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Cash transfers work. So why don’t states do more of them?

It’s a fact that should be so obvious that it’s trite: the most effective way to help people who don’t have enough money is to give them more of it. Cash transfers are among the most efficient ways for wealthy states to spend money in middle- and low-income countries. Studies show that they improve life outcomes, improve mental health, reduce stunted growth in children and increase the number of women and girls in education.

And that’s only if we limit our analysis of money transfers to those given by rich states to poorer ones. If we broaden our view to working people in the rich world transferring cash to their relatives in middle and low-income countries (the largest source of external financing in those countries before the pandemic), their impact is even greater.

While research on the effectiveness of money transfers is largely limited to poorer countries, they also have major implications when used in rich countries. It generally appears to be cheaper and more effective for both households and states to provide hungry families with money for food rather than providing food directly. This should reveal whether wealthy states offer breakfast clubs and free school lunches to children or whether they would be better served by simply increasing the amount of money governments give directly to lower and middle-income citizens.

The effectiveness of cash transfers also partly reminds us that, for most of us, individuals are usually pretty good at estimating how to spend their own money. Not that this means that remittances are the only lever that governments should use.

questionable Star Wars Purchases aside, I’m probably the best judge of how I can spend my own money, but my ability to fund and run all the things I want to myself is limited. I don’t have the resources or, frankly, the motivation to run my own public transport network, hire my own police, decarbonise my energy use, or set up my own education system. These are all issues that governments need to deal with, as well as redistributing cash to the needy. Yes, money transfers work, but studies also show that capacity-building measures, such as building hospitals and schools, play a role in alleviating poverty.

Nevertheless, despite the fact that money transfers are so effective, states do very little of it, especially within their own borders. Why not? One reason is simple politics: When I told an American friend the topic of this week’s column, they laughed relentlessly. They then told me that free school lunches may be less effective than increasing Social Security benefits, but that these lunches are a popular government program, while Social Security is not. Political parties of any number of hues have found success at one time or another with the idea that there are a large number of “undeserved” voters whose spending patterns need to be monitored, controlled or dealt with. Very few politicians are willing to admit that many social problems can be greatly contained by simply spending more money on people, rather than through invasive state programs.

Another is that states are concerned with the handful of people who are not well served by money transfers: what you might call the “power users” of government services. A survey in New Zealand found that a fifth of the population was responsible for 54 percent of all cigarettes smoked, 57 percent of hospital stays and 81 percent of criminal convictions. While most job seekers wouldn’t, if they were granted unconditional remittances, live on benefits forever or spend their money on so-called “temptation goods” such as alcohol, cigarettes and other drugs, a minority would.

So, who should states perform their services for? The majority who are better off with cash transfers, or the minority who need more intensive support? We see this with very conditional benefits – studies show that the number of long-term unemployed is consistently decreasing, but with the result that more of them end up in lower paid and less secure jobs than before. Well-being policies are designed with the needs of ‘power users’ in mind, rather than what could benefit the majority.

Thus, the reluctance of states to introduce money transfers has largely to do with what governments see as their ‘real’ job: to make policies for the minority of people whose problems cannot be solved by injecting more money alone. But governments could free up both more resources and more time if they were willing to tailor their initial response to the vast majority of service users, rather than those who need more lengthy and more difficult policy interventions.

stephen.bush@ft.com

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