Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


How Digital Wallets Could Help the Poor and Reduce the Cost of Government

Digital wallets like PayPal’s Venmo, Apple Pay, Google Wallet, Square, Xoom (NASDAQ: XOOM), and Softcard could help the poor and reduce the cost of government at the same time.

Bill Gates has pointed out that governments like to make payments to the poor but often have a hard time doing so. He noted that one of the major problems facing the poor is that they don’t have financial products working for them. Gates has said he wants to set up a digital payment system for the world’s poor.

The problem is that under traditional welfare schemes like Food Stamps, now euphemistically called the Supplemental Nutrition Assistance Program, or SNAP, recipients have to apply to a bureaucracy, get evaluated, and receive aid directly through the government. This process, as anybody who has ever dealt with it knows, can be time consuming.

I remember it took me longer to apply for unemployment insurance in Colorado than it did to set up this website. A poor person that needs such aid may have to take a long bus ride to a government office, spend several hours waiting to see a bureaucrat, then wait for weeks for the benefit to start arriving, if it comes at all.


This system is good for bureaucrats because it provides them with plenty of high-paying jobs with good benefits in comfortable offices where they do not have to work very hard. It is often bad for the poor, a lot of whom simply refuse to participate because of the time and effort involved and bad for taxpayers, who end up paying the bureaucrats’ salaries.

To make matters worse, these systems often do not work. Remember the Obamacare websites and exchanges. In Colorado, the Food Stamp cards issued by the state did not work a few years ago. It took the state years to get a simple computer system up and running.

Digital Wallets and Guaranteed Income

Digital Wallets could provide an interesting alternative to this system by giving government a means to send cash directly to the poor. Since most poor people have or could easily buy a smartphone, the government could simply disperse the aid to an app such as Venmo or Apple Pay. This would eliminate the paperwork, and it could be used to greatly reduce the bureaucracy.

One solution would be to set up a guaranteed income scheme that would disperse specific amounts of money to digital wallets of individuals under a certain income level. We already have such a scheme in place in the U.S. in the form of Social Security for the elderly and disabled.
Eligibility for the system could be determined by income tax returns. All a person would have to do would be to file an income tax return; since there are income tax preparers in virtually every shopping center in America, it wouldn’t be hard to reach the poor with the system. Such a system would probably reach a lot of poor people that normally avoid the social services bureaucracy like the plague. The working poor in particular are often unable to take time off work to apply for benefits.

One benefit of this system could be to eliminate the state welfare bureaucracies. This could reduce the size and scope of state government and help Americans regain mobility.

Many poor people are afraid to move to areas with better climates or more job opportunities because of the time and effort invested in the local welfare bureaucracy. It can take months to get signed up for benefits and even longer to receive services such as public housing. Simply moving to another county can cost such a person his or her income; moving to another state can be an unthinkable dream for such people.

Instead of a massive bureaucracy to disperse the money to the poor, we could use a combination of the present banking system and digital wallets to disperse the money, much as Social Security uses the present day banking system. Since the system could be used at any business that took digital wallet payments, it could act as a direct economic stimulus.

This would, as Mr. Gates has pointed out, have the added advantage of getting the poor involved in the banking system. One of the biggest problems facing the poor in the United States is that a lot of them are effectively shut out of the financial services system. One reason why these people stay poor is because they lack the means to save money, receive payments, or get credit.

How the Social Services Bureaucracy Would Strike Back

There would be massive resistance to such a scheme from the social services bureaucracy, its apologists in the media and academia, and the Democratic Party. One of the Democrats’ main constituencies these days is government employees or bureaucrats. Indeed, one of the real motivations behind Obamacare seems to be expanding the size and scope of the social services bureaucracy and the number of bureaucrats or potential Democratic voters. I could think of several ways of expanding health insurance to the poor that wouldn’t have required the kind of massive bureaucracy Obamacare is trying to inflict upon us.

There would be two major arguments that the bureaucrats and their allies would use to defend the status quo. The first is that the bureaucracy is needed to prevent fraud and make sure only the truly needy receive benefits. The second is that there are some dysfunctional people, such as the severely disabled, who might not be able to participate in the system.
The first argument against this is that there are means of detecting fraud that do not involve a bureaucrat looking at every application. One is sampling, in which a person or a computer algorithm picks out cases at random and examines them for signs of fraud. A second would be an algorithm that scans cases for the signs of fraud and pegs those cases for examination. Such means could be cheaper and more effective. One interesting question to ask the bureaucrats is how does the credit card industry detect fraud? Perhaps such methods could be applied to the welfare system.

The second argument is even easier to dispose of for four reasons:

  • The number of severely dysfunctional people in society is very tiny. Despite what social workers think, the vast majority of poor people function fairly well in society. They do not need help or guidance from bureaucrats; they need money to pay bills or buy food. The system needs to be designed for the majority of users, not a tiny minority.


  • Most severely dysfunctional people are cared for by their families or friends. Under a guaranteed income scheme, the disabled person’s payment could be dispersed to the dysfunctional person’s legal guardian.


  • Our present system, as the number of homeless sleeping on our streets indicates, does a very bad job of serving the severely dysfunctional. In Colorado, the newspapers and television stations treat us to human services horror stories on a regular basis, usually about once a month. The most outrageous story involved a social worker who placed at-risk children in a home with a convicted child molester.


  • The severely dysfunctional persons that don’t have families could be cared for by charities or church groups. Those organizations would simply receive the payments.


Interestingly enough, a system that changes the focus of the social services infrastructure from “evaluating the poor” to caring for those that cannot care for themselves might be more effective than our present status quo. Social services resources could be redirected to monitoring the severely dysfunctional and making sure they are safe and cared for rather than harassing the poor with paperwork.



It is time that we started thinking of ways of using new technology to address the problems of income inequality and poverty. We should also start using 21st Century solutions for 21st Century problems; using 20th Century solutions such as the social services bureaucracy will only inflict more hardship upon the poor.

Disclosure: The Author own shares of eBay Inc. (NASDAQ: EBAY), which owns PayPal.