Bryan Caplan  

Does Burning Your Money Make You Poor?

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Does burning your money make you poor?  Almost everyone responds, "Obviously."  And in a sense, it is obvious.  If you take all your money and burn it, you'll be hungry and homeless as a result.  QED.

In another sense, though, burning money might not change a thing.  How so?  Suppose if you don't burn your money, you flush it down the toilet instead.  Empirical researchers who look will detect zero effect of burning money on your standard of living.  Why?  Because your Plan B is just as impoverishing as your Plan A.

As far as I know, no researcher bothers to study the connection between burning cash and living in poverty.  But researchers do study analogous issues, like: Does becoming a single mother lead to poverty?  At least according to some studies, once you adjust for preexisting characteristics, women who have kids out of wedlock are no poorer than women who don't.

How is this even possible?  You have to think about what single moms would have done if they hadn't gotten pregnant.  Maybe they would have just spent more time hanging out with irresponsible boyfriends and partying.  If so, researchers will detect no effect of single motherhood on poverty.

There's nothing literally wrong with this result, but it is easily misinterpreted.  Key point: Most people who affirm that "Single motherhood causes poverty" tacitly assume a more elaborate counter-factual.  Something like: "Continuously working full-time without getting pregnant."  And if that's the counter-factual, "Single motherhood causes poverty" is almost as undeniable as "Burning money makes you poor."  Empirical research can and occasionally does disprove common sense.  But more often empirical research just addresses a different but superficially similar question.




COMMENTS (14 to date)

Bryan's point reminds me: Lately I've been noticing backdrops, the sets of assumptions behind what people (including me) say. Sometimes we express disapproval of someone else's backdrop by calling it a paper tiger. But I wonder if all of our expressions of language appear against an assumed background.

We speak to point out something new or different — against a background. (And we can not speak otherwise??)

Jacob from Kent writes:
"You have to think about what single moms would have done if they hadn't gotten pregnant. Maybe they would have just spent more time hanging out with irresponsible boyfriends and partying."

Do you have tenure?

john hare writes:

Jacob,
Is your question alluding to the point that having kids she can't afford will keep her poor, which is a different statement from make her poor?

Scott Sumner writes:

I don't think I buy this argument. Suppose that poverty is caused by the decision to not work hard, and that once you've made that decision single motherhood has no marginal effect. In that case if we assume the "problem" is single motherhood, then we might adopt the wrong public policies to solve the problem. Thus we might adopt more sex ed in schools and free birth control, rather than an earned income tax credit to subsidize working.

JFA writes:

Bryan might not have thought of this because of his bias of "when in doubt, have more kids," but if a mother living in poverty has a child, that mother increases poverty because there is now one additional soul living in poverty. I've always thought one of the best ways to reduce poverty is for people in poverty to stop having kids.

Lupis42 writes:

@Scott,

How does that contradict Bryan's argument?

Colin Barnard writes:

File this under...

Bad decision makers, make bad decisions.

Really not surprising, same as the correlations between ( joblessness, single motherhood, crime, poverty, insert here ).

Chris writes:

@Scott,

Unless I'm mistaken, I think that's Bryan's point.

Hazel Meade writes:

I sometimes think that many people have an essentially fixed comfort level, and that they will work just hard enough to get to that comfort level and then stop.
If that's the case, then a person who burns money is going to work extra to make up for the burned money, resulting in a zero effect of the money burning. Or if they have extra money, beyond the basic comfort level they are going for, they will burn the extra money, so their net standard of living is no better. Of course, by "burn" I mean spend it on something with little long-term value like drugs or alcohol or a vacation. (Not that entertainment isn't a value it just won't impact your longer-term standard of living.)

Fred Anderson (Mr.) writes:

As one unschooled in these matters, my speculations often lead to places those more schooled may not have thought worth the visit.
Suppose that wealth arises from only two sources; labor and capital. The decision to not work hard -- perhaps because of a low comfort set point -- creates a condition wherein one has little extra money. Esp., little extra that could be saved / invested; and thus begin contributing some income from capital to augment the individual's labor-based income. If one has extra, but chooses to burn / waste it, then -- once again, they are left with little or nothing to save / invest.
It is (to me) an interesting question whether the mother's investment in her fatherless child is money burned / wasted. It certainly keeps her locked down to her current labor-only income. (Keeps her poor.) But advocates for the child would probably balk at seeing this classified as "burned" rather than as "invested." I have often suspected that a lot of us would have been beach bums if it weren't for our children and the instinctive pressure to care for them.

Bob Murphy writes:

I saw the post title and totally thought this was going to be about real vs. nominal income...

LD Bottorff writes:

@JFA,
Bryan might not have thought of this because of his bias of "when in doubt, have more kids,"

I think you Trejoed Bryan.

Munira Girnary writes:

To the question of whether single motherhood causes poverty, we need to ask is whether her situation was truly one of "free market" or was there intervention from government or other authority.
Was she forced to become a single parent or did she have a choice?

Also having a kid is a game-changer. You're not just providing for yourself but for your child. You try harder. Suddenly your opportunity choices are much narrower but you put more thought to your next job which may in the long run be the reason why you got out of poverty.

Daublin writes:

There's a related fallacy around recycling versus throwing things away.

On the surface, throwing a resource away looks like a complete waste. However, you have to examine the entire counter-factual before you can really decide. In practice, there are many factors which can make disposal be the more efficient option.

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