Guaranteed income can lower household spending while reducing debt

A new study of a guaranteed-income program in Compton, California, finds that regular cash payments from the government to low-income households during the COVID pandemic improved recipients’ perception of housing security while reducing household spending. The research suggests that households may have used the money from the program to pay down debt. 

The two-year study, published Dec. 10 by the National Bureau of Economic Research (NBER), began in December 2020 with the Compton Pledge, an effort by then-mayor Aja Brown and the nonprofit Fund for Guaranteed Income to alleviate economic hardships caused by the COVID pandemic. The program provided $500 per month on average to 698 randomly chosen low-income households over a two-year period – a roughly 20% increase in monthly household income. A control group of 1,402 households received no transfers. 

Unlike universal basic income programs, which are meant to reach all people regardless of wealth or need, guaranteed income programs provide unrestricted, recurring payments to individuals or households most in need of cash. Some researchers have theorized that such programs in some regions could help achieve environmental goals by eliminating the need for communities to, say, cut down a forest to sell timber or graze cattle. Others have argued that more income could lead to more consumption and all the emissions that historically have come with it.

In the United States, low-income communities are among those most vulnerable to impacts from climate change or pandemics. “Providing cash transfers, which can be flexibly spent as needs arise, could be one strategy for increasing the resilience of individuals and households to a range of stressors,” said Sara Constantino, an assistant professor of environmental social sciences at the Stanford Doerr School of Sustainability and author of the NBER study.

In describing the motivation for the new study, Constantino said, “There is robust evidence of the positive effects of unconditional cash transfers on consumption, income, food security, psychological well-being, and child outcomes in many parts of the world, mostly in middle- and low-income countries. But the evidence base in the U.S. – a very different context – is limited.” 

18 million U.S. households were food insecure in 2023.

Frequency matters

Half the households in the guaranteed income group were paid twice per month, and the other half just once per quarter. Eighteen months into the program, the researchers interviewed 1,074 recipients and control group participants to assess the effect of the cash on a range of economic and social factors: income, expenditures, asset accumulation, debt, workforce participation, and psychological, financial, and food security. 

“This is the first U.S. guaranteed income study to assess whether impacts vary depending on how often transfers are received – specifically, whether small-yet-frequent or larger-and-lumpier payments work better for the recipients,” said Constantino, who co-authored the study with Sidhya Balakrishnan of the Jain Family Institute, Sewin Chan and Jonathan Morduch of New York University, and Johannes Haushofer at the National University of Singapore. 

The researchers found a greater decrease in credit card debt among households receiving twice-monthly transfers compared to those receiving quarterly payments.

Marked impacts

While critics of guaranteed income caution that direct, unrestricted money will negatively affect recipients’ desire to work, the authors of the new study found that cash transfers did not significantly affect participation in full-time work. They found a slight decline, however, in workforce participation among recipients working fewer than 20 hours per week at the start of the program.

The payments were distributed from February 2021 to April 2023, a period when unemployment had risen sharply and incomes declined nationwide. Excluding the cash transfers, average monthly incomes for households in the program were $333 lower than those of households in the control group. In the context of pandemic recovery, however, Constantino emphasized that this reflects smaller or slower income increases among recipients during the economic recovery from the pandemic. 

The researchers found recipients spent an average of $302 less per month than control households. At the same time, average non-housing debt balances for recipients declined by almost $2,200 over the 18 months, suggesting that households may have used the additional income to pay down debt, though this decrease was not statistically significant.

Recipients’ sense of security

Guaranteed income recipients reported less fear of being evicted, but no significant improvements in overall psychological or financial well-being.

Some results varied by demographic characteristics of recipients. Male recipients, for example, reported larger negative impacts from cash transfers, including lower financial security, while female recipients reported improved financial security and smaller negative impacts on earned income, expenditures, and assets. 

Among single mothers, a group that experiences a high rate of poverty, income increased even before accounting for additional income from the program. Single mothers did not reduce their labor force participation, and the average number of hours worked in the paid labor force increased among single working mothers.

The study produced some surprises. First, the finding that guaranteed income reduced recipient spending differs from earlier studies, including recent research in the U.S. showing increased spending and debt in households receiving unconditional cash transfers. This could be due to high debt burdens among the study sample prior to the transfers. Second, the authors did not expect to find the timing of transfers had such limited impacts. 

In future research, Constantino is interested in exploring “anticipatory” actions, such as delivering cash transfers before extreme weather events. Additional studies could help answer whether these or other interventions may help people respond to emerging threats more effectively and recover more quickly while improving longer-term resilience.