Question: A prevalent argument against providing public assistance in the form of direct cash handouts is the concern that recipients may spend this money on items deemed objectionable by taxpayers, such as illegal drugs or gambling. To mitigate this risk, proponents suggest that public assistance should be delivered as in-kind transfers, such as food, housing, or medical care. What assumptions are made about the income elasticities of these objectionable goods? Furthermore, if recipients could easily resell the in-kind transfers, would there be any significant difference between cash handouts and in-kind assistance?
Solution: The argument against providing cash assistance instead of in-kind support—like groceries, housing, or medical services—centers on the fear that cash could be spent on activities considered objectionable by society, such as drug use or gambling. The rationale is simple: by providing food or housing vouchers rather than cash, we can theoretically steer recipients away from using aid for purposes deemed harmful or immoral.
However, this line of reasoning is built on shaky foundations.
At its essence, the argument presupposes that the demand for objectionable goods increases with income—implying these goods have a positive income elasticity. The assumption is that if individuals receive more money, they will likely spend more on drugs or gambling, which is a plausible assertion.
Yet, this very argument also makes an opposing assumption regarding in-kind transfers: it suggests that receiving food, housing, or medical care will not lead to an uptick in the consumption of objectionable goods. This can only be true if these goods somehow remain unaffected by changes in income when received as in-kind support.
Even if individuals cannot directly sell the food or housing provided, receiving these essentials for free liberates funds that would otherwise be allocated to them. That saved money can then be directed toward anything—including those objectionable goods. Unless we subscribe to the notion that individuals will consume only the in-kind goods and ignore everything else, we should anticipate that some of that saved income will find its way into the purchase of whatever they value on the margin.
In essence, the rationale for in-kind transfers is self-contradictory. It posits that cash leads to negative behavior because of income’s influence—while simultaneously claiming in-kind transfers do not because income suddenly becomes irrelevant.
Now, if we entertain the notion that recipients could resell the in-kind goods, the transfer effectively mirrors cash assistance in all significant respects. They could convert food or housing vouchers into cash and spend it as they wish. From an economic standpoint, resale transforms the in-kind transfer into a cash transfer.
However, even if resale isn’t an option, the fundamental conclusion remains unchanged. The crux of the matter is fungibility: money is interchangeable, and so is the value of money saved. If a recipient was already purchasing food prior to receiving a food transfer, that assistance merely liberates their existing funds to be spent elsewhere.
Whether the consumption of objectionable goods increases as a result hinges on one critical factor: whether those goods are classified as normal goods—items that people tend to purchase more of as their effective income rises. If they are—and the argument against cash assistance implies they are—then any transfer that boosts effective income, whether in-kind or in cash, will yield similar effects.
