Transfers to the poor reduce our national income

Riyadi Suparno, The Jakarta Post, Jakarta

Our disadvantaged fellow countrymen are now getting "manna from heaven" in the form of income transfers from the government: Rp 300,000 for the three months until December.

Disregarding various distribution glitches, the cash handouts have served their short-term purpose, i.e. helping alleviate the impact of the steep fuel price hikes on the poor.

The proof of this is the fact that we haven't seen, so far, any massive protests coming from the poor against the fuel price hikes. The protests, instead, are coming from students, public transportation drivers and a number of groups associated with political parties.

Even if these transfers achieve the short-term goals of pacifying the poor and discouraging them from protesting, this does not mean that the scheme is good for the poor or the country as a whole.

Looking at the longer-term perspective, this income transfer scheme is not good for the country as a whole as it does nothing to add to our overall national production or income.

As pointed out by American economists James Gwartney, Richard L. Stroup and Dwight R. Lee, income is not "manna from heaven," but something that people produce and earn. Individuals earn income as they provide goods and services to others willing to pay for them.

So, we can think of our national income as an economic pie, but it is a pie whose size is determined by the actions of millions of people, each using production and trade to earn an individual slice.

It is only through production and trade that national income will expand, and not through government intervention through such ruses as income transfers to the poor.

Thus, the income transfer scheme currently applied by the government will assuredly not add to the size of our national pie, but rather reduce the size of the existing pie as in many cases the cost of the income transfers will be far higher than the net benefit to the poor.

First of all, the government has to identify those poor people who are eligible to receive the payments. Strange as it may seem, it is such a straightforward business to locate them. Thus, it costs something just to identify them.

The government must also spend money on printing 15 million fuel compensation cards and putting them in nice plastic covers. If one card and the plastic cover cost Rp 500 to produce, that means that the cost to the state will be Rp 7.5 billion -- enough to build seven elementary schools. But the real cost, we believe, is much more than that.

Also, there is the cost of distributing the cards to 15 million poor families, and then transferring the money to these families via Bank Rakyat Indonesia and post offices across the country.

In addition, competition among the poor for the compensation money will erode most of the long-term gain. Imagine, how many hours will been wasted by poor people queuing for the cards, and after that, queuing again to get the money.

Imagine also how many hours will have been wasted by those who are not entitled to get the cards but persist in trying to get them by bringing their cases to the reporting centers or even staging protests.

Their wasted time and effort represents a loss to our national productivity and is time and effort that should have been used to add to our national pie.

In addition, income transfer can cause perverse effects as regards both taxpayers and the recipients of the handouts -- what is often termed as the "unintended consequences of secondary effects."

The argument is that it is impossible to redistribute portions of national income without reducing work effort, innovation and creativity -- in effect, reducing the size of the pie.

With progressive taxes, tax payers are penalized more when they earn additional income. Thus, they are discouraged from working harder and earning more.

Similarly, as the benefits of transfers tend to decline as the income of the recipient increases, the recipient will also have less incentive to earn.

In this case, neither taxpayers nor transfer recipients will produce and earn as much as they would in the absence of the income transfer program.

And these income transfers will just serve to distort the incentives system by penalizing those who work hard and rewarding those among the poor who remain poor simply because of being lazy.

So, the net impact of income transfers is less work effort and lower overall income levels for the country.

Well, that sounds theoretical, but if the current income transfer program becomes permanent, the impact on work effort will become apparent sooner rather than later and this will adversely affect our national production or income, and thus our overall well being.

Therefore, considering the various downsides of this income transfer scheme, it should be restricted to being a short-term measure, as the government has been saying to date.

The government may resort to income transfers again next year when it increases fuel prices further to bring them up to international levels. But beyond that, such programs should be avoided.

If the ultimate goal is to help the poor and reduce poverty, the government should never resort to income transfers. It can use other more productive programs like a "cash for work" program, which former president Soeharto applied quite successfully to develop rural infrastructure projects.

With "cash for work" programs, the government is killing two birds with the one stone: they provide the poor with work and at the same time get the infrastructure built, with the effect that our national pie is not eroded but rather expanded -- something that will benefit all of us, including the poor.