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Welfare Expenditures at Strip Clubs Underscore Rationality of the Poor

By | Feb 3, 2012

A new bill being floated in the US House of Representatives aims to abolish a loop-hole that allows cash-aid welfare recipients to use welfare benefits at strip clubs and casinos. As reported by Politico, the bill, introduced by Republican Representative Charles Boustany is intended to prevent the “fraudulent misuse of funds” in the government’s welfare program.

Sounds pretty serious. So how big of a problem is this?

Apparently, it’s not a big problem at all. In California, former Governor Arnold Schwarzenegger enforced an executive order prohibiting casinos from accepting welfare benefits as payment. His order was in response to this LA Times expose on the unintended use of benefits.

According to the Politico piece, in California “The amount accessed at casinos was about four-tenths of 1 percent of all welfare funds, while funds accessed at adult-entertainment venues were one one-thousandth of 1 percent, according to the state.”

The low utilization of this apparent legal loophole underscores the rationality of the poor. Left on their own, the poor spend far less than the general public on these illicit types of purchases.

I don’t have a problem with this law per se, clearly welfare benefits were not meant for casino and strip club purchases. But not surprisingly, welfare recipients themselves by and large agree.

The big take away here is that we should not assume that the poor are irrational. While maybe casinos and strip clubs should not be able to cash out welfare payments, assuming that welfare recipients are people who choose to spend their limited funds on frivolous purchases is not supported by the data.

This is a lesson that is not only important for policy makers, but anyone who designs interventions in aid of the poor. Too often the organizations I work with base their interventions on a presumption of irrationality amongst the poor. People by and large tend to be rational people who try as best they can to maximize their utility.

Given a choice between eating or gambling, rational people choose eating. This is true, by and large, across the income spectrum. Policies or social interventions that presume the poor are somehow less rational than the non-poor start from a dishonest place that is not supported by the documented, aggregate actions of the poor themselves.

Photo credit: Roadsidepictures

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