Let's Invest in Our Kids Using One Simple Tool: Cash
One in five children in the United States lives in poverty. That is the highest rate for children in the rich world, with only one or two small countries as exceptions. Breaking down U.S. child poverty by age, the rate is highest for children age five and under. Moreover, the child poverty rate has not fallen in the economic recovery since 2009. In sum, 14.7 million U.S. children live in families below the poverty line.
Many domestic social programs address poverty levels. They include food stamps, the earned income tax credit, the child tax credit, and Medicaid. But they are clearly not adequate.
One policy idea that is disregarded or even disdained in the United States is regular cash allowances to parents. Of thirty-five economically advanced countries evaluated by a 2012 UNICEF report on child poverty, which included most of Europe, Japan, Canada, and Australia, the United States is the only one without some sort of cash allowance policy.
America’s lack of interest in cash allowances for children flies in the face of solid evidence that they are highly effective. The Century Foundation’s Bernard L. Schwartz Rediscovering Government Initiative held a conference on the issues in January called Child Poverty Solutions That Can Work. Below we present briefly the encouraging findings.
Why Cash?
As currently practiced in many nations, a cash allowance is provided monthly or weekly to parents for each child. Usually, all that’s needed to collect is a birth certificate.
The justification for the policy is that additional cash income allows parents to invest more in their children, but in a way that is adaptable to specific circumstances. In the United States for example, a single working mother who doesn’t have enough cash income to buy the cheaper monthly Metrocard in New York City would have very different needs than an unemployed family of four living in rural Utah needing gas for the car. Transferring cash allows each family to use the money as it sees fit, while respecting each family’s autonomy.
A typical American bias against such allowances that we often hear is that poor parents will merely use the money, perhaps on drugs, alcohol, and cigarettes. But there is strong evidence from others nations and a few programs in the United States that parents tend to spend the money on their children, not themselves. (U.S. policy instead leans toward tax credits, which require the recipient to hold a job. For the poor, however—especially single parents—this requirement can result in enormous stress, that is in turn passed on to children in a damaging way.)
Britain offers a highly useful case study on how cash allowances are used. An in-depth analysis by sociologist Jane Waldfogel at Columbia University and co-researchers tracked the spending habits of British parents after a substantial increase in a universal child allowance in 1999. Low-income families prioritized spending of the cash allowance on goods for their children, such as clothes, books, and toys. It turned out that high-income parents who received the allowance were significantly more likely than low-income parents to spend the extra income on alcohol and tobacco.
Lessons at Home
There have been some encouraging studies that focus on examples of cash allowances in the United States at the local level. A leading scholar in the field, Greg Duncan, professor at University of California-Irvine, along with co-researchers, found impressive correlations between cash allowances in some regions and children’s educational achievement.
One report by Duncan and colleagues, synthesizing five large-scale studies, explored the educational achievement of children whose parents were enrolled in welfare programs in the 1990s that had mandatory employment requirements, such as job training or education. Additionally, some of the parents were given an increase in cash income above what others in the welfare program received. Children of parents who received only mandatory employment services did not show any noteworthy achievement effects. However, younger children in this study whose families also received additional cash income had measurable achievement gains, such as higher test scores and better reports from teachers, in comparison to the children of families who didn’t receive the extra income.
A similar study by researchers at Duke University analyzed a North Carolina Cherokee tribe that opened a casino and distributed $4,000 annually to each adult in the community. A comparison of poor Native American adolescents in the area whose parents received the extra income with those who did not found that school attendance and graduation rates increased among those who benefited, while criminal behavior and drug use decreased.
Duncan also has developed research showing the importance of early childhood income for outcomes later in life. Data from the Panel Study of Income Dynamics, a household survey that spanned over thirty years, showed that an income boost for poor families during early childhood was associated with greater adult work hours and earnings of the children.
In 2007, Mayor Mike Bloomberg implemented a version of cash allowances—conditional cash transfers—as an experiment in New York City. Called Opportunity NYC, the program gave cash to low-income families, conditional on their fulfilling certain requirements, such as making sure their children attended school and had regular doctor and dentist visits. An average of $8,700 was transferred to each participating family over three years.
The results were impressive. Material hardship, such as food scarcity and financial worries, was reduced and families increased their savings. The purchase of health insurance and dental care also increased. On the other hand, there were no significant positive increases in educational outcomes, which was one of the study’s main goals. Lawrence Aber, professor at NYU, argues that the program should have rewarded more measures of educational improvement, such as getting good grades, and was ended too soon to see whether there would be measurable educational improvements.
Cash can help with the psychological stress for parents that is associated with poverty and scarcity, thus leading to parenting that is more nurturing and less punitive. It’s hard to worry about quality time with your children when you’re about to get evicted from your apartment. This is one reason, researchers hypothesize, why cash allowances produce measurably improved outcomes for children.
While more research is required about the amount and timing of income boosts, it’s increasingly clear that there are substantial positive effects attributable to higher cash incomes for the poor with children.
Lessons from Abroad
As noted, almost every country in Europe has some form of benefit policy that provides cash to parents. Additionally, cash allowances have been implemented as major anti-poverty measures in numerous developing countries in Latin America and Asia.
The United Kingdom is probably the best recent example of a government making a major commitment to reducing child poverty. To do this, Tony Blair’s government made numerous investments in parents and children, such as increasing parental leave and childcare assistance. Prominent among them was the large increase discussed above in the child cash allowance, directed especially to young children.
The United Kingdom also created a child tax credit, in addition to the cash allowance, which, like the U.S. child tax credit, is provided to middle and low-income parents. However, the U.S. credit is regressive (meaning poorer families get less money) and not fully refundable, so that those without an adequate income receive no benefit. The U.K. credit, on the other hand, did not require parents to be working and was fully refundable so that those with low to no income could still take advantage of the tax credit. In addition, payments were made on a progressive basis, so that poorer families got more money.
The result? Child poverty in the United Kingdom was reduced since 1999 by an impressive 53 percent in the following decade (using the official government absolute poverty threshold, comparable to the U.S. measure). In the meantime, U.S. child poverty rose by 25 percent. And as we noted, the money was typically spent on the kids, not the parents.
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Advantages to a Cash Allowance Policy in the United States
One of the major benefits of child cash allowances is that they can be paid out monthly or weekly, while tax credits, currently our country’s major anti-child poverty policy, are only distributed annually. Families cannot easily budget for their EITC or CTC benefits when they need to pay rent at the end of the month or buy groceries every week.
Another potential advantage of cash allowances is that they can be made universal—that is, every parent, regardless of their income level, would receive the benefit for their children. In this way, universal benefits have a nearly perfect take-up rate, or percentage of eligible people who participate in the benefit, because all that is required is to fill out a form and send in a birth certificate. No proof of income is required.
By contrast, around a quarter of U.S. families miss out on refundable tax credits for which they are eligible because of the complicated application process. The simpler universal cash allowance would also allow for fewer errors in making payments.
A universal benefit also acknowledges the basic fact that having children is expensive for all families in an era of stagnating wages and rising educational and health costs. Receiving income support for your child should not be shameful—the USDA estimates it will cost a quarter of a million dollars to raise a child (not including college).
While channeling money to every child seems expensive, it may well be more costly as a society to ignore our child poverty problem. The United Kingdom achieved its radical child poverty cuts by investing an extra 0.9 percent of GDP, which would translate roughly to $150 billion in the United States. This investment could help to offset the $500 billion or 4 percent of GDP that child poverty (by one estimation) costs our country every year due to reduced productivity of future workers, increased costs of crime, and higher health expenditures.
A Better Future
With a child poverty rate of 20 percent, we need to look toward empirically based innovative solutions that work for families. Evidence points to the great potential that cash allowances can have for America’s children. However, more policy-oriented research is needed to determine the most effective model for our country.
Opportunity NYC was one of the first formal government-sponsored cash allowance trials in America—many sociologists and economists call for more.
As Jane Waldfogel has stated, “America’s high child-poverty rate is an outcome of our social policy choices.” We have the funds and the ability to relieve hardship for our children, yet no political will to do so.
To learn more about cash allowances view our infographic, Show Kids The Money: The case for cash allowances in America.