The Poverty is the Point
Poverty
Matthew Desmond, author and sociologist, wrote this very good piece in the New York Times, an adapted essay from his forthcoming book (which published this week). The question he attempts to answer in both places is: why do so many Americans remain poor, despite the country’s profligate anti-poverty spending?
I enjoy reading things that challenge my previously held views on a topic. The typical, knee-jerk, left wing response to America’s poverty problem would be: Wealth inequality! We don’t care about our poor! Something of that nature. Much ink has been spilt - in these very pages - about America’s crumbling safety net. But, we have a lot of money, and it turns out we spend a lot of money trying to combat poverty, so where the hell does it all go?
Desmond tried to find easy answers, and came up short:
Throughout Reagan’s eight years as president, antipoverty spending grew, and it continued to grow after he left office. Spending on the nation’s 13 largest means-tested programs — aid reserved for Americans who fall below a certain income level — went from $1,015 a person the year Reagan was elected president to $3,419 a person one year into Donald Trump’s administration, a 237 percent increase.
Even adjusting for health care spending, we’ve more than doubled the amount we spend on ‘poverty’ in America in the last forty years. Yet the poverty rate has remained stubbornly high. We spoke last week about programs like SNAP that have been cut - but it’s worth remembering, they were supercharged during the peak of the pandemic. They should have still been effective at the prior baseline, but it took a huge infusion of cash to move the needle in the right direction.
There are clear examples of ‘welfare’ programs that hardly benefit the poor - we’ve talked about TANF, and how states have perverted its original intent:
Nationwide, for every dollar budgeted for TANF in 2020, poor families directly received just 22 cents.
But SNAP and Medicaid provide billions a year in direct assistance:
Roughly 85 percent of the Supplemental Nutrition Assistance Program budget is dedicated to funding food stamps themselves, and almost 93 percent of Medicaid dollars flow directly to beneficiaries.
States do often make it onerous to get and keep federal benefits, but there’s no denying that for the millions who receive them, they should be helping more than they are. Rather than focusing on the many ways our safety net fails the most vulnerable, Desmond explores another theme we’re quite familiar with around here, namely: the exploitation of the poor for profit.
Rent
We talk a lot around here about rent, which can cost an outsized percentage of a poor person’s income:
Rent has more than doubled over the past two decades, rising much faster than renters’ incomes. Median rent rose from $483 in 2000 to $1,216 in 2021. Why have rents shot up so fast? Experts tend to offer the same rote answers to this question. There’s not enough housing supply, they say, and too much demand. Landlords must charge more just to earn a decent rate of return. Must they? How do we know?
A threefold rent increase to a person struggling to earn a living can be untenable. The ‘safe’ recommended amount of income to spend on rent is 30%, but surveys regularly find many families spending half their earnings on rent. Controlling for income, rental pricing for the poor is actually much higher relative to home value than for well-off renters:
A study I published with Nathan Wilmers found that after accounting for all costs, landlords operating in poor neighborhoods typically take in profits that are double those of landlords operating in affluent communities.
[…]
But in many cities with average or below-average housing costs — think Buffalo, not Boston — rents in the poorest neighborhoods are not drastically lower than rents in the middle-class sections of town. From 2015 to 2019, median monthly rent for a two-bedroom apartment in the Indianapolis metropolitan area was $991; it was $816 in neighborhoods with poverty rates above 40 percent, just around 17 percent less. Rents are lower in extremely poor neighborhoods, but not by as much as you would think.
Yes! If you’re renting a ‘cheap’ house or apartment that may have cost it’s owner twenty percent of a home in a nicer area, you’re not paying twenty percent of the rent, you’re paying eighty percent, allowing them to pocket double the profits.
What options do the poor have? If they’ve been evicted from a prior property for any reason, they likely can’t pass the credit and background check requirements to rent from a corporate landlord - who’s busy using algorithms to artificially inflate rent anyhow. They rent from slumlords because they have no other options - a landlord who won’t run your credit but will charge you two times market rate for your apartment. What a deal! It’s no accident certain prolific landlords made their fortunes in tenements and slum apartments.
Unfortunately, solving the rent crisis isn’t as simple as raising wages. Landlords use any wage gains as an excuse to greedflate the rent:
A 2019 study conducted by the Federal Reserve Bank of Philadelphia found that when states raised minimum wages, families initially found it easier to pay rent. But landlords quickly responded to the wage bumps by increasing rents, which diluted the effect of the policy. This happened after the pandemic rescue packages, too: When wages began to rise in 2021 after worker shortages, rents rose as well, and soon people found themselves back where they started or worse.
Wage gains and any other sort of direct cash assistance often end up in the pockets of landlords, because poor folk typically don’t own homes, and are completely at the mercy of ‘market’ prices dictated arbitrarily by rent seekers. Most municipalities have scant protections for renters, or ways to prevent onerous rent hikes - the penalty for these violations is often mild and fighting abuse requires access to a tenant lawyer, meaning landlords can flout local regs with little to no penalty.
Banking
Let’s talk bank fees:
In 1977, over a third of banks offered accounts with no service charge. By the early 1990s, only 5 percent did.
As interest rates fell, banks turned to fees to make money. Charging customers a monthly fee while earning money on their deposits and returning at or near zero percent interest is a good gig, if you can get it. Then, with the advent of the overdraft, banks had a new revenue stream:
…in 2021, the largest banks in America charged customers almost $11 billion in overdraft fees. Just 9 percent of account holders paid 84 percent of these fees. Who were the unlucky 9 percent? Customers who carried an average balance of less than $350.
Like housing, the wealth extraction comes at the poor’s expense. Banks charge exorbitant fees because they can:
In 2021, the average fee for overdrawing your account was $33.58. Because banks often issue multiple charges a day, it’s not uncommon to overdraw your account by $20 and end up paying $200 for it.
We have talked about how many of the big banks are reducing or doing away with overdraft fees entirely, but that is a recent development, and they’ve pocketed hundreds of billions of dollars over the last couple decades, mostly from the poor.
When those same poor can’t pay the fees, they’re added to blacklists like ChexSystems that can block them from opening new accounts at any of the more ‘reputable’ banks. This forces them into the hands of predatory subprime banks, or no bank at all, which carries its own set of costs:
In 2020, Americans spent $1.6 billion just to cash checks.
The approximately seven million Americans without a bank account had a billion and a half dollars extracted by for-profit check cashing companies for simply turning a piece of paper into a handful of bills.
No bank account likely means no credit or debit cards, which likely means low or no credit score. The three for-profit credit agencies are happy to track things like liens, bad debts, collections, or bankruptcies, but rely purely on data submitted to them by the same extractive industries preying on the poor. No or low credit can prevent people from getting jobs, renting apartments, buying insurance, renting a car, or avoiding huge deposits on basic necessities like gas or electric. It’s no accident the slumlords prey on the unbanked and people with poor credit - they’re the housing of last resort.
Not to mention, poor credit means you don’t have easy access to cash if the unexpected happens - the latest emergency savings report is dire, with more than two thirds of people saying they live month-to-month and would be unable to cover living expenses if they lost income. When those folks have unexpected bills, they often turn to the only industry that’ll provide them with money - payday loans.
In the 1980s, bank deregulation meant payday lenders could charge up to 700 percent interest on short term loans:
The annual percentage rate for a two-week $300 loan can reach 460 percent in California, 516 percent in Wisconsin and 664 percent in Texas.
Payday lenders are the most extractive of the industries feeding off the poor, turning insane profits on meager amounts of money:
The average borrower stays indebted for five months, paying $520 in fees to borrow $375.
Despite the industry’s reputation, most payday borrowers pay the loans back, meaning that the lenders could charge much less and still be wildly profitable. They charge more because they can, because governments won’t regulate their greed, and because a large swath of the country is precipitously close to financial ruin.
The big banks profit from it too, even if they don’t plaster their names on the storefronts. Wells Fargo and JPM both bankroll payday lenders. It’s a completely legal, highly lucrative business, why wouldn’t they?
Even if banks don’t feel comfortable backing reputable-sounding companies like Cash America, they’ve got the latest subprime lending gimmick - BNPL. In 2021, BNPL companies originated $24 billion dollars’ worth of loans, and despite lenders charging both merchant and borrower, they’ve been unable to make enough money to overcome their excessive marketing fees and rising defaults. But, like payday loans, most BNPL borrowers do repay their loans, but unlike payday loans BNPL is ubiquitously integrated with major e-commerce retailers, touting risk-free purchasing and encouraging lower income Americans to take on even more debt, often for small ticket luxury purchases they don’t need.
The financial industry alone is responsible for such comprehensive theft from the poor it’s difficult to grasp:
Every year: almost $11 billion in overdraft fees, $1.6 billion in check-cashing fees and up to $8.2 billion in payday-loan fees. That’s more than $55 million in fees collected predominantly from low-income Americans each day — not even counting the annual revenue collected by pawnshops and title loan services and rent-to-own schemes.
Tack on the BNPL, subprime car loans, and all the other ways finance extracts the meager savings of the country’s most vulnerable, and its no wonder that even when the government puts money directly in the pockets of Americans during a crisis, they’re quickly back under water.
Inflation
Desmond’s essay doesn’t directly address cost of services as a hidden tax on the poor, but a recent blog does a great job of splitting out the actual cost increases by industry. More people in America make a ‘low’ wage than any other developed country - nearly 23 percent. They still have to pay for goods and, critically, services to live day to day.
The most obvious costs on the adjusted inflation chart are hospital services - often used by the uninsured, who don’t have a physician - water and sewage, vehicle insurance, vehicle repair, day care, and…rent!
We’ve talked at length about hospitals and why they continue to be expensive and the quality of care continues to get worse. Utilities, car loans, day and nursing care all continue to increase in price. And what does the country’s large swath of low wage workers have to show for the last forty years’ economic growth? Flat or declining pay:
For several decades after World War II, ordinary workers’ inflation-adjusted wages (known as “real wages”) increased by 2 percent each year. But since 1979, real wages have grown by only 0.3 percent a year. Astonishingly, workers with a high school diploma made 2.7 percent less in 2017 than they would have in 1979, adjusting for inflation. Workers without a diploma made nearly 10 percent less.
So these critical services cost anywhere from one to two times as much as they did twenty years ago, and workers may be making six percent more than they did in the year 2000. Not great!
To make matters worse, our government is currently engaged in an escalating war against ‘inflation’ and has raised interest rates making buying or leasing a car, buying a home, or doing anything that requires financing significantly more expensive for the people who could hardly afford it before. The Consumer Price Index, the guidepost the Fed uses for inflation has rent as one of its key metrics - a cost completely untethered from economic conditions and instead set by the aforementioned greedy landlords. So the Fed’s reaction to a CPI inflated by profiteers enables the very same profiteers to raise prices on consumer goods and services, citing inflation (it’s a great cover for layoffs, too). I feel like I am losing my mind.
Solutions
We don’t often deal in solutions here, but Desmond suggests a few worth considering - not because there’s any hope our gridlocked government full of wealthy elites will do any of them, obviously. It’s just nice to imagine.
#1 - Organizing:
Sectoral bargaining, as it’s called, would affect tens of millions of Americans who have never benefited from a union of their own, just as it has improved the lives of workers in Europe and Latin America.
Sectoral bargaining does what it says on the label - an entire sector could be represented by union leadership, who would negotiate on behalf of, say, all hotel workers in the country, rather than the piecemeal approach we currently have that favors companies seeking to break up and block unions.
#2 - Housing
Public housing provides affordable homes to millions of Americans, but it’s drastically underfunded relative to the need.
[…]
We could also pave the way for more Americans to become homeowners, an initiative that could benefit poor, working-class and middle-class families alike — as well as scores of young people.
Banks do not want to issue low dollar mortgages because they don’t make as much money on them. We do have a small dollar federal home loan program but it applies only to rural buyers - the 502 Direct Loan Program is run by the Dept of Agriculture and has placed more than two million families into homes. Extending a program of this type to urban areas would provide a path to wealth building for those currently excluded, at little cost to the government.
Public housing with stabilized rents would drive down rental prices across the board, and other taxes and regulations could force predatory landlords to play by the rules, preventing them from profiteering off the poor and vulnerable.
#3 - Banking
Banks should stop robbing the poor and near-poor of billions of dollars each year, immediately ending exorbitant overdraft fees.
[…]
States should rein in payday-lending institutions and insist that lenders make it clear to potential borrowers what a loan is ultimately likely to cost them.
Some banks are on the right path fees-wise, but the rest will not necessarily follow suit without government intervention. Payday lending, rent-to-own, BNPL, and so many other industries taking advantage of local lobbying and lax state regulation, should be brought under federal mandate and forced to play fair.
As Desmond points out, we pay more into poverty programs than any of our peers, and have worse outcomes, because we’re dumping money into the top of a funnel that doesn’t actually end up in needy bank account (if they have them) because it’s swiped by so many profiteers along the way.
Short Cons
POLITICO - “What democracy does not mean, Lowenstein argued, was “plebiscitary democracy,” or simple rule by democratic majorities. Citing the Federalist Papers — the namesake of the Federalist Society — Lowenstein suggested that governance based on simple mathematical majorities would enable “tyrannical domination of the minority by the majority.” ”
WaPo - “In interviews, former Tesla employees who worked on Tesla’s driver-assistance software attributed the company’s troubles to the rapid pace of development, cost-cutting measures like Musk’s decision to eliminate radar — which strayed from industry practice — and other problems unique to Tesla.”
WSJ - “In a survey of more than 1,000 hiring managers last summer, 27% reported having job postings up for more than four months. Among those who said they advertised job postings that they weren’t actively trying to fill, close to half said they kept the ads up to give the impression the company was growing…”
NYT - “If China wants to obtain data about U.S. residents, it can still buy it from one of the many unregulated data brokers that sell granular information about all of us. If China wants to influence the American population with disinformation, it can spread lies across the Big Tech platforms just as easily as other nations can.”
NY Mag - “There is nobody else in crypto quite like Arthur Hayes, especially because the industry’s biggest personalities keep theatrically imploding.”
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