…paying the first bill in a stack of overdue bills does little to relieve a guilty conscience.
That is from Charles Karelis’s truly intriguing The Persistence of Poverty: Why the Economics of the Well-Off Can’t Help the Poor.
If your car has lots of scratches and dents, getting rid of just one doesn’t help much either.
More generally, if pains and troubles are high enough, extra pain and trouble just isn’t so bad. You hardly notice it. But that overturns standard economic assumptions of diminishing marginal utility, and the rest of Karelis’s model follows directly.
Poor enough people will accept risk in the downward direction rather than smoothing consumption, so they buy lots of lottery tickets. They also commit more crime, so they can have at least some joyous times, and they take lots of "stupid" chances. Yet the poor are not irrational or necessarily dysfunctional in terms of procedural rationality, but rather they are optimizing given constraints. They are taking the Friedman-Savage model very very seriously.
"Getting tough" with the poor through policy is more likely to backfire than succeed, as it just encourages more mean-reducing, risk-taking behavior. At some level the marginal utility of consumption for the poor fits the standard model, so income effects will more likely bring normal behavior than will substitution effects. That’s one reason why the EITC works relatively well.
The more the poor regard themselves as lagging the rich (rather than doing better than, say, their peers back home in Gujarat), the more stupid risks they will take. That’s why poor immigrants are more value-maximizing than the poor that have lived in America a long time and adapted to American norms and expectations. The immigrants don’t regard their burdens as insuperable and they are on standard downward-sloping marginal utility curves.
It can make more sense to give money to people on the verge of leaving poverty, rather than people deeply mired in poverty. The former transfer will get people onto "normal" marginal utility curves, but the deeply poor will just squander their new wealth, as it doesn’t much alleviate their unhappiness.
This short book is a wild ride. The absence of traditional evidence makes it hard to evaluate these hypotheses, but it is one of the more valuable and stimulating contributions of the year.