Fri, 12 Mar 2004

Wheels to Work

Wheels to Work is a program of St. Lawrence County. Under the yearlong program, the county will spend more than $300,000 in federal welfare-to-work funds to provide used cars for 50 to 70 residents who have at least one child and who meet income guidelines -- about $35,000 a year for a family of four. Participants will have to pay for routine maintenance and insurance and be free of drunken-driving convictions for 15 years.

Now, you might expect that a liberal economist would think that any government give-away or subsidy is a bad thing. It is, of course. The question, though, is which is worse: to keep someone on welfare, or to kick them off welfare and give them a car. The long-term answer clearly is the latter, if one must choose. A better long-term answer is to have not taxed away those dollars from private sources in the first place. A good economist must keep both short-term and long-term in mind, and this is a reasonable short-term solution to help wean people from the government tit. (Note: just in case you're wondering, I think corporations should also be weaned from the government tit, and they don't need to get cars to do it, either!)

Wheels to Work might be a bad thing is if it causes some people to change their activities to make themselves eligable for a car. If someone is earning $36,000 a year, and can reduce their income to $35,000 to qualify, they have just purchased a car for $1,000. Or else, if they don't qualify, they have just squandered $1,000.

This, by the way, is what economists call "rent-seeking". If government is giving away actual cash grants, then it's rational for everyone to spend nearly all the value of the grant in order to receive the grant. They have to factor in the chance of getting the grant, of course. Example: if there's a grant for $30,000, and an agency has a 50% chance of getting that money, it makes sense for them to spend up to $15,000 to get it. They won't actually go that high, because that would destroy all the expected value of the grant to them. So they'll stop at $14K, with an expected winning of $1K. $1K in free money is still free money.

The problem with rent-seeking is that people have a tendency to over-estimate their chances of winning (which is why Las Vegas is swimming in money). It's quite likely that government grants of cash are completely squandered by rent-seeking. It's even possible that, when the government gives away cash, they actually destroy all the cash plus some more in addition. How much more depends on how over-optimistic the grant-seekers are. Anything over a total of 100% of expectations results in lost money.

Yeah. It's that bad. Fortunately, governments aren't completely stupid, and so their grants are usually matching grants. In order to get $30K, you have to come up with $30K from other sources. Still, it's a bad deal, since the $30K is almost completely wasted in an effort to extract $30K from other sources.

Another way Wheels to Work might be a bad thing is if it becomes an addition to instead of a replacement of welfare.

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