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Food Subsidies, Handouts, and India

August 9, 2010

I read this article and came to the opposite conclusion that Matt Yglesias did— that nothing about the significant government failures and corruption leads me to optimism that a food stamp or cash handout program would be any better distributed or less corrupt.  It seems like the best, most likely-to-be-successful reform would be to better oversee and reform the current program, rather than try some radical new program.  Incremental steps first.

Theoretically, cash grants, as apposed to in-kind grants, raise the social welfare benefits that accrue from a given program.  That’s because some individuals don’t need the items being granted as much as other people, or have other needs that are greater than the items being granted.  For instance, a poor person on food stamps might have perfectly adequate food supply (say, their cousin is a farmer or their sister is a grocer), but struggle to make rent every month (say, because they live in an expensive city).  Because that person is poor, they join the food stamp program anyway, and overconsume food and underconsume rent.  Cash grants fix that problem– the recipients can use the grant for whatever the think they’re needs are most pressing.  Everybody wins– the state pays the same amount, and the poor person has their needs better served.

The argument against cash grants is that they can also be spent on ‘bad’ things, like drugs, alcohol, flat screen televisions, whatever.  Because the American social welfare system infantilizes the poor, we therefore don’t let poor people have that autonomy, and mandate that food stamps must go to food and other essential items like daipers.  Also the food industry lobby is one of the most powerful supporters of food stamps, and even orthodox conservative senators from farm states find themselves supporting this particular program, like Dick Lugar recently did in the New York Times.   Would Dick Lugar ever vote for increasing Section 8 funding?  Unlikely.

The main lessons I got from the article about India was rather different.   The first lesson was the eternal social welfare policy problem: As we used to say in policy school, the problem with the poor is that they are poor.  In other words, they have many, many problems related to poverty– not one problem with a single solution.  And (in the India case, according to the above article) the poor are often terribly in debt, and they’re forced to borrow money at bad rates.  Sounds like a job for superman– microfinance. (I’m being sarcastic, as microfinance is often sold a a panacea.)  But maybe a well-designed debt forgiveness program would work the best, in India’s case.  But the article never gave a convincing argument that a replacement government program would be better run.

Finally, perhaps much of the problem stems from financial illiteracy– which would also not be solved with cash grants or food stamps.  This problem is far more acute among peasants in developing countries than the poor in the developed world.  It’s especially a problem in places where perhaps one percent of the population has bank accounts, and peasants have few places to store money safely.  (This fact is something that Westerners who design development policies often have rarely understood.)  In fact, it would probably exacerbate the problem of poor financial decisions among the developing-country poor.  Food is food afterall, even if beneficiaries sometimes sell it on a secondary market.

This seems to be another case of orthodox economics and public policy analysis failing to take into account real existing market distorting problems on the ground– theory butting up against practicality, and failing.

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