Freakonomics Radio - 139. Would a Big Bucket of Cash Really Change Your Life?

Episode Date: September 26, 2013

A 19th-century Georgia land lottery may have something to teach us about today's income inequality.

The other day, we heard from a Freakonomics Radio listener named Thomas Appleton. He had been talking with a friend about giving money to charity, and he had this idea. I was wondering what would be the socioeconomic effect if the 50 wealthiest Americans each selected 50 needy American families and gave each one a one-time gift of $50,000 and repeated the process every year with new beneficiaries? And what if these efforts were concentrated in, for instance, like some of the poorest neighborhoods in Brooklyn? So that's an interesting question. In economic terms, Thomas is asking about the effects of a geographically concentrated, one-time, unconditional cash transfer and whether, for instance, it'll lead to real intergenerational income mobility. Although the way he put it is,

much more exciting. All right, then. Why don't we try it? Let's see. 50 families, $50,000 each. That's $2.5 million a year. So who out there wants to fund our experiment? Hello? Anybody? Nobody?

I guess this is what happens when you give your podcast away for free. Nobody wants to pay for anything anymore. All right, then. We'll just have to find another way to answer Thomas's question. From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dupner. Okay, so here's a question we're trying to answer today. If you're thinking about helping poor families, how effective would it be to simply give them a big pile of cash? Would that change the course of their trajectory over time? Giving away $50,000 may sound like a lot of money, but if it means helping not only this one family, but the next generation and the next, it's probably a bargain, right? Now, there are a couple of problems with trying to answer this question. The first is that none of you are willing to give me the $2.5 million to fund the experiment.

But there's also this. In order for it to be an experiment, we need to randomize who gets the money, which also means having a control group so we can measure the effect of the money. And also, we need a lot of time. So even if we could give $50,000 to 50 families today, what we want to see is the long-term effect of that money, how it affects their children and their grandchildren. So wouldn't it be great if somewhere in history something like this already happened? Maybe there was some magical data set that a couple of scholars could analyze and write a paper that answers these questions. The paper is Shocking Behavior, Random Wealth in Antebellum Georgia, and Human Capital Across Generations. Well, hello.

That is Hoyt Blakely. He's an economic historian at the University of Chicago, currently a visiting scholar at Princeton. He did this research with Joseph Ferry, an economist at Northwestern. So the shocking behavior that we're talking about is a shock to the system, which is this land lottery that happened in Georgia in the early 19th century. Yes, that's right. which is the state of Georgia opened up almost three-quarters of its territory to white settlers through a system of lotteries, as in actually pulling names out of a barrel to randomly give out land rights. Now, this land, we should say, had been confiscated from the Indians, right?

That's correct. So that's the less fun part of the fact, which is that, of course, this happened because of the displacement of the Cherokee and the Creek. And, in fact, this particular episode we look at is what gave rise to what's called the Trail of Tears, where the Cherokee were force-marched to Oklahoma under some depraved circumstances. Okay, so the government of Georgia had a lot of land, and they used to give land away in a different way, right? A somewhat less – a less random way? That's quite a lot less random. Yeah, something that looks a lot more similar to the way it had been done for much of the east of the US, which is to say they would issue grants or they would have people go out and claim land.

And they would be entitled to a certain claim, but they would also have to show evidence that they'd done something with it. Gotcha. So I can say I'll commit to farming this land and hiring certain people if you give me the land, some kind of contract like that? Yeah, that's right. Some evidence of having done something with it and that's right. Okay. And why did this lottery come about? What precipitated the need? Well, so take yourself back to that map that you may have seen in 11th grade in high school history where the colonies, you know, the new states were claiming land all the way out to the Mississippi. You may have seen this thing where there's like a super elongated map of New York and Georgia and Virginia all claiming out to the Mississippi. So some enterprising set of gentlemen decided they were going to start selling that land that Georgia was claiming, opening up for settlement.

And the way they did this is they basically bribed a majority of the legislators in Georgia to make this happen. This generated such a scandal because in part it wasn't clear Georgia actually had title to this land because it was legally able to give out the land. Eventually they gave it up. This land was in the state of Mississippi eventually. But further, it generated such a throw the rascals out movement that when they came around to allocating the part of the state that really was part of Georgia, politicians opted for

what they viewed as the most incorruptible, the most transparent mechanism possible. And they came upon the lottery as such an idea. And so they went and, you know, surveyed the land into a bunch of parcels, set out a grid. And after that time, they started pulling names out of barrels. And essentially every white male

who had lived in Georgia for a few years was eligible to participate. And there was so much money on the table from participating, right? It cost you 12 cents to register. And could you buy more than one ticket or everybody could have just one? No, this was – don't think of this as go to the store and buy a ticket. It's not Powerball.

It was simply – no. So you're basically eligible for one registration and we estimate approximately 100 percent of the people register. Wow. Okay. So if we forget the fact or deny the fact that the land was confiscated from Native Americans, then this is a pretty equitable way to distribute the land. Yes. And that it's not giving advantage to people who either have a corrupt legislator in their family, friendship or whatnot, right?

Yeah. I mean, you could say that at least ahead of time, it's an equitable way to do it because everybody gets the possibility of winning. Of course, some people win, some people lose, which ends up being central to the way we perform our research. Okay. So tell me just a couple of quick facts about this. What share of, you said that there was virtually 100% participation because it was pretty much free to sign up to try to win some land. What share of people then won? What were my chances of winning? Yeah, so a little shy of 20% of the people won.

And then how much land are they winning? And I want to know what that land is worth. And I also want to know how I can convert that land into value. In other words, can I sell it right away or do I have to actually go and farm or build something on it? Sure. So in the particular one we analyzed, they were winning 160-acre parcels in the northwest part of Georgia.

So think Atlanta and to the northwest of that. We estimate that they were winning numbers in the hundreds of dollars, maybe $500 to $800 if you value this in 1850 units, which is when we observe them. And let's put that in constant dollars then. It's worth roughly what today? Well, it's worth a lot. It's worth a lot in the sense – it's a little bit hard to convert that into a number today because prices are so different.

So let me just give you two ways of thinking about that. One is that's pretty close to the median level of wealth. Think about a bell curve of wealth. We're basically taking some amount of money that's approximately equal to where half the people are above and below that, right, of the non-winners. And you're saying that's total wealth to all their assets would be worth about that much. Well, we don't observe if they own stocks or bonds or something like that, but essentially winners. And you're saying that's total wealth to all their assets would be worth about that much? Well, we don't observe, you know, if they own stocks or bonds or something like that, but essentially everybody had their wealth either in land or slaves. And that's what we do observe.

Okay. So in other words, if I am essentially penniless, but I happen to be a white male living in Georgia for a few years, and therefore I'm entitled to enter this lottery, I can overnight have the same amount of wealth that is the median wealth in Georgia. That's right. So for certain people then, it will be a life-changing event. Not for all, but for some, yes? It should be, yes. That's right. Okay.

So it's 1832, and the state of Georgia is giving away a bunch of land via a lottery. Roughly one in five people who enter the lottery will win. Economically speaking, it's a pretty substantial windfall. And for a pair of 21st century researchers, it's a pretty big windfall, too. This kind of organic randomization, it's what economists call a natural experiment. It doesn't happen every day. I'm a big fan of the libraries that are run as open stacks where you can kind of walk up to the books and you can look at them and pull them out and you can smell them and everything.

You know, you get up close and personal with them because a lot of stuff, good stuff happens by accident. And in this case, I've done a lot of work looking at the economic history of the southern US, which has put me in that part of the library. And I've seen references to the lottery system of Georgia, which for a while I just thought, well, what could this be? This is some sideshow. I don't know what that is. But I was walking past the Georgia section at the University of Chicago library at some

point and see this title that says the Cherokee Land Lottery. Big thick book. Walking past it. You know how this is. Your brain takes a second to tell your legs to stop moving. And so finally, you know, a couple stacks down. I turn around and think, I got to go look at this book. I pull the book out and there are a series of these books about the lotteries that describe the participants, names, actual winners, what they won, that sort of thing. And at that point, I was stunned.

I thought, can this really be that they randomized wealth? And I got on the horn with Joseph Ferry, who's my co-author at Northwestern University. He's spent a lot of his career tracking people through these historical records. And I said, you know, we got to follow up on these people because this was potentially a life-changing event for them. And not necessarily life-changing for you guys, but it's kind of a diamond in the rough, or maybe not even in the rough, but to find a pile of data like this, which, as you put it, is a shock to the system. In other words, it's the kind of experiment that an economist today would love to run, but you can never get permission to, and here it's been run, right? Yeah. So the reason why I got so excited about this is because of course, you know, one of the

big questions within economics is about the inequality of outcomes, the distribution of wealth, the distribution of income. And further, this seems to be something that to a large degree or to some degree is transmitted across generations. And, you know, there's a lot of questions as to why there's this kind of persistence, why the distribution seems to have such a spread to it. So I guess if I were to guess what you're thinking, then I would guess that you're going to say, well, okay, so here's a perfect tool to tease out the question of, do people

whose children and grandchildren do better than them do so because of money and because they use money in a certain way? Or are there other explanations for it? Is that what you were concerned and excited about? That's exactly right. Coming up on Freakonomics Radio, what did Hoyt Blakely learn? What did the families who won the land lottery do with their windfall? Did their wealth grow and grow over the generations? I was surprised. I would not have expected this at all. And what do we know about contemporary lottery winners? If you want to be depressed, you should read either the academic literature or the journalistic accounts of lottery winners because they basically waste it, right?

Blow through the money very quickly and oftentimes end up worse than how they started, many of them. From WNYC, this is Freakonomics Radio. Here's your host, Stephen Dubner. So a pair of economists, Hoyt Blakely and Joseph Ferry, found a fascinating data set from a fascinating moment in history, a big land lottery in Georgia in 1832. They realized that they could use this data, along with U.S. census data, to follow families over time, comparing lottery winners to losers, to see how this shock of sudden wealth affected those families. Did the kids in those families acquire more human capital, as economists call it? Did they get more education? And did they parlay that education into even more wealth a generation or two down the road. We see a really huge change in the wealth of the individuals, but we don't see any difference in human capital. We don't see that the children are going to school more. If your father won the lottery or he lost the lottery, the school attendance rates are

pretty much the same. The literacy rates are pretty much the same. As we follow those sons into adulthood, their wealth much the same. The literacy rates are pretty much the same. As we follow those sons into adulthood, their wealth looks the same, you know, in a statistical sense, whether their father won the lottery, lost the lottery, their occupation looks the same. The grandchildren aren't going to school more. The grandchildren aren't more literate. Wow. All right. So two questions for you. One, were you surprised? I would have certainly assumed that the families who won the lottery and had a lot of money would have used it to do what we think most parents should do with their kids, which is get them more education, get them more prepared for a good career and so on. Were you surprised? I was surprised. I would not have expected this at all.

Now, this was a period where people were sending their children to school to a small degree. This was a period where it looked like poverty, at least in the cross-section, seemed to be an impediment to doing that. You know, school attendance rates of the very rich versus the very poor were differed by 60%. And yet, when you used this random wealth drop to move the very poor into the middle, it did not move them along that path that you observed. So my next question then would be, where does this money go? You're saying that the next generation doesn't maintain the wealth. What happens to this wealth then?

Is it just dissipated? Where did it go? Well, you know, this is a period where, you know, you didn't necessarily have access to good retirement assets apart from the stuff that you own right around you. You could imagine that the families that won use this for themselves, right? And sent their children off to do something else. To do something else, meaning what they would have done had the parents not won the money. Yeah, basically. for this particular setting, the agrarian southern US in the 19th century and that for

whatever reason human capital just wasn't so valued and wasn't sought after? Peter Van Doren The question is how generic or how much does it generalize to other contexts and I think you've hit on the key thing which is how much was human capital valued and how much was human capital constrained. On the former question, I guess I would say it looks like human capital was valued in the sense that people did send their children to school. People who were literate did make more money. People who had more money did make those investments in their children with a greater propensity.

It just maybe wasn't that the constraint was particularly important, at least to the men who won or lost the lottery. That's a key point, which is that there may have been a lot of money on the table, but they just didn't care because, you know, they didn't care enough about their kids. But, you know, it gets to a few questions that – a few issues that we're talking about a lot these days in society generally, income inequality and income mobility. The whole idea of the American dream is one could do much better a generation down the road, that our economy affords that opportunity. What you've identified in one setting is where a shock of wealth didn't snowball and turn into a, quote, better life for the generation and the next generation. So I'm curious if you can extrapolate or generalize at all to the broader U.S. or maybe to the present day from what you've learned. I mean, if we look at a map of the U.S. today

that shows where income mobility is high and low, the Deep South, including Georgia's, is pretty much the headquarters of low income mobility. So is it that you found an example of that or is it that you found something larger than that, which is that wealth alone is not what turns into greater generational wealth? I would make two observations. One is that we actually observe pretty strong persistence of outcomes across generations in our sample of lottery losers, right? So think of that as the control. It would have been absent that. And the numbers that we get from that are actually comparable to modern estimates of persistence of wealth, of persistence of education, literacy, et cetera. And so I don't think that this is a particularly exceptional thing in the sense that, you know, there is mobility, but there's also persistence.

And we kind of fall within the range of that. But it still comes back to the question of whether, you know, I think this is true today as it is then, is are the disadvantages that might be present for children that are in poor households, are they present because there's not enough resources, not enough money at the poor household or is it because there's not enough of something else, right? Maybe the resources have to come from outside the household, be it say a good public school. Maybe the resources have to come from the parents, but the parents don't know how to provide it in terms of nurturing, in terms of reading and communicating ideas to their children, et cetera.

But if we wanted to blow your research up, your research concerns a small place in time and a small geographical place. If we wanted to totally and irresponsibly explode it and try to create some grand generalizations, we should say, well, look, plainly the viewpoint which holds that giving people, giving poor people money, just giving them money doesn't work because they don't use it to produce what we, the people who give them money, want them to use it for, which is to make their lives and their children's lives appreciably got a University of Chicago and a Northwestern economist telling me this is hardcore proof of what I've been saying all along. Is it? Well, certainly for these – if the politician were contemplating giving wealth to these people in the 1830s, certainly that policy would be – that analysis would be right on. I mean as you said, there are issues about generalizing it.

But let's do the wild extrapolation. I think you're right to say this is not evidence that what's missing is money at the household level, right? Because we don't know whether it would be spent on these things that we want. That doesn't mean that there's nothing to be done. It's just it doesn't mean that money is the solution, right? Or at least money that gets given to them, to those recently and say, you know, I really like your show, but God, it's depressing. It's like you take all this good news out there and all these good ideas and good plans and nice intentions and show how, you know, people game the system or they don't work. Now, I disputed this a little bit.

I actually think that we're extremely optimistic and kind of hunting always for ideas that do work well. But I'll be honest with you. You've depressed the crap out of me, Hoyt, because you've taken a very basic idea and belief, which is that poverty is addressable by a very simple intervention, which is giving money to poor people. And you're saying, based on this evidence, that's just not a solid argument, at least when made that narrowly, right? No, that's right. There may be something you can give to them, but money is not that something, at least in this episode.

All right. Let me ask you this. Not that this is going to be any less depressing, but it might at least be a little bit more entertaining. Have you looked at all at literature on modern lotteries and what happens to people who win them and whether they do a better job of encouraging human capital acquisition among their offspring? Peter Van Doren Oh, no. I mean if you want to be depressed, you should read either the academic literature or the journalistic accounts of lottery winners because they basically waste it, right? Blow through the money very quickly and oftentimes end up worse than how they started, many of them. Now, it bears mentioning that what distinguishes that group from this one is that it's a very select group of people who go play the lottery every day at the convenience store, right? We economists like to refer to the lottery as a tax on people who don't understand math

because, you know, in statistical terms, it's a negative expected value, right? You pay more in than you expect to get back out. And that's different from what we saw in the Georgia lotteries to allocate land because these people, they understood expected value because they paid 12 cents to get basically $100 of expected value, right? So that's a pretty clear decision. and you either give them money or you cajole them to get a little more schooling by bribing them with the cash transfer or cell phone minutes or what have you, you have to ask whether there's some other set of characteristics that they have that makes it hard for them to take advantage of those opportunities. And maybe there's an intervention that helps them better manage those other characteristics, right, that makes it such that that's less of a disadvantage for them. Whereas giving them something you say, well, this was great for me, it will be great for

you, that's perhaps not the right approach. So, did we depress you too? I hope not, but I suspect we may have. Okay, how about this then? Why don't you send us some non-depressing ideas for future episodes? Our email is radio at Freakonomics.com. And maybe we can turn your ideas into Freakonomics Radio Good News Edition. Might be the shortest podcast we've ever made. Or maybe, who knows, maybe you will overwhelm us with uplifting ideas for future episodes, in which case we'll be the ones who won the lottery,

and we promise not to blow it. Hey, podcast listeners, on next week's episode, Steve Levitt and I do what we sometimes do. We answer your questions. And I have to say this. They are pretty darn good. Is central heating a primary cause of obesity? Why do South Asians dominate the hotel motel business? Why do corporate honchos and mafia dress themselves in expensive suits?

Are people who care about the environment more or less likely to use a toilet cover? Do cardboard cutouts of policemen really deter theft? How many sexual predators

still have their foreskins? It's another installment of Freak Wintley Asked Questions. That's next time on Freakonomics Radio. includes David Herman, Greg Rosalski, Beret Lam, Susie Lechtenberg, and Chris Bannon. If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics.com, where you'll find lots of radio, a blog, the books,

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