« Brad DeLong's query | Main | Sentence of the day »
The Persistence of Poverty
...paying the first bill in a stack of overdue bills does little to relieve a guilty conscience.
That is from Charles Karelis's truly intriguing The Persistence of Poverty: Why the Economics of the Well-Off Can't Help the Poor.
If your car has lots of scratches and dents, getting rid of just one doesn't help much either.
More generally, if pains and troubles are high enough, extra pain and trouble just isn't so bad. You hardly notice it. But that overturns standard economic assumptions of diminishing marginal utility, and the rest of Karelis's model follows directly.
Poor enough people will accept risk in the downward direction rather than smoothing consumption, so they buy lots of lottery tickets. They also commit more crime, so they can have at least some joyous times, and they take lots of "stupid" chances. Yet the poor are not irrational or necessarily dysfunctional in terms of procedural rationality, but rather they are optimizing given constraints. They are taking the Friedman-Savage model very very seriously.
"Getting tough" with the poor through policy is more likely to backfire than succeed, as it just encourages more mean-reducing, risk-taking behavior. At some level the marginal utility of consumption for the poor fits the standard model, so income effects will more likely bring normal behavior than will substitution effects. That's one reason why the EITC works relatively well.
The more the poor regard themselves as lagging the rich (rather than doing better than, say, their peers back home in Gujarat), the more stupid risks they will take. That's why poor immigrants are more value-maximizing than the poor that have lived in America a long time and adapted to American norms and expectations. The immigrants don't regard their burdens as insuperable and they are on standard downward-sloping marginal utility curves.
It can make more sense to give money to people on the verge of leaving poverty, rather than people deeply mired in poverty. The former transfer will get people onto "normal" marginal utility curves, but the deeply poor will just squander their new wealth, as it doesn't much alleviate their unhappiness.
This short book is a wild ride. The absence of traditional evidence makes it hard to evaluate these hypotheses, but it is one of the more valuable and stimulating contributions of the year.
Posted by Tyler Cowen on August 7, 2007 at 06:16 AM in Economics | Permalink
Comments
Fantastic post!
Posted by: Andrew Flowers at Aug 7, 2007 7:08:17 AM
Very interesting. This also suggests value in subsidizing high school study abroads to developing countries for poor native-born Americans. For example, I wonder if there is a difference in performance for poor evangelicals who go on missions to developing countries. Although if the limitation on mobility for native born poor is in part IQ (as opposed to immigrant poor from Gujarat) such study abroads may have limited value.
Posted by: Hopefully Anonymous at Aug 7, 2007 8:20:43 AM
Come to Baltimore. Stubborn crime and poverty. In this case, one cannot even blame it on Republicans, as the state (and city) is overwhelmingly run by Democrats, and is one of the wealthiest state's in the US.
Posted by: mcwop at Aug 7, 2007 8:23:06 AM
As Mark Twain said, "Interesting, if true. And interesting, anyway!"
Posted by: pawnking at Aug 7, 2007 9:17:39 AM
If you define poverty in relative terms (such as bottom 10% of income), then you cannot make someone "leave poverty" without pushing someone else into it. And if you define it in absolute terms (PPP adjusted), then what about the folks in Gujarat (or 19th century for the matter)?
Posted by: Giedrius at Aug 7, 2007 9:22:28 AM
If your income << c(0), a marginal increase doesn't have an effect. (Throwing the starfish closer to the water doesn't save its life.)
I had thought this was well known in economics, if not in the teaching of it. Perhaps I was mistaken.
Posted by: Ken Houghton at Aug 7, 2007 9:51:45 AM
So then, if your neighbors, your friends, people you see on TV are noticeably richer than you, and you can see no way to get to their level, you're pretty likely to give up, rather than taking steps to be more like 'that nice family down the street'?
Well, that explains rap.
Posted by: shawn at Aug 7, 2007 10:10:11 AM
Isn't the thesis rather like saying that writing the first chapter of a book is no good, because it doesn't make you a published author? Any positive change can have a follow-on effect if it's allowed to.
Posted by: Robert Speirs at Aug 7, 2007 10:12:45 AM
"That explains rap"? I really wonder if a musicologist would arrive at the same ignorant, dismissive, and likely bigoted, conclusion.
Posted by: irtisaam at Aug 7, 2007 10:58:26 AM
Addendum to the Baltimore reference:
Baltimore supposedly had (has) around 60,000 heroin addicts, out of a population of about 650,000.
Baltimore has around 300 murders annually (although this declined slightly in recent years), the vast majority related to the drug/gang activity in the city.
If Levitt's calculations about low wages in Chicago's gangs translates to other big cities, then it seems that the poor of Baltimore certainly fit this risk-taking, crime committing, brutal-living model.
Posted by: Jim Outen at Aug 7, 2007 11:00:13 AM
Sounds interesting. I like the strategy of analyzing the behavior of people as if they were rational. It's not true, but it should work as well for the poor as for hedge fund managers.
Posted by: Bill Harshaw at Aug 7, 2007 11:04:44 AM
My mind is running slow today.
but isn't their a conflict between these two paragraphs:
"Getting tough" with the poor through policy is more likely to backfire than succeed, as it just encourages more mean-reducing, risk-taking behavior. At some level the marginal utility of consumption for the poor fits the standard model, so income effects will more likely bring normal behavior than will substitution effects. That's one reason why the EITC works relatively well."
AND
"It can make more sense to give money to people on the verge of leaving poverty, rather than people deeply mired in poverty. The former transfer will get people onto "normal" marginal utility curves, but the deeply poor will just squander their new wealth, as it doesn't much alleviate their unhappiness."
The first paragraph supports a redistribution of wealth through the EITC while the second says that any such effort is ultimately useless. right???
Posted by: hmmm at Aug 7, 2007 11:26:55 AM
Might someone dismiss the 'that explains rap' comment as racist? Perhaps. Might someone believe that the prevalent ‘rob to get ahead, and as the only way to get ahead’ theme in rap is related to these very themes of "a too-scratched car" and "commit more crime, so they can have at least some joyous times"? More likely.
Or, is any criticism of a form racism?
Posted by: shawn at Aug 7, 2007 11:47:08 AM
@hmmm...I was confused about that for a minute, too...but I think that the point is that AT SOME POINT, a "redistribution of wealth" (as you're phrasing it...I don't think that's the only way it would happen, but nonetheless) would be effective in moving someone out of poverty, where below that point, they'll only squander the money.
Posted by: shawn at Aug 7, 2007 11:50:50 AM
where below that point, they'll only squander the money
Where "squander," I guess, means "buy something one needs, rather than paying one of the 100-odd debts one owes."
I don't think you can talk about poverty meaningfully while still using words like "squander." Indeed, I had thought that was one of the points of the book under discussion.
Posted by: Anderson at Aug 7, 2007 11:57:14 AM
Hmmm:
Correct me if I am wrong about the EITC, but it seems in line with both paragraphs. If you earn nothing, you get nothing. If you earn a bit but are still in poverty, you get some. If you earn enough to stay out of poverty, you get nothing. It has triage built in, paying the middle portion to nudge it into normal behavior. It may not be perfectly targeted for that (as in where it kicks in and leaves off), but the idea seems complementary.
Posted by: Zubon at Aug 7, 2007 11:58:04 AM
hmmm:
The EITC affects a large fraction of the workforce. Depending on family size, one can earn $30K per year and still be getting something from the EITC. Also, EITC disbursements are increasing in income until a nontrivial earingings threshold (It's on the order of $10-15K depending on family size*), afterwards there is a phase-out region. Thus the two paragraphs make sense if people earning $15K or so per year can be said to be "on the verge of leaving poverty."
*See http://www.econ.ucdavis.edu/faculty/hoynes/working_papers/TaxPolicyEconomy_ConferenceDraft.pdf page 22.
Posted by: hrh at Aug 7, 2007 12:00:03 PM
...buying lottery tickets and other forms of gambling would count more as squandering than 'buying something one needs', wouldn't it? buying beer rather than food would also count as squandering. IF it's the case that those kinds of, as Tyler couches them, "stupid" decisions occur more readily at a minor or major windfall of cash below a certain level of poverty, then that's the interesting and useful thing here, I think.
I agree that that word is probably overly pejorative, and it has an inherent value judgment...not sure which other phrase works better.
Posted by: shawn at Aug 7, 2007 12:01:37 PM
If impatient, self destructive behavior is rational, I guess everything is rational. Discipline, hard work, that's a preference, like preferring the color blue over green.
Posted by: eric at Aug 7, 2007 12:11:09 PM
So let's see we have:
1. Blame the victims
2. Victims don't have to eat or educate their kids or have health care so there is no point in giving them public assistance
3. Consider only macro policies and ignore the fact the the public is made out of people.
Perhaps studying the attitudes of those caught in the poverty trap might be instructive here is a good place to start:
The Corner: A Year in the Life of an Inner-City Neighborhood
I hate to break it to all those who do their pontificating from 30,000 feet, but policies must help real people not averages.
By the way, I'm willing to state that the US can currently afford to eliminate all those living a sub-standard life style. That we chose not to is a function of our Puritan heritage, and the Calvinist pursuit of material wealth.
I have an essay on this on my web site, I won't give the link because most commentators prefer to criticize without actually doing any reading. You can find it easily enough if you wish to. It concerns poverty.
Posted by: robertdfeinman at Aug 7, 2007 12:43:31 PM
The worst problem with being poor in America today is not that you can't afford to buy enough stuff but that you can't afford to get away from other poor people.
Posted by: Steve Sailer at Aug 7, 2007 12:46:48 PM
ok, i get it now. thanks for the assistance. I didn't quite understand the dynamics of EITC. and this sentence,
"At some level the marginal utility of consumption for the poor fits the standard model, so income effects will more likely bring normal behavior than will substitution effects"
doesn't cover those in extreme poverty, as tyler points out at the second to last paragraph. This sadly rings true from my experience.
Posted by: hmmm at Aug 7, 2007 12:48:11 PM
Anyone who objects to the use of the term "squander" to refer to how many poor people spend windfalls and other extra money needs to spend more time with actual poor people. I've never seen so much drinking, smoking, and marijuana use than in the homes of poor people living off of welfare and/or disability, housing assistance, and food stamps.
Another great example: A woman who used to work with me complained frequently about her teeth and how they hurt and blamed them for why she couldn't eat healthy food and thus was morbidly obese. She also had difficultly getting to work reliably because her car had broken down and she didn't have the money to fix it. When she received a large year-end bonus she spent it on buying a set of very fancy bowling balls instead of on going to the dentist or fixing her car. Also, she complained that she couldn't afford to buy health insurance, but she seemed to have plenty of money for parties, fireworks, her cell phone, and getting new tattoos.
Posted by: Jacqueline at Aug 7, 2007 1:36:45 PM
Jacqueline:
Now perhaps you would like to apply your moral principles to the $7000 shower curtain or the $1 million birthday party?
How about the new Tuscan winery that is charging about $700 for a bottle of recent vintage wine?
Many poor people spend on "foolish" things because they know that this may be one of the few times in their lives that they can live beyond their means. Middle class people think that the wise thing to do is to save up for the future, but these people's lives are so marginal that they will never be able to save enough to make a difference to their standard of living. So they live for the present.
It is a sorry reflection on our society that we can't care for or have compassion for such people, but must seek to demonize them.
Posted by: robertdfeinman at Aug 7, 2007 1:47:31 PM
Good article,
"Consider only macro policies and ignore the fact the public is made out of people."
My mother thinks I'm a heartless b*****d since I sided with my dad's employer when they modernized, causing my dad to loose his job. I was trying to explain to her that society was now better off because the plant's economic output, per unit of labor input, had gone up. The workers who lost their jobs (and they did receive a modest buyout packages) were now free to work elsewhere with no loss in production at the plant. Any additional work they did decide to do translated into a net, per capita, increase in economic output for society. She didn't appreciate my analysis.
Posted by: Richard at Aug 7, 2007 1:59:36 PM
