Does Burning Your Money Make You Poor?

Does burning your money make you poor?  Almost everyone responds, “Obviously.”  And in a sense, it is obvious.  If you take all your money and burn it, you’ll be hungry and homeless as a result.  QED.

In another sense, though, burning money might not change a thing.  How so?  Suppose if you don’t burn your money, you flush it down the toilet instead.  Empirical researchers who look will detect zero effect of burning money on your standard of living.  Why?  Because your Plan B is just as impoverishing as your Plan A.

As far as I know, no researcher bothers to study the connection between burning cash and living in poverty.  But researchers do study analogous issues, like: Does becoming a single mother lead to poverty?  At least according to some studies, once you adjust for preexisting characteristics, women who have kids out of wedlock are no poorer than women who don’t.

How is this even possible?  You have to think about what single moms would have done if they hadn’t gotten pregnant.  Maybe they would have just spent more time hanging out with irresponsible boyfriends and partying.  If so, researchers will detect no effect of single motherhood on poverty.

There’s nothing literally wrong with this result, but it is easily misinterpreted.  Key point: Most people who affirm that “Single motherhood causes poverty” tacitly assume a more elaborate counter-factual.  Something like: “Continuously working full-time without getting pregnant.”  And if that’s the counter-factual, “Single motherhood causes poverty” is almost as undeniable as “Burning money makes you poor.”  Empirical research can and occasionally does disprove common sense.  But more often empirical research just addresses a different but superficially similar question.

The post appeared first on Econlib.