With the cash transfers, the people can decide for themselves how to meet their most urgent needs

TO BE NOTED: From Aid Watch:

"How to help the poor have more money? Well, you could give it to them

by Laura Freschi

In 2007, people in the Western Province of Zambia lost their homes, their livestock and their crops when heavier-than-normal flash floods swept through their area. USAID’s office of disaster assistance stepped in with $280,000 worth of with seeds and fertilizer, training for farmers, and emergency relief supplies.

Two NGOs working in Zambia, Oxfam GB and Concern Worldwide, tried a different approach: they handed out envelopes stuffed with cash—from $25 to $50 per month per affected family, with no strings attached. An evaluation found that common fears about cash transfers—that the cash infusion will cause inflation in the market, that the money will be squandered, or that men will take control of the money—were unrealized.

What did people buy with the money? The list includes maize, beans, salt, cooking oil, meat, vegetables, clothes and blankets, paraffin, transport, soap and body lotion, and lots of other mundane household items. They also loaned it to friends, used it to pay back debts, purchased health care, education and transport, and rebuilt their homes. Only a very small fraction of the money (less than .5%) was spent on “unproductive” items, like liquor for the men.

Unconditional cash transfer programs can be fast and cost effective. With no technical experts’ salaries to pay, and no trans-Atlantic shipping costs for US-produced food aid, more of the cash can go straight to the recipients (in the case of the Concern Worldwide project 27% was spent on program administration, while 73% was distributed in the cash transfers.)

Cash transfers also acknowledge that poor people are capable of making good economic decisions without the help of outside experts armed with needs assessment checklists. An evaluation of another Oxfam cash transfer program, this one in Vietnam (summary here), found that villagers made sophisticated investment decisions, choosing whether to invest in seeds and fertilizer, family coffins and tombs, cows and buffalo, home improvements, debt repayment, and /or community roads.

As Duflo and Banerjee document in their study on the economic lives of the poor, the rich often assume that poor people have few choices about where to spend their money. And this notion allows aid agencies to assume the paternalistic role of decision-maker for the poor. Yet Duflo and Banerjee note that subsistence accounts for a lot less than 100 percent and the “poor do see themselves as having a significant amount of choice.”

Cash transfers have plenty of potential drawbacks, as these studies also point out. Handing out large amounts of cash comes with its own set of logistical hurdles and could invite theft or corruption. And what if this approach puts women and children at a disadvantage, while men take and spend the cash? There are improvements to be made, in targeting the right population, and equipping people with better tools (like financial training and savings accounts) to help them make the most of the money. Two studies by Innovations for Poverty Action and the Poverty Action Lab at MIT in Morocco and Indonesia (both ongoing) should shed more light on when and how cash transfers can be most effective. (See also studies collected by the UK-based Overseas Development Institute).

When USAID provides blankets, seeds and fertilizer to flood victims, they are doing their best to decide for the victims what their most urgent needs are. With the cash transfers, the people can decide for themselves how to meet their most urgent needs. This gives people who have lost their livelihoods, belongings or loved ones a new feeling of control over their lives, builds money-management skills, and restores to them their power to make economic decisions. If you were in their shoes, which would you prefer?

Posted by Laura Freschi"

"Allowing central banks to transfer cash directly to households would be the purest form of Milton Friedman’s “helicopter drop”.

By now, you know my position on printing money. I'm for it, damn it, and don't get in my way. Here's Eric Lonergan in the FT:

"The most direct and efficient solution to the economic and financial problems is for central banks to transfer cash directly to the household sector.

Final demand and profits would recover, asset prices would rise and as a result banks would have strengthening balance sheets. Fiscal positions would similarly improve with rising revenue.

These are the effects that policymakers are trying to achieve in an indirect and inefficient manner: we are using governments to do the spending, and we are trying to fix the financial system piecemeal, when the problem is demand, profits and prospective default risk.

Allowing central banks to transfer cash directly to households would be the purest form of Milton Friedman’s “helicopter drop”."

I'm starting to feel very proud of myself for having read that Buiter paper. Let's put Wagner on and get the helicopters flying, like those lovely monkeys in "The Wizard Of Oz". I'm not joking. I've always loved those monkeys. I love the smell of cash dropping from the sky in the morning. It smells like...like...Recovery.

"What is lacking is a legal and institutional framework to do this. "

To hell with that. We don't have time to worry about legalities and institutions. Sadly, that's exactly opposite to what I believe, but let's go on. Maybe he knows a way around this problem, not involving torture.

"The helicopter model is right, but we don’t have any helicopters. Open market operations are ineffective at the zero bound because the financial system just holds more cash, as we have seen in Japan. We need to print the money and give it directly to consumers."

Why don't you just rent some helicopters from the traffic reporters? Ah yes, I do love the printing idea. Agreed.

"Central banks, and not the fiscal authorities, are best placed to make these cash transfers. The government should determine a rule for the transfer. It is the government’s remit to decide if transfers should be equal, or skewed to lower income groups."

As long as you're giving free money out, you might want to skew it towards the poor. Just a thought.

"This rule should be decided in advance."

How else could they decide who to give it to? Unless you're taking this helicopter thought experiment seriously.

" But the quantity and timing of the transfers should be the authority of the central bank, subject to their discretion and to be used with the intention of meeting their inflation and growth objectives. The central bank would then raise interest rates and shrink its balance sheet when the economy recovers.

The reasons for granting this authority to the central bank are clear: it requires use of the monetary base. Granting government such powers would be vulnerable to political manipulation and misuse. These are the same reasons for giving central banks independent authority over interest rates.

Under the existing legal and institutional framework, the closest equivalent policy to this helicopter drop is for the government to make transfers financed by the central bank. Indeed, I suspect this is indirectly what America will do next year."

It will if I have any influence on my fellow citizens with this blog.

"Tax rebates (i.e. cash transfers) will likely be a part of Larry Summers and Tim Geithner’s fiscal stimulus and US Federal Reserve chairman Ben Bernanke has already talked - to considerable effect - about buying government debt as a next step for the Fed.

This is an entirely reasonable approach, given current institutional constraints. But a pure helicopter drop has obvious and compelling advantages. It protects central bank independence, and gives central banks a means for stimulating demand quickly and efficiently when interest rates reach zero. What will we do if the fiscal stimulus fails to trigger a recovery?"

I'm a helicopter and tax cut and stimulus man. What do you say to that?

"Possibly of importance is the issue of Ricardian equivalence (the theory that suggests that unfunded tax cuts will have no effect on spending because the public know they will be taxed in future to pay for current government largesse).

Ricardian equivalence is a useful concept not because individuals are hyper-rational, but because the opposite is true: framing matters. If cash transfers are financed by government borrowing from the central bank there will be calls for prospective fiscal policy to be tightened. If the central bank prints money this pressure will not exist, and a framework for responsible use of this tool already exists - medium-term price stability."

Leave Casey Mulligan out of this. But I agree, just print the money.

"We need a legal and administrative framework to allow central banks print money and transfer it to households. This would be efficient, effective and would eliminate the deflation risk for good."

Good luck my friend, and thanks for the post.