Do positive wealth shocks stick?

by on July 2, 2013 at 8:07 am in Economics, History, Law, Uncategorized | Permalink

There is a new paper by Hoyt Bleakley and Joseph P. Ferrie, titled “Up from Poverty? The 1832 Cherokee Land Lottery and the Long-run Distribution of Wealth.”  This paper uses a very clever experimental design, relying on random, lottery-based allocations of land.  The question is how much winning this land lottery helped people in the longer run.  Here is the abstract:

The state of Georgia allocated most of its land to the public through a system of lotteries. These episodes provide unusual opportunities to assess the long-term impact of large shocks to wealth, as winning was uncorrelated with individual characteristics and participation was nearly universal among the eligible population of adult white male Georgians. We use this episode to examine the idea that the lower tail of the wealth distribution reflects in part a wealth-based poverty trap because of limited access to capital. Using wealth measured in the 1850 Census manuscripts, we follow up on a sample of men eligible to win in the 1832 Cherokee Land Lottery. We assess the impact of lottery winning on the distribution of wealth 18 years after the fact. Winners are on average richer (by an amount close to the median of 1850 wealth), but mainly due to a (net) shifting of mass from the middle to the upper tail of the wealth distribution. The lower tail is largely unaffected.

The bottom line is that the grants increased inequality, many people were helped a great deal, and a large chunk of people weren’t helped at all.  An ungated version of the paper is here.

Alan July 2, 2013 at 8:18 am

I guess you include the Creek Indians and the Cherokee amongst the “large chunk of people weren’t helped at all”.

8 July 2, 2013 at 8:20 am

Were there developers at the lottery who immediately offered the winners cash money? In 2013, some people would take the land, but most poor people would probably take an immediate cash payout and blow it. America in 1832 lacked capital, not so much in 2013.

Noto July 2, 2013 at 8:30 am

Yes, I believe that was case (based on my recollection from recent presentation of paper). Many took land, but many also sold almost immediately. Unfortunately, I don’t think the authors can tell who did what.

mulp July 2, 2013 at 2:49 pm

But by winning the lottery and selling for cash and blowing it, they ended up richer 18 years later than those who lost the land lottery.

You just argued the way to help poor people is give them lots of cash and letting them just blow it because 18 years later they will be richer than not being given cash.

mw July 2, 2013 at 8:46 am

Which sums up neoliberal conventional wisdom well: even if more poor people would benefit if we “restricted their freedom” by requiring their transfers to come in the form of, say, higher education, we should go the cash-transfer freedom-route even if it only benefits the minority that are in a mental/physical/intellectual state that allows them to take effective rational advantage of it.

Cliff July 2, 2013 at 10:44 am

Plz provide evidence higher education is better than cash for poor people?

mw July 2, 2013 at 11:04 am

The point is that there is a large number of people for whom the cash is doing nothing, so *for them* it couldn’t be worse, and an open-minded scientific approach would experiment with different strategies, regardless of the ideology with which they’re associated, to get the people in the tails that stubbornly don’t conform to the theorist’s preferred model of human behavior.

JWatts July 2, 2013 at 2:35 pm

even if more poor people would benefit if we “restricted their freedom”

So, you would prefer to see poor peoples freedom restricted? For their own good, I presume.

mulp July 2, 2013 at 2:55 pm

Where are the conservatives arguing for showering cash on the poor with or without strings attached to lift them out of poverty?

Conservatives are the ones who argue that poverty is a choice and that the people who ended up better off in 1850 chose to work hard to win the lottery, and that chance had nothing to do with it. After all, to a conservative, all it takes to win the lottery is to pray real hard, and god will make you rich.

TV July 2, 2013 at 8:50 am

It seems like the result can be interpreted in 2 ways:
1. If you’re a conservative: Giving money to certain types of poor people does not help others.
2. If you’re a liberal: Cutting taxes on the wealthy doesn’t help others.

Cliff July 2, 2013 at 10:44 am

I don’t get #2?

Frederic Mari July 2, 2013 at 9:07 am

Interesting study – Thanks for posting.

That being said, though I am on the left in such debates, it is true that wealth shocks need to be handled carefully and the poor may not be best placed to handle large windfalls.

IIRC, many lottery winners (of modern lotteries) do poorly/go broke. Normally, yearly payouts are supposed to help with this issue but not if you start taking loans against future yearly payouts (as a winner did, iirc). http://ca.finance.yahoo.com/news/riches-rags-why-most-lottery-winners-end-broke-180227163.html

Relevant quote: “According to a 2010 study by researchers at Vanderbilt University, the University of Kentucky and the University of Pittsburgh, the more money you win in the lottery, the more likely you are to end up bankrupt”.

The argument against huge wealth shocks, even positive ones, isn’t the same as an argument against small-ish, regular payments.

Frederic Mari July 2, 2013 at 9:13 am

On the other other hand, http://hj.se/download/18.3bf8114412e804c78638000145/1299244443175/WP2010-3.pdf

“We investigate the link between the propensity to become an entrepreneur and exogenous release from financial constraints in Germany. The results show that financial constraints do exist given that individuals are more likely to start a personal business after receiving a windfall gain. The value of windfall gains has a significant but non linear effect on the decision to become self employed. We also report that there is no evidence that becoming self employed involves the anticipation of windfall gains”.

Then again, those Germans, they’re just not normal…

Floccina July 5, 2013 at 4:30 pm

A little off topic but becoming an entrepreneur after a windfall might be one reason that so many of them end up broke. For example many pro athlete lose huge fortunes by funding bad businesses. Curt Schilling is an example.

JWatts July 2, 2013 at 3:17 pm

Normally, yearly payouts are supposed to help with this issue but not if you start taking loans against future yearly payouts (as a winner did, iirc).

It seems like the obvious solution is to treat this like a retirement fund or SS. Ergo, the lender can’t attach these type of payments or use them as collateral for a securitized loan. While this does indeed decrease the liberty of the lottery winner, it seems to be close enough to societal norms to not cause to much of a restraint on liberty.

Gunnar Tveiten July 4, 2013 at 5:27 am

Normal Lotteries are poor tools for investigating the impact of positive wealth-shocks on the general population though.

Because participation (in both frequency and amount) in lotteries are strongly correlated with multiple traits that are strongly negative for your future wealth.

People who are bad at handling money, are much more likely to participate in lotteries. People who spend every cent of their paycheck on lotteries, are more likely to win the lottery, but also (of course!) much more likely to waste any gains on more gambling or other nonproductive activities.

dearieme July 2, 2013 at 10:24 am

“The lower tail is largely unaffected.” Anyone who didn’t expect this result must have lived a very sheltered life. “For ye have the poor always with you”.

prior_approval July 2, 2013 at 12:01 pm

But at least in the U.S., it was possible to boot them outside of the U.S. for decades – http://en.wikipedia.org/wiki/Cherokee#Removal_era

Well, after ensuring they were poor, that is – the Georgia Gold Rush didn’t benefit any of the people who had lived there for generations, being Indians.

mulp July 2, 2013 at 3:03 pm

So, Georgia was a leftist big government State in early US history with the government picking the winners and losers in a massive redistribution of wealth from the wealthy to the poor?

JWatts July 2, 2013 at 3:22 pm

No, Georgia (circa 1832) was not a leftist government, nor was it a big government, it didn’t “pick” users which implies an actual decision process, not a lottery, nor did it redistribute wealth from the “wealthy” to the poor. This was state land that it gave away.

However, it’s a great model. Can we get the US government to give away some/most of the massive amount of land that it is hoarding? A random lottery to the nations citizen’s to “redistribute” that land would be a great idea.

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