously save over time to replicate. “The lump sum group doesn’t have to save,” Suri explains. “They just have the money upfront and can invest it.”
Intriguingly, the results for the long-term monthly group, which will receive about $20 a month for 12 years rather than two, had results that looked more like the lump sum group. The reason, Suri and Banerjee find, is that they used rotating savings and credit associations (ROSCAs). These are institutions that sprout up in small communities, especially in the developing world, where members pay small amounts regularly into a common fund in exchange for the right to withdraw a larger amount every so often.
I have donated money to such programs in the third world (Oxfam) and like to think this does something to end poverty. Check it out!
“It converts the small streams into lump sums,” Suri summarizes. “We see that the long-term arm is actually using ROSCAs. A lot of their UBI is going into ROSCAs to generate these lump sums they can use to invest.”
I visited one of the villages receiving the 12-year UBI back in October 2016, and even then I observed people putting together ROSCAs and making plans to accumulate cash to invest. Edwine Odongo Anyango, a father of two and handyman who was 29 at the time, told me he had formed a ROSCA with 10 friends. “The monthly thing is not bad, but I think a lump sum payment would be better,” he told me. “That way you can do a big project at once.”
But I was surprised by just how often this attitude was reflected in Suri and Banerjee’s data. They found that the smallest increase in consumption — in actual regular spending on things like food and clothing — was in the long-term UBI group, which you might think is the group most able to spend a bit more every month. For the most part, they don’t do that: They invest the money instead.
As you might expect, given how entrepreneurially minded the recipients are, the researchers found no evidence that any of the payments discouraged work or increased purchases of alcohol — two common criticisms of direct cash giving. In fact, so many people who used to work for wages instead started businesses that there was less competition for wage work, and overall wages in villages rose as a result.
And they found one major advantage for monthly payments over lump sum ones, despite the big benefits of lump sum payments for business formation. People who got monthly checks were generally happier and reported better mental health than lump sum recipients. “The lump sum group gets a huge amount of money and has to invest it, and this might cause them some stress,” Suri speculates. In any case, the long-term monthly recipients are happiest of all, and “some of that is because they know it’s going to be there for 12 years ... It provides mental health benefits in a stability sense.”
I think this points to the takeaway from this research not being “just give people a lump sum no matter what.” Ideally, you could ask specific people how they would prefer to get money. For instance, if you were a Kenya politician designing a basic income policy on a permanent basis, you could design it such that a recipient could opt into a $500 payment every two years or a $20 payment every month.
But barring that, long-term monthly payments seem to offer the best of all worlds because they enable people to use ROSCAs to generate lump sum payments when they want them. That enables flexibility: People who want monthly payments can get them, and people who need cash upfront can organize with their peers to get that.
Roscas defined: The primary goal for joining the ROSCA group among participants is to achieve economic stability. The results of the study postulate that, through institutional mechanisms and social networks, ROSCAs create an environment for families to save and invest. The emphasis on the concept of “you cannot save alone” underscores the importance of supportive structures to enable low-income households to save. Although “alternative savings programs” such as ROSCAs are imagined as something that less well-to-do persons use, the findings from this study demonstrate that such strategies also appeal to some people with higher socioeconomic status. This appeal and utility speaks to the importance of ROSCAs as an institutional response, rather than just an informal arrangement among persons known to each other.
Maslow’s hierarchy of needs may play a role in this. Poor people in rural Kenya face a very different world of needs and resources than most in the United States—-or do they? I believe that while we are labeled a first world country, we have a significant minority in our country that functionally live in the third world…..and the publicity regarding this population is quite different than those living in rural Kenya. Drugs, Crime, and family networks may or may not be variables that make the lessons of this study hard to apply to us in the USA. I think the safety net for someone who chooses to not work and take drugs with their guaranteed income (something not seen in the study) is dramatically different in Kenya vs inner city Detroit.
The primary goal for joining the ROSCA group (the experimental group) among participants is to achieve economic stability. The results of the study postulate that, through institutional mechanisms and social networks, ROSCAs create an environment for families to save and invest. The emphasis on the concept of “you cannot save alone” underscores the importance of supportive structures to enable low-income households to save.
There is a first-world example of a somewhat similar study:
Finland
A nationwide, two-year pilot scheme was launched in Finland on 1 January 2017. In total, 2,000 participants, who were randomly selected among those receiving unemployment benefits and aged 25–58, were entitled to an unconditional income of €560 per month, even if they found work during the two year period.[53] The experiment tests whether the implementation of basic universal income could help provide welfare more in line with the changing nature of work, reduce the cost and complexity of the benefits system and provide citizens with greater incentive to find work. Addressing issues caused by automation, long-term unemployment and lower wages are part of a larger social context for the experiment.[54][53]
As planned, the experiment ended at the end of 2018, and the government of Finland has decided not to continue the experiment while the results of the study are analyzed.[55] Preliminary results were released in 2019. While levels of employment did not change, it did report that those involved showed "fewer stress symptoms, fewer difficulties concentrating and fewer health problems than the control group. They were also more confident in their future and in their ability to influence societal issues."[56][57] The full results of the study will come in 2020, after researchers have had time to analyse all the collected data.[58]
The study was generally considered a failure, though many experts have stated that the experiment had many problems making its results not necessarily generalizable.[59]
Experiments with basic income in the Netherlands are experiments with social assistance (more than basic income) as they focus on current welfare claimants.[48] The most important experiment was called Weten wat werkt (Knowing What Works) and was a cooperation between Utrecht University and the City of Utrecht, studying "alternative approach to deliver social assistance".[49] During the experiment, social assistance claimants were randomly divided into four groups, each of which received payments under different conditions. The aim of the study was to investigate the effects of different or fewer rules on claimants of social assistance. The experiment was supposed to be launched on 1 May 2017, but approval by the Dutch Ministry of Social Affairs and Employment was delayed.[50] The experiment started in June 2018 and concluded in October 2019.[51] Results showed that there were no negative effects and some positive results for all three interventions compared to the control group. Participants increased their participation in the labour market but benefits to their health were too small to be statistically significant.[52]
A guaranteed income does not come intuitively to most of us as an answer to poverty in our country. Some questions follow:
Would you hire the homeless person you last saw to work in your business or around your home? Would anyone? Why or why not? If some of them are ultimately unemployable, what system would you put into place to support them as opposed to letting nature take its course—which also has costs to all of us. Social workers can often find systems that support the homeless if they are given the opportunity: Vets have benefits for example. People with HIV have existing supports. Homeless adolescents (5-8% of the school population in the school district where I live) can have access to some supports.
The economy is not entirely predictable and unemployment flows from this. We have had systems in place for this. Are they optimal? Adequate? In need of revision?
“Investing in a business,” the focus of the Kenyan study was an end result. What does that mean exactly? If we give poverty stricken people in my community a monthly “salary” I don’t have a very good idea of what investments they could realistically consider other than getting health care, clean cloths (for job seeking), and perhaps, education.
My science fiction reading from adolescence often posited a future where everything is done through automation leaving the social problem of nearly universal unemployment a rich setting for the plot’s evolution. Social disarray was uniformly presented as that future…….Are we there yet?
Again, Maslow’s Hierarchy comes to mind; your resources guide which of your priorities gets attention and your priorities guide where your resources go. Physical needs (food, water, shelter) are foundational with safety and security the next level up. Love and self-actualization are often dreams…….
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