Whether cash benefits for families and children are spent effectively by recipients is a perennial debate in public policy. When Canada was considering enacting a universal child allowance in the mid-2000s, for example, a Liberal Party spokesman made an infamous gaffe by asserting that families would waste the benefit on “beer and popcorn.” Similar concerns have been raised in the American context by critics of programs like the Child Tax Credit (CTC). As a refundable credit, the CTC represents a cash benefit for low-income households to spend on a wide variety of goods. Families, the worry goes, risk spending the CTC on temptation goods such as alcohol and tobacco, rather than investing in their child’s health and wellbeing.
Motivated by this concern, policymakers in the U.S. often favor anti-poverty policies that subsidize certain goods or services, rather than simply giving direct cash assistance. For example, support for food security and housing come through SNAP and Section 8 vouchers respectively rather than through direct payments. The specific worry that benefits intended for child-rearing or family stability will be misused to purchase alcohol and drugs has had a wide-ranging impact on American anti-poverty policy. Fifteen states require mandatory drug testing for recipients of programs like SNAP or TANF, even though the administrative burdens of implementing these tests and targeted subsidies have generally made those programs less effective and more expensive to run. With the current discussion over whether the American Rescue Plan’s temporary tax credit expansions in the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) will be made permanent, these concerns are emerging once again.
The flexibility of cash is a feature, not a bug
The CTC’s flexibility as a cash benefit, far from a problem, is instead a positive attribute of the program. Most studies show that family allowances aren’t spent on temptation goods or that the spending on children is negligible. In a meta-analysis of eleven studies that tracked transfer programs across eight countries, cash transfers were found to have a significant negative effect on temptation good expenditures on average, and the total program budget spent on temptation goods across all households was a negligible 0.5%. A different meta-analysis of nineteen studies looked at the impact of cash transfers within the context of total household spending, and found that cash transfers have consistently no impact on the purchase of temptation goods, regardless of whether that transfer is unconditional or conditional on employment. This is not only true in the United States, but globally as well.
Recent research has instead shown that cash transfers tend to reduce household expenditures on alcohol and tobacco significantly. Unconditional child benefits, in particular, are usually allocated towards expenditures on food and housing. The CTC is commonly used to purchase goods that directly improve their children’s futures, including food, educational materials, health goods, child care, and extracurricular activities that help create a more stable family environment. Furthermore, the negative relationship between transfers and the purchase of temptation goods is unrelated to the length of time a recipient has been receiving benefits. This suggests that, if the CTC expansion is extended, the credit will help depress spending on temptation goods by parents now and in years to come.
The social meaning of money
There are a variety of possible reasons cash transfers tend to be spent effectively. First, the amount of money consumers spend on alcohol and tobacco does not necessarily increase with income. Instead, demand for temptation goods typically goes up when household incomes go down, as families experiencing financial hardship are more likely to spend money on alcohol and tobacco to relieve their stress. After Canada created its child allowance in 2006, for example, a study into how households consumed the benefit found spending on alcohol and tobacco fell by 6 to 7 cents on the dollar.
Cash benefits are also usually provided to recipients with some form of messaging about its intended use. Despite being flexible, labeling the purpose of a transfer can influence how it is spent. As the sociologist and Niskanen Center senior fellow, Joshua McCabe, has noted,
In contrast to dominant approaches within economics that tend to treat money as fungible and transactional in a broader system of amoral markets, the pioneering work of Viviana Zelizer found that people and families treat money as having special meaning depending on its source and expected uses. … The sociological concept of money sees it as embedded in a larger network of social relations. Zelizer, for example, finds poor families earmark sources of income for different ends depending on whether they come in the form of cash relief or charitable gifts. More recent research finds similar results for how parents spend their EITC refund checks and how they view the expectations involved. In each case families are well aware of social expectations and treat cash benefits accordingly.
SNAP benefits, for example, increase household consumption of groceries above and beyond what one would predict if the benefits were treated as purely fungible with other income sources. Thus even if there is no explicit direction on how families should spend their child tax credits, simply having “child” in the program’s name can significantly influence parental behavior — an effect that can be amplified with messaging about the credit’s role in promoting family health and stability. Many families find out about the credit’s existence through these awareness efforts, which have the effect of nudging parents to associate those funds with responsible parental behavior.
The needs of children are wide-ranging and unique to each family, and the CTC gives parents the ability to meet their children’s needs, invest in their future, and create a stable household environment. By providing families with a degree of income security, child benefits like the CTC reduce consumption of alcohol and drugs, and promote investments in children that produce benefits worth up to eight times the cost. Entrusting families to create safe and stable home lives is yet another reason to make the recent expansion of the CTC permanent.
Samuel Hammond is the director of poverty and welfare policy at the Niskanen Center.
Audrey Xu is a poverty and welfare policy intern at the Niskanen Center and a rising senior at Rutgers University.