Last week, The Washington Post's Max Ehrenfreund caught a Reddit thread that reveals how brutally simple it is to eradicate American poverty, and yet how muddled American policy-making can be on the subject.
In short, if you’re poor in America, the economy works in a fundamentally different way than if you have means: rather than giving you opportunities to build up savings and capital, it treats you as an unending source of regular small-bore profit, bleeding you for what little you have.
The thread — essentially a chronicle of stories from impoverished Americans — included experiences like buying a cheap $15 pair of shoes at Walmart, and then having to repair them again and again, because poor people are rarely, if ever, able to afford the one-time $60 expense for good shoes. Or buying paper towels one roll at a time, rather than in bulk, because the poor can’t afford the latter — ultimately leading them to “actually pay more than others for common staple goods.”
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Then there’s the proliferation of rent-to-own stores: the American poor can't afford to drop a one-time payment of $1,500 on a sofa, but they can afford monthly installments of $110 that ultimately add up to over $4,500 for a sofa over time.
At a presentation to the conservative American Enterprise Institute (AEI) a few months back, journalist Megan McArdle provided similar examples: if you’re poor, you can’t afford the deposit on an apartment, so you rent out a hotel or motel room per week for less, which winds up costing way more over the long haul. Or you buy a $500 car that needs repairs every few months, because you can’t afford the more reliable $8,000 car.
Perhaps most perversely, poorer Americans are so cash-constrained and have so few opportunities to save, that many banks don’t even see the point in opening in their area. A combined 68 million Americans have either no access to traditional banking services, or limited access. Instead, to cash checks or take out loans, they rely on a mishmash of pawn shops, payday lenders, and other unsavory firms, who cumulatively suck up an enormous portion of poor Americans’ incomes through user fees and exorbitant interest rates.
McArdle’s speech is especially interesting, since she emphasizes the ways poor people adapt to communal scarcity by establishing really strong reciprocal sharing norms. It operates as a form of insurance: if one person has a good month, she will help out family and neighbors, on the assumption the social network will reciprocate when she is having a bad month. But this also comes with consequences. It means poor people often give up good opportunities that come along — say a shot at college, or a better job with benefits — to help others. Or they lose any savings they’ve built up by giving it to friends and family, thus preventing them from ever accumulating capital.
The point is that scarcity has its own relentless internal logic. Whether it’s firms in the private market trying to figure out ways to get goods and services to the poor that will actually turn a profit, or the social adaptation of the poor themselves, scarcity shapes negative feedback loops around itself that perpetuate poverty.
But McArdle also illustrates how short-sighted people have become in trying to design policy to break these impasses. She recommends redesigning IRAs and the Earned Income Tax Credit to essentially short-circuit the sharing impulse — to use policy to goad the poor into practicing a certain bourgeois selfishness.
A smarter approach would be to simply acknowledge that a lack of capital is the underlying problem here, and thus the solution should be to flood these communities with, well, capital.
The first thing the poor need is a place to park their capital when they get it. But if the private sector is unable to provide banking and credit in a manner that isn’t destructive, then the rather obvious answer is to have the public sector provide them. David Dayen has already done yeoman’s reporting laying out how basic banking services could be layered atop the current infrastructure of the United States Postal Service. The proposals — including one backed by the Postal Service’s own inspector general — encompass basic checking account and debit card services, the provision of savings accounts, and small-dollar loan services. Post offices already exist in many of the poorer areas traditional banks have abandoned, and the Postal Service actually served a similar function through much of the 20th century. It could provide these services for just 10 percent of what pawnshops, check-cashers, and payday lenders charge for them.
Next, the poor would need something to put in their savings accounts. A universal basic income — a regular check from the government with no strings attached — could provide a modest bit of non-market income as a cushion against day-to-day expenses, while extra allotments could be added for families with children. And current tax credits could be expanded (or replaced with wage subsidies) to bulk up the income people get from their jobs. The Democrats have already proposed such an expansion, including a bonus if people sock a certain portion of the money from the credits into savings. Between those multiple streams of cash and the bonus, people in impoverished areas would hopefully be able to start building up at least some capital.
In fact, policy-makers could go ever further: Norm Ornstein has suggested simply providing every American with a modestly stocked savings or investment account at birth, which could then be drawn upon for critical pivot points like buying a home or a car or paying for an education. That, too, could be folded into a public banking system.
Finally, the most straightforward way to ensure impoverished areas have a job market would be a jobs guarantee: using federal finance, in coordination with local communities and nonprofit organizations, to provide jobs.
Taken together, these policies could give Americans a cushion against the relentless extractive logic of life in impoverished areas, while helping them begin to build up savings, and attracting enough economic ferment to encourage private sector job growth. If the problem with these areas is a lack of capital so desperate that any savings are immediately dissolved and dispersed, like a drop of water hitting a totally dry sponge, then the most obvious answer — however radical — is to simply soak the sponge.
