FAIR MONEY

Face to Face with Inequality


Leave a comment

Reflection as a Luxury Good

Maria Konnikova has an excellent article in the New York Times today, entitled “No Money, No Time: The Poor Are Under a Deadline that Never Lifts.” She sums up the experimental work of Sendhil Mullainathan and Eldar Shafir on the effects of poverty and works her way backwards to reality, applying their conclusions to the lives of the people at the bottom of the heap. In the lab, people in artificially induced states of poverty perform worse than people operating under conditions of abundance. Mullainathan and Shafir also conclude that they tend to solve for the present moment more–meaning they borrow, handicapping their future performance.

Mullainathan and Shafir decompose poverty into three components: lack of money, lack of time, and lack of bandwidth (by which the mean the ability do dedicate sufficient mental resources to any given problem so as to make good decisions). Their argument is that a lack of money correlates with a lack of time in the real world, and that both conspire to reduce available bandwidth for decision-making.

Shafir recommends designing programs to reduce bandwidth demands and uses the FAFSA as an example:

“If I give people a very complicated form, it’s a big demand on cognitive capacity,” Mr. Shafir says. “Take something like the Fafsa” — the Free Application for Federal Student Aid — “Why is pickup for the low-income families less than 30 percent? People are already overwhelmed, and you go and give them an incredibly complicated form.”

To him, the obvious conclusion is to radically change our thinking. “Just like you wouldn’t charge them $1,000 to fill out a form, you shouldn’t charge them $1,000 in cognitive complexity,” he says. One study found that if you offer help with filling out the Fafsa form, pickup goes up significantly.

Interestingly, their work also seems to support one of the tentative findings from FAIR Money’s Payday loan study, that talking about one’s situation, even if only to a researcher who offered no comment, seemed to have an effect on decisions about how to handle one’s financial dilemmas. By paying people to participate in our study and talk about their situation, we paid them to take time to reflect, alleviating some of the pressure on two of those three dimensions of poverty.

Advertisements


1 Comment

Economic Realities of the 21st Century

The Economic Policy Institute calculates that in 2010, six members of the Walton family siphoning profits from the Walmart empire were together worth $89.5 billion. That amount of wealth is equal to the total value held by the bottom 41.5% of Americans, a staggering 48.8 million US households.

For more insight into how Walmart beggars low-income families and lets the rest of us pay for the consequences, see the PBS documentary Store Wars or How McDonald’s and Walmart became Welfare Queens.


Leave a comment

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.


Leave a comment

The Feeling of Scarcity

In their book Scarcity, Sendhil Mullainathan and Eldar Shafir blame the apparently irrational act of taking out a payday loan (and taking out a second one to pay off the first, etc.) by poor people on the mindset induced by scarcity–that is, being poor makes it difficult to think about anything but getting money, the sooner the better. An interesting proposition.

In our research, we found some indications that talking about one’s financial straights leads to smarter decision-making, which would mean that if Mullainathan and Shafir are correct about the tunnel vision imposed by poverty, then talking to another person about the issue counteracts scarcity’s tendency to focus the mind on the getting of abundance ASAP.


Leave a comment

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.


1 Comment

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. 


Leave a comment

Homeless in Silicon Valley

Moyers & Company aired a segment on homelessness in Silicon Valley this April. Moyer’s observes in the prelude:

California’s Silicon Valley is a microcosm of America’s new extremes of wealth and poverty. Business is better than it’s been in a decade, with companies like Facebook, Google and Apple minting hundreds of new tech millionaires. But not far away, the homeless are building tent cities along a creek in the city of San Jose. Homelessness rose 20 percent in the past two years, food stamp participation is at a 10-year high, and the average income for Hispanics, who make up a quarter of the area’s population, fell to a new low of about $19,000 a year — in a place where the average rent is $2000 a month.

All of the above is true, but it doesn’t capture the full range of economic inequality in Silicon Valley. The phrase “hollowing out the middle” Moyer’s discusses further on is more accurate. That term describes a process which has largely gone unseen and unheard in Silicon Valley, but which affects people across a surprising range of income brackets and occupations. Over the course of the Fair Money project we found people struggling at income levels in the six figures as well as at income levels far below that level. Homelessness is up in Silicon Valley, but homelessness is only the most visible example of a more general process.

Nor does Moyer’s segment do justice to the ingenuity and innovations deployed by those facing harsh economic realities. People do not passively accept their circumstances; they actively transform them. While the phrase “hollowing out the middle” and the signs of homelessness grab headlines, the process of filling in the gaps and getting on with living is a hopeful accompaniment.