By By Katherine Rodgers, Sydney A. Grissom, Lucas Hubbard, and William A. Darity Jr.
Windfall (gain): “An unexpected addition to income, for example, receiving an inheritance from a distant relative or winning a lottery”
I. Introduction
If mainstream media coverage is to be believed, then only misfortune awaits those who suddenly receive a large sum of money, via windfalls or any other purportedly undeserved shortcut to prosperity. The story of Jack Whittaker, for example, has been well-publicized as a cautionary tale: After winning a $315 million Powerball lottery in 2002, Whittaker would go on to experience a divorce, multiple lawsuits, and the overdose deaths of two family members, among other hardships (Nocera, 2012).
The notion that monetary windfalls seem to bring bad luck and foster poor decision-making is so ubiquitous that, in 2012, a popular satirical website ran a story with a simple yet brutal headline: “Powerball Winners Already Divorced, Bankrupt” (The Onion, 2012). A more recent, and more substantive, corresponding tale from the COVID-19 era is that of Sho Taguchi, the unexpected recipient of the pandemic relief budget for the entire town of Abu, Japan. After accidentally being wired 46.3 million yen, equivalent to more than $350,000 USD, Taguchi proceeded to lose the money at a casino (Ueno & Ives, 2022).
Windfalls—loosely defined here as any shock to an individual’s or household’s financial status stemming from lottery winnings, inheritances, tax refunds, dividends, government payouts, or any similar, non-primary source of “normal income”—provide ample opportunity to both question purchasing habits and subsequently (if not preemptively) allocate blame for flagrant or irresponsible spending.
This skepticism serves many purposes. First, it justifies austerity, by convincing us to assume that any additional money delivered to individuals or households will be wasted. It makes “proper” money management by the layperson appear unattainable, if not impossible, thus aiding the promotion of the professional money management industry and heightening financial inequality. Finally, dismissal of windfalls as a viable policy tool prevents the opportunity for more robust analysis of the effects of government payouts. This is tautological but important: Without systems in place that give money directly to individuals, it is impossible to understand precisely what happens when money is given directly to individuals. In this fog of ignorance, anecdotal cynicism and urban mythology easily assert dominance.
However, according to the best available evidence, it appears that windfalls can help unlock many economic doors. On a small scale, windfalls can help alleviate acute financial stress, as seen during the COVID-19 pandemic when stimulus checks and child tax credits bolstered unemployment relief. By June 2022—well after the last stimulus checks were issued in the spring of 2021, following the expiration of expanded unemployment benefits in the second half of 2021, and after the expiration of the Expanded Child Tax Credit in December 2021—more Americans reported being under financial stress than at any other point since August 2020 (Perez & Byron Campbell, 2022).
Large windfalls, including lottery wins and substantial government payouts as redress for past harms, can provide an antidote to financial stress.
Significant infusions of wealth can be transformative, by providing “a means of social mobility and solidification of social, political, and economic status,” and by breaking repeated intergenerational patterns of familial placement at the bottom of the socioeconomic distribution (Addo & Darity, 2021).
Understanding the impacts of windfalls on their recipients is an important task with both short-term and long-term policy benefits. One need only consider the turbulent conditions of the past few years to see windfalls’ potential. As the COVID-19 pandemic caused the world to collapse into unprecedented, deep economic waters, windfalls became more important and visible than ever: The potential for inheritances increased in line with rising mortality rates, Americans needed (and continue to need) income supports through government payments, and high unemployment—and a lack of economic alternatives—induced purchases at “essential” state lotteries (Allsop, 2020).
The pandemic showed how little we understand the effects of windfalls, which will continue to be relevant in the modern, volatile economy. Anytime unemployment rises, businesses fold, and rent and utility bills continue to accumulate, many people will rely on financial injections—from family, friends, and the government—to survive. How individuals respond to these injections is important in gauging their impact on the crisis.
Understanding the effect of windfalls is not relevant merely during economic downturns. In the United States, the concept of reparations for Black descendants of American slavery has grown in popularity in recent years, and there has been a notable increase in support from white Americans for such a proposal.
A 2000 survey conducted by Dawson and Popoff (2004) found that only 4 percent of white Americans supported monetary payments as reparations for Black Americans. A more recent survey suggests the proportion is now closer to 30 percent (Nteta, 2023). Since younger people are disproportionately more inclined to support reparations, it makes sense that this number will continue to climb (Nteta, 2023).
There are many criticisms of monetary payments as reparations. Common arguments include: these windfalls would be wasted, they would not improve the financial situation of Black Americans, and they might even leave Black Americans worse off (Nance-Nash, 2021; Harrison, 2022). Widely held, inaccurate, and racist beliefs about dysfunctional financial behavior of Black Americans as the foundation for racial economic inequality leads to a conclusion that monetary reparations will be ineffective in eliminating the gap. According to this perspective, if eligible Black Americans do not change their financial mindset and behavior after receiving financial reparations, the act of restitution will be empty.
Yet, supposedly “defective” financial habits of Black Americans are not the source of Black-white wealth disparity. Rather, the disparity is a consequence of federal policies, including the racially uneven land distribution policies in the late 19th century and the racially uneven home-buying subsidy policies in the 20th century (Darity & Mullen 2020, p. 28-47). Moreover, evidence detailed in this report suggests that windfalls improve the mental and emotional well-being of recipients, enabling them to make better decisions.
Dispelling the myths that surround windfalls, and the expected outcomes of different types of windfalls, is imperative if we hope to create better policy and build a just society.
This report aims to answer a simple, pressing question: What happens when individuals and households receive infusions of money, expected or unexpected? Economists have been preoccupied with this question for a long time. In general, any paper concerning the permanent income hypothesis, first proposed by Milton Friedman in 1957, explores this question. As a result, the economics literature is ripe with relevant theoretical and empirical analyses, past and present, which allows us to provide a critical synthesis and summary of the nuanced factors affecting post-windfall behavior.
We divide this analysis into two sections: The first focuses on large payouts (such as lottery winnings and inheritances), and the second focuses on smaller payments or infusions (like income supplements or stimulus checks). Our analysis makes it clear that the evidence alleviates many popular fears surrounding windfall infusions and underscores the benefit of these payments, although the benefits are contingent on the specific circumstances of the recipient and the form and size of the windfall. We conclude with thoughts on the future role of windfalls, and what they could provide as the nation considers responses to the ongoing economic crisis and beyond.
(See report here: https://rooseveltinstitute.org/publications/understanding-the-effects-of-windfalls/)
About the Author New York Trend is a weekly news publication that focuses on issues and lifestyles of the African & Caribbean American communities throughout the New York metropolitan area and Nassau and Suffolk Counties of Long Island. It is a respected and well recognized news publication that has been in existence since 1989. Owner, Publisher and Executive Director, Dr. Teresa Taylor Williams has been at the helm of this award-winning publication since its inception. New York Trend continues to be the only black woman-owned, metropolitan newspaper in New York and Long island. New York Trend is the largest black-owned newspaper throughout Nassau and Suffolk counties. |