<p>You seem to be having some misconception how these transfers work</p>

<blockquote>
  <p>Printing money and giving to the poor causes inflation. Increases demand and hikes prices. This is basically certain.</p>
</blockquote>

<p>This is not generally how government transfers are done. In fact it is very rare to see in practice transfers that are payed by directly printing money. However, if it would be done it would ceteris paribus increase price level and hence cause inflation. It might happen indirectly by central bank buying up government bonds, but governments issue debt for plethora of reasons so its not straightforward to attribute it to any particular transfer. Moreover, if the policy is just paid out of the budget without accompanying monetary expansion then in principle it should not lead to inflation per se. Even if it did, inflation in principle does not necessary decreases the economy's output making it poorer (especially if the inflation is very low, as its rate increases it can also negatively affect output but that usually requires high rates of inflation).</p>

<p>Next the article from Banerjee does not even discuses whether transfers make economy richer or poorer.  The article only shows that the labor supply responses of the recipients of cash transfers are not as bad as is often thought and that they are relatively efficient way of combating inequality and poverty compared to other transfers. Moreover, they also show they do not provide incentives for  some bad behaviors as much as was thought. This is not the same as saying transfers make society richer.   </p>

<p>Now to your main question whether direct cash transfer makes economy poorer or richer depends on what is their effect on output. Unfortunately there is no straightforward answer as it depends. Transfers create efficiency loss because they distort incentives of people to produce goods and services in several ways. First, the transfers must come out of somewhere - so usually countries have to raise taxes. These in turn lead to dead-weight loss as these taxes distort peoples optimal choices when it comes to their consumption/labor supply and their economic activity in general (for example income tax creates substitution effect from working to leisure). At the same time they also distort the behavior of recipients, as people have less incentive to work when they receive transfers (this is not an exhaustive list of all effects just examples). </p>

<p>However, transfers also create several benefits for society. For example during economic crises some transfers (such as unemployment benefits) serve as automatic macroeconomic stabilizers and can help recessions to be milder. There is some tentative evidence that economic inequality is actually bad for economic growth although jury is still out on that (see <a href="https://link.springer.com/article/10.1023/A:1009850119329" rel="noreferrer">Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of economic growth, 5(1), 5-32.</a> -  the research shows some evidence for inequality retarding growth in poor contries and boosting it in richer countries - but see also sources cited therein some authors claim that inequality retards growth even in rich countries). There might be other efficiency reasons why transfers, including cash transfers, might help to raise output. </p>

<p>Whether the benefits of transfer to the economy are larger than cost is complex question that is frankly poorly understood and not yet intensively studied as it depends on what are the effect on inequality on growth and productivity and the relationship between them is anything but straightforward. The answer will for sure depend on what is exactly the size of these transfers and also how exactly they are paid for. However, to the extent that our society wants to have transfers the research of Banerjee shows having direct cash transfers might be one of the more efficient ways how to do that, and thus even in case that the transfer would make economy poorer in general a direct cash transfer might have less negative effect than other type of transfers. </p>

CC BY-SA 4.0
2020-06-03T19:26:31.293Z
+1  Adding to your point about transfers serving as automatic stabilizers, it can be argued that the propensity to spend out of unemployment benefits is likely to be high, and therefore they can raise aggregate demand even if fully funded via taxes, where the propensity to spend of those taxed is not as high.
Adam Bailey
CC BY-SA 4.0
2020-06-03T16:34:06.047Z
2020-06-03T16:48:58.557Z
2020-06-03T16:48:58.557Z
1muflon1
<p><strong>Printing money and giving to the poor causes inflation.</strong>
Increases demand and hikes prices. This is basically certain.</p>

<p>But on the contrary, a paper titled <strong><a href="https://economics.mit.edu/files/12488" rel="nofollow noreferrer">Debunking the Stereotype of the Lazy Welfare Recipient:
Evidence from Cash Transfer Programs1</a></strong> by Nobel Laureate <strong>Abhijit Banerjee</strong> ,MIT stresses that directly giving out monetary benefit does not make workers lazy and increases productivity with experimental proof from 7 programs. </p>

<p>Is this not in direct conflict with this concept that handling out money to poor,when goods and services are limited would cause inflation. 
It turns out this is even being implemented in my home state post a cyclone amidst the pandemic, so I'm confused as to <em>which outcome is possible given they are in direct conflict with each other ?</em></p>

CC BY-SA 4.0
2020-06-03T15:42:58.447Z
Transfers are not the same as money printing. If I take money away from you and give it to others, no new money is introduced into the system.
Giskard
CC BY-SA 4.0
2020-06-03T15:56:48.910Z
@Giskard Yes,but a group suddenly having an influx of a lot of money,will shift to increase a demand ,even if I don't have the supply of goods again, causing inflation right ?
Qbuoy
CC BY-SA 4.0
2020-06-03T16:34:12.780Z
Even if I assume all assertions in this question to be true (which will not necessarily be the case in reality), I still don't see the conflict you are talking about. Inflation does not imply an automatic decrease in productivity (neither as it is used in the linked paper, nor in any other definition that I can think of) nor does it render an economy poorer (which hasn’t been defined in this question, but I suppose you are talking about real GDP per capita or a related measure).
Andre
CC BY-SA 4.0
2020-06-03T16:49:02.067Z
@Qbuoy What about the group "suddenly" losing all that money to the government via transfers? Won't their demand decrease?
Giskard
<macroeconomics><inflation><gdp><economic-growth><money-supply>
Does Direct Benefit Transfers make an economy poorer?
Qbuoy
# Does Direct Benefit Transfers make an economy poorer?

(Asked by: username_0 on 2020-06-03)

**Printing money and giving to the poor causes inflation.**
Increases demand and hikes prices. This is basically certain.

But on the contrary, a paper titled **[Debunking the Stereotype of the Lazy Welfare Recipient:
Evidence from Cash Transfer Programs1](https://economics.mit.edu/files/12488)** by Nobel Laureate **Abhijit Banerjee** ,MIT stresses that directly giving out monetary benefit does not make workers lazy and increases productivity with experimental proof from 7 programs.

Is this not in direct conflict with this concept that handling out money to poor,when goods and services are limited would cause inflation.
It turns out this is even being implemented in my home state post a cyclone amidst the pandemic, so I'm confused as to *which outcome is possible given they are in direct conflict with each other ?*

**Tags:** macroeconomics, inflation, gdp, economic-growth, money-supply
> **Comments:**
> **username_1**: Transfers are not the same as money printing. If I take money away from you and give it to others, no new money is introduced into the system.  
> **username_0**: @Giskard Yes,but a group suddenly having an influx of a lot of money,will shift to increase a demand ,even if I don't have the supply of goods again, causing inflation right ?  
> **username_2**: Even if I assume all assertions in this question to be true (which will not necessarily be the case in reality), I still don't see the conflict you are talking about. Inflation does not imply an automatic decrease in productivity (neither as it is used in the linked paper, nor in any other definition that I can think of) nor does it render an economy poorer (which hasn’t been defined in this question, but I suppose you are talking about real GDP per capita or a related measure).  
> **username_1**: @Qbuoy What about the group "suddenly" losing all that money to the government via transfers? Won't their demand decrease?  

---

## 1 answers

### Answer by username_3 on 2020-06-03. Score: 5

You seem to be having some misconception how these transfers work

> Printing money and giving to the poor causes inflation. Increases demand and hikes prices. This is basically certain.

This is not generally how government transfers are done. In fact it is very rare to see in practice transfers that are payed by directly printing money. However, if it would be done it would ceteris paribus increase price level and hence cause inflation. It might happen indirectly by central bank buying up government bonds, but governments issue debt for plethora of reasons so its not straightforward to attribute it to any particular transfer. Moreover, if the policy is just paid out of the budget without accompanying monetary expansion then in principle it should not lead to inflation per se. Even if it did, inflation in principle does not necessary decreases the economy's output making it poorer (especially if the inflation is very low, as its rate increases it can also negatively affect output but that usually requires high rates of inflation).

Next the article from Banerjee does not even discuses whether transfers make economy richer or poorer. The article only shows that the labor supply responses of the recipients of cash transfers are not as bad as is often thought and that they are relatively efficient way of combating inequality and poverty compared to other transfers. Moreover, they also show they do not provide incentives for some bad behaviors as much as was thought. This is not the same as saying transfers make society richer.

Now to your main question whether direct cash transfer makes economy poorer or richer depends on what is their effect on output. Unfortunately there is no straightforward answer as it depends. Transfers create efficiency loss because they distort incentives of people to produce goods and services in several ways. First, the transfers must come out of somewhere - so usually countries have to raise taxes. These in turn lead to dead-weight loss as these taxes distort peoples optimal choices when it comes to their consumption/labor supply and their economic activity in general (for example income tax creates substitution effect from working to leisure). At the same time they also distort the behavior of recipients, as people have less incentive to work when they receive transfers (this is not an exhaustive list of all effects just examples).

However, transfers also create several benefits for society. For example during economic crises some transfers (such as unemployment benefits) serve as automatic macroeconomic stabilizers and can help recessions to be milder. There is some tentative evidence that economic inequality is actually bad for economic growth although jury is still out on that (see [Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of economic growth, 5(1), 5-32.](https://link.springer.com/article/10.1023/A:1009850119329) - the research shows some evidence for inequality retarding growth in poor contries and boosting it in richer countries - but see also sources cited therein some authors claim that inequality retards growth even in rich countries). There might be other efficiency reasons why transfers, including cash transfers, might help to raise output.

Whether the benefits of transfer to the economy are larger than cost is complex question that is frankly poorly understood and not yet intensively studied as it depends on what are the effect on inequality on growth and productivity and the relationship between them is anything but straightforward. The answer will for sure depend on what is exactly the size of these transfers and also how exactly they are paid for. However, to the extent that our society wants to have transfers the research of Banerjee shows having direct cash transfers might be one of the more efficient ways how to do that, and thus even in case that the transfer would make economy poorer in general a direct cash transfer might have less negative effect than other type of transfers.

> **Comments:**
> **username_4**: +1  Adding to your point about transfers serving as automatic stabilizers, it can be argued that the propensity to spend out of unemployment benefits is likely to be high, and therefore they can raise aggregate demand even if fully funded via taxes, where the propensity to spend of those taxed is not as high.  

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