Archive for February 16th, 2009

The Wealth and Poverty of Nations (and Neighbors)

Sharon February 16th, 2009

A while back there was a study that suggested that it is more expensive to be poor in the US in some ways, than it is to be rich.  And to anyone who has actually been poor, this probably made perfect sense.  Among the ways that being poor cost you money:

1. Your infrastructure is limited, so you are limited to what fits in your infrastructure – for example, you don’t have a car, so you can only shop at the convenience stores or those on your bus line, which are more expensive than the Walmart outside town.  Your house or apartment is underinsulated, so your utility bills are extremely high.  You have to have food and heat, so you pay them, and struggle.

2. You are less likely to have insurance, or to have exhausted your safety nets,  so you are more likely to find yourself paying for acute costs because of things you’ve let go – instead of routine dental care, you don’t got the dentist until there’s a major crisis, involving multiple root canals.  You can’t afford to have the roof replaced, so you wait until things start falling on your head.

3. You find yourself falling behind on bills and incurring the costs associated with that fall behind – $50 here to get your electricity turned back on when the child support payment didn’t come in, higher interest rates on the credit cards because of late payments, the returned check fee for the school yearbook you’d hoped your tips would cover…

 4. You have little access to ways of getting ahead – you can’t buy in bulk because you can’t lug your toddler, your infant stroller and a 50lb sack of anything on the bus.  You credit is shaky, nonexistent or minimal, so you can’t borrow enough to start that business or get a car that wouldn’t break down.  So you continue to buy the higher priced bags of rice, and pay the repair and heat bills bills,  - even though you’d save money with a minor upgrade that is as out of reach for you as the moon.

5. The upgrades are out of reach because things like “return on investment” don’t matter when you can’t front the cash.  People who talk about “Only 3 years until you get your money back” for some investment don’t quite grasp that fronting 3 years of anything is out of the question – you can’t handle the credit, you can’t handle the payments, and odds are you, can’t get the loan anyway.

6. Prior indebtedness weighs you down.  Those payments that seemed so manageable when they were described to you at teaser reates or in isolation are now major drags on your budget.  Borrowing to meet crisis needs – say, the payments you owe the hospital from after your car accident, make it less likely you can get along day to day.  Moreover, the costs keep shooting higher, either because companies are making less profit and want more, or because you screwed up as in #3.  You now know you will never, ever get out from under it – and thus, your choices are limited by your debt.

There are other ways that this high cost of poverty plays out, but these are enough examples to get you going.  I’m willing to bet that some of my readers have experienced some of these costs themselves, and more probably will as the current economic crisis expands.

But unlike in prior recessions, ordinary people aren’t the only ones experiencing the new realities and limitations of poverty – governments at all levels are getting to know these restrictions.  I recently listened to my state’s debate on what to do what the stimulus money being offered to them.  The choices consist of:

1. Save the money to meet future budget shortfalls, which will definitely occur.

2. Spend the money in the vain hope of getting the economy moving on projects that were conceived back when we had a growth economy and probably won’t do much to alleviate our plight.  Meanwhile, panic because there will be no money for future budget shortfalls.

3. Use it to cover increasing gaps in safety nets – gaps that only get bigger, and devour more of the money.

None of these really deals with the primary need, which is for deep infrastructure change.  But, of course, it is increasingly beyond our states, just as it is beyond most poor people.  For example, you’d like to move to a better apartment, the one with a bedroom for your daughters who now sleep in the living room, no cockroaches and nearer your husband’s job.  But to do so, you’d have to get first months, last months and security accumulated, plus the cost of the moving truck, and the landlord isn’t likely to give you back the security deposit because he’s that kind of landlord. 

Now the states are in roughly the same situation as your average working class poor person – they aren’t allowed to carry deficits (ie, no credit for you), and the one thing they can’t do is get enough money to do the things that are really needed – even if they knew what they were. 

Meanwhile, their infrastructure begins to degrade, the rough equivalent of skipping your dentist appointments – the bridges start to crumble, the roads have potholes, etc…  And of course, a year or two of neglect is going to mean more costs down the road – but that can’t be helped.

Because your infrastructure is now limited to the cheap energy infrastructure, the states are now limited to cheap energy adaptations – and emphasis on the cheap, or the ones that use what you’ve got - that is, without a public transport network, the best we can hope for is carpooling.  Without good housing, the best we can expect is for someone in any given family to keep their house and move their relatives in.

And crises keep coming along to undercut your attempts to catch up.  First the unemployment funds start to empty, and then the bond defaults start.  A city goes bankrupt and needs state aid to keep the trash pickup coming, and no one budgeted for that.

Credit becomes almost impossible to find – no one wants your muncipal bonds, no one shows up for the auctions.  Which means that you have to stop even the steps you’ve been taking to get ahead.

Things that would give you a return on investment – say, improving the quality of education for your million school kids, or ensuring that some of them can go on to college through state subsidies, or investing in the good health of your households, or making your environment attractive to the kind of businesses that are most likely to stay and bring in tax revenues become impossible – you don’t have the money to make sweetheart deals or improve education – in fact, you are probably cutting back on it, and accepting that in 12 years, you’ll pay the price in students who did about as well in 35 kid classrooms as you’d expect.

That is, real poverty works pretty much the same at the personal, state or national (Iceland, say) level – you can’t buy much, you can’t save money, your costs get driven up. you lurch from crisis to crisis, getting further and further in the hole.  Some people are able to make their way out due to concerted effort and some good luck, but for most people, no matter how you try, getting out is almost impossible – because it would require the ability to invest in your future.  At best, you can maintain, get a little ahead this year, and fall back next, rather as Japan has done for the last 15 years. 

We are not yet at the stage where the US government is fully in this mode – it is still able to borrow money, but there are ominous signs of what is to come.  China’s mutterings about uncoupling from US debt are getting louder.  And with Japan facing a national contraction of 10%, their ability to buy our Treasuries is falling apart.  What happens when the 2 billion per day inflow sputters or halts? 

This is something that many people, maybe even most, simply can’t get their minds around.  The idea that a nation could get poor – and that it could look a lot like when Grandma got poor – seems strange and alien.  The idea that our country or our state would lose the ability to invest in major infrastructure changes, that we might have to live with what we have, seems very strange.  After all, can’t the nation run deficits?  Can’t it just print money.

 Yes, it can.  It can run huge deficits – but remember, all those debts will have to be served, and with a declining tax revenue (poor unemployed people and companies that go out of business pay fewer taxes than employed folks and functioning corporations) revenue base, more and more of our wealth has to go to servicing debt.  And all that borrowed money has to come from somewhere - and more and more debt makes people less likely to lend.  Think of it in terms of your own credit score – the lender is far more likely to lend to you if you have money in the bank and a loan level you can reasonably service than if not.

So what about printing money?  Yes, the US can do that, indeed, the Fed already is.  But the amount being printed is comparatively trivial in relationship to the debts and losses, and because we know that, the temptation is to hang on to any money we have in anticipation of the next emergency, which always comes. 

To do it on the scale required would require that we decouple from the world economy in a lot of ways.  Now this may well happen, but the process of decoupling is likely itself to be difficult, and deeply destructive to the economy.  That is, you can print money if you’ve already accepted that other nations aren’t going to be doing a lot of foreign investment – but that means seeing other economies take their wealth out of yours, which is a further deflationary event.  By the time hyper-inflation does come, what you probably have is something called “collapse.” 

And by this point, the assumptions one can safely make about what nations can and can’t do are probably rather different – one stops, I suspect, seeing nations like the US as powerful actors who could do things like extend health care to everyone or rebuild our energy infrastructure.  Instead, governments can do one of two things – pitch their entire effort into ameliorating suffering, or pitch their effort mostly into preserving wealth and privelege.  Something has to go, generally, and the first thing is likely to be the big dreams.  Instead, goals get smaller – either petty small, or more basic, simpler and more honest.  So far, we’ve been heavy on choice #2, help the rich,  but there are still hopes for better, and reason to try and make it happen at every level.

I think a lot of people who “get” the recession break off here, at the idea that there can be such a thing as a nation becoming poor.  And yet, it does happen – we’ve seen standards of living fall in several nations over the last few decades.  But Americans particularly struggle to get their heads around the idea that many of the big things governments do might cease to be done.  And they may be right – but I think it is wise to recognize the real possibility that at the municipal level, the trash pickup and snowplows may stop, that at the state level, your wife who is an employee may end up collecting worthless IOUs, or that projects designed to improve all our lives may simply be abandoned mid project.  And that at the national level, the scope of our ambitions may have to get smaller, and smaller, and smaller.

 What is remarkable about the resilience of poor people is how often they do manage to keep themselves from hitting rock bottom, despite the heavy burdens they labor under.  That is, while some do end up homeless and desperate, most ordinary poor people work their job or jobs, tend their kids, put food on the table, keep everyone going, get their kids to school.  That’s something that states and nations could also do – we will have sufficient resources to keep everyone fed, even to keep our commitments to the hungry in the world.  We will have sufficient resources, if we choose, to educate children and offering support to the elderly, the frail, the vulnerable.  But this will mean giving up most other goals – including the ones that talk about growth and executive salaries.

Moreover, there is an alternate form of poverty – self-sufficient poverty.  That is, it is possible to shift one’s idea of growth from the “quarter over quarter” to the “generation over generation” model – that is, you don’t get richer with your annual raises, you get richer because your parents save what they have, and pass it down to you.  They improve the soil, they plant more trees, they pay off the debt, and then you add the extra room for your sister and her children, dig the drainage, start the business that you can pass on to your children.

At the personal level, this is the difference between the urban dweller who lives on $2 per day and spends 80% of her income on food, and the one who lives on $2 per day on a piece of land that produces enough food for them.  In the first case, a medical crisis is a disaster, and you can never get ahead, never find the money to send your kids to school, never keep up.  In the second, most years the money can be held for doctor’s bills and school fees, and there’s hope.

The major functional difference in the two cases is this – the self-sufficient model has found ways around the constant falling behind.  It isn’t perfect – people do fall behind.  But there’s more stability in the long term. Instead of paying heavy fees to have services or energy provided, you might make your own, uisng a methane digester to provide cooking fuel from your own bodily wastes, or you might turn to community funds to start a business, or build a home, rather than banks with heavy interest rates.  Infrastructure investments are slow and less frequent – but because you stay in place for generations, the accumulated benefit of those investments, whether richer soil or a carefully harvested and nurtured forest or a house adapted to your climate and needs accrue enough to each generation to make progress.  Instead of always losing because you cannot afford to borrow ahead from the next generation or the next year, you never borrow against them – you plan for their enrichment by doing what you can, slowly, and then passing down the benefits over time. 

At the government level, it is possible to respond to less formal wealth with more informal wealth – with improving people’s quality of resources, rather than their quantity, with offering incentives for self-sufficiency, with encouraging people to feel content with what they have, or even proud of doing without and living well.  It is possible to imagine a patriotism built on our ability to adapt to these changing conditions, a sense that we are passing on to the future a legacy.  It is feasible to invest in natural capital – to plant more trees that will bear and serve future generations, to improve soil and water quality, and pass down more and better – not more and better economic growth, but more and better natural resources, and more and better priorities.

The transition from on-the-edge to self-sufficient is not a magic bullet – it is all poverty, and no poverty is bliss.  I do not claim that poverty is an ideal – merely that at least for a time, it is inevitable that we will experience a dramatic drop in what we can afford and have.  I wish I thought that there was another way through the present disequilibrium, but I do not.

The good thing is that we are still endowed with resources, nature still repairs itself to a degree, though we have done deep damage, there is still some hope for the future, if we were to invest ourselves in it.  And the other good thing is that after a period of poverty, one can reach equilibrium in which one no longer feels poor – that is, perhaps if we can find a way to induce people to improve their culture, soils, water, resources, we may find that living with much less is easier, we have adapted and developed a vernacular lifestyle in which “poverty” is no longer the right description, because we are accustomed to what we have, and we get back a little more each year, a little more beauty, a little more community and social capital.  

 Sharon