It's a small quibble, but it helps explain the different behavior of the wealthy and the poor. More importantly, it explains the mindset that changes with wealth.
Bret Devereaux of the acoup blog had a good piece on this in reference to medieval farming estates of lesser nobles and the abject poor [0]:
"I led in with all of that risk and vulnerability because without it just about nothing these farmers do makes a lot of sense; once you understand that they are managing risk, everything falls into place.
Most modern folks think in terms of profit maximization; we take for granted that we will still be alive tomorrow and instead ask how we can maximize how much money we have then (this is, admittedly, a lot less true for the least fortunate among us). We thus tend to favor efficient systems, even if they are vulnerable. From this perspective, ancient farmers – as we’ll see – look very silly, but this is a trap, albeit one that even some very august ancient scholars have fallen into. These are not irrational, unthinking people; they are poor, not stupid – those are not the same things.
But because these households wobble on the edge of disaster continually, that changes the calculus. These small subsistence farmers generally seek to minimize risk, rather than maximize profits. After all, improving yields by 5% doesn’t mean much if everyone starves to death in the third year because of a tail-risk that wasn’t mitigated. Moreover, for most of these farmers, working harder and farming more generally doesn’t offer a route out of the small farming class – these societies typically lack that kind of mobility (and also generally lack the massive wealth-creation potential of industrial power which powers that kind of mobility). Consequently, there is little gain to taking risks and much to lose. So as we’ll see, these farmers generally sacrifice efficiency for greater margins of safety, every time."
[0] https://acoup.blog/2020/07/24/collections-bread-how-did-they...
For instance: does your local city council respond to rising rents with the same urgency as they respond to falling real estate values? What did America put more money into during the coronavirus crisis, keeping people from being evicted or propping up the stock market?
Rich people don’t worry about tail risks because they don’t have to.
Not to mention if they ever get un-poor they don't have the knowledge to 'build wealth' until they start slowly learning it or from a mentor.
We would better off teaching 'home finances, interest and banking' classes instead of Algebra 3 or geometry 2 (for 99% of people)
It is crazy that for a standard "Savings" account: - interest earned is less than inflation. - I pay tax on that interest earned. "Saving" money in a common savings bank account pisses away value.
Many people are not capable of more financial management capability.
The middle class is often locked into a mortgage - I am too! - and is barely one step up. But it is one step up.
Ultimately, poor people don't own things that make money. They are not "rent seekers". They don't own stocks or real estate or anything else where the simple act of ownership makes money.
Interestingly, the current administration proposed to index capital gains taxes to inflation to address that very paradox. Unsurprisingly, their proposal would have just been a giveaway to the wealthy.[0]
[0] https://itep.org/why-trump-administrations-plan-to-index-cap...
US tax system is MUCH more complicated, than UK's... and UK's system is fairly complex.
It's not risk free, there is nothing that stops government from creating inflation so they can pay off the debt for in inflated dollars.
Today, central bank alone doesn't have power to make create money out of thin air. Government guaranteeing loans from banks to corporate players and projects is creating inflation. It's good for politicians as they can pay off their expensive mistakes in cheap money.
Isn't the bank meant to be using your money in a "managed fund" like manner? IE leverage it to make profits.
Here in Australia the banks make quite decent profits, and yet a savings account can't break even, before tax?!?
I haven't done the sums but I am curious if it is better to own shares in the bank than put money in the bank.
I am also inclined to ensure my son does get financial knowledge. It is hard to play a game you know only limited rules of.
Savings. Generally advertised as helping your money grow. It isn't advertised as a "Slow draining of value" account.
I began my career in private wealth management (minimum $5M investable assets).
I ditched that to try to help real people...joined a brokerage where I discovered sales targets still required $250K, at the very least, in investable assets (this excludes include home and any assets that cannot be held by the brokerage, so the net worth of these people was usually $500K+).
I finally gave up and attempted to run a business on a different fee model to educate lower/lower-middle class people on their finances. The Great Recession and my youthful idealism & naivete destroyed that.
Don’t forget that local government also taxes the poor with predatory fees and fines for minor infractions.
- parking tickets - car insurance fines - cash bail
Sources: https://www.latimes.com/archives/la-xpm-1996-04-20-me-60640-... https://theappeal.org/fines-and-fees-explained-bf4e05d188bf/
As a person who mentors poor people, it's not always this..
Don't get me wrong, there are some poor people who are poor by choice. They usually don't feel like victim and aren't stressed about them being poor. They are pleasant to deal with as they understand the trade off they are making. They are very small % of poor people.
Here is the difference I see:
1. Reasonable well off people (many of HN crowds are this) are usually willing to listen and discuss the ways some project or work can be done better.
2. I've gone to offer same suggestions to poor people, a lot of them listen to me absent minded. They complain "I am too tired", "I am losing hope" while a few of them go back to doing drugs and drinking.
3. Poor people don't want to lose their "immediate" freedom. While well off people understand it's a temporary scarifice they are making, later situation will change.
4. Optimism, all the guys who came up with ideas and plans are now doing well.
6. Ability to form relationships and acquire new friends. I consistently saw the poor people who I was mentoring would abuse their friends (without realising), they'd call them "dumb, stupid" while having all evidence like "success, wealth, education qualification" which clearly showed the person giving them advise they are asking for is just trying to help them.
7. Coming from poor household, I used to think rich people are evil and all but I really figured out that a high proportion of rich people were just more attentive and good are forging connections which often continued life long and the benefits compound when you are connected to so many good people for so long this is what most poor people do not realize.
It's not the reason why people are poor, it's the result of being poor and being treated as such.
It's probably not possible because there are factors other than what you described.
At best, you just invented credit cards. But poor people often either can't get credit cards, or the interest rates are astronomical, or they require a cash deposit (that they can't afford) to secure them.
The point of my comment was to suggest that you be the lender and get these easy returns, if you’re so confident in the theory. Why did you think it would be relevant whether current credit cards would lend to them?
If you don’t own a car in the US and don’t live in a place like NyC you will be destitute. You will have no way to get food and no way to get to work (and therefore pay rent.) Most people in the US could afford to actually save money if they didn’t have to pay (including interest!) on the loans they have to take out to buy a (crappy and used often!) car.
>Instead of buying a 20-pack of $necessary_product that costs $20 and will last for months, the lower class buy a 2-pack that costs $5 and lasts a couple weeks because they need the $15 to pay rent.
That directly implies that if they could be lent the $15, they could get the long term cheaper option and save money, even if they had to pay it back plus a high APR.
It worked pretty well.
Under those conditions, getting a down payment on a mortage was huge problem.
Have you tried applying for a mortgage and renting?
UBI does not solve the problem outlined by jfrunyon that
> expenses are higher for poor people.
There are fair criticisms of UBI but it would not be acting in a vacuum. There could be policy and actions to support the goals of UBI. Everything is more complicated than it seems.
Prices increase in this case - that is how markets work.
Its been found that what most have called charity is actually predatory lending by another name. I’m sure there are some legit players but like most things in life you may need to read the fine print and get a lawyer.
Source: https://mathbabe.org/2015/10/13/microfinance-is-mostly-a-sca...
Try doing that in US....
Meanwhile, the rich have gotten exponentially richer, as public policies have shifted ever more in their favor. For much the 1900s the top income tax bracket in the US was over 80%, peaking at 95%. Now its 37%. The estate tax for much of the 1900s was 80%. Now it's practically 0% for all intents and purposes.
The poor have gotten slightly better off, the wealthy have gotten dramatically better off, and the gap between the two has widened. Systems designed to keep the two groups together have been chipped away at, and are buckling. This is a result of social policy.
Top tax is not the same as effective tax rate. For example, when Reagan lowered the top brack from 50% to 37% while also closing taxable shelters,the amount the rich paid actually went up.
The CBO has all this type of data.
>This is a result of social policy.
It's more the result of changes in the world economy. Computers have made skilled jobs vastly more productive, while unskilled like making burgers or painting exteriors have not seen anywhere near the gains.
And as the rest of the world is catching up quickly to first world quality of life, the advantage the poor in the US had on the world labor supply is much less.
>while on average wages have tracked inflation
Only for white men in the US (and most first world countries). Poor women and minorities have seen vast gains in income over the past 40 years in the first world. The rest of the world has seen a massive gain for the poor.
Remember, the poverty line in the US is about the top 15% of incomes worldwide. Our poor are quite rich by world or historical standards. You used to be able to check this at globalrichlist.com, but it's now down. I suspect you can find this info elsewhere.
As some easy evidence to check, poverty line for a household of three in the US is $21k (and that pre-tax transfer. Post transfer is about 40k). Here's per country median incomes.
https://worldpopulationreview.com/country-rankings/median-in...
This is something a lot of folks miss. The US has the most progressive tax system in the western world. The top brackets pay a much larger percentage than anywhere else.
Estate tax being practically zero means huge quantities of un-earned wealth are transmitted from generation to generation. This isn't true in most first-world countries.
The top tax rate in the US isn't nearly as high as many European countries.
The specific quantity of money that is collected as tax revenue has much more to do with just how successful the higher classes are in the US as compared to other countries. This is a function of (wealth inequality multiplied by the top tax rate) not of how progressive the system is -- certainly not at the federal level.
If you have citations, they are much welcome.
The post you're replying to missed many critical factors, such as the fact that the average salary in constant-dollar terms has remained the exact same since 1964 in the US. [1]
[1] https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
And the bottom tax rate is much much lower than in other countries. The top 3% of earners pay 50% of income taxes in the US. Nowhere in Europe will you find this.
Remember, in addition to their flatter income tax rates, Europe also has 20% VATs which is extremely regressive.
Think of an abstract poor family from New York State (outside New York City): two adults working for minimum wage (roughly $11), two kids.
Assuming 48 weeks in a year (allowing four weeks for vacations, seek days and such) total family salary will be about $41 000.
From that they will pay:
- $1700 of federal tax
- $1000 of state tax
- $4000 of sales and excise tax (assuming the rate for both is about 10%)
... while receiving back (all numbers are approximate)
- $5000 of federal earned income tax credit
- $4000 of federal child credit
- $1600 of state earned income credit
- $1300 of state child credit
Which gives a net credit of $5300.
That's not counting food stamps, free school meals and medical insurance subsidies.
If this is not a progressive tax system, then I don't know what is.
Then of course since we’re comparing the rest of the world to the US, you need to add a couple hundred dollars per person per month - easily $10K for a family per year - for health insurance that gives them a $5K out of pocket maximum per year they can’t afford so they don’t die of cancer (but can’t afford an early diagnosis) and can’t afford their insulin. All of which is included in the tax burden and covered in Europe and Canada and Australia and New Zealand and Taiwan, to name a few. This amounts to a regressive 25% tax if you’re comparing directly (as good health insurance costs rich and poor the same, but represents a disproportionately higher amount of take-home pay for the poor).
I never understood the “freeloader” narrative, payroll taxes easily cancel it all out.
That's a fairly common perception. Most often summarized in "the rich get richer, the poor poorer" (at least on a relative basis).
I was born in a Communist country, and I have another perception. Poverty has different levels. The most abject poverty is when you go hungry. My family didn't experience that, but we experienced the next step: severe food rationing. War-style rationing in peace times. 90% of the population in my city being subjected to that (the elite party members were not, obviously). My parents driving to a neighboring city to be able to buy potatoes and onions. My kids nowadays spend too much time on iPads and Xbox, I was spending too much time waiting in line to buy bread.
And I can only guess that there were hundreds of millions like me in all the Communist world (China included). For the most part this type of poverty has been eradicated.
I for one celebrate that.
I remember going to another country to get pasta and rice by the bag - so that we had something to eat... just 25 years ago. That has little to do with poor growth distribution in US.
Having lived in a post-communist country and gaining wealth, I can see now in US that it's drastically harder to be better off here. It's a case of "everyone starts as poor" comparing to "poor have a lot of obstacles in holding onto wealth". You need at least $1mil in generational benefits to be well off in US.(either cash, quality education or other means)
The worst part for US - even moving to a rich place like NYC will not give you the necessary boost anymore(median NYC income is below national median)
On the whole, decentralized distribution is always better than when centrally controlled
What's the difference? Millions of people in the US have to line up at soup kitchens and food banks in order to avoid starvation.
>On the whole, decentralized distribution is always better than when centrally controlled
That's a strong claim; I'd be interested to look at evidence for it if you have any.
One major counterpoint would be the enormous reductions in poverty that China has achieved over the last decades. Quoting from Wikipedia here:
>The dramatic progress in reducing poverty over the past three decades in China is well known. According to the World Bank, more than 850 million Chinese people have been lifted out of extreme poverty; China's poverty rate fell from 88 percent in 1981 to 0.7 percent in 2015, as measured by the percentage of people living on the equivalent of US$1.90 or less per day in 2011 purchasing price parity terms.
In case you don't know, in addition to the portions of the Chinese economy directly owned by state-owned enterprises, the Chinese government exercises a large amount of control over the private enterprises in the country. You might find this article helpful: https://www.theguardian.com/world/2019/jul/25/china-business...
All of this is distracting from my point earlier which is what exactly do you see as the difference between hunger experienced by people in communist countries in the past and the 37 million people in the US who experience food insecurity each year today? You mentioned that people don't have to "line up" for food in the US, but thousands of people do, every day.
I'm aware of the market reforms in China over the last half century. They've moved the country closer to something like capitalism, but it's still incredibly far from anything in the West.
You seem to be unaware that ~30% of the Chinese economy is owned by state owned enterprises, and China in general, or you wouldn't say something as incorrect as "Compared to other countries, China is around the median in terms of how much control the government has over their economy."
But again, you're dodging the question of why you believe, in the US, widespread hunger is an unfortunate necessity, but in communist countries, it was the result of the economic structure. I'd encourage you to consider why you believe that, and whether it's reasonable.
* https://www.theguardian.com/us-news/2017/sep/05/hookworm-low...
https://www.thelancet.com/journals/lancet/article/PIIS0140-6...
https://ourworldindata.org/a-history-of-global-living-condit...
Get together with your neighbors and buy a 20-pack?
> the lower class have to buy their own uniforms or tools.
Workers owning their own tools. Isn't it what Karl Marx dreamt of?
> Instead of a 5% interest rate on their loan, they have a 25% interest rate.
Don't use loans. Seriously. You either can afford something, or you can't. Buying a house is probably the only exception. I know in US culture it sounds almost as crazy as "don't own a car" or "don't watch TV", but that's entirely possible.
Instead of buying a home, the lower class rent their whole life. Instead of their daddy giving them a home, the middle class pay interest on a mortgage most of their life.
Instead of buying a 20-pack of $necessary_product that costs $20 and will last for months, the lower class buy a 2-pack that costs $5 and lasts a couple weeks because they need the $15 to pay rent. And then they have to spend more money on gas (or bus fare, or a taxi, or time and energy walking, or ...) to get to the store again sooner.
Instead of the employer providing any supplies that are needed, the lower class have to buy their own uniforms or tools.
Instead of a 5% interest rate on their loan, they have a 25% interest rate.
Because they don't make enough money to set some aside as savings, they have to pay late fees or NSF fees or overdraft fees.