What to Do About the Poor People

What to Do About the Poor People

July 14, 2008

With a Democratic administration likely next year, it is a good time to think about traditional Democratic interests, which mainly circle around the lower 50% of income earners. These are the lower middle class and the lower-lower middle class, and the genuinely destitute.

I birng this up because most Democratic solutions — dopey tax credits for daycare, for example — don’t really accomplish anything at all except serve as a Works Progress Administration program for accountants. Other “solutions” — like taxing capital gains at 28% or higher with no inflation adjustment — do absolutely nothing for those with lower incomes, but definitely impair economic progress, with the inevitable result of higher unemployment, declining wages, and all the other symptoms of economic stagnation. You need only look at Britain before Margaret Thatcher to see where all this ultimately leads. As for “tax credits,” it would be much better to apply a $50,000 exemption, or a “tax credit for living.” I mentioned $20,000 per adult and $10,000 per child, but why be so chintzy. How about $40,000 per adult and $20,000 per child? If you want to do something for those with lower incomes, here’s an idea: don’t take their money.

Most people with economic understanding tend toward the Republican stance, which is something like: “if the economy does well overall, it should be better for the middle and lower-middle class.” Which is generally true, but that’s typically about as far as it goes. There are many commentators who feel a great compassion toward the difficulties of what is really 50% or more of the U.S. population, but they typically have little economic understanding and come up either with ideas that make businessmen very nervous due to their potential negative economic effects, or amount to small-scale government handouts with little real effect at all. In general, the businessmen have it right — you can’t make the less-well-off better off by a method that cripples the economy as a whole.

One things about “poor” people today, in the U.S., is that they have vastly higher incomes than most people in the world, and enjoy a rather high standard of material abundance. Starvation is practically unheard of. If anything, obesity is a bigger problem. Most everyone has electric lights, hot and cold running water, and functional sewage systems. Even, despite the government’s official “fork you” stance, a certain level of government health care, if you are poor enough and know where to look. And yet, there seems to be an experience of extreme lack.

Part of this seems almost entirely psychological in nature. A graduate student of marine biology might have an income that falls solidly in the second or even first quintile (bottom 20% or second 20% of income), but the graduate student considers himself (or herself) as a member of the intellectual elite. Even after receiving their degree, and becoming a junior adjunct professor of some sort, they may make less than many construction workers, but they retain their elite cachet. Plus, the work is a lot more fun. So, part of the experience of being “poor,” is, I believe, the sense that you are a loser in a game in which there are winners and losers — not so much because of physical hardship per se. If you were a cleaner of hotel rooms for example, you would probably have the daily experience of being rather badly treated by one boss or another.

Within this category of psychological issues is the notion of expectation or entitlement. Today, there are a great many immigrant workers who seem to be able to work low-paying jobs (drywaller, dishwasher, grass-cutter) but manage to save a quarter or even half their income, which they send back to their family in Guatemala or southern Mexico. Indeed, the savings rate in China is about 40%! A dozen may live in a three-bedroom house, in a suburb near you, which keeps individual rent down. They may not own cars, but ride a cheap Wal-Mart bike to work (if you’re willing to work cheaply, usually you don’t have to travel very far). And, they eat the simple rice/beans/corn/tomato based foods that they are already accustomed to. I get the impression that most illegal immigrant workers don’t particularly like working in the U.S. — they prefer their rural Mexican villages in terms of lifestyle. Plus, they tend to look upon the U.S. as a Nation of Assholes. Nevertheless, it has been an environment where they have been able to thrive, in their very modest way.

Then there are the dropout artists — like Ran Prieur for example, who has carefully organized his life so that he needs only about $400 a month to live. Most of his time is spent lackadaisically enjoying his afternoons, much like any ski or climbing bum without the skiing or climbing. People have been doing this forever, such as this famous book published in 1978:

Possum Living

“Do you remember the story of Diogenes, the ancient Athenian crackpot? He was the one who gave away all his possessions because “People don’t own possessions, their possessions own them.” He had a drinking cup, but when he saw a child scoop up water by hand, he threw the cup away. To beat the housing crunch he set up an abandoned wine barrel in a public park and lived in that.

The central theme of Diogenes’ philosophy was that “The gods gave man an easy life, but man has complicated it by itching for luxuries.”

Apparently he lived up to his principles. But despite that handicap he seems to have had the most interesting social life imaginable. He not only lived in the center of the “Big Apple” of his day (5th century B.C. Athens), he also had the esteem and company of many of the most respected, rich and influential citizens, including that of the most expensive prostitute in town.

When Alexander of Macedon, the future conqueror of the known world, was traveling through Greece, he honored Diogenes with a visit. Alexander admired Diogenes’ ideas to the point of offering him any gift within his means. Diogenes, who was working on his tan at the time, asked as his gift that Alexander move aside a bit so as to stop shading him from the sun. This to the richest and most powerful man in the Western world.

Parting, Alexander remarked, “If I were not Alexander, I would be Diogenes.” Diogenes went back to nodding in the sunshine.

Diogenes was fair and just to all but refused to recognize the validity of man-made laws. He was a good old boy, one of the first back-to-basics freaks in recorded history. He lived to be over 90. Alexander, The Mighty Conqueror, drank himself to death at age 33.”

Diogenes didn’t have jack squat, but he wasn’t poor.

One of the things that makes poor people poor in the U.S. — not the only thing by any means, but we’re going one at a time — is the American Dream. Not the independent rise-to-success one, but the one that’s all about ownership, of a single-family house that looks like a farmhouse, and of course a car or three. The American Dream is mostly just what people are told to buy by their television sets. For millennia, people got by by doing basically what everyone else was doing. If you were born in Switzerland, you probably raised cows and made cheese, or maybe chocolate or cuckoo clocks, because that is what everyone else was doing, and it worked, and it was too hard to figure out an alternative way. One of the reasons this monkey-see-monkey-do strategy worked is because it was based on reality. You could see that the cow raisers and cheese makers were more-or-less successful, because they were right in front of you and you could confirm it with your own eyes. Also, if you did figure out an alternative way, you might not be included in the social gatherings of the cow and cheese people, which could have been pretty tough in rural Switzerland of yore. I don’t think Diogenes made it too well with the women, until maybe after he was famous and hobnobbing with Alexander the Great. Who wants to raise kids in a wine barrel?

This process has been co-opted somewhat by the marketing people. Instead of seeing a cow-and-cheese person, who is genuinely, in real life, satisfied with their situation, you see a person on TV — an actor — acting satisfied after their purchase of a plasma TV. After enough exposure to this sort of thing, a person concludes that everybody but them owns a plasma TV, and seems happy about it, so they should to — even if this is not really the case at all. Over time, it actually becomes the case: people in the neighborhood own this or that, and act like they are happy about it, just like the people on TV.

There is no end to such things. I have an interesting little book called The Exurbanites, which is about the upper-middle-class people who live in the exurbs of New York City, most of whom commute to the city. It was published in 1952! The book is about the whole ring of residential communities, but it is especially about Westport, Connecticut, which is where the author lived (before moving back to NYC), and also where I lived for some time. As part of his research, he talked with the local accountants, who know better than anyone who is really making the dough and who is just putting on a show. The accountants told him that, such was the level of expenditure necessary to maintain this exurban lifestyle (and this is upper-middle-class, not upper class), that practically everyone making under $60,000 a year in 1952 dollars (about $750,000 today) was barely getting by! Westport is an interesting little study, because, in the author’s day, it was a sort of model of the suburban, upper-middle-class ideal. (The rich are in Greenwich.) It still holds that mantle today, as it has long been the home of Martha Stewart, who exported a sort of Westport ideal across the United States and the globe during the 1990s. The author said the same thing of Westport in 1952. It was where the advertising people lived, and, whether consciously or unconsciouly, this ideal was transmitted across the country as What People Did. That’s why people in Arizona or Nevada, places with no trees or water, live in wood-framed houses with a lawn in the front and back. In Connecticut, there are trees everywhere, and after you cut down the trees to make your house, a lawn remains.

The point is, we are drenched in a media creation which projects an image of a lifestyle that costs about $250,000-$500,000 a year to maintain — not only through advertising, but through the television shows themselves, which generally portray people fairly close to the socioeconomic class of television producers. This is difficult enough for well-paid New York executives to maintain, and practically an impossibility — even the KMart version — for about 70% of the U.S. population.

There is no limit to where the “keeping up with the Joneses” game can go. I knew a fellow making about $3m a year who lived in Greenwich CT, which used to be a good Greenwich income, but who started feeling poor after a while. He flew commerical airlines, while the neighbors flew on NetJets, and raised his own kids rather than foisting them off on a platoon of nannies, tutors and governesses. Fortunately, he was of retirement age, and had the good sense to escape to Montana. Probably this is where some of the urge to tax the “rich” to oblivion comes from. (Most rich people don’t pay much taxes — they own companies — so the high taxes mostly fall on the upper-middle clas.) Gotta slow down the Joneses.

The point is, one of the reason people feel “poor” — this aching lack — is that they are chasing an ideal that they can’t afford, but what appears to be “what everyone does.” One of the most absurd manifestations of this tendency is Rent-A-Center, a scarily-successful store where you can rent home furnishings by the month or week. It targets low-income people who can’t scrape together $200 to buy a sofa at Ikea. You would think that the stuff at Rent-A-Center would be super cheap, sort of sub-Wal Mart. Not at all! These marginal low-income customers are buying — er, renting — stuff that would be right at home in the second living room in a Westport mansion. Look for yourself:

Rent a Center’s Home Entertainment Center offerings

Actually, such is the material abundance of U.S. society today, that you can furnish a house for damn near nothing at all. Just browse around Freecycle or Craigslist. It is not hard to find someone who is happy to give away — for free, or nearly so — perfectly nice and functional furniture, simply because they have the urge to buy something new. It is piled up in every basement and attic from the Atlantic to the Pacific. The immigrants seem to understand this well. Last year, I gave a piano to a Chinese guy from Brooklyn, who had to bring along an interpreter because he didn’t speak English. He wasn’t the fastest, either — I had it listed on Craigslist for weeks as a “free piano,” but no English-speaking people showed up at my door with a truck. Maybe they’re all renting pianos from Rent-A-Center.

I think the point of this is: the problem is not that many people are not participating in the “American Dream,” as a “limousine liberal” might conclude, but that trying to live up to the marketers’ fantasy makes people poor. The reason I bring this up first is: before you get into the details of how to achieve certain outcomes, it is good to think about the outcomes you want to achieve.

Okay, so far I haven’t got anywhere beyond “poor people should suck it up,” a typical Republican response, and this is supposed to be for Democrats. We’ll work on this project more in the future.

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Fannie and Freddie: Good job. Fannie and Freddie were always acccidents waiting to happen. They took on such absurd leverage — about 50:1 — that any significant housing decline would push them to the brink. While the situation with these entities was always rather dubious, with the shareholders in effect profiting from the implicit government guarantee, the Treasury’s solution for Fannie and Freddie is about as good as can be expected in this situation. That’s why it’s nice to have a real banker, like Paulson, involved, rather than some politician who is in waaaay over his head. Could you imagine a solution desgined by Barney Frank? The Treasury is talking about a $15B recapitalization of Fannie and Freddie, which means that existing shareholders will probably get diluted into oblivion. As of the end of Friday, FRE had a market cap of about $5.0 billion and FNM had a market cap of about $10.0B. (There could be more than $15B coming in the future.) Which implies that, at $15B, the US government would own about half of these entities. Well, that’s what should happen. They were government agencies to begin with, and could go back to that. The shareholders enjoyed the profits, now they get the risk. The libertarians would argue that the Fannie/Freddie bondholders, in other words, the holders of all that MBS, should also take a haircut. Maybe so, but we don’t want mass chaos either.

A recap plan — especially one where the errant management gets a swift kick in the butt, and maybe a perp walk on top of that — is not a “bailout” in the classic stealing-from-the-government fashion that was common in the 1980s and 1990s.

Privatize the profits. Socialize the losses.

I would much rather see the U.S. government take an equity stake in Bank of America, diluting the existing shareholders and brooming top management, than the existing plan to bail out BofA by making them whole on their busted mortgages. Since the federal government is involved, you could even set it up so the top maangement gets booted with no payout whatsoever, and even that they lose 70% of all their previously-paid compensation of the last five years. (That would play well on TV, and if the management is smart, they’ll take the deal and act like it actually hurts.) Remember, most of BofA’s liabilities are to its depositors, which are mostly FDIC insured in any case. Thus, whether the US government backs up BofA’s depositors via a capital injection or via insurance payouts in bank liquidation, the US government is picking up the shortfall in either case. Actually, the capital injection route is probably a lot cheaper overall, because in the chaos of a liquidation of a major entity, much larger losses are likely to occur. Not to mention that the broader economic effects would probably be worse. Also, the process of liquidation, as happened to the S&Ls in the early 1990s (or Indymac as we speak), is an avenue whereby a great many people with government connections got wealthy by scamming the government to sell them assets at stupid-low prices. And, an equity stake in Bank of America could be sold back to the market at some future date. The government might even make a profit from the deal.

S&P said recently that a federal government takeover of Fannie and Freddie would cost about $1 trillion. I doubt it. They have about $5 trillion of mortgage exposure, including guarantees, so that would mean about a 20% hit to their held and insured mortgages as a whole. These are fairly good-quality mortgages. Although the ones that foreclose might have a 20% loss rate, if that is 20% of the whole (a whopping huge number), that would imply about a 4% loss overall. Plus, the companies are still profitable on a pre-credit losses basis, so some of those credit losses would be offset by income. Maybe $100 billion overall, which is not really that much compared to what the government is sending up in smoke in Iraq.

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Super high mileage car watch: Volkswagen 1L at 235 mpg!

From the company that brought us the Beetle duing the road-boat era in the 1950s, and the 50mpg diesel Rabbit in 1976, comes this two-person concept car that gets 235 miles per gallon on a standard (non-hybrid) one-cylinder diesel engine, which produces 8.5 horsepower. It weighs 639 lbs. (The Honda Goldwing two-seat motorcycle weighs about 900 lbs.) Now, 8.5 horsepower is arguably not a whole lot, but then, the Volkswagen Beetle had only 28hp, pushing 1,500 lbs. So, the power/weight ratio is about the same, especially taking the improved aerodynamics into account. Volkswagen is expected to start a limited production run in 2010. Chevy Volt? — not a chance against this one. Okay, it has only two seats, maybe one-and-a-half seats really. But, most trips are with one person, and most of those that have multiple people are with two people. In practice, either a) the owner will have a second, four-seat car for use when needed, or b) if you have three or more people who want to go somewhere, at least one of the three will have a four-seat car, and you’ll take that one. I used a two-seat Mazda Miata as an only car for four years, for my wife and I, and it was never a problem. Cars don’t use gasoline when you don’t drive them. Keep the Suburban in the garage, and put 2500 miles a year on it when you need to carry big loads or lots of people.

Volkswagen 1L info

More 1L info

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Okay, now that we’ve had some car porn, it is time to balance out with some train porn! Trains are a much better solution than cars, even 250mpg cars. Not that you can’t have a car — Japan is a country with seven international car companies — but it should stay in the garage, with most of the trips by train, bike or foot. At least in urban areas, which is where most people live.

This is a train map of the Greater Tokyo area. Wow! Much better than trying to keep the whole suburban disaster above water a little longer with higher-mileage cars.