Tuesday, May 17, 2016


One important implication of the standard consumer choice model in economics is that in-kind transfers should have the same effect on spending as giving cash, at least if the transfer is small enough relative to the overall budget.

The logic is simple: If I give you $200 per month in food stamps, and you were already spending at least $200 in cash on food, you can use the food stamps to free up the $200 in cash that you were spending on food, and spend it on what-you-will. I may as well have given you the cash. In particular, there is no guarantee that your spending on food will increase by a single penny, although most likely it will go up by at least the portion of an additional $200 in cash that you would have devoted to buying more food.*

This logic applies to targeted grants from the federal government to local jurisdictions as well, and the case of federal funding for schools is an interesting and rather sad example. Best of luck, Secretary King, getting those federal tax dollars to the poor schools and deserving students that really need the help. Shame on the lobbyists, and shame on the school districts for diverting the grants to the rich kids. Still, as an economist, what else could I expect?

* I don't deny here the finding of behavioral economics that people don't always treat cash and in-kind transfers as completely fungible. The basic principle is still important.

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