Category Archives: Wealth and poverty

Making it in America means never having to meet any poor people

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janitor

A brilliant story by David Scharfenberg in the Boston Globe recently addressed a subtle but growing issue for Boston and other cities around the country: the increasing segregation of poor and rich. Scharfenberg writes:

The surge in affluence in some areas and poverty in others has wiped out scores of mixed-income neighborhoods. In 1970, 7 in 10 families lived in these places. Now it’s just 4 in 10…

Blue- and white-collar families who once lived close enough to bump into each other in the aisles of the local hardware store or chat in the pews of the neighborhood church live in much more homogenous places now.

Low-income people can go an entire day without talking to someone who has a college degree or a job in a downtown office. And for the affluent, handing a credit card to the gas station attendant or grocery clerk may be their only weekend brush with blue-collar America.

This is an issue pretty much everywhere, as the article argues. That’s not surprising given that income inequality in this country by some measures is at its worst in nearly a century. It’s not just a matter of white and black; poor and rich just don’t live next to each other and interact the way they used to.

You don’t have to think very hard to imagine what type of impact this might have over time. In a recent post on this blog, I discussed how some economists see marriage trends significantly worsening inequality. Given that we tend to meet and marry only people of similar means and education, they argue, wealth and capital tends to get concentrated in families over time. That we are so spatially and geographically separated from one another ties this narrative together.

As you might guess, this issue is deeply personal for me. My wife and I are both from the Boston area, and recently moved back there after spending the first few years of married life in Connecticut. In the short time we were gone, property values in and around Boston seemed to have exploded. The city was becoming a hot destination, our real estate agent told us, with the biotech industry here booming, new construction changing the landscape of downtown, and Boston increasingly seen as hip and fashionable among young professionals.

We eventually got a house we liked: something with enough space and a yard, in a town with good schools, easily commutable to downtown. What came as a surprise after moving in was that our neighborhood was a lot more diverse than we expected, both ethnically and economically. On our block we’ve got both whites and blacks, both native born Americans and immigrants. Our next door neighbors include a dermatologist, an accountant, and a career social worker. To me, where we live seems like a rare vestige of class and race diversity in Boston, literally on the border between a town that is mostly white and rich, and another that is mostly poor and black.

But the funny thing about our neighborhood is that even people who have lived there for decades hadn’t actually met eachother, a fact we discovered once we went out and knocked on people’s doors to introduce ourselves. Even when we live near each other, it seems, we still don’t tend to mingle across racial, social, or economic lines.

The basic problem here isn’t just that different people aren’t meeting each other, I’d say. It’s that no one is meeting each other, at least not the way they used to. That may be because many of our social institutions have weakened or vanished altogether. From churches to bowling leagues, many of the activities and groups that so commonly tied neighbors together have lost prevalence in American society over the past generation. Meanwhile, the way we socialize has changed, with fewer people slowing down and taking a moment to actually meet in person. To use a stereotypically Boston example: donut shops used to be places where friends would meet to chat over a freshly baked donut and a coffee. But since I was a kid the institution of donut-shop-as-meeting-place has all but vanished, with most converting into pure takeout joints with little or no seating. It’s telling that one of Dunkin Donuts’ most prominent marketing images is now an illustration of people walking briskly with coffee in hand.

dunkin_donuts_people_walking2

The famed political scientist Robert Putnam — quoted in this particular Globe article, incidentally — calls this phenomenon “bowling alone”. I would call it the “Netflixification of America”, but the idea is the same. As a Baha’i friend of mine once explained during a discussion on why it was so hard to attract people to events, religious or otherwise: “People just don’t go to each other’s homes like they used to. They mostly just stay home.” Somewhere along the way we seem to have lost our tendency towards basic social interaction with those around us, and I sense that the dissolution of that cultural quality is playing an underappreciated role in many of the country’s burgeoning social problems.

As I wrote in the case of marriage and its effects on inequality, we too easily dismiss the way our social lives and individual choices impact society at large. Few people would disagree that the increasing segregation of rich and poor could have disastrous social consequences. But perhaps even fewer are ready to materially change their lives in an effort to push back against the trend. The first step is to recognize that it’s not supposed to be this way. In the words of Abdu’l-Baha: “The surface of the earth is one home; humanity is one family and household. Distinctions and boundaries are artificial, human.” We should not and can not let ourselves think that this is normal.

Regardless of who lives around us, we can all make an effort to make friends with people who are different. If you’re rich and well educated, this could be as simple as striking up a conversation with your dry cleaner, bus driver, or cleaning lady. From there, maybe even invite some of these people over to your house, go out for a movie, meet for a coffee, etc. In other words, start small. Who knows? You may end up with a friend that you never would have known otherwise, while making a small contribution towards repairing America’s frayed social fabric.

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What is my problem with poor people?

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Homeless man and dog

Recently, I decided to try out a Greek food truck for lunch that’s down the street from the office. The line was long, but I didn’t mind. It was nice outside so I was happy just to wait patiently and surf with my phone in the meantime.

While waiting, a lady approached those of us who were in line and asked for money for something to eat. Her speech was irregular and she smelled of booze. The other people in line ignored her. As I’ve tried to do in the past in similar situations I decided to at least acknowledge her; that’s the minimum degree of respect you can show a person asking for money out on the street, I’ve always figured. She asked if I would buy her some food, and I said yes. I had a ten-dollar bill in my pocket (as usual I’d left my wallet at my desk at work), so I had enough for two sandwiches. Plus, I’ve always tended to feel more comfortable giving food, rather than money, to those asking for help.

After that point it was chaos. I asked her what she wanted to eat, and she told me she wanted a chicken platter, which was $7. I told her I didn’t have enough money for that plus my own lunch, but I could buy her a sandwich instead. She agreed, but only after some awkward back and forth that drew curious glances from the other customers (it wasn’t that she was stubborn, but rather that she didn’t seem in the right frame of mind to understand the logic).

When I got the counter, I ordered one sausage sandwich for myself and one chicken sandwich for my friend. While the staff were putting these together (assuming they were both for me, I guess), they saw the lady, who it seemed was familiar to them. “What can I get you, honey?”, one of the cooks called to her, as she was standing off to the side. I opened my mouth to speak, about to explain the situation to him, when I heard her exclaim over my shoulder, “A cheeseburger!” I shut up. I paid for both sandwiches, gave one to the lady (who thanked me), and I was on my way.

It’s experiences like this one that complicate matters for me — and, I assume, many of those reading this — when it comes to giving money, food, or whatever to the poor, and especially to beggars. There is no way to write about these things risking sounding arrogant, paternalistic, or just plain dumb. But not discussing them is a worse alternative. This blog entry is more meditation than manifesto; I have no definitive answers, only personal experiences and scattered thoughts.

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Survey data confirms: It really stinks being poor

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Pew Research recently came out with a fascinating study across a number of countries asking individuals about life satisfaction. The results are pretty interesting, and I’d recommend taking a look at the summary here.

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One of the most intriguing charts that Pew presents (see above) is a scatter plot of countries, with average rating of life satisfaction on one axis and per capita GDP on the other. Not surprisingly, there’s a positive correlation between income and satisfaction, meaning that people in wealthier countries tend to be more satisfied with their lives than people in poorer countries. But we also see that the very wealthy countries (like the United States) aren’t significantly more satisfied than the middle-of-the-pack countries, echoing previous research on this topic. In fact, the country that rates highest in terms of life satisfaction is Mexico, where per capita GDP is about $10,000 per year, roughly a fifth that of the US.

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What’s missing from the conversation on income inequality?

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Income inequality is a hot topic these days here in the US, and for good reason: over the past generation or so, real gains in income for those at the bottom and middle of the spectrum have been practically nil, while those at the top (especially the very top) have risen rapidly. As a consequence, income inequality by some measures is at its highest levels since the 1920s.

cbo-inequality-after-tax-income

If income inequality has been rising for so long, why is it only recently getting so much attention? I think the main reason for the recent attention was the housing bust and financial crisis in 2008 (duh), which provided a shocking contrast between widespread home foreclosures and mass layoffs on the one hand, and generous bank bailouts on the other. But since then, we’ve had plenty of other things to keep our attention on the subject. I’m thinking the Occupy Wall Street/99% movement; the 2012 Presidential election, which forced a national dialogue on the subject; and the near-celebrity status of economist Emmanuel Saez, whose recent book has attracted huge media attention.

Within that debate, economists continue to fuss over a longstanding question: Sure, inequality is rising, but what does that mean for economic growth? Do societies in which the rich take a bigger and bigger slice find it more difficult to grow the whole pie over time?

The Washington Center for Equitable Growth has a new paper summarizing the research, both old and new, on exactly this topic. It’s a good read even if you’re not into economics, especially the overview section, which gives some nice context for this question. Among the report’s conclusions are:

Most research shows that, in the long term, inequality is negatively related to economic growth and that countries with less disparity and a larger middle class boast stronger and more stable growth. Some studies do suggest that in the short run, inequality may spur growth before hindering it over the longer term, but overall there is growing evidence that, in the long run, more equitable societies are associated with higher rates of growth.

It’s always important to differentiate between positive and normative questions in economics, and this subject is no exception. The former asks something about how the world is; the latter, how the world should be. Economists like to focus most of their time on positive issues: Does inequality constrain growth? That is an important question, and researchers and organizations which focus purely on answering it objectively and honestly are doing very important work. Nonetheless, what seems to be missing from today’s debate about inequality is a second, more normative question: If the economy continues to grow while remaining very unequal (or becoming more unequal), is that ok?

For two reasons, I’d say the answer is No (surprise!). The first reason has to do with economic theory. The second has to do with the very purpose of our lives as human beings. Continue reading →

Free advice on children’s books from a bona fide expert

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There hasn’t been much blogging these days, for which I felt it necessary to issue an apology. The excuse I’ll use (for everything, really) is that my wife and I had our second child recently, and life has predictably been turned upside down. Things will normalize as far as this blog goes in due time, I promise.

Having baby #2 has brought the expected burst of joy, with an entirely new set of challenges. The biggest is the predictable jealousy of our two-and-a-half year-old son for his new baby sister. We’re not too concerned, as everyone tells us this is normal. We actually see it as an opportunity for him to experience some healthy heartbreak and learn that he’s not the center of the universe. Nonetheless, for the time being he’s been an absolute menace, with lots of tantrums (the sight of mom nursing another baby is a usual source of emotional devastation).

A lifesaver for our older one has been books, especially at night time. My wife is constantly on the prowl for good children’s books, and it’s a credit to her that our son is so fond of reading at such a young age. Consequently, I’ve become something of an expert on children’s literature, like most parents I suppose. Honestly, most of the genre is just crap, in my experience, though I understand that I’m not exactly the target audience. (After re-reading those “Mister” books for the first time in nearly three decades, for instance, I now fully believe them to have been written and illustrated by a 3rd grader during recess.) However, there are a couple of books in particular that are just superb at explaining complex social concepts to kids, including some economic themes that we adults routinely gloss over or fail to address entirely. It might seem corny to look to children’s books for economic wisdom, but “corny” has never stopped me on this blog before, so bear with me.

The first I’ll mention is Little Blue Truck Leads the Way by Alice Schertle. It tells the story of a little blue truck who ventures into the tall, fast city, only to find that all the other vehicles are in a terrible, aggressive rush. Everyone is so stressed and hurried that the city streets eventually grind to a halt, and no one can get anywhere. Finally, all the vehicles recognize the wisdom of the Little Blue Truck, who teaches everyone to wait patiently and form an orderly line, allowing others to go first.

little_blue_truck

The beauty of this book is not just that it teaches kids to respect order and not barge ahead of others. It’s that it acknowledges the limits to the importance of economic efficiency. The problem with the big city, it seems, is not just that it’s chaotic, but that it’s miserable. All of the vehicles, in their scramble to get ahead, are stressed, angry, and frustrated. (Sounds like my morning commute into Manhattan.) When everyone slows down a bit, the city is able to relax and breathe, adding value to its residents’ lives in ways that can’t easily be measured. This is an important point that is lost on a lot of us adults; in our quest for efficiency and productivity, we sometimes unwittingly sacrifice subtle things that are vital for our own welfare. This is a point I’ve been thinking of writing about on this blog for a while now, but like a lot of things, it’s probably best left to art.

The second book is Just So Thankful, by Mercer Mayer (from that “Critter” series that a lot of us became acquainted with as kids). It follows a kid who’s bummed out that his parents won’t buy him a particular toy, and who grows jealous of the new kid in school, “H.H.”, who’s super rich and seems to have every toy (as well as servants, a mansion, and a swimming pool). When H.H. comes over to Critter’s modest house to play one day, the rich kid ends up having a blast enjoying the little things — helping out with dinner, playing with he family puppy, getting his shoes eaten up by the dog — and shows Critter how good he truly has it, despite the fact that his family isn’t rich.

just_so_thankful

There is no shortage of art seeking to explain that material possessions aren’t what make us happy, that “the best things in life are free”. But this book does more than that, which is to emphasize that people of all economic backgrounds — rich, poor, whatever — derive happiness from the same things in life. H.H. arrives at Critter’s house with excitement about seemingly mundane but valuable things, like having a family cookout. Far from snobby about his wealth, we find when H.H. is stripped of his butler and cell phone and Super Streak Scooter, he’s just another normal kid who enjoys the same thing as everyone else.

Anyway, those are my children’s book recommendations. If you’re a parent, you should get them for your kids. If not, you might still get them and read them on your own. Just think twice before doing so in public, because that might seem creepy. About as creepy as a grown man writing emotionally about children’s literature on an economics blog.

 

In the fight between capitalism and business, capitalism is getting whupped

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Godzilla vs Mr. Bill

I recently finished reading Chrystia Freeland’s Plutocrats, which is about the world’s rising elite class and the enormous buildup of wealth at the top of the spectrum. Easily the most satisfying part of the book is towards the end, when she discusses the potential impact of this phenomenon for our economy and our democracy. Here she shares a brilliant quote from Luigi Zingales, an economics professor at UChicago’s Booth School of Business, which I felt compelled to share:

True capitalism lacks a strong lobby. That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one.

Industry has been throwing its weight around to the detriment or the larger marketplace — and to society in general — for decades, if not longer. As Zingales describes, this includes purposefully stifling open competition, and in doing so hurting other companies operating in the marketplace, as well as the consumers who would otherwise benefit from the better quality and prices that a competitive market would bring. To take one recent example we’ve already covered here on this blog, the lines separating media companies, political lobbyists/fundraisers, and government policymaking have been blurred, possibly paving the way for regulators to sign off on ever-growing oligopolies, and thus crowding out efficient competition from smaller firms. In other words… cable is too frigging expensive!

But beyond just stifling competition, there are innumerable ways that businesses and industry groups distort the free market with their political power. More than fifty years ago, Eisenhower prophetically warned of the “military industrial complex”, where an industry that stood to profit from war would skew the nation towards unnecessary debts and perpetual conflict. There are countless corollaries today in other industries. Big banks lobby against financial regulation, strengthening their bottom lines while potentially increasing the likelihood of another devastating financial crisis. Producers of fossil fuels quietly spend huge sums trying to confuse the scientific debate on climate change, holding the price of carbon emissions inefficiently low while the earth gradually warms. The farm lobby assiduously maintains the political backing for agricultural subsidies year after year, paid out of the pocket of the US Treasury.  Each case is an example of “extracting rents”, in economics speak. That is, a small and powerful minority with political power extracting value from the broader society and keeping it for itself, all the while compromising the efficiency of the free market.

This is not capitalism, or certainly not “true capitalism”, as Zingales puts it. True capitalism can be, and should be, ethical and egalitarian in its principles. And with the right rules and regulations, it can lead to generally fair and stable outcomes for society (see America for about thirty years following WWII). But not many people can spot the difference between “true capitalism” and what I’d call “rigged capitalism”, and most people nowadays appear hopelessly resigned to the latter.

Guess what? Progress is messy

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Federal Troops Occupy Mare Favela Ahead of World CupBloomberg recently published an interesting article about Dembore Silva, a young Brazilian slum-dweller, and his uniquely entrepreneurial plans for the upcoming World Cup:

The 26-year-old is renting his studio apartment in Brazil’s biggest slum for the month-long duration of the soccer World Cup that ends July 13. He’s expecting to collect 4,000 reais ($1,719)… He plans to use the cash to buy a motorbike to supplement his income of 1,500 reais a month by ferrying people up to Rocinha, a hillside district of 70,000 that overlooks some of Rio’s beaches. “I could make an extra 1,000 reais if I had a bike.”

Silva’s plan isn’t just a cute World Cup story. It captures an important truth about development, which is that for many of the world’s poor, the path towards a more dignified quality of life is often paved with messy, uncomfortable choices.

This truth often gives us in the developed world a feeling of shock and guilt. It should: Basically, this young man plans to vacate his own home so that a rich tourist from abroad can drink, party and watch soccer, probably spending way more in a few weeks than what Silva makes in an entire year. Of course, by developing country standards Silva’s story is pretty tame; for many others, the choices are much more heartbreaking.

Like I touched upon in a blog post last year, the uncomfortable truth is that this is how economic progress happens. Specifically, people in poor countries seek to invest in themselves or in their children towards reaching a better life, even if the path between point A and point B is less than ideal. In this case, 1) a young man thinks about ways to raise his income; 2) he concludes that he needs a motorbike to boost his tourism business; 3) he decides that in order to fund this investment he’ll need cash (he can’t just walk into a bank, silly); and 4) World Cup!

I bring this up because I’ve encountered dozens of well-meaning, morally conscious individuals — many of them Baha’is — who seem to think it’s best to block these types of choices from happening, I guess because they find those choices repugnant. It’s highly commendable to desire to live in a world in which this doesn’t happen, but to respond to such a desire by actually taking away choices isn’t productive. Along the way towards declaring “No more sweatshops!”, we tend to ignore an obvious fact: Some poor lady in the developing world has it so bad in life, her alternatives so dismal, that she actually chooses to spend 12 hours a day in a poorly-ventilated room sowing buttons onto dress shirts.

Our goal as a human race should be to expand and improve the choices available to the world’s poor, not to limit them. For instance, had Silva lived in a place with properly functioning financial markets, he could have simply borrowed the 4,000 reais and paid off the loan with his increased income, with the bank taking on the risk that the borrower can’t pay back the loan. This is a basic economic tool that’s regrettably out of reach for many in the developing world, and there are numerous efforts — most notably the microfinance movement — underway to try and solve the problem.

But for a young man living in the slums, there’s no bank around the corner standing ready to make everything that easy. There are lots of people in the development field working on this, but right now the reality is that we’re just not there yet. Meanwhile, the World Cup comes around only once in a lifetime, and so does the opportunity to cash in on a tourist desperate for a place to stay. It’s all well and good to lament the existence of slums in the first place, and even better to try and do something about it. But for now, the slum dweller eager to sacrifice, work, and invest his way to a better life deserves our admiration, as well as a simple promise to stay out of his way.

What can youth athletics teach us about free markets?

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How about a little sportsmanship when it comes to markets?

How about a little sportsmanship when it comes to economic competition?

Sometimes small gestures can prove profoundly spiritually powerful. Spirituality, after all, isn’t just meditating on the top of a mountain or praying by a candlelit bedside. It’s found in real, human gestures that happen around us everyday.

One remarkable illustration of this — and which recently gained national recognition here in the US — happened at a high school wrestling match in St. Paul, Minnesota last month between St. Michael Albertville High School sophomore Mitchell McKee and Blaine High School sophomore Malik Stewart. Other than the stakes, namely the state championship for the 120 lb weight class, this wasn’t an extraordinary match. Except that the following happened: After Stewart was beaten, he immediately walked over and embraced the father of the opposing wrestler, who is terminally ill with cancer. You can read the whole story here (and I strongly recommend you do.)

What was it about this story that made it so emotionally powerful, and vaulted it into the national spotlight a few days later? I think it’s because sports — and particularly youth sports — can occasionally remind us that even in an ultra-competitive atmosphere, the most beautiful human virtues can rise to the surface. Anyone who’s watched high school wrestling in particular recognizes that the sport uniquely balances strategy and discipline with primal aggression and raw effort. That a spontaneous act of humanity can emerge from such gritty violence is testament to the delicate balance between competition and cooperation. At one moment, two athletes struggle to physically dominate each other as if their lives depended on it. At the very next, those two athletes, as well as a tiny community of spectators, are somehow tearfully united by a simple but powerful gesture.

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Greed as epidemic, from Wall Street to Main Street

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batch of dollarsLast month the New York Times published a fascinating and much talked about op-ed by Sam Polk, a former derivatives trader turned socially-conscious entrepreneur. If there’s such a thing as a must read, this would be it.

In Polk’s piece, he talks about his time on Wall Street and what he believes was his out of control addiction to money. There are countless passages that are worthy of pasting here, but here’s just a sample:

At 25, I could go to any restaurant in Manhattan — Per Se, Le Bernardin — just by picking up the phone and calling one of my brokers, who ingratiate themselves to traders by entertaining with unlimited expense accounts. I could be second row at the Knicks-Lakers game just by hinting to a broker I might be interested in going. The satisfaction wasn’t just about the money. It was about the power. Because of how smart and successful I was, it was someone else’s job to make me happy.

Still, I was nagged by envy… I wanted a billion dollars. It’s staggering to think that in the course of five years, I’d gone from being thrilled at my first bonus — $40,000 — to being disappointed when, my second year at the hedge fund, I was paid “only” $1.5 million…

Like alcoholics driving drunk, wealth addiction imperils everyone. Wealth addicts are, more than anybody, specifically responsible for the ever widening rift that is tearing apart our once great country. Wealth addicts are responsible for the vast and toxic disparity between the rich and the poor and the annihilation of the middle class.

Polk’s depiction of Wall Street’s culture of voracious greed sounds like a Scorcese-like fantasy. But it’s hardly an exaggeration.

Like I’ve mentioned on this blog before, I work in the investment banking industry, but in research. All that means is that I’m a kind of glorified front-office nerd who works in tandem with bankers, traders, and salespeople, and who’s often called upon to discuss the markets with hotshot portfolio managers. Research isn’t compensated like those other job functions (I’ll get to that in a minute), but we’re close enough to the action to understand the cultural current that runs through a trading floor or a dazzlingly decorated hedge fund meeting room.

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The world’s poor: Stressed, jaded, and incessantly patronized

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1375849_18372716I write a lot on this blog about economists’ assumptions about human behavior, and when these assumptions are useful to understand reality and when they are not. For instance, a while back I touched on the assumption of “rationality”, which for economists has a strict mathematical definition and is needed to make certain clean, elegant microeconomic models work. Unfortunately, some people take this and other theoretical assumptions beyond their original purpose, asserting, for instance that every human action in real life must be motivated by a rational thought process all the time.

Most of us are observant enough to know that at least sometimes, human beings do not, in fact, behave rationally. Addiction is an often used as example. I’m sure you can construct a model showing how a person could behave rationally and still drink himself into oblivion. But it’s much easier simply to admit to oneself that irrational behavior exists in the world, and basic models based based on an assumption of rationality are limited.

The question is, Just how widespread is our irrationality? That’s the question asked by many behavioral economists and psychologists who’ve attempted to document and codify all sorts of irrational things that human beings tend to do. (Dan Ariely’s best seller Predictably Irrational, though a few years old now, is a great book for a summary of this line of research.) I tend to believe irrational behavior can be found almost everywhere, and understanding this can help us improve ourselves and our society. A few months back, for instance, I made the argument that certain types or consumer loans preyed on individuals’ irrationality, specifically their impulsiveness and lack of understanding of finance. The poor are prime targets, in that they may be less likely to have had some basic financial education, and are naturally more susceptible to the “Interest Free Loans!” thing and other scams, perpetuating the imaginary dream of unlimited access to money without consequences.

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