Da Greg Mankiw, macroeconomics

Many policies aimed at helping the poor can have the unintended effect of discouraging
the poor from escaping poverty on their own. One way to help the poor is to provide them directly with some of the goods and services they need to raise their living standards. For example, charities provide
the needy with food, clothing, shelter, and toys at Christmas. The government
gives poor families food stamps, which are government vouchers that can be
used to buy food at stores; the stores then redeem the vouchers for money. The
government also gives many poor people healthcare through a program called
Medicaid.
Is it better to help the poor with these in-kind transfers or with direct cash payments?
There is no clear answer.
Advocates of in-kind transfers argue that such transfers ensure that the poor
get what they need most. Among the poorest members of society, alcohol and
drug addiction is more common than it is in society as a whole. By providing the
poor with food and shelter, society can be more confident that it is not helping to
support such addictions. This is one reason in-kind transfers are more politically
popular than cash payments to the poor.
Advocates of cash payments, on the other hand, argue that in-kind transfers
are inefficient and disrespectful. The government does not know what goods and
services the poor need most. Many of the poor are ordinary people down on their
luck. Despite their misfortune, they are in the best position to decide how to raise
their own living standards. Rather than giving the poor in-kind transfers of goods
and services that they may not want, it may be better to give them cash and allow
them to buy what they think they need most
A common criticism of welfare programs is that they create incentives for
people to become “needy.” For example, these programs may encourage families
to break up, for many families qualify for financial assistance only if the father
is absent. The programs may also encourage illegitimate births, for many poor,
single women qualify for assistance only if they have children. Because poor,
single mothers are such a large part of the poverty problem and because welfare
programs seem to raise the number of poor, single mothers, critics of the welfare
system assert that these policies exacerbate the very problems they are supposed
to cure. As a result of these arguments, the welfare system was revised in a 1996
law that limited the amount of time recipients could stay on welfare.
How severe are these potential problems with the welfare system? No one
knows for sure. Proponents of the welfare system point out that being a poor,
single mother on welfare is a difficult existence at best, and they are skeptical that
many people would be encouraged to pursue such a life if it were not thrust upon
them. Moreover, trends over time do not support the view that the decline of the
two-parent family is largely a symptom of the welfare system, as the system’s
critics sometimes claim. Since the early 1970s, welfare benefits (adjusted for inflation)
have declined, yet the percentage of children living with only one parent
has risen.
Measurements of the distribution of income and the poverty
rate are based on families’ money income. Through various government
programs, however, the poor receive many nonmonetary items, including food
stamps, housing vouchers, and medical services. Transfers to the poor given in
the form of goods and services rather than cash are called in-kind transfers.
Standard measurements of the degree of inequality do not take account of these
in-kind transfers.