The High Cost of Free Money

Researchers gave cash to low-income people. It led them to spend more and work less

By Allysia Finley of The WSJ.

"Did pandemic stimulus payments harm lower-income Americans? That’s the implication of a new study by social scientists at Harvard and the University of Exeter.

Liberals argue that no-strings-attached handouts encourage better financial decisions and healthier lifestyles. The theory is that low-income folks become more future-oriented if they’re less stressed about making ends meet. The Harvard study put this hypothesis to the test and found the opposite.

During a randomized trial conducted from July 2020 to May 2021, researchers assigned 2,073 low-income participants to receive a one-time unconditional cash transfer of either $500 or $2,000. Another 3,170 people with similar financial, demographic and socioeconomic characteristics served as a control group. The trial was funded by an anonymous nonprofit.

Participants earned an average of about $950 a month and had $530 in unearned income (e.g., food stamps). About 80% had children, and 55% were unemployed. Over 15 weeks they were surveyed about their physical, mental and financial well-being. Forty-three percent also agreed to allow researchers to observe their bank balances and financial transactions.

The top-line result: Handouts increased spending for a few weeks—on average $26 a day in the $500 group and $82 a day in the $2,000 group—but had no observable positive effect on any individual outcome. Bank overdraft fees, late-payment fees and cash advances were as common among cash recipients as in the control group.

Handout recipients fared worse on most survey outcomes. They reported less earned income and liquidity, lower work performance and satisfaction, more financial stress, sleep quality and physical health, and higher levels of loneliness and anxiety than the control group. There was no difference between the two cash groups.

These findings contradicted the predictions of 477 social scientists and policy makers the researchers surveyed. That’s not surprising. Most liberal academics and politicians believe government handouts are the solution to all problems. If transfer payments were a ticket to the middle class, the War on Poverty would have succeeded long ago.

The researchers posited that perhaps the cash payments weren’t generous enough to generate a positive result. “Receiving some, but not enough, money may have made their needs—and the gap between their resources and needs—more salient, which, in turn, may have made them feel distressed,” they write.

“Needs” is a subjective term. The theory is that low-income people who got handouts became more stressed when they realized they still couldn’t afford everything they “needed,” or more likely, wanted. If that’s true, simply giving people even more cash would surely lead to the same problem.

More plausible, the payments made work less rewarding, which reduced feelings of personal well-being. Cash recipients reported less earned income and felt worse about their work. It’s no surprise that people who received a large percentage of their monthly income for doing nothing were less motivated to work and less satisfied with their work. Earning a paycheck can give workers a sense of personal agency that encourages them to make better financial and health decisions. Receiving a handout may do the opposite.

As for financial outcomes, poor people often struggle to manage money, and this is one reason why many remain poor despite receiving plentiful government assistance. Merely giving people more money won’t make them better stewards of it, as the study showed. In some cases, people spend more than they receive and become overextended.

The roots of poverty are complex, but the study isn’t a one-off in documenting a link between transfer payments and worse outcomes. A 2018 study in the Journal of the American Medical Association examined the diet quality of food-stamp beneficiaries from 2003 to 2014, a period in which average benefits increased more than 50%. Similar low-income people who didn’t get food stamps ate more healthily than those who did. The non-food-stamp group consumed significantly fewer sugar-sweetened beverages, and their diets improved more over time.

Transfer payments ballooned during the pandemic as Democrats argued that they were needed to prevent millions of Americans from falling into poverty. Republicans in Congress put up little resistance, at least while Donald Trump was president. Congress spent a total of $800 billion merely on stimulus checks during the pandemic.

The handouts induced people to spend more and also reduced the incentive to work, which fanned inflation. Now there’s evidence that the payments could have reduced personal well-being as well. A tome could be written on all of the government mistakes during the pandemic. One lesson for Congress seems clear: Never again send out cash with no strings attached."