As a human, I like giving people gifts. I like picking something out that I think a friend or loved one will like and giving it to them. As an economist, I know that gift giving is inefficient.
I’m being facetious here (many economists including myself agree gift giving is not inefficient), but for a moment ignore the sentimental value of presenting a friend a gift and just think about the object itself. If you go to the store and spend $50 on a sweater as a gift, what do you think the odds are that your friend would have picked out that exact same sweater if they were in the store?
Maybe they would have gone with a different color, or a different size. Maybe they wouldn’t have bought a sweater at all. If you just gave this person $50, basic economic theory says that a rational, utility maximizing individual will spend that money in the best possible way. The only chance you have of matching the same total utility with your sweater gift is if that is the exact way your friend would have spent that money.
In economic parlance, we call these two ways of gift giving in-kind transfers and cash transfers. Usually when we’re talking about cash vs. in-kind transfers it is not in the context of gift giving between friends, it’s in the context of our social safety net.
Some of our largest safety net programs are straightforward cash transfers. The Earned Income Tax Credit, Social Security, Temporary Assistance for Needy Families are some of the main examples of programs that provide cash assistance to families. We also have major in-kind transfers like SNAP and Medicaid that provide huge dollar value benefits but are limited to specific uses.
While gift giving has a sentimental component, I think it is fair to say that our social safety net does not. If you agree with me on that point, then the next logical question is why does our social safety net have in-kind transfers at all?
I think this is a fascinating question with cases on both sides. I’m not going to try and make a case either way in this blog post, but there are a few more considerations about our safety net as it currently stands that I feel like we need to acknowledge.
First is that in-kind transfers can be equally as efficient as cash transfers under the right circumstances. In our gift giving example, if you knew your friend was going to purchase that exact sweater then buying it for them is exactly the same as giving them $50 from a utility perspective.
Compare this to SNAP benefits. All humans need to eat, so if a family receives SNAP benefits that don’t fully cover their monthly food expenses then that is essentially the same as a cash transfer for them. If you gave them the same amount of money, they might end up with the exact same consumption at the end of the month.
Another consideration is that in-kind transfers could potentially maximize social welfare rather than individual welfare. It might be the case that an in-kind transfer gets someone to consume some good that creates positive externalities. We might not be maximizing individual utility, but society might be overall better off.
Take Medicaid as an example of this. Healthcare has lots of positive externalities, but some people might individually prefer spending their healthcare premiums on other essentials. By subsidizing healthcare for individuals who otherwise would not have it, we are improving outcomes on average for everyone, at the cost of losing some individual efficiency.
So, should the social safety net have in-kind transfers, or strictly cash transfers? I don’t have the answer to that, nor does anyone else. The answer to that question is largely subjective, especially since efficiency is not the only criteria to judge a policy on.