A dollar is a dollar? What economists don’t get about indirect programs

[EDIT. I am no longer satisfied with my treatment of Ng’s argument. It is perhaps not wrong as such, but it is like taking a 2 dimensional slice of a three dimensional object. I have ignored much of what is subtle and interesting in his take. I will leave this essay up though for two reasons 1. Accountability 2. Because the general tendency I criticise is a real and dangerous factor in economics, is present in Ng’s argument to some extent and does deserve to be criticised. Perhaps one day I will edit this article to deal with Ng’s argument more fully.

I am also not happy with the standard of proof reading, but given this essay is now in the mistakes pile, it’s hard to motivate cleaning it up.

EDIT EDIT: I am now even less satisfied. It gets Ng’s argument wrong, and if the counter-argument has any merit specifically regarding Ng’s argument it is by accident- although as a general critique of the habits of many economists, it is valid.]

1. A dollar is a dollar: The proposition

In his celebrated textbook Welfare Economics Yew-Kwang Ng contends that “A dollar is a dollar”.

Ng is broadly speaking on the political left, and the argument might best be seen as an internal critique of the left. In effect Ng agrees that the left is right to back extensive government provision of public goods, and that they are right to support strong redistribution. The left is wrong, however, to try to mix the two. Transfers should be done through progressive taxation and payments that as closely as possible mimic true lump sum transfers. The government’s function in promoting efficiency by substituting for the private sector where it can do better (e.g. healthcare) and the government’s function of  redistribution should be separate.

The saying that “a dollar is a dollar” is a consequence of this philosophy applied to cost-benefit analysis. Except when it is engaged in the taxes and transfers, the government should generally focus its efforts on efficiency rather than equity. Any deleterious equity effects can be corrected later through progressive taxation. Increase the number of dollars then, regardless of the recipients.

2. Common critiques

There are a number of critiques one might make of this position:

A) Some forms of transfers might be less distortionary if done in kind for behavioral economics reasons- viz, they are harder to notice. For example, do we really believe people are going to shy away from becoming corporate lawyers because the government prioritizes infrastructure projects in poor areas? This may be especially true of unpredictable, once off projects on behalf of the poor.

B) It is also important to take account of non-monetary goods. We can imagine for example, a government agency making a decision resulting in job losses in order to increase efficiency, reasoning that it can compensate the losers later through progressive taxes. Such an approach would neglect the enormous, well documented psychological harms of being fired. There may be similar problems with programs requiring the exercise of eminent domain, and the psychological costs of being forced to moved.

C) Some programs that look like indirect equity programs may actually be efficiency increasing programs in disguise, e.g. the minimum wage in a labour market with employer monopsony power.

3. My objection: The public prefer indirect transfers

I want to focus on another criticism though, because I think it is very important not just to understanding where Ng’s argument may go wrong, but key to understanding why economists are so often at daggers with the defenders of progressive programs.

People like redistribution but they like it to be done indirectly

Indirect may not be quite the right word, but it’s the closest economic equivalent I can find for a bundle of features beloved by the public but  loathed by economists. The public like transfers which are in-kind and targeted at special aspects of social problems created by poverty (e.g., winter heating). Economists, on the other hand, dislike them, and prefer the simpler approach of giving cash to poor people directly to tackle the problem.  Let me give a few examples.

A) People don’t mind subsidising the car industry, but might resent paying unemployment benefits to the manufacturing workers, should the government withdraw subsidies and the industry collapse as a result.

B) People are more comfortable with paying the gas bills of the poor in winter than just giving them money.

C) There is far more support for the government stepping in and making sure people have housing, than giving them a bunch of money that they will then presumably spend on housing.

There are a variety of reasons for this love of indirect policies among the public, varying from case to case. My best guesses would be: A) reflects deep seated ideologies about the value of work while B) & C) reflect the fact that denying people help with heating or housing feels heartless.

4. Making the perfect the enemy of the good

Regardless of the exact explanation the public often don’t like the idea of writing other people cheques, but feel more comfortable helping them out in-kind. This rubs economists up the wrong way- and Ng is not unique in this regard. Economists aren’t necessarily against generosity, but they like it to be direct. The problem is, the public don’t so much, and that can result in a failure to implement transfer programs at all- whether direct or indirect, as the clash of expert opinion and public sentiment fizzles to nothing.

Frustratingly, when this or that progressive program is proposed, economists will often quibble at the edges, wanting it to be more direct and cleaner. But this usually isn’t on the table. Thus economists have a tendency to make the perfect the enemy of the good, as they are far more likely to successfully veto policies which are generally improvements on the current situation but are too indirect, than they are to get their preferred direct alternatives. The public’s preference for indirect initiatives, and the economist’s preference for direct initiatives then cancel out in an outcome with far less transfers than either economists or the public would prefer.

5. Exceptions and the rule

I should be clear that when I say that the public prefer what we have called indirect transfers, there are exceptions. We are talking about general tendencies and idealized types here. At the moment for example, the public in Australia is, according to polling, generally in favor of a substantial increase to the unemployment payment, which is closer to the direct than the indirect end of the spectrum.

Also, political economy effects don’t always favor indirect measures in the long run either. The way in which the right has used the food stamps program to demonize the poor by constantly alleging they are evading the rules is instructive- the disciplinary measure becomes a way to demonize the subject further.

For these reasons and others I believe in substantial, untied cash transfers to the unemployed, because while there is an argument for opacity, it is not so strong that it can’t be overwhelmed by other factors.

6. Concluding thoughts, and why this isn’t an argument for deceiving the public

On an abstract level I tend to think that the economists have the better of the argument, but it doesn’t matter that much, because people aren’t going to change. Besides, maybe the people have a point- perhaps the psychology and political economy of receiving a cheque from the government is very different in a humiliating way than the psychology of receiving a house to stay in from the government. It is, in both senses, a moot point. Economists, if they want to fight poverty, should be mindful of the political reality that these policies might be easier to implement in an indirect form.

One way people will misinterpret this essay is that they will think I’m suggesting that we should support indirect redistribution to “sneak it past” the voting public. This is an unfortunate consequence of my using the word “indirect””- if anyone has a better alternative, let me know. What I call “indirect policies” in this essay are usually more salient than so called direct policies, so there can be no question of sneaking them past the public.

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