economics taxes inequality

The Effects of Transfers

The consequences of transfers fall into a few buckets. The two most obvious are the the immediate first-order effects:

  1. The positive welfare effect from providing assets to the poor
  2. The negative welfare effect from taking assets from the rich

Then there are the medium-term second-order effects:

  1. Reduced labor from the disincentive to work
  2. Improved long-term outcomes from better access to resources

Finally, there are the more controversial long-term effects regarding the effects of transfers on culture and the gene pool.

We will examine each of these in turn.

First Order Effects & Labor Discincentives

The first order effects of transfers are really part of a broader conversation on optimum taxation and are typically weighed under a framework of social welfare maximization. This is also the proper way to weigh the labor disincentivizing effects. See here.

Long-Term Outcomes

It's uncontroversial that welfare boosts the quality of life of its recipients in the short-run, but its not nearly as obvious that there are long-term effects. For instance, if there were long-term effects, we'd expect the generous welfare states in Europe to lead to more equal pre-tax-and-welfare income. This is not really the case Gini in the bottle. Still, there is some evidence for long-term effects:

  • One researcher found that removing a youth from SSI reduces their younger siblings' adult incomes by about $5,000 per year Deshpande.
  • A group of researchers looked at when different counties got access to food stamps and the association between that and life outcomes. They found significantly positive effects Bailey.
  • Expanding the EITC causes positive effects on educational outcomes while increasing labor participation Maxfield.

Additionally, there is some decent evidence that welfare has positive effects on children's eventual adult incomes.

There are two problems with these studies. The first is that they are only quasi-experimental, so while suggestive of causal effects, they're hardly a gold standard.

The second is that we have no way of knowing whether these results are actually positive-sum. For instance, several of the studies find transfers increased educational attainment, but it isn't clear that this is actually a worthwhile goal.

Likewise, it's entirely possible the income effects may come from zero-some vectors rather than genuine increases in human capital. As far as I can tell, no one has seriously examined this hypothesis.

Long-Term Effects

The long-term effects of transfers are mostly speculative.

Most likely, transfers reduce labor force participation. We know they do in the short-run and long-run elasticities are generally larger than short-run elasticities. That being said, some of the above studies find positive long-term effects on incomes, so its at least plausible transfers can boost labor participation.

But all of that is kind of moot since it's not obvious whether marginally more labor participation is good or bad. Arguments that it is good generally spin a narrative that work is "good for the soul" by giving a sense of accomplishment, purpose, responsibility, and an appreciation for the value of labor. Arguments that more labor is bad generally rest on claims that most marginal consumption is zero-sum.

Conservative commentators will sometimes claim that transfers cause cultural and genetic changes by encouraging rent-seeking and allowing poor people to have more children, which presumably reduces the genetic capability of the population to produce. These claims are obvious extremely controversial.

Works Referenced

  1. Yglesias, M. (2020). The welfare state is extremely good. Slow Boring.
M, S. (2013, November 26). Gini in the bottle. The Economist. Deshpande, M. (2020). How Disability Benefits in Early Life Affect Long-Term Outcomes. Bailey, M. J., Hoynes, H. W., Rossin-Slater, M., & Walker, R. (2020). Is the social safety net a long-term investment? Large-scale evidence from the food stamps program (No. w26942). National Bureau of Economic Research. Maxfield, M. (2013). The effects of the earned income tax credit on child achievement and long-term educational attainment. Job market paper.