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BOHANON & CUROTT: Financial aid frees up funds for alternate uses

March 2, 2018

bohanan curottAn underappreciated principle of economics is the fungibility of resources. To give an illustration, consider young Nick, a sophomore at State U who is very close to his solicitous grandmother, Nanna.

Nick has two vices: eating oversized hamburgers and smoking Marlboro cigarettes. Nanna approves of the first but strongly objects to the second. Nick has a modest income of $20 a week. Both burgers and smokes cost $5 a pop, and he consumes two burgers and two packs of cigarettes per week. In a fit of generosity, Nanna informs Nick she will, forthwith, send him $10 a week, but with the proviso he “not spend it on those nasty cigarettes.”

Nick is delighted and assures Nanna he will not spend her funds on smokes. Being a bit old-fashioned, Nanna sends him an actual $10 bill every week, which Nick dutifully places in a jar in his dorm room. He uses it only for burgers, two a week. However, he now uses his other $20 to buy one additional hamburger and three packs of Marlboro’s. While Nick dutifully dedicates the crisp Hamilton to Nanna’s intended purpose, the effect of Nanna’s gift is to increase his cigarette consumption. You see, Nanna’s $10 is fungible. Note that if Nanna sent him $10 in coupons redeemable only at his favorite burger joint, the impact would be the same: The coupons are also fungible.

There are plenty of applications of fungibility to public policy. Suppose North Korea suffers a domestic famine. Pictures of starving children lead us to donate to a fund that gives the North Koreans rice and medicine—and only that. We assuage our conscience—we are feeding hungry Korean kids but not supporting the regime’s perfidy. NOT! Our gift inevitably frees North Korean resources from rice and medicine production, allowing Mr. Kim to build more bombs.

Closer to home, the $100 of food items we donate to the food pantry surely goes to the plates of struggling families. True enough—but it also likely frees up the struggling household’s limited cash resources, allowing them to keep the cable TV connection. You see, “Feed hungry kids” has more donor appeal than, “Keep kids watching The Disney Channel.”

In all three cases, “food aid” increases food consumption but also increases the consumption of non-food items. Is the gift worth it? Only Nanna knows, but she should have no illusion as to the facts of the matter!•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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