The poor were given money for 7 years just like that: what came of it - ForumDaily
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The poor were given money for 7 years just like that: what came of it?

Basic income (UBI) programs are increasingly capturing the minds of policymakers. But is it really as good as it seems? Dylan Matthews from Vox shared the first results of the world's largest experiment to create a basic income and some of his financial observations. Next - in the first person.

Photo: IStock

Large parts of my brain that could contain useful knowledge are instead filled with tweets I saw years ago. One of my absolute favorites was a man who only called himself the Side Hustle King, who asked his followers, “Would you rather have $1 right now or $000 every month for the rest of your life? I choose option B. This is passive income.”

To save you some arithmetic, unless you plan to live at least another 1667 years (which is how long it would take to earn $1 million on $50 a month) and don't care about inflation, Side Hustle King is wrong. Option A is much better. This is an example of how sometimes it is better to opt for a lump sum rather than regular payments.

GiveDirectly, a charity that sends money directly to low-income families, has identified another similar case in which the answer is not so obvious. For several years now, GiveDirectly has been conducting the world's largest test of a basic income: from 2016 to 2028, about 6000 people in rural Kenya received $20. Tens of thousands of other people are receiving shorter-term or differently structured payments.

One of the main questions GiveDirectly is trying to answer is how exactly to target funds to low-income families.

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Just giving money is good, but it misses some important details of the work. It matters whether a person receives $20 monthly for two years or takes $480 right away. In total it is the same amount of money; This is not a Side Hustle King situation. But how you get paid still matters. Just $20 every month will help you create a budget and take care of regular expenses, and $480 can immediately become capital for starting a business or other large project.

Reasons for paying all your money up front

The latest study from the GiveDirectly pilot project, conducted by MIT economists Tavneet Suri and Nobel laureate Abhijit Banerjee, compares three groups: short-term basic income recipients ($20 monthly for two years), long-term basic income recipients (all 12 years) and recipients of a $500 lump sum, about the same as the short-term basic income group. The paper is still a work in progress, but Suri and Banerjee shared some of the results.

By almost all financial indicators, the lump sum group was better than the monthly payment group. Suri and Banerjee found that the group receiving a lump sum earned more, started more businesses, and spent more on education than the group receiving monthly payments. According to Suri, “the bottom line was that the lump sum group saw their net income,” or small business profits, double. The effect was about twice as good as the group receiving short-term $20 a month.

The explanation they came up with is that the $500 lump sum provided valuable start-up capital for new businesses and farms that a $20-a-month group would have to save very carefully over time to replicate the effect.

“A group receiving a lump sum does not need to save,” explains Suri. “They just get the money up front and can invest it.”

Intriguingly, the results of the long-term monthly group, which receives about $20 a month for 12 years rather than two, were more similar to the results of the lump sum group. The reason, according to Suri and Banerjee, is that they used rotating savings and credit associations (ROSCA). These are institutions that arise in small communities, especially in developing countries, where members regularly contribute small amounts to a common fund in exchange for the right to withdraw larger amounts from time to time.

“This turns small flows into large lump sums,” says Suri. “Most of their payouts go into ROSCAs to generate these lump sums that they can use for investments.”

In October 2016, I visited one of the villages receiving 12-year UBI, and even then I saw how people were creating ROSCA and making plans to save money for investment. Edwin Odongo Anyango, a father of two and a jack of all trades who was 29 at the time, told me that he started ROSCA with 10 friends.

“Monthly payments are nice, but I think a lump sum would be better,” he told me. “This way you can do a big project right away.”

But I was surprised by how often this attitude was reflected in Suri and Banerjee's data. They found that the smallest increase in consumption—actual regular spending on things like food and clothing—was seen in the long-term UBI group, which one might think is the group most able to spend a little more each month. For the most part, they don't do this: instead, they invest the money.

Benefits of monthly payment

As might be expected, given how entrepreneurial the recipients are, the researchers found no evidence that the payments discouraged work or increased alcohol purchases—two common criticisms of direct cash payments. In fact, so many people who previously worked for wages started their own businesses instead that competition for hired labor decreased, and as a result, overall wages in the villages increased.

They also found one important advantage of monthly payments over lump sums, despite the greater benefits of lump sum payments for starting a business. People who received monthly checks were overall happier and reported better mental health than those who received lump sum payments.

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“A group receiving a lump sum is given a huge amount of money and is forced to invest it, which can cause them some stress,” suggests Suri. “Be that as it may, recipients of long-term monthly payments are the happiest, and part of this is because they know that the money will be paid over 12 years.” It provides mental health in the sense of stability.”

I think this suggests that the takeaway from this study shouldn't be "just give people a lump sum no matter what." Ideally, you would ask specific people how they prefer to receive money. For example, if you were a policymaker in Kenya designing a permanent basic income strategy, you might design it so that the recipient has the option of either paying $500 every two years or $20 every month.

But despite this, long-term monthly payments seem to be the best option available because they allow people to use ROSCA to receive lump sum payments when they want it. This provides flexibility: people who need monthly payments can get them, and those who need money up front can team up with their colleagues to get them.

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