Inequality by Half Measures

By M.A.

Note: This post is part of our League Symposium on inequality. You can read the introductory post for the Symposium here. To see a list of all posts in the Symposium so far, click here.

In the discussion of inequality by Roger, the issue of the Rector Testimony is brought up. Rector is a Heritage Foundation… employee… who asserts that through various governmental programs, a “poor” person could theoretically receive $44,000 each year in government benefits by combining obligatory programs with “means-tested” aid.

Unfortunately for Rector and Roger, the assertion simply didn’t hold up to scrutiny. The actual quote from the Rector testimony relevant to the discussion is this:

“If converted to cash, means-tested welfare spending is more than sufficient to bring the income of every lower income American to 200 percent of the federal poverty level, roughly $44,000 per year for a family of four.”

Now, this measurement is accomplished by simply taking the entire budget of the programs Rector was condemning. In the very previous paragraph, he acknowledged that many of the programs did not merely aid the poor, but low-income groups in general.

His calculation also assumes that “a family of four” is drawing the maximum from Social Security, Medicaid, Medicare, and all 89 programs simultaneously. Sadly, the precise quote from that earlier discussion is difficult to find (the League’s search engine does not search comments, it appears) so I’m going to paraphrase the consensus from earlier: it is impossible for someone to do this. It would require drawing full Social Security benefits, full Medicaid, full Medicare, AND navigating the paperwork for:

12 programs providing food aid,
12 programs funding social services;
12 educational assistance programs;
11 housing assistance programs;
10 programs providing cash assistance;
9 vocational training programs;
7 medical assistance programs;
3 energy and utility assistance programs; and,
3 child care and child development programs.

Clearly we need more specifics. We can find some of them in Rector’s vitriol-laced paper from 2009, a partisan wreck that starts out as an attack piece and goes downhill from there. In it we find:

  • Rector considers the Earned Income Tax Credit, taken by more than 90% of Americans, a “means tested cash aid” program. He does the same for the Additional Child Tax Credit.
  • Down in the index, he finally gets round to listing the programs he considers “welfare” entirely. Under Cash he includes EITC, ACTC, Foster Care Title IV, Adoption Assistance Title IV, “General Assistance to Indians”, and Assets For Independence, a federal program to provide assistance to community organizations providing antipoverty programs.
  • Under Medical there’s Indian Health Services, Community Health Centers, Healthy Start.
  • The food program list goes all over the place. He breaks out School Lunch, School Breakfast, the Summer food programs, Child Care Food Program, and Special Milk Program separately when they are all part of the national educational food initiative.

I could probably waste far too much time analyzing the list, but the point is: even under that short list we can see how it’d be impossible for a single family to pull in all benefits from all programs at once. They’d have to be a pair of seniors pulling in full SS and SSI funding, living in a nursing home drawing full Medicare and Medicaid, raising at least two children below the age of 10, getting the children on every single educational and food aid program, pulling in urban and rural housing assistance simultaneously, and also members of an indian tribe living on-reservation to pull in the various benefits the US government is obligated to provide to the tribal members currently. There are a whole host of other contradictions and mutually exclusive programs in the scenario required to get “$44,000 in aid to a family of four.”

Can we all just agree now that Rector’s numbers are total fishing BS?

Mike Schilling also brings up the point of Vimes’ Theory:

At the time of Men at Arms, Samuel Vimes earned thirty-eight dollars a month as a Captain of the Watch, plus allowances. A really good pair of leather boots, the sort that would last years and years, cost fifty dollars. This was beyond his pocket and the most he could hope for was an affordable pair of boots costing ten dollars, which might with luck last a year or so before he would need to resort to makeshift cardboard insoles so as to prolong the moment of shelling out another ten dollars.

Therefore over a period of ten years, he might have paid out a hundred dollars on boots, twice as much as the man who could afford fifty dollars up front ten years before. And he would still have wet feet.

Owning a somewhat old car, but having purchased it when it was a late-model new car still under warranty through a certified-used program, I’m very sympathetic to this issue. For approximately 3 years, all my major maintenance for the car was covered, though I was paying the balance of the car note; for another 2 years, I was lucky enough to have no major issues. With the car paid off now and owning a decade-old car, I budget roughly $1500/year to keep it running. Were the maintenance on the car to hit double that, it’d be time to start looking at a new vehicle as it’d be an indication that the car was structurally unsound and about to become a major money sink.

A friend of mine, who is economically worse off than myself, recently had to buy a car. They wound up with a car a couple years younger than mine, but with far more maintenance issues already. They paid approximately 25% less for their car than I did for mine up front, with a reasonable chunk (25%) down payment. Then, the maintenance issues came into play. The cars they could afford up-front costs for are money sinks requiring some significant maintenance, and it’s only through the goodwill of myself and a few other mechanically inclined friends willing to donate our time/labor, scouring junkyards for parts and making the repairs for the cost of “cover the part and heat up a frozen pizza for lunch”, that the car’s been kept in a usable condition. Someone in that position without friends willing to do so, paying hourly labor rates at a mechanic shop, would be sunk.

We’ve discussed a lot about the concentrative effects of certain policies. There’s the preferential treatment of the primary mode of wealthy class income (“capital gains” taxed at most at 15%) versus the primary mode of middle class income (wage income, taxed higher), the repealing of the estate tax (which allows passing greater and greater advantages in hoarded wealth), the fundamental upwards-redistributive implications of the banking and stock market systems as rigged by the wealthy with their thumb on the scales. But we haven’t really discussed the downward pressures inherent in out-pricing the lower or middle class into a state where in many categories they can only afford the up-front costs for necessity items that are long-run money sinks.

It’s easy to say “well a car should only cost you 5 grand, then you should be saving up for a late-model that will run you 12 to 15 grand as your next car.” It’s much harder when realizing that while the up-front cost of that $5k car is only $5k, the 5-year cost may be as high as $12k anyways. If I can afford that $12k up front, sure I can afford to set aside $1.5k a year towards my next purchase – but if I can barely scrape together the down payment on a $5k vehicle, which I desperately need to get to/from my workplace? The poor are entrapped and enslaved by the rich, running the Red Queen’s Race economically.

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119 thoughts on “Inequality by Half Measures

  1. Implicit in the block listing the programs is one of the problems each of these programs needs federal and state admin, it would be interesting to see how much is spent on the administration. Why not lump each category into a block grant to the states, and can all the federal administration? Set the funding equal to the sums the recipients actually receive. One example I have heard of is the multiplicity of job training programs, why not consolidate into on program?

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    • Sigh.

      Do some research before opening your mouth; the mythical “bureaucratic costs of the federal administration” put even most charities to shame, the utterance a sure sign you’ve been listening to too much talk radio and need a reality check.

      Why replicate at state levels what can be done with less overhead at the federal? “States Rights” has become a synonym for “abusive decisions” for good reason, it was the rallying cry for “states rights” to implement bigoted and discriminatory policies.

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    • MA’s quite right. Government overhead is low — ridiculously low by private industry standards, even by charity standards.

      Which makes a great deal of sense, if you take off the idealogically hat and put on a pragmatic one. What has every politician, from the very first elected government to today, run on?

      “Eliminating waste and fraud”. Because there’s no downside to that. Everyone loves it when you eliminate waste and fraud! Who defends waste and fraud? (Well, other than Rick Scott from Florida and Defense Contractors in general).

      Which means that with some rare exceptions — the Defense budget is the most obvious example, because we love the military more than we hate waste and fraud (or rather, it’s so easy to wrap yourself in the flag as a defense for throwing meaty bones to local defense contractors. There is no such patriotic defense for gouging Medicare).

      Anyways, with rare exception there isn’t a major bureacracy in the federal government that hasn’t been eyeballed by Congress, auditors, Congressional staffers, the CBO, reporters, and anyone with an axe to grind — and recently. If not “constantly”.

      Nobody scrutinizes the United Way’s books the way Social Security’s does, for instance, and hell does not rain down on any private company like it does some government program that finds itself in the crosshairs when a Congressman needs a distraction.

      Everyone goes to balance the government’s books on ‘waste and fraud’ every year, like clockwork. From a pragmatic viewpoint, it’d be surprising if there was significant unnecessary overhead. (It’s not like government employees can really line their own pockets, short of outright embezellement or theft. And expanding the civil service hasn’t been an option in decades.)

      You want waste and fraud and unnecessary overhead? Go check out the stuff that got privatized. That’s where the money is — and the lack of oversight.

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        • If idiots were compiling the numbers, yes. However, since they aren’t….*shrug*.

          Take health care, for instance — seen the overheads of Medicare or the VA versus, oh, anyone else? Blue Cross, Aetna, UHC, anyone?

          2 or 3% for government — 20% for everyone else. Or more. There were screams of outrage at the mere idea of forcing insurance companies to live with spending 80% of premium dollars on health care.

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  2. The original discussion was this thread.

    As I pointed out there, your description of Rector’s methodology is totally wrong. Quoting from the first page of the document:

    The means-tested welfare system consists of 79 federal programs providing cash, food, housing, medical care, social services, training, and targeted education aid to poor and low income Americans. Means-tested welfare programs differ from general government programs in two ways. First, they provide aid exclusively to persons (or communities) with low incomes; second, individuals do not need to earn eligibility for benefits through prior fiscal contributions. Means-tested welfare therefore does not include Social Security, Medicare, Unemployment Insurance, or worker’s compensation.

    Bolding mine. So right there we know that he’s not assuming that this hypothetical family of four is drawing the maximum Social Security benefit.

    The total of $927 billion per year in means-tested aid is an enormous sum of money. One way to think about this figure is that $927 billion amounts to $19,082 for each American defined as “poor” by the Census. However, since some means-tested assistance goes to individuals who are low income but not poor, a more meaningful figure is that total means-tested aid equals $9,040 for each lower income American (i.e., persons in the lowest income third of the population).

    What’s $9,040 time four? $36,160. If the average low-income family of four makes $8,000 per year, well, that means…

    If converted to cash, means-tested welfare spending is more than sufficient to bring the income of every lower income American to 200 percent of the federal poverty level, roughly $44,000 per year for a family of four. (This calculation combines potential welfare aid with non-welfare income currently received by the poor.)

    I don’t see anything in here that supports your claim that he’s making any assumptions about drawing the maximum possible benefit from every single means-tested program. In fact, I’m fairly certain that you would get a sum much larger than $44,000 if you did that.

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      • But it further distorts the picture of poverty by placing income thresholds on an automatic elevator that climbs as overall income rises.

        Yeah, because indexing to inflation and the CPI, rather than assuming a flat rate, is SOOOOO dishonest…

        Excuse me while I laugh a while. That was ridiculous. So ridiculous that even the hyperpartisan Weird Nuts Daily wouldn’t publish it, he had to send it to the New York Post and the Daily Caller.

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        • The old poverty measure was already indexed to the CPI. The new measure, called the Supplemental Poverty Measure, is indexed to spending of households at the 33rd percentile. Allowing the poverty threshold to increase in real terms (i.e., faster than inflation) as general living standards rise was an explicit design goal.

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          • As Rector noted, the new method means that if everyone’s income doubled tomorrow (while prices remained the same), poverty wouldn’t decrease.

            From an objective public policy approach, that’s pretty bad design.

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              • Isn’t this a natural extension of the view that poverty and income are as much relative as concrete? If everyone’s income doubled tomorrow, the poor would still think of themselves as poor and we’d absolutely define poverty up with or without this policy. The poor’s relational position wouldn’t change.

                Actually, it would change and probably get worse because we can never assume that prices would stay the same. Scarcity would interfere with even the most positive assumptions.

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                • Mr. Blue,

                  Of course prices would increase in the real world, but this is a thought experiment. And what it shows is why I object to the relative well-being approach to poverty. It means that if the least well off people were living at the level of today’s millionaires, they’d still be “poor” if everyone above middle class was living like Bill Gates.

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                  • The first paragraph was to indicate the flaw in using relative income as a measure of well-being, because we can’t recognize progress no matter how much we make. The second paragraph was to indicate a flaw in using absolute income, because you’ll never be able to account for scarcity in anything more than a thought exercise.

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                • “Isn’t this a natural extension of the view that poverty and income are as much relative as concrete?”

                  Like Jesus said, the poor will always be with us. They’ll have smartphones and nice clothes and weight problems and cars still inside the manufacturer’s warranty, but they’ll still be poor. (Well, Jesus probably didn’t say the bit about smartphones, but you get the idea.)

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        • No need to be so antagonistic to the pushback you’re getting here M.A.

          It is pretty clear that most Social Security spending is not included in Rector’s data set. True, the first line item in there includes $55 billion in payments labeled “SSI/OAA,” but Older Americans Act funding is a separate revenue stream.

          Still, there’s a lot of problems with Rector’s analysis. First, about half of the total amounts in his data set – and about a third of the amounts in his data set for analyzing payments to “families” – are for health care. That’s important since health care is fishing expensive, is going to vary wildly by age, and is not capable of ready conversion to disposable income.

          Then, as you indicate, he includes about $50 billion in EITC refunds. Although this is “means tested,” enough people qualify for it that it’s disingenuous to attribute all of the refundable portions of this only to poor families.

          He’s also throwing Pell Grants in there, about $40 billion worth, again attributing these funds entirely and only to the 14 million poorest families. Given that there are more than 6 million Pell recipients in a given year, this would mean that almost half of the 14 million poorest families have someone receiving a Pell Grant. This seems odd. Then add to that the fact that Pell Grant expenditures seem to have maxed out at around $28 bn in 2009-2010 and so far as I can tell was less than that in FY2011, and I also have to question the accuracy of Rector’s numbers. See: http://www2.ed.gov/about/overview/budget/budget11/justifications/p-pell.pdf

          It’s also not clear to me how he calculated which benefits go to families with children and which do not.

          He’s also got a whole chunk of block grants that don’t directly go to individuals included in there, but instead go to fund community programs, as well as the cost of other government services and departments that are primarily utilized by poorer families. This is really misleading, since we all get similar types of benefits that no one in their right mind would ever think to suggest should be added to our income totals. If we did start including those benefits to our income totals, then suddenly that $44,000 figure would seem a lot lower. Think how much the income of the average American would rise if suddenly we had to include an equal, pro rata share of our national defense spending and highway spending into our income calculations.

          His numbers on food related outlays also appear to be off, though not by enough to make a major difference.

          Point being, there’s good reason to question the validity of the numbers from this testimony.

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              • Of course EITC and Medicaid count. If we don’t accept Rector’s number, let’s hear another. Calling his work bullshit is not a thesis or a counterargument. It’s bullshit.

                /8-[O>

                Migod, man, there’s a valid and necessary point in here and it will not be shouted down or gummed to death.

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              • Mark,

                Why wouldn’t Medicaid legitimately be counted? It’s either providing medical care that the person otherwise couldn’t afford or allowing them to shift what they would have spent on medical care to other products or services. I don’t see how it differs from food stamps or housing assistance in that aspect.

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                • It’s just misleading to include it in this way, for a few reasons. First, not many people would jump to say that the portion of their health insurance provided by their employer is part of their income, so he’s applying a standard to the poor that few would apply to themselves. For that matter, it’s not treated as income for tax purposes.

                  Second, since he’s using it for the propositinthat we’re spending twice on welfare as what would be required to lift every American out of poverty, it seems inappropriate to include medical outlays, which aren’t really supposed to lift anyone out of poverty, just make sure that the poor have access to healthcare and don’t die because they’re poor.

                  Put it this way- using this logic, it would be appropriate to say that a family the head of which undergoes a single major surgery paid for by Medicaid is living several times above the poverty line.

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                  • Mark,

                    See below on what my point is, which obviously is still not clear.

                    It is that consumption inequality is different than income inequality. To keep arguing that these things are not the same as income is exactly my point.

                    Did you ever read my post, or just this fair and balanced rebuttal? Do you realize that the reason he has resorted to OP rebuttals is that I will no longer respond to him because he said FU and called me a lying “a..hole” a half dozen times or more?

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                    • So far I’ve watched you say horrible, unsubstantiated things time and again. Many of them applied to people I know, who I care about, and about which the things you said are completely untrue.

                      One of your fellow-travelers in defending you decided to take a “quote” from me, replace a word in it, and used the altered quote to call me an anti-semite. And has yet to apologize.

                      If that’s your idea of courteous discourse, I’d hate to think of what you think a flamewar looks like. You had your chance, I outlined clearly where I believed you had stepped over the line, and you accused me of insulting you again in the process.

                      I’m done turning cheeks and I’m not letting distortions stand unchallenged. If you’re willing to engage fairly… then START DOING SO.

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                    • MA, dude. Chill out. Roger’s good faith is beyond reproach. If you think some of what he writes sounds ignorant, then educate him; if you think he’s dishonest, then ignore him. It is also incredibly unfair to hang someone else’s comment in an unrelated thread on him, particularly when that someone else was warned over that comment.

                      Look, there are a lot of libertarians, and even some conservatives, on this site. Hell, I consider myself one, though I suspect fewer and fewer would agree with that classification. You’re going to have to decide at some point whether you want to engage with them and try to persuade them, or ignore them. Throwing around accusations of dishonesty and the like at the drop of a hat isn’t going to do anything other than provoke anger and counteraccusations.

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                    • Not to mention that he’s also misrepresenting my comment. I never called him an anti-semite. I was making the totally valid observation that what he was saying about the rich was word-for-word identical to the kind of things anti-semites said about Jews.

                      I’ve made this observation before; see my 1:09 and 2:55 comments here:

                      Brandon: Isn’t leftism just anti-semitism with “Jews” crossed out and replaced with “the rich” or “bankers?”

                      Tom: Me, I wouldn’t play the anti-Semitism card here, Mr. Berg. I’ve found it to be a fairly equal-opportunity bigotry. People are people.

                      Brandon:
                      I’m not saying that leftists are antisemitic. If you replace Jews with a different scapegoat, then it’s not really very antisemitic.

                      I just think that the sort of populist leftism you see in this and similar movements is very strongly remnisicient of traditional antisemitism, with the most significant difference being a different choice of scapegoat.

                      There’s probably a right-wing analogue, too. Anti-immigrant hysteria, for example. Dirty furriners takin’ our jobs.

                      That is, both antisemitism and the sort of bigotry we see from M.A. and OWS are instances of the broader phenomenon of scapegoating of market-dominant minorities.

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                    • Mr. Berg, please let this die. Since I’m named here, I put your comment down to a somewhat valid analogy but a Godwin-like breach of aesthetics: Invoking anti-Semitism is the end of all discussion.

                      A junky riff, is all. Happens to the best of us. You hold your own hereabouts very well with civility and principle. Even had you gotten away with it, playing the other fellow’s game is usually a bad idea anyway. And you cannot win at this one. Your heart’s not in it.

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                  • Mark,

                    I take your second point. But your first one, well, just because people don’t call their health insurance part of their income doesn’t mean it isn’t. It is part of their compensation package, and if you try to reduce it by raising co-pays or their share of the cost, they quickly recognize it’s part of their overall income package.

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  3. This post is based on a very basic misinterpretation of Rector’s testimony.

    “If converted to cash, means-tested welfare spending is more than sufficient to bring the income of every lower income American to 200 percent of the federal poverty level, roughly $44,000 per year for a family of four.”

    That does not imply,much less “assert” that “through various governmental programs, a “poor” person could theoretically receive $44,000 each year in government benefits.” That’s not what Rector is saying at all. He’s saying, “Total means-tested spending on cash, food and housing programs is now twice what would be needed to lift all Americans out of poverty,” so let’s not spend more on it during a time of large deficits.

    Disagree with him, sure. But don’t make a false presentation of what he’s saying.

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    • Let’s take the logic one step further. The government disburses 1/2 what it is currently spending on “the war on poverty” to the actual poverty stricken on a cash basis. Kind of like how folks are enticed to take early retirement with immediate (albeit discounted) benefits. Then we get to see what happens and watch the economists squirm as their dismal science yet again fails to predict the results.

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      • Then we get to see what happens and watch the economists squirm as their dismal science yet again fails to predict the results.

        Heh. I’d imagine someone will get it right. And they’ll be the next Nobel winner in an attempt to confirm the undismalness of the science.

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        • the undismalness of the science.

          As an aside, I wish the true story of the origin of “dismal science” were more widely known.

          [Thomas Carlyle] first used the phrase11 in an article titled ‘Occasional Discourse on the Negro Question’ published in Fraser’s Magazine in December 1849 and reprinted in the form of a separate pamphlet in London in 1853 with the title ‘Occasional Discourse on the Nigger Question’.12 It deals with the labour situation in the West Indies where the white planters were complaining that following the emancipation of the slaves they were unable to obtain enough labour (at the prevailing wages and conditions of work) to carry on their business.13 Carlyle puts the view that ‘work’ is morally good and that if a “Black man” will not voluntarily work for the wages then prevailing he should be forced to work. He writes of those who argued that the forces of supply and demand rather than physical coercion should regulate the labour market that: “the Social Science … which finds the secret of this Universe in supply and demand and reduces the duty of human governors to that of letting men alone … is a dreary, desolate, and indeed quite abject and distressing one; what we might call … the dismal science” (Volume 11, p 177). (Source.)

          Suddenly it doesn’t sound so dismal after all.

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          • If I read that correctly (and my olde time translation skills are weak), it seems he was saying that economics is dismal because it posits that folks shouldn’t be forced to work if they aren’t properly enticed by shitty pay and work conditions?

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            • The other way around. He’s saying it’s a dismal science because it claims people shouldn’t be compelled to work.

              Here’s another Carlylian use of the term from the link James provided:

              In Carlyle’s opinion: “declaring that Negro and White are unrelated, loose from one another, on a footing of perfect equality, and subject to no law but that of supply and demand according to the Dismal Science”, “is clearly no solution” to the problem (ibid).

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              • Yep, Carlyle was unhappy that voluntary exchange was replacing coerced relations. He thought the end of slavery, and the beginning of actually having to provide (something approaching) fair compensation for labor was dismal.

                Which is why I think it actually doesn’t look so dismal after all–there are much more dismal alternatives.

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                • Ok, yea, that is what I thought it meant. My phrasing was off, but I got the gist.

                  With that in mind… holy f’ing shit. That phrase has a whole new meaning now.

                  The sad thing is, there are elements of that mindset that still ring familiar, at least in terms of folks shutting up and smiling and taking whatever working conditions they are offered instead of properly responding to incentives.

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    • This post is also based upon a faulty reading of my argument. My point was that consumption inequality is not the same as income inequality. The standard of living the poor is substantially boosted by this assistance. In my “fact” I gave a range of $9000 to $19000 in means tested assistance depending upon the denominator.

      Some people are getting lost in the weeds and missing the forest. To repeat, the “forest” is that consumption inequality is not the same as income inequality. Does anybody dispute this? If not, then we have no argument. Feel free to use whatever denominator you’d like.

      For the record, I am a major fan of means tested aid, especially when constructed in ways which don’t encourage dependency.

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  4. Can someone help me inderstand the argument on the latter half of this post.? As best I can make out, it is that we should blame the rich for the costs of used cars or something.

    “The poor are entrapped and enslaved by the rich, running the Red Queen’s Race economically.”

    Well I guess that puts my “progressives have a zero sum economic world view” to rest, doesn’t it?

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    • Roger, the argument is it costs money (and time) to be poor. The argument resonated with me because of a Washington Post piece that presented circumstances that further explain the counterintuitive point that being poor is expensive, The High Cost of Poverty: Why the Poor Pay More. As the opening of the Post piece puts it,

      You have to be rich to be poor.

      That’s what some people who have never lived below the poverty line don’t understand.

      Put it another way: The poorer you are, the more things cost. More in money, time, hassle, exhaustion, menace. This is a fact of life that reality television and magazines don’t often explain.

      So we’ll explain it here. Consider this a primer on the economics of poverty.

      “The poor pay more for a gallon of milk; they pay more on a capital basis for inferior housing,” says Rep. Earl Blumenauer (D-Ore.). “The poor and 100 million who are struggling for the middle class actually end up paying more for transportation, for housing, for health care, for mortgages. They get steered to subprime lending. . . . The poor pay more for things middle-class America takes for granted.”

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        • The poor are entrapped and enslaved by the rich, running the Red Queen’s Race economically.

          I’d say that pretty harsh characterization is more or less accurate depending on the circumstances. We’d previously had an extended discussion of sweatshops and desperate exchange – exploitation of the less powerful nearing enslavement? Yeah, I can accept that characterization. Financial services in the US, the unbanked paying an arm and a leg for financial services, check cashing, money transfers, and bill payment services, not to mention when people are steered towards unsuitable financial products like subprime loans – again, the taking advantage of information/power imbalances and the unwise decision to discontinue the postal savings system (should have included a warning, hobbyhorses ahead at the start of my comment). Again, running the Red Queen’s race isn’t far from the truth.

          I haven’t heard it expressed precisely this way in US public debates, but another way of expressing the sentiment I believe MA is trying to get across is “opportunity hoarding” – (very roughly) forming networks that exclude and perpetuate inequality to the detriment of the poor. And oftentimes in the US context, putting a big fat “meritorious” stamp on the outcome (SAT scores’ relationship to family income for instance).

          I might not have expressed it in precisely the terms MA uses, but I think there’s an awful lot of generosity extended to the wisdom (justice even!) of markets and market forces that I view as fanciful. Perhaps it is the central point of disagreement.

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          • Creon,

            You seem to be making an assumption that the reason that banks charge a poor person more is that they are using them to subsidize the rich.

            In reality, banks charge each risk segment based upon its expected return. This includes the risk of default and the expense load. People with good credit have good credit for a reason, because the models the bank uses are extremely good predictors of risk. Note also that there are competing firms designing competing credit score methodologies. This is because the accuracy of these models is worth billions of dollars, and there is a never ending arms race to build better prediction models.

            If a bank tried to use the poor to subsidize the non poor, then a competing bank would sweep in and offer slightly better, but still above market rate of return, loans and make extra profit.

            Think of it this way. The loan rate and fees that a banker needs to charge to make the going rate of return on a higher risk loan is higher than that for a low risk loan. If there were no low risk loans anywhere in the world, the bank would still need to charge the same rate as they do today to make a profit on the poor person.

            I could explain a few caveats to this, including that the bank may look at profit by customer in total other than by individual loan, but in general this will hold true.

            In brief, the reason poor credit risks pay higher interest rates is because they are worse credit risks. If space aliens ate the rich, the banks would not change their interest rates for the poor.

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            • Creon,
              As for sweatshops…

              Sweatshops, when applied to voluntary employment, is a derogatory term that is used to belittle employers who are doing more for the welfare of poor people than all the bleeding hearts that ever lived. They are providing a job and an opportunity which is better than any other alternative that the poor person has. We owe them our gratitude.

              This statement does not apply to coercive sweatshops of course. My point is that sweatshops are not exploiting the poor, they are benefiting them. Much , much more than you or I do.

              I do always try to do my small part though, that is why I always look for the sweatshop label.

              As usual, I am teasing, but just a little….

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              • We owe them our gratitude.

                This might be what Tom calls niggling, but … according to the economic theory you embrace, their decision is determined by profit motive. It’s determined by logic, not by a moral choice. Why is there anything praiseworthy in that?

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                • StillH20 are you saying following logic is NOT praiseworthy? Should we follow emotion instead? Morality is undefined, it means totally different things to different people and societies.

                  The “sweatshops” that proliferated in America were sufficient to draw unprecedented numbers of immigrants who saw “sweatshop opportunity” as vastly superior to for instance, starving in a potato famine. America was Heaven on earth compared to Ireland.

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                  • The “sweatshops” that proliferated in America were sufficient to draw unprecedented numbers of immigrants who saw “sweatshop opportunity” as vastly superior to for instance, starving in a potato famine.

                    And the fact that they preferred having their workers risk burning to death than possibly sneak off for an occasional breath of fresh air is fully justified, and certainly no excuse for the heavy hand of government regulation.

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            • because the models the bank uses are extremely good predictors of risk.

              I think it is a particularly difficult time to argue for the wisdom of banks and financial institutions more broadly. Were banks “extremely good predictors of risk” we’d have been spared a global financial crisis. A lot of institutions claimed to have a command of risk and suddenly face rather big surprises, whether triple-A rated financial products being unpriceable or, more recently, hedges turning into $2 billion losses.

              I take your point that some particular elements of financial services doesn’t fit the predatory overtones of the statement, “The poor are entrapped and enslaved by the rich, running the Red Queen’s Race economically.” Other conduct does seem to fit the highly critical statement, (mis)conduct by subprime lenders who made a quick buck and left others holding the bag. Or the specter of CEOs getting multi-million dollar golden parachutes while the companies they ran go down in flames, laying off thousands on terms not nearly as generous as those top management receives.

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              • I offer no market defense for the behavior of financial firms in the current crisis. I am aware that some explain it as problems with crony capitalism and unexpected consequences of heavy handed regulation and implicit guarantees. However I am not prepared to argue the case.

                As for CEOs, I too suspect rent seeking on their behalf. I could be wrong, but it does not smell right to me either.

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    • I think he’s arguing that people shouldn’t have to buy old cars and that if it wasn’t for the rich, they’d be able to afford cars with lower maintenance costs (new or lightly used).

      This is wrong-headed, in my view. I think the hand-me-down nature of the automobile market is a plus. Some people can afford new cars, others can opt for the discount of something used, and even those with just a few thousand can buy something to get by. Price discrimination at its finest.

      I think more inexpensive new cars would be great, but I don’t expect Tata Nanos to be allowed on our roads any time soon.

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      • This is wrong-headed, in my view.

        I agree. Seems to me that if a car could be profitably manufactured for a price lower than a Yaris or Hyundai, we’d see it. I don’t think the rich are driving up the price of cars. Other stuff might be – safety and emission standards and the like, which MA is probably pretty amenable to – but not the rarified tastes of the rich.

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      • No, the point is that the car market is just one example of how the poor wind up paying more than the rich for the same item, long term – and in the case of cars, in worse shape.

        Can’t afford the up-front costs of a bed? Sofa? No problem; lease from a rental place. Pay what it would have cost up-front over a span of a couple years, then keep paying. Or there’s always the “income tax return signoff” racket, where the processing fee eats into your money.

        Cars are just a great example because they show clearly the disadvantages. If you’re reasonably well off, you can buy a new car – which will come under warranty – or a certified-used, with at least limited warranty. You’re getting one with less maintenance hassles. Probably better interior and exterior condition.

        Get a car from one of the used car dealerships that cater to the “poor” side, and not only are you going to pay quite a bit to manage to get their financing (don’t bother going to the dealerships; you don’t have the credit score). You’re in “your job is your credit” land. The cars on the lot have no history, could have come from anywhere. If they assure you the title is “clean”, warning sign. Just because you’re poor, you are exposed to much greater risk in this market as well as a lot of other markets.

        Being rich is an insulative factor. You can coast through more, you take on less risk for the basics. Failure to acknowledge that is a fundamental flaw in all these discussions. Those who insist that the poor should “just pull themselves up by their bootstraps”, who think that “everyone can do it”… here’s the reality. You can do everything right that you were supposed to do to climb up out of poverty, but you will still fall prey to the risks that you are required to take for even the most basic things that those better off take for granted and you will still fall prey to the heightened costs in both time and money that exist merely because you are poor.

        Don’t believe me? Try to open up a checking account with a solid income, credit score, and a job that does direct deposit; then compare opening a checking account with a low-paying hourly wage job, nonexistent credit score, and checks directly cut to you. See which one charges monthly fees.

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        • Some of this is correct, but not all. I’ve been poor, and I never used the rent-to-own places, but picked up furniture from friends, at garage sales, and thrift stores. I also never used the cash advance places.

          Those places don’t really harm the poor so much as a particular subset of the poor, the stupid and/or unwise.

          I drove used cars (still do). I’ve had some that needed frequent repairs, but the total cost was still less than a new car. My Subaru Forester was bought new for $20,000 in 2000. With interest, the total cost was ~25,000. Over the 12 years I’ve owned the car, that’s about $2000 per year. Plus a bit here and there in repairs. A couple of CV joints at $400 a pop, and this past year the rear axle went out, costing over $1,000. A handful of other things. In the meantime I had a used Mercury Grand Marquis that was the worst used car I’ve owned. I paid $1500 for it,then had to spend about another $1000 almost right away. A few things here and there, about equal to the few things for the Subaru. Say another $1,000. We had that car for about 8 years, which comes out to about $450 per year.

          But in general, if your argument is that life is more difficult for the poor, then you’re not making an argument against anyone here. Of course life is easier for the rich (at least financially, not necessarily emotionally). But that’s about as controversial a claim as that sports are easier for the athletically gifted. In the discussion about inequality, nobody, but nobody, has argued that the rich don’t have it better.

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          • Two things James. One is that I like your car cost story. I have a view of car ownership that a hold pretty tightly: pay no more than $1000/yr in car costs – price and maintenance over the life of the vehicle. It’s not a very difficult balance to achieve, I’ve found. Just buy the right used car.

            The other thing is that I think part of MA’s argument is that the differential fees and access wrt credit experienced by the rich is a form of privilege which is denied poor people. That singling out poor people for higher fees because they have a higher likelihood of not paying a loan back is a form of discrimination (or something).

            I’m actually pretty sympathetic to that. Why shouldn’t banks collect extra fees to supplement defaults on a based on the totality of the loans made rather than determining it by class (or credit score)? It’s not like rich people need the discount. And it’s pretty clear that poor people do. But more importantly: isn’t the purpose of a bank or credit card company to lend money to whoever qualifies? And if so, why shouldn’t (not isn’t!) everyone lumped together in a single risk pool?

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            • I think if they did that, they would want to change who qualifies. Whichever institution has the tightest restrictions can offer the lowest rates, so people who now have to pay higher interest rates wouldn’t be able to get loans. Does that make sense?

              The bank example is actually quite good. It’s also one that doesn’t have a whole lot of solution to it.

              The furniture rental example is really bad. Unless you’re only staying somewhere temporarily and literally just need it for a little while, just buy from a thrift store. Maybe not even then. So many people are looking to get rid of what they have. It’s an even better hand-me-down market than cars!

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              • The bank example is actually quite good. It’s also one that doesn’t have a whole lot of solution to it.

                A public option for certain basic financial services, basic savings account, check cashing, wire transfers under a certain sum of money, and loans up to a limited sum. Am I missing some very obvious pitfall?

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                • The problem with the “loans” part of that equation is that payday loans – which I assume is what we’re talking about – are inherently expensive due to very high default rates and involve very high interest rates even if you discount the “scrooge” factor. Last I heard, Goodwill charges an APR of 250%, and I don’t think they are indiscriminate. That’s better than the private lenders, in part because of profits and in part because of reduced operating costs, but would we be willing to charge that?

                  The government would likely be operating at a loss for some or all of these things, or charging fees like the banks, but it’s the loans that I’d worry most about. For the rest, I’d need an handle on how much it would cost.

                  Does anyone know how much banks charge for small accounts?

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            • Stillwater,

              Blue is correct. Companies loan money based upon expectations of getting it back plus interest minus defaults and expenses. This all needs to add up to a sufficient profit to reward stock holders above competing investments adjusted for risk and such.

              If the companies spread risk based upon social factors other than expected return per customer segment, then a company could get better returns by not accepting or even not marketing to those with higher chance of default.

              If you force banks to subsidize, you will create market distortions and availability problems. The wind market along the coast and higher risk drivers in over regulated states are similar problems in the insurance industry. I suggest separating social programs from market institutions. When you try to merge them you screw them both up.

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              • Ok, now I am getting rather obscure, but do you have any objection to the NEA Arts Indemnity Program? Basically, the program “is to make accessible works of art that otherwise would be inaccessible by minimizing insurance costs” (NYT). The public option for art insurance had become especially important to museums because private insurers raised their rates so much post-9/11 (NYT). A public option going a ways to solving, I admit, a niche problem. But I don’t see why the unbanked couldn’t benefit similarly. I’m partial to the human rights arguments about financial services and credit being human rights, but I think that those favorably disposed to economic and social rights will likely already be in agreement on that score.

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                • Insurance markets often have mechanisms such as higher risk pools to handle extreme cases. My experience with these is not favorable. I believe they create market distortions which harm more people than they help, and often times it is those they try to help that get the harm. I would recommend that if we want to subsidize the poor or the high risk, that we do so outside the private market.

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          • “I’ve been poor, and I never used the rent-to-own places, but picked up furniture from friends, at garage sales, and thrift stores. ”

            You also watch minor-league baseball and college ice hockey, because you’re a bread-and-circuses apologist for the rich!

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  5. The problem with Vimes’ Theory is that it implies that poverty is an unstable equilibrium. Give a poor person a bit of extra money, and he can afford to buy better boots. With the money he saves from not having to buy new boots each year, he can buy a more durable version of something more expensive. And it keeps snowballing until he’s not poor anymore.

    In practice, poverty seems to be fairly stable, and can often recover from fairly large positive income shocks.

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    • Tiny snowballs don’t make a snow fort. Not until you have an awful lot of them. So fixing poverty isn’t a matter of one pair of shoes. It’s a whole host of things. And the poor pay more all over, as Creon links above. I’ll just challenge you to actually read it.

      It’s not just “the poor.” Congress in 2007 passed a law to deal with this problem too. It protected military members, but did nothing for others who have been harmed since the repeal of most states’ usury laws – and the practice still goes on.

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      • See, there’s good stuff in you posts MA! Things you can challenge libertarians on rather than insult them about. One thing is usury. Should there be an upper limit on interest rates? Should we prohibit predatory lending practices even tho they seem to be voluntarily entered into? Etc etc.

        If you’re right about this stuff, and you ask them some questions, they’ll fall right into your trap.

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        • One thing is usury. Should there be an upper limit on interest rates? Should we prohibit predatory lending practices even tho they seem to be voluntarily entered into?

          Speaking as a libertarian myself, I don’t quite see the trap here, but maybe that is because my views on financial markets are less dictated by abstract theory and more based on what I see as a capital markets professional.

          If I had time, I could write an expanded post on this subject, but I will answer each question briefly and spare you the pain of additional reading:

          1. Yes, in some cases, interest rates should be capped, especially when the underlying collateral consists of reasonably liquid assets (the kinds of assets predatory lenders seek qualify in this regard). If someone takes out a loan based on a tax refund and the lender has a claim to that refund, I can not see how the lender’s principal risk is so high to justify APR’s exceeding 100% when all of the bullshit fees are taken into consideration.

          2. Yes. Information asymmetries in consumer finance are enormous and “lenders”, especially lenders of last resort have used this to screw people over more times than I can care to count. Predatory lenders don’t care about a borrower’s ability to repay principal since they have a borrower’s collateral and can convert that to cash as its exit strategy. Predatory lenders seek to maximize interest payments and fees and are incentivized to string borrowers along as long as possible. That may be a voluntary arrangement (albeit indirectly), but I don’t think it’s mutually beneficial to both parties. Again, I would have to spend more time I don’t have defending this but I hope this gives you a general idea of where I’m coming from.

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      • Yes, I read that article when it came out, and I have the same objection: This implies an unstable equilibrium that doesn’t seem to model real-world poverty very well. That is, if this is why people get stuck in poverty, then a one-time cash infusion should result in a permanent increase in a poor person’s disposable income. The guy who pays $15 to cash his paycheck could pay the $7 to get a replacement driver’s license, and then he never has to pay a check-cashing fee again. A $500 rainy-day fund means you never have to take out a payday loan again.

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    • With the money he saves from not having to buy new boots each year, he can buy a more durable version of something more expensive. And it keeps snowballing until he’s not poor anymore.

      Why does it assume that that series either diverges or converges somewhere north of poverty?

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