FAIR MONEY

Face to Face with Inequality


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Carrying Life in a Backpack

2014 marks the anniversary of LBJ’s War on Poverty.  50 years later, in a series on American hardship, Trip Gabriel writes about entrenched rural poverty in his article “50 Years Into the War on Poverty, Hardship Hits Back”. The article is a heartbreaking look at how government has failed the rural poor in Appalachia, a place where economic opportunities are scarce and roughly 47% of the population relies on social security as their only personal income. Their story reflects that of many, disenfranchised and disinvested in across the United States, as the Unconditional War on Poverty waned in popularity, leaving young people with little hope and few options. As Donald Bolden, quoted in the article, says, “‘Ain’t that a shame: I’m 30 years old and carrying my life around in a backpack.’”


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Affirmative Action the Conservative Way

Evan Mandery points out that so-called “legacy” preferences in college applications can be worth about 150 points on the SAT’s to the privileged applicant whose privileged parents got in to the elite schools before the competition got really stiff. I think non-legacies should start thinking about bringing suit for being excluded unfairly despite their own hard work.


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Marshmallows for Grownups

In a recent New York Times article, Shaila Dewan wrote that “Encouraging low-income people to borrow money, and then to get a credit card enabling them to borrow more, may seem counterintuitive or even a little risky.”

It’s not at all counterintuitive if you realize that credit is doled out based on a version of the famous marshmallow test: those disciplined souls who can refrain from using the credit that they have are worthy of more credit. Or: much shall be given to those who have their needs and desires under a tight rein. I recently learned that if you use 15-45% of the credit that you have, your FICO score goes up. Now, some people will be able to game this really easily. You can shut down a credit card if you are low in the “approved range.” You can open another credit card account if you’re a little on the high side. These are just cosmetic changes and can’t have any real bearing on your power to repay any additional debt. All the same, I’m fairly confident that it will turn out to be true that those who have the wherewithal to manage their spending to stay in the credit usage band will turn out to be more financially successful and able to repay debts in the long run. Consider the following reasons:

  1. Their needs and their income are reasonably matched, so they are in a pretty sustainable pattern. (That is, most of them probably don’t have to consider that the marshmallows lying on the table may be the only way to feed their kids today.)
  2. They get really inexpensive credit and so they can buy a house, get a boat, start a business, and so on, without taking scary risks, like poor people with low credit scores have to do.
  3. The probability that a health-related expense will have brought them to their knees is probably also quite a bit lower, as they are more likely to be in jobs with decent health plans attached.  (Perhaps the Affordable Care Act will rejigger the equations a little bit here.)

Given the financial regime we live under, getting poor people to improve their credit rating by showing that they have the discipline to leave the marshmallows on the table makes perfect sense. They probably are a better bet to repay whatever credit they use than the poor devils who are daily trying to figure out which bill they can pay this week and whether they have enough gas to swing by the food pantry.

I suspect that it’s nevertheless highly “counterintuitive” (as per Dewan) because there is something very squirrelly about the ethics of the case. It is cruel to dangle money in front of folks who desperately need it and then reward them for not spending it. It is just another example of levying a surcharge on poor people for being poor. Punishing and further impoverishing the poor doesn’t sound quite right to most of us, even if we are willing to concede that the logic of the financial institutions getting wealthier by this mechanism have a corner on the publicly recognized logic.

I think this is why the vast majority of parents fail to raise their kids by the general principles brought to bear by the financial institutions that rule much of our lives. I have only ever run into one person, an Ethiopian, who had received parental training that prepared him for this reality. His parents gave him an allowance in the same spirit that we receive credit cards–if he spent it, he would be grounded. While this young man thought that he had learned something useful from his frequent punishments, he didn’t think he would raise his own kids that way.

We may bow to the power of the banks in the management of our financial affairs and in our social judgment, but our intuition tells us pretty clearly that setting traps for the most vulnerable among us is no way to treat people.


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How about that post office?

Mehrsa Baradaran, a law professor with an interest in the “social contract” underlying the financial industry, proposes that the post office start offering financial services to the underbanked.  It makes sense, she says, because the postal service has a presence in neighborhoods that commercial banks have pulled out of. It’s the best idea I have heard of to apply positive pressure on the subprime financial services industry and change the competitive landscape those services operate in.


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Educational Inequality and Increasing Social Rigidity

In a New York Times op-ed on the self-reinforcing nature of inequality, Robert Frank writes “perhaps the most import new feedback loop shows up in higher education. Tighter budgets in middle-class families make it harder for them to afford the special tutors and other environmental advantages that help more affluent students win admission to elite universities. Financial aid helps alleviate these problems, but the children of affluent families graduate debt-free and move quickly into top-paying jobs, while the children of other families face lesser job prospects and heavy loads of student debt. All too often, the less affluent experience the miracle of compound interest in reverse.” (See full article, The Vicious Circle of Income Inequality.) What does that mean for higher education? Frank proposes that “we’ll want to think more creatively about public policies that might contain” any of the feedback loops that increase inequality. How about a little more self-scrutiny and creative thinking on the part of institutions of higher education?


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Wretched Refuse of our Teeming Shore

The National Bureau of Economic Research recently released a study of the impact of contingent faculty at Northwestern University on student outcomes, concluding that they did better than their tenure-track counterparts. “We find consistent evidence that students learn relatively more from non-tenure line professors in their introductory courses,” the authors write. They also found that students in classes taught by contingent faculty are more likely to take another class in the same subject. Most interestingly, these differences “are particularly pronounced for Northwestern’s average students and less-qualified students.”

A couple of data points are in order:

1, There are more contingent faculty than tenured and tenure-track faculty in American universities, and they account for the overwhelming majority of courses taught.

2. At many universities, contingent faculty make at or even below the minimum wage. They typically receive a set amount per course–a pittance more often than not–that bears no relationship to the work required to do the work.

Bully for them that they are actually better teachers, and bully for the students that this be so. But exactly how does it compute that tuition has been going up by leaps and bounds year after year even as teaching happens more and more on the dirt cheap?


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Calling for Humanism

Peter Buffett has a spot-on op-ed in the New York Times today, in which he calls out the complicity of philanthropy in a culture of exploitation and inequality, by which the right hand gives a little philanthropy as a sop to problems the profit-mongering left hand has created.

Especially relevant to the mission of FAIR Money is his indictment of philanthropic financial services to the poor:

“Microlending and financial literacy (now I’m going to upset people who are wonderful folks and a few dear friends) — what is this really about? People will certainly learn how to integrate into our system of debt and repayment with interest. People will rise above making $2 a day to enter our world of goods and services so they can buy more. But doesn’t all this just feed the beast?”

Buffett says he is not calling for an end to capitalism, he is calling for humanism.

FAIR Money has started talking about what it takes to empower people (of all levels of income) to participate financially on their own terms. In Buffet’s words: what does it take to stop feeding the beast? I hope we can arrive at an answer using a thoughtful, inclusive, participatory process.


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The Moral Hazards of Too Much Money

If you think the pursuit of happiness is essentially a private affair, then recent research findings regarding the impact of inequality will make a hash of your most cherished beliefs. A Greater Good article summarizing the research on inequality points out that people are happiest and most compassionate in countries with the least inequality. And it’s not the poor who are short on compassion, but the wealthy. People who are significantly wealthier than others, it turns out, are not only less generous but also more apt to drive over hapless pedestrians who find themselves in a crosswalk when the wealthy come barreling down the street. People who are given an obvious advantage in games of monopoly still think they are brilliant and deserving when they win. Food for thought. 


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Inequality

Bill Moyers talked to economist Richard Wolff yesterday about the astonishing rise of inequality in the last 30 years. One telling fact is that peak purchasing power of the minimum wage was in 1968. Advancing inequality is astonishing not because it’s unprecedented, but because it’s happening in a so-called democracy, with the apparent consent of the governed.

Sadly, this aligns with a striking non-finding from the FAIR Money research: nobody talked of social injustice in connection with their personal finances, even though all but one or two had drawn an extremely short stick in the lottery of American life. All our participants internalized their difficulties as personal challenges, which may tip over the edge into personal failure anytime. This is why FAIR Money means to develop tools that give people more power in their own financial lives and, perhaps, a footing to participate differently in the political decision-making that affects them every day in every way.