Punishing Poverty, Rewarding Affluence

How the United States deliberately makes the rich richer and the poor poorer.

One of the most striking things about the United States is that, as a society, it spends far more money subsidizing affluence than alleviating poverty.

The other notable thing is that poverty persists because the non-poor benefit in many ways by keeping a significant number of Americans in poverty.

Those are two of the most striking conclusions from Princeton sociologist Matthew Desmond, who has a new book out. I don't have the book in my hands (there are over a hundred holds so far at my library), but I've been seeing him interviewed by a number of media outlets and what he has to say is shocking.

In fact, rather than a natural outcome of differential talent, there are a number of ways the rich get preferential treatment to stay rich while the poor are kept down. These are becoming more and more extreme and apparent in modern-day America. In other words, if poverty is the result of individual decisions, it is largely decisions by the rich.

One of the most common canards is that spending money does nothing to alleviate poverty. That sounds ridiculous on its face, and it is. Desmond says that numerous studies show that spending money does, in fact, do a great deal to alleviate poverty. He notes that the last ambitious poverty reduction effort in America—Lyndon Johnson's "Great Society"—reduced poverty by half.

So spending money, does, in fact, reduce poverty, just as one would expect. So why does the money America spends on poverty seemingly accomplish so little?

The reason is because federal money is given to states who have total discretion on how to spend it. What that means in practice is that only 22 cents on average of every dollar the government spends on TANF gets to the people who need it. The rest is siphoned off in a panoply of moralizing, patronizing programs such as Christian summer camps, abstinence-only sex education, job training programs, marriage initiatives, and so on. Desmond notes that Kentucky is the only state where more than 50 percent of aid to the poor actually gets to the poor. He also notes that single parents aren't substantially poorer than their married counterparts in other countries, despite being demonized in the Conservative press (and, of course, kids have no control over their parents’ situation).

Or sometimes states just sit on it. Billions of dollars in aid to the poor sits idle in various accounts. Desmond notes that Tennessee is currently sitting on over 700 million in unspent welfare funds and Hawaii is sitting on enough to give every poor kid in the state ten thousand dollars.

The poor are victimized in other ways. They pay the vast majority of the financial fees charged by banks. According to Desmond, 61 million dollars in check cashing and payday loan fees is siphoned off every single day, the vast majority of it from the poorest Americans. That is, every year Americans have to collectively pay 11.7 billion dollars to access their own money.

Then they are victimized by the housing market. Unable to get mortgages, they are trapped in the rental market where prices just keep going up. Desmond found that, except for a few big cities, profits for landlords in the poorest areas are double those of more affluent areas. Why? It's because the fixed costs to landlords like property values, mortgages, and taxes are much lower in these areas, but the difference in rent between poor and affluent neighborhoods is negligible.

He notes that other wealthy countries do not tolerate the levels of absolute deprivation seen in the United States (which is referred to as “American-style poverty”). It's no wonder so many people turn to food, drugs and alcohol to cope. It’s no wonder so many poor people suffer from depression and anxiety, making their situation even worse. We focus on the behavior of individuals so we can justify poverty as the result of individual actions—in other words, in America we see poverty as a moral failing. This upholds our just world beliefs and allows the wealthy and middle-class (what remains of it) to look down on the poor and working poor—they get what they deserve. Desmond quotes the novelist Tommy Orange: “What I’m here to talk about is how our whole approach since day one has been like this: Kids are jumping out the windows of burning buildings, falling to their deaths. And we think the problem is that they’re jumping." Desmond argues that the we need to look at the fire and its causes and not just blame people for jumping.

Meanwhile, the U.S. government is happy to subsidize affluence. It grants a whole host of tax breaks and deductions to wealthy and upper-middle-class households such as the mortgage interest tax deduction and generous tax breaks for college savings, retirement funds, and wealth transfers—the vast majority of which accrue to the most affluent families.

Desmond finds that the U.S. government spends 36,000 dollars on average on the wealthiest 20 percent of Americans but only 25,000 on the poorest 20 percent of Americans. That is, on average the government spends nearly 40 percent more money on the richest Americans than on the poorest Americans: "We're doing a lot more to guard fortunes than to expand opportunity." Desmond notes that in 2022 the United states spent 190 billion dollars on homeowner subsidies but only 53 billion on direct housing assistance to the needy.

Desmond rejects the framing that tax loopholes and subsidies are somehow different than direct aid. Both cost the government money, he says, and both put money in someone's pocket. They are both a form of redistribution, just in different ways.

Those tax loopholes, he says, starve anti-poverty programs of needed funds. In fact, he says, if the wealthiest Americans just paid what they owed—not more—there would be enough money to end poverty: “If the top 1 per cent of income earners just paid the taxes they owed, the country would raise an additional $175bn a year. That’s almost enough money to fill the poverty gap.”

How do the wealthy and upper middle class benefit from keeping other Americans in poverty? By taking advantage of the cheap goods and services that the working poor produce. By benefiting from high stock prices that come at the expense of keeping wages low and busting unions. By fighting minimum wage increases. By preventing low-income housing from being built. By opposing public transportation, keeping the poor segregated and dependent on cars. By fighting tooth-and-nail to keep the their taxes low and preserve the tax loopholes that disproportionately benefit them at the expense of poor and needy families.

They get cheap fast food. They get Uber. They get DoorDash. They get cheap daycare. They will cry and moan about anything that costs them a dime—including higher wages for the bottom 50 percent of workers. You saw this in online posts were wealthy Silicon Valley techbros were whining about having to play a whole 50 cents extra for their morning breakfast burrito.

The US spends almost as much as France on welfare, but this welfare — including tax credits and employer-sponsored health insurance — favours the rich too. Overall the US tax system is barely progressive: rich families pay an effective tax rate of 28 per cent, while poor and middle earners pay 25 per cent.

While the Republicans constantly decry "welfare dependency", the the data show that welfare avoidance is far more widespread than welfare dependency. He notes that 1 in 5 elderly Americans who are eligible for food stamps don't take advantage of it. Billions in aid go undistributed. One reason is because we have enacted a stringent regime of means-testing which comes with all sort of cliffs and cutoffs which are beloved by both parties. This is supposedly to make sure benefits only go to "deserving" families. Another big reason is because government aid programs are deliberately bewildering and hard to access by design. For example, only a quarter of unemployed workers filed for benefits in 2022. I found this comment on Hacker News which largely mirrors my own experience here in Wisconsin:

Michigan pays a maximum of $362 a week. Earlier in the pandemic, they waived the job application reporting requirements, and I got the enhanced unemployment, which made it much more worthwhile—enough to cover at least my mortgage, especially combined with the now-also-expired child tax credit.

But waiving the reporting requirement has now expired and it's $362 a week, and has been since 2002. You have to fill out antiquated forms which include things like the phone number and address of the hiring manager you interviewed with—information that often isn't even available, when so much of the application process for most positions is now via online forms. Slip up slightly, and you'll lose weeks of pay.

Given that this jumping through hoops takes a lot of time that I could otherwise use for my job search, last time I opted to not even bother—better to get to a new job faster than work to earn a small fraction of my usual pay, which won't even cover mortgage alone. This shouldn't be a huge mystery.

https://news.ycombinator.com/item?id=3537660

Less than 1% of calls to state unemployment call centers were answered, audit shows (Milwaukee Journal-Sentinel)

Governor DeSantis admits Florida’s unemployment system was designed to not pay out claims (NBC2 News)

And I haven't heard Desmond talk about it, but everyone knows that the United States is alone in the developed world for linking health care access to employment and having by far the world’s most expensive and predatory higher education system, saddling Americans with a mind-boggling 1.5 trillion dollars (trillion with a 'T') of student loan debt. “Socialism for the rich and rugged individualism for the poor” would actually be an improvement over the current situation where the poor are sucked dry and exploited mercilessly. I encourage you to watch this interview:

Subsiding Affluence

Subsiding affluence has been on full display recently with the U.S. government rushing to the rescue of wealthy Silicon Valley entrepreneurs and V.C. investors in the wake of the SVB Bank failure. The U.S. government was happy to make these wealthy depositors whole, no questions asked, even though the cap on deposit insurance is only $250,000.

Defenders of this argue that the money is coming out of the fund that insures deposits, and so will not cost "taxpayer" money. This belies two points. First, I don't have more than $250,000 in my local credit union (and never will), but if it went under, the U.S. government would surely tell me (and you) to go pound sand. But more importantly, if the same protection were extended to every depositor in the banking system instead of just this one particular bank, there would be insufficient funds in the system to cover it. So SVB depositors are clearly getting a subsidy from the rest of us because they only paid enough into the insurance fund to cover the first $250,000 and not the full value of their deposits. The billions put into SVB will be recouped through hikes on the premiums every other bank pays which will be passed along to the rest of us.

It’s the classic, “privatize profits, socialize losses” scenario. As Nathan J. Robinson asks, "If the rich customers of Silicon Valley Bank deserve to be protected from economic hardship by the government, what about the rest of us?"

...the rich are considered “too big to fail,” because their economic woes can have cascading effects that hurt the whole economy, but when bad things happen to poor people, they are not similarly “insured” by the government.

It was not the fault of SVB depositors that the bank collapsed—they trusted the institution—but nor was it the fault of student loan debtors that the value of their degree was less than what they were promised. It is not the fault of people who get sick that they rack up huge medical bills. They deserve to be insured against risk, too, through free government healthcare.

The Federal Reserve acted within hours to try to ensure SVB’s collapse didn’t hurt the depositors, because this kind of harm is considered catastrophic and unacceptable. But there are plenty of harms to people that go on every day that are not treated with similar urgency, because there is an implicit hierarchy of how much different people matter.

Every Libertarian Becomes a Socialist The Moment The Free Market Screws Them (Current Affairs)

Contrast the hand-wringing and pearl-clutching over a mere $10,000 dollars of student loan forgiveness (out of that 1.5 trillion) with the generous terms extended to business owners regarding the Paycheck Protection Program (PPP)—of which less than 35 percent actually wound up in the hands of American workers:

The bulk of the loan money handed out through the government’s $800 billion Paycheck Protection Program (PPP) didn’t go to workers—it helped business owners and shareholders.

That’s the finding of a new study published by top economists at the National Bureau of Economic Research. The group, which includes 10 professors and researchers—among them MIT economics professor David Autor and several Federal Reserve economists—writes in their paper that the vast majority of PPP loans given out during the first round of disbursements, in 2020, weren’t used to offset employee paychecks.

Less than 35% of the $800 billion in PPP loans actually went to workers, say economists (MIT Blueprint Labs)

Perhaps most galling of all, one of the petitioners who sued to prevent students from getting that relief, Myra Brown, was herself forgiven of over 47,000 in PPP loans. Double standards much? It only gets worse the harder you look:

As COVID-19 shutdowns threatened businesses back in 2020, the U.S. government began issuing nearly $800 billion in potentially forgivable Paycheck Protection Program loans. The program was designed to help small businesses keep workers employed during the uncertain early days of the pandemic.

More than two years later, the overwhelming majority of these loans have transformed into government grants, as 91% have been either fully or partially forgiven, according to an NPR analysis of data released by the Small Business Administration on Oct. 2.

The SBA expects that figure to grow to nearly 100% as more forgiveness requests are processed this fall.

Virtually all PPP loans have been forgiven with limited scrutiny (NPR)

Yet we’re told we can’t have the “moral hazard” of students getting a small modicum of debt relief. It’s interesting how often student loan forgiveness is always framed as costing “taxpayer money” while all those generous tax deductions are never mentioned. So, who are the real welfare queens in America? We sure do seem to have lots of money sitting around for some people¹.

Economist Dean Baker has written tirelessly (and published a book) describing the myriad ways the U.S. government policy is expressly designed to make the rich richer, including extending generous copyright protections, government-granted patent monopolies, and erecting barriers for licensed professionals in order to shield them from foreign competition. In a recent column, he describes how U.S government policy surrounding Covid functions as a subsidy to the pharmaceutical industry. Instead of funding clinical trials for an open-source, cheap-to-produce vaccine developed by researchers at Baylor University and Texas Children’s Hospital which has been widely used in India and Indonesia, the government handed over research to Moderna which will now charge the government over $100 per shot.

The arithmetic on this is incredible. Shots of Corbevax cost less than $2 a piece in India. If it costs two and a half times as much in the U.S., that still puts it at $5 a shot. That implies savings of more than $100 a shot. That means that if we get 100,000 people to take the Corbevax booster, rather than the [Moderna]-Pfizer ones (Pfizer is planning to also charge over $100 for its booster), we’ve covered the cost of the trials. If we get 1 million to take Corbevax, we’ve covered the cost ten times over, and if 10 million people get the Corbevax booster, we will have saved one hundred times the cost of the clinical trial.

But for now, we are not going this route. Remember, the purpose of government is to make the rich richer.

The Silicon Valley bank bailout: The purpose of government is to make the rich richer (Real World Economic Review). And there are thousands of examples just like this that the press simply will never tell you about, preferring to uphold the idea that the rich are just better and harder-working than the rest of us².

We may hate the poor, but we certainly seem okay with spending money on the richest of the rich. We even fund their lavish weddings:

Colorado has spent nearly $300,000 in taxpayer money on private weddings in the state as part of an incentive program meant to lure event planners to spend money here and bolster local economies after the pandemic...After receiving details of the program through the Colorado Open Records Act, CPR News found:

• One wedding in Aspen at actor Kevin Costner’s rented private ranch received $92,287 — almost a third of the total and nearly 10 times more than the second highest.

• Roughly two-thirds of the cash has gone toward weddings in Pitkin, Eagle and San Miguel counties. Just 14 counties of the state’s 64 are represented in the wedding program.

• To qualify for a rebate, a wedding must cost at least $35,000.

• Metro State University’s hospitality school administers the program, and the recipient of the $92,287 rebate is one of the school’s largest donors. In addition, the administrator’s brother received a $4,467 rebate for a wedding in Vail.

Colorado taxpayers have helped pay for 35 private weddings since 2021 (Colorado Public Radio)

Some Alternatives

A common argument concerning the SVB Bank bailout is that it's necessary to prevent the entire banking system from collapsing which would hurt all of us. But that misses the fact that there are other ways of configuring the financial system so that systemic risk doesn't turn into a hostage situation every time where taxpayers are obligated to funnel billions of dollars to the wealthiest Americans.

One common proposal I’ve heard from a number of economists such as Dean Baker, Yanis Varoufakis and others is to give every American a digital wallet at the Federal Reserve. This would eliminate the middleman. Baker writes of the idea:

The most obvious solution would be to have the Federal Reserve Board give every person and corporation in the country a digital bank account. The idea is that this would be a largely costless way for people to carry on their normal transactions...The idea would be to effectively separate out the banking system we use for carrying on transactions from the system we use for saving and financing investment…

We would have the Fed run system to carry out the vast majority of normal financial transactions, replacing the banks that we use now. However, we would continue to have investment banks, like Goldman Sachs and Morgan Stanley, that would borrow on financial markets and lend money to businesses, as well as underwriting stock and bond issues. While investment banks still require regulation to prevent abuses, we don’t have to worry about their failure shutting down the financial system.

Not only would the shift to Fed banking radically reduce the risk the financial sector poses to the economy, it would also make it hugely more efficient. We waste tens of billions of dollars every year maintaining the structure of a financial system that technology has made obsolete. The current system also makes some people incredibly rich, even when they fail disastrously...

Seth Ackerman describes the proposal in Jacobin Magazine. Ackerman notes how the separation of business ownership from funding creates systemic risk because bank deposits are effectively loans from depositors that banks invest in other activities, yet they also function as money-on-demand to pay for things we all need including our salaries:

...banks don’t keep the cash we lend to them in a vault; they invest the money by making their own loans or buying securities. That means whenever you request a withdrawal from your account (whether at an ATM or inside a bank branch or whatever), your bank’s ability to come up with the cash depends ultimately on how its investment portfolio has been performing.

A bank deposit is therefore, in one sense, not so different from a mutual fund or any other kind of investment...But with bank deposits, the irrationality I’ve been describing becomes uniquely and explosively dangerous. That’s because deposits are a unique kind of financial asset: unlike almost every other kind, they are used as money....In a modern economy, in fact, deposits make up the bulk of the money supply.

Why Do We Even Need Private Banks? (Jacobin)

Ackerman goes on to ask, if the Federal Reserve must permanently guarantee every deposit, why don’t we just bank directly with the Fed? He describes a proposal from Saule Omarova and Robert Hockett to do just that. And, of course, Post Office Banking would help the poor avoid those parasitical charges and overdraft fees. One wonders if the banks will be bailed out when the next systematic crisis occurs which looks to be a real-estate crash because so many people are working remotely:

American offices are half-empty. That could be the next big risk for banks (CNN) Will we see yet another bailout?

And, of course, I’ve written before that the United States could embark on a massive apartment building program in growing urban areas that would help bring down the cost of housing. Those apartments could charge below market rate in order to take the pressure off renting costs. If rents got too low, we could sell the buildings off to the private sector in a sort of Keynesian countercyclical policy. The government already does this, for example, with commodity producers—it buys up oversupply in order to prevent gluts and sells it off when prices rise again. Why isn’t this on the table for housing if it’s such an acute emergency? Why do we subsidize wealthy agricultural conglomerates while letting ordinary people go broke from paying exorbitant housing costs (or become homeless)? Why do we expect the free market to solve it?

Conclusion

Perhaps the most tragic thing about all this is that we've seen the alternative in action. During the pandemic, as The New York Times put it, "The U.S. Built a European Style Welfare State." Eviction moratoriums, extended unemployment benefits, and money for child care and health care subsidies dramatically lowered child poverty and expanded access to health care. As Desmond notes, states which kept these benefits fared no worse economically than states which pared them back at the earliest opportunity. In other words, giving money to people works. Yet the government is ready to strip it all away because it’s “unaffordable” or because it’s being falsely blamed for inflation:

Unemployment Insurance is one area in which some experts would like to see changes become permanent. More than 15 million people who aren't typically covered—like part-time workers, interdependent contractors and the self-employed—were covered for a year and a half.

Another is support for families with young children. The expanded child tax credit—given monthly for a half a year so families didn't have to wait until tax time—reduced poverty by one third.

A third is health insurance access. A policy decreasing health insurance prices for people who buy their own insurance and making it free for the lowest earners is one reason the uninsured rate has dropped to a record low of 8 percent, and Congress has already extended the subsidies through 2025.

The U.S. Built a European-Style Welfare State. It’s Largely Over. (New York Times)

This weekend I have to file my taxes or face a penalty despite the fact that nothing has changed for me and the government knows exactly how much I owe. Citizens of other countries don't have to do that. They receive a bill form the government, which they are allowed to amend or contest if necessary. Other countries also allow their citizens to easily file their taxes for free online. The U.S. government does neither of these things, even though it easily could. Instead, I have to pay hundreds of dollars in hidden and opaque fees to private companies in order to do this.

Why? Because tax preparation companies have prevented the government from doing those things in order to keep siphoning money to themselves from the rest of us.

Inside TurboTax’s 20-Year Fight to Stop Americans From Filing Their Taxes for Free (ProPublica)

While relatively minor in this case, this deliberate kneecapping of the government in order to funnel money to the rich and big business for profit is analogous to every social policy in America. We’re constantly told the government is incompetent and can’t do anything right by these self-serving businesses even though it’s by design. Why don't we citizens demand better?

Oh, that's right, we're too busy fighting over "wokeness".

1. See, for example, this comment from Hacker News, home to some of the most strident, moralizing libertarians anywhere:

“Several businessmen I know have had PPP loans that are forgiven, including one who got a payout over $1 million. Not one of their businesses actually lost money, so this just ended up being extra profit. Outside of restaurants and entertainment, it seems that the PPP loans were just a massive payout to the rich. How can we prevent such wasteful government handouts in the future? How can I avoid being demotivated as an entrepreneur when I see guys getting million dollar government payouts when I have to hunt and scrap to get deals in private enterprise? Is this just the end of capitalism?”

Ask HN: $1m+ Forgiven PPP Loan

No, it’s not the end of captialism—it is captialism and, as the internet meme goes, “always has been”. And similarly:

“When I was in college in DC during the financial crisis, friends and I were at a bar and some guy comes in and pays the whole bar's tabs. Shouted "TARP MONEY!" and leaves. Pretty sure that guy was doing some fraud, but he was nice enough to share so I guess that's something.”

Imagine if a poor person did that with a welfare check.

2. I can tell you from experience that practically everything that gets built in America—including by the private sector—has a generous helping of government money behind it, including things like tax incremental financing.