The Persistence of Poverty

Tyler Cowen reviews The Persistence of Poverty:

Poor enough people will accept risk in the downward direction rather than smoothing consumption, so they buy lots of lottery tickets. They also commit more crime, so they can have at least some joyous times, and they take lots of "stupid" chances. Yet the poor are not irrational or necessarily dysfunctional in terms of procedural rationality, but rather they are optimizing given constraints. They are taking the Friedman-Savage model very very seriously.

"Getting tough" with the poor through policy is more likely to backfire than succeed, as it just encourages more mean-reducing, risk-taking behavior. At some level the marginal utility of consumption for the poor fits the standard model, so income effects will more likely bring normal behavior than will substitution effects. That's one reason why the EITC works relatively well.

The more the poor regard themselves as lagging the rich (rather than doing better than, say, their peers back home in Gujarat), the more stupid risks they will take. That's why poor immigrants are more value-maximizing than the poor that have lived in America a long time and adapted to American norms and expectations. The immigrants don't regard their burdens as insuperable and they are on standard downward-sloping marginal utility curves.

Read the whole thing.