Lars Peter Hansen and Kevin M. Murphy discuss how data can inform policymaking.A Nobel Laureate on the Limits of Evidence-Based Policy
Capitalisn’t: Why America’s Poor Remain Poor
- July 05, 2023
- CBR - Capitalisnt
Poverty will be abolished in America only when a mass movement demands it,” writes Princeton’s Matthew Desmond in his book Poverty, by America. On this episode of the Capitalisn’t podcast, hosts Bethany McLean and Luigi Zingales discuss with Desmond his views on the complex and deeply entrenched root causes of poverty, poverty’s relationship with the American capitalist system, and how we could build on individual choices to end poverty.
Matthew Desmond: The fundamentals of American society are breaking down, especially in the labor market and the housing market for the American poor. And it kind of is a recipe for spending more to stay in the same place.
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Bethany: As regular listeners know, here on Capitalisn’t, we’re always interested in exploring what’s working and what isn’t in capitalism. Perhaps the biggest piece of evidence that capitalism in America doesn’t work, at least not for everyone, which probably doesn’t mean great things for social stability, is growing income inequality and the persistence of poverty.
On a recent episode, we had as a guest former Senator Phil Gramm, who argued this is all wrong. That when you take into account noncash transfers to the poor, like food stamps and Medicaid, inequality has shrunk, and poverty has been eradicated. OK, not quite, but close.
Luigi: We promised in that episode that as a counter to Gramm’s argument, we would have Matthew Desmond, who is a professor of sociology at Princeton. His previous book was Evicted, which explored the ways in which the housing system reinforces poverty, and which won a Pulitzer Prize for nonfiction.
Now he has a new book called Poverty, by America, and the title is very indicative. It is not poverty in America, but poverty by America. And as you probably would imagine, his argument could not be more counter to Gramm’s one.
In effect, he argues that poverty in America is a terrible scourge, that we have made no progress and that it is a moral outrage. He writes that according to the government’s official poverty measure, there has been little change in the share of the population considered poor over the last 50 years. It was 12.6 percent in 1970 and 13.5 percent two decades later. And by 2019, it was still 10.5 percent.
Bethany: Importantly, Desmond argues the numbers aren’t the only way to define poverty. And this is important. He writes: “Poverty isn’t simply the condition of not having enough money. It’s the condition of not having enough choice and being taken advantage of because of that. It’s constant worry about how you’re going to pay your bills. The inability to think about anything beyond the fear of the present moment.”
People have called this the bandwidth tax, and Desmond argues that partly because of the horrific stress caused by poverty, it’s likely to become a vicious trap. He told Ezra Klein on Ezra’s podcast: “Poverty is not just a line. It’s not just an income level. Poverty is often pain and sickness. It’s living in degraded housing. It’s the fear of eviction. It’s the eviction and the homelessness. It’s getting roughed up by the police sometimes. It’s schools that are just bursting at the seams.”
Luigi: But here’s the funny thing: Gramm and Desmond actually agree on one thing, which is that transfer payments have increased enormously. Desmond writes: “If American poverty persisted, I thought it was because we had reduced our spending on the poor, but I was wrong. Spending on the nation’s 13 largest means-tested programs, aid reserved for Americans who fall below a certain income level, went from $1,015 a person when Reagan was president to $3,419 a person when Donald Trump was president, a 237 percent increase.”
Bethany: But in Desmond’s view, this hasn’t helped. He argues that the money doesn’t reach all the people who are eligible. And I think his argument that poverty is more than a number is really convincing. At the same time, Luigi, aren’t he and Gramm in some ways both guilty of some sleight of hand?
To simplify Gramm’s argument, he says there is no inequality because of transfer payments. And since transfer payments encourage people not to work, we should get rid of them, and everyone will work again, and it will all miraculously be OK.
Desmond, for his part, says we have terrible poverty, even though transfer payments have gone up dramatically, because he doesn’t count these payments in the main quantitative way in which he defines poverty. So, if you don’t count the thing that is supposed to be the solution in your measurement, then of course, the measurement looks bad. Am I right about that, Luigi?
Luigi: Yes and no. I think what is ironic is that Desmond and Gramm look like the stereotypes of their respective professions. Phil Gramm is an economist by training, and Desmond is a sociologist by training. Gramm is all about numbers and not much about stories and emotions, except the ones from his personal life. Desmond is all about story and emotion, sometimes at the risk of falling into anecdotes, but the stories he tells are very compelling—also, because he lived many of the stories. This is not stuff that he read in the New York Times. This is stuff that he lived directly.
Bethany: Yeah. He’s a journalist at heart, I think. And there’s a lot more to Desmond’s argument. His book is either a screed or a call to action, depending on your perspective. He argues that the primary reason for our stalled progress on poverty reduction is that we have not confronted the unrelenting exploitation of the poor in the labor, housing, and financial markets. And that’s because more fortunate Americans benefit from that exploitation. He writes: “Tens of millions of Americans do not end up poor by a mistake of history or personal conduct. Poverty persists because some wish and will it to.”
There’s so much to discuss here, but let’s talk to Matthew first.
Luigi: I would like to start by asking, what made you interested in the question of poverty to begin with?
Matthew Desmond: Well, I grew up poor. I grew up in a little town in Arizona. My family’s gas got cut off regularly. We lost our childhood home to foreclosure. And then for my last book, Evicted, I moved into Milwaukee, moved into a mobile-home park and a rooming house on the north side of the city and spent time with families getting evicted. And that’s where I saw another kind of poverty that I’d never experienced, never seen before. I saw grandmas living without heat in the winter. I saw kids routinely evicted. And I think that pressed this question of why there’s so much poverty in this rich country inside of me in a deep and unique way.
Luigi: Now, can you define poverty for us, because I think that a lot depends on where you set the line for poverty, right?
Matthew Desmond: Officially, poverty is an income level. The American official poverty measure is drawn about $27,000, 28,000 a year for a family of four. The supplemental poverty measure is a little higher, between $31,000 and $33,000 a year for a family of four. You get 10 scholars in a room, and they’re going to argue about the measurement. But I think that everyone agrees it’s too low. Drawing it at $32,000, 33,000 a year for family of four, I mean, does anyone feel that $40,000 or even $50,000 in major cities is anywhere close to economic security?
But that doesn’t even brush the surface. And I think that those of us that have spent a lot of time in poor neighborhoods know that poverty isn’t just the lack of money. It’s chronic pain on top of exposure to violence and crime, often on top of eviction and homelessness, hunger, death. And death come early and often. And so, I think that this recognition that poverty as this tight knot of social maladies and humiliations is really important for grasping the stakes of the problem and really making an argument for the moral urgency of how much of an abomination poverty really is.
Bethany: I think the point that you make that poverty isn’t just a number, that we need a much broader definition of it, really resonated with me. At the same time, there is, for lack of a better way of putting it, a sleight of hand of sorts in your analysis because you argue that poverty based on income hasn’t budged, even though transfer payments have increased dramatically, because those transfer payments aren’t included in the income levels. Do you think that’s an issue with relying on income levels to define poverty, or would you argue that it’s immaterial, given all these other factors that make up poverty?
Matthew Desmond: There’s not a sleight of hand in the book. There’s just the editorial decision, and there’s a ton of footnotes, and the footnotes use different poverty measures. And those different poverty measures show the persistence of poverty over the last 50 years, even in the face of rising government spending. And this is a paradox I think we have to lean into. Because there’s a ton of evidence that shows that government programs work. They’re essential. They’re important.
There’s also a ton of evidence that spending and investments on the 13 biggest means-tested programs, in any case, have grown. The first year into Ronald Reagan’s administration, we spent around a thousand dollars per person on those programs. And the first year in Donald Trump’s, we spent about $3,400 per person on those programs, adjusted for inflation. It’s a 237 percent increase.
And so, if you look at the official poverty measure, it’s been stagnant, but it’s a flawed measure. It doesn’t account for a lot of that spending. But if you look at the historical supplemental poverty measure, which does account for a lot of those transfers and taxes, you get the same result. Fifty years ago, in 1973, the historical SPM is about 15 percent. Fast-forward 40 years, it’s about 15 percent. It dips a little before the pandemic, and then, of course, it plunges because of this historic investment in the American people by the federal government. But now it’s creeping back up.
That’s the paradox I think we have to embrace if we’re going to solve poverty. And I think that the solution to the paradox, or one kind of solution to that puzzle, is that the fundamentals of American society are breaking down, especially in the labor market and the housing market for the American poor. And it kind of is a recipe for spending more to stay in the same place.
Let’s get into the weeds just a little bit, if you don’t mind. When the War on Poverty was launched in 1964, the Great Society, one in three American workers belonged to a labor union. Real wages were climbing every year. And so, in that kind of scenario, those investments were cures. But as workers lost power and our jobs got a lot worse and wages have stagnated, those programs have turned into something like dialysis. They’re incredibly helpful and meaningful, but they’re not lifting a lot of folks out of poverty in a permanent way because the job market and the housing market continue to be pretty exploitive.
Luigi: But can we divide things a little bit? One issue is, are we transferring enough money to the real poor people? What I think we learned interviewing Senator Gramm is that there’s quite a bit of money transferred to the bottom quintile of the income distribution. Now, some of it is transfers in kind. We can discuss how much you value Medicare in terms of dollars. Bethany and I had a discussion on that. But let’s for the moment ignore these nuances, and that’s one issue.
The second issue is, are the average working guys making enough money? Which is a very important discussion, but I consider it slightly different. And the third one is, is the market for less-affluent people a protected and competitive market, or are people taking advantage? I think that your book, from what I see, mixes the two, three things, and of course, they are related, but I would like to sort of separate them.
Let’s first start with the first one, which is how much we transfer. You’re claiming we don’t transfer enough. We don’t transfer well enough. How much more should we transfer? How should we transfer?
Matthew Desmond: That’s a big question. I think that one of the things that separates America as a rich democracy from the other advanced democracies is the fact that we collect about 25 percent of our GDP in taxes every year. You look at the Netherlands or Italy or Sweden and other countries, they’re collecting around 35-38 percent of their GDP in taxes, and I think they just have more to work with, more investments in public goods.
I do think that we can deepen our investments, and I think we can make the delivery systems a lot better. And so, the book goes in depth about this kind of idea I call welfare avoidance. The fact that there’s, by my calculation, over $140 billion of unused aid left on the table every year. A dollar in the federal budget doesn’t necessarily mean a dollar in a family’s hand because a lot of families aren’t getting connected to those programs that they benefit from.
And it doesn’t seem to be stigma that’s driving it, mostly. Now, I’ve spent a lot of time in welfare offices. It is a stigmatizing, really hard, even dehumanizing day, but it seems like the data really suggests it’s an administrative burden and red tape. Over 200 questions you have to answer to apply for food stamps in California, for example. And so, I do think we can make those delivery systems a lot easier. We learned that during COVID. But I do think we need to deepen our investments, especially in things like affordable housing.
And I think that this gets to one of the questions I feel behind your question, which is, is it just deepening our investments, or do certain fundamental aspects of American society have to change? And I feel like it’s both. In the weeds on housing, federal housing spending has increased about 15 percent since 2000 in real terms. And so, we might think, “Oh, 15 percent more families are being served,” but that’s not true.
It’s about 4.5 million families in 2000, and it’s about 4.5 million families today. Why? And it’s because the rents have basically increased that much during that time. And if many of our government programs or public-private investments subsidize the private market, then that’s a recipe for spending more to stay in the same place.
Bethany: Would you argue that even if increased transfer payments do blunt some of the effects of poverty, that that isn’t a long-term solution? Would you rather see those payments eventually having an effect on people’s top-line income numbers, too? Would you rather see the top-line income numbers improving than the gap having to be made up by transfer payments, even if transfer payments are doing something?
Matthew Desmond: You mean, would we rather have higher wages or deeper transfers? Is that the question?
Matthew Desmond: Do we have to choose? I feel like one of the facts of our welfare state is that a lot of our programs have really accommodated poverty and not disrupted it. I do think that we have to design policies that do get wages up for workers at the bottom income distributions. The real wages for men without a college degree today are less than they were 50 years ago. That’s a real problem. And so, this is why the book goes hard about things like worker empowerment, sectoral bargaining, totally reforming the way we do minimum wage, which is just cruel in this country, I think.
But I also think we have to think about housing and other forms of exploitation. There’s a lot of evidence that when cities raise the minimum wage, renting families have an easier time making rent for a little while, and then the rents catch up with the extra wages. And so, I think that if we don’t think about those kinds of concerns, we risk kind of diluting the power of either programs that raise incomes to the bottom or raise wages. I think we have to have a floor-and-ceiling approach.
Bethany: I’m going to posit something somewhat shocking, which is that, in a really odd way, you and Phil Gramm actually seem to agree. You both argue that transfer payments haven’t accomplished what they should have, given that they haven’t gotten more Americans to be able to make more money. Now, he’s got a very different set of policy prescriptions than you do. His policy prescriptions are essentially, get rid of transfer payments so people have to go earn money. But what do you say about just this broad notion that you guys actually do agree that transfer payments haven’t accomplished what they should?
Matthew Desmond: Well, I think for those of us that are seeking to end poverty, it’s a challenge, and it’s a paradox, and I don’t think we can run away from it, actually, or adjust the inflation measure in a way that tells a different story. I think we really need to look hard at it.
If you just look at normal hardship measures, it’s really troubling. Eviction filings are up 22 percent over the last 20 years. The number of families visiting food pantries up 19 percent. Number of homeless schoolkids up 74 percent since the Great Recession. Real, troubling, hard measures that are really difficult to dismiss. And so, I think that this book is asking for more, not less. It has a recognition of the power and importance and just lifesaving benefits of many of these programs. I mean, I’ve been with families when they receive a housing voucher, and they just fall to their knees and weep because they know that it’s a lifesaver.
And the evidence of what those families do when they finally receive that voucher after years and years on the waiting list is moving to me. They take it to the grocery store, they buy more food, their kids become less anemic. And so, arguments about taking away those programs or doing less for those families are pretty insensitive and out of touch and sometimes even cruel, I think.
But I also think we have to recognize that we don’t just need more of the same. We need different policies, policies that disrupt poverty and especially policies that attack exploitation in the financial and housing markets. And so, I think that that paradox is something that we should start leaning into and confronting because it has real policy implications. It means that we don’t just need an expanded EITC, for example, which I would be for, but we also should be pushing for things like sectoral bargaining and worker empowerment.
Luigi: But when it comes to transfers, I would have expected you to say that maybe we should be reallocating them because it seems to me that a lot of the transfers end up going mostly to older people, and young people and kids, et cetera, are short-changed in the equation.
Not that older people don’t need help, but I think that they are a much more powerful coalition and end up receiving a lot of it versus where the dollars can also make more of a difference. Because if you feed people early on and you educate people early on, you have a very effective human being for the rest of their life rather than people who are traumatized and deprived for the rest of their life. I think that, again, there is a political constraint, but the way I would frame—but feel free to disagree—is we need to be more targeted in our help.
Matthew Desmond: I remember being at the Kennedy School, and a colleague turned to me, and he said, “Would you rather have twice as many housing vouchers, but they’re worth half as much?” These kinds of questions, trade-off questions, these are serious questions. I think we should pursue them. The book rejects them, though, in a way. The book is like, “These are scarcity mindset questions. Do we have to choose in America to support our elderly population or support our kids?” I don’t think we do.
There’s this one study that I just can’t get over, which shows that if the top 1 percent of Americans just pay the taxes they owe, stop evading taxes so successfully, we could raise an additional $175 billion a year. That’s enough to reestablish the child tax credit that cut child poverty by 46 percent during COVID. That’s enough to double our investment in affordable housing. That’s basically enough to pull everyone above the official poverty line.
It’s a rough estimate, but it shows that I don’t think we have to back ourselves into the scarcity corner, where we’re choosing between kids and elderly folks. I think that we do have to advocate for policies that result in the richest among us taking less from the government. Policies that invest deeper in fighting poverty instead of guarding fortunes or subsidizing affluence.
Luigi: In Italy, whenever they try to fudge the budget, they say, “We’re going to fight against evasion because this would bring in so much more revenue.” I’m not saying that there is not ample room to tax people, to enforce taxes better, but it is a bit of an easy way to get out of a trade-off because in general, there is a trade-off. My question is, do you put a limit on how much you are willing to contribute to fight poverty? Say you are fairly well off, so 30, 40, 50, 70 percent of your income can be taken for redistribution. Where would you put the limit, or is there no limit, even 90 percent could be fine?
Matthew Desmond: I haven’t addressed that, but I think that there is a limit. There is something to it. I think the limit is higher than it is now. I think that even if we don’t touch the tax brackets and we just did a better job with enforcement and collection and really cracking down on tax-evasion shenanigans, that in itself would make a huge difference. The IRS chair this year said we lose about a trillion dollars a year now in tax evasion and avoidance. I think your question is totally fair, and economists have answered that in a much more sophisticated way than I can right now. But I think that just doing the minimum would make a ton of difference for this country in a way that it’s not right now.
Luigi: One of the important factors that you point out, which I think is very important, is the cost of housing. By and large, the cost of housing is driven by two factors. Number one is the resistance to building more. Not-in-my-backyard policies have really been a major obstacle to the supply of new construction, and that has dramatically increased the cost of rentals. And even your colleague Leah Boustan recognizes that immigration leads to higher rental costs. It’s obvious that if there are more people, then demand is higher, at least in the short term, especially if the supply is not so elastic, and it is going to lead to higher rental costs. If we don’t tackle either of these two issues, I think it would be difficult to fix the issue of the cost of rentals in the short term.
Matthew Desmond: I agree with you that exclusionary zoning is a major impediment to integration and a major cause of the affordable-housing crisis. On most residential land, it’s illegal to build anything other than a single, detached family home, and that has increased housing pressures. But I also feel that we know a lot less about what’s driving higher rents than we think we do.
In some cities, the lack of supply is clearly the story. But many cities—Toledo, Tucson, Houston even—have decent vacancy rates and are still seeing real pressures on the rents. And some of the highest-evicting cities in the country—Richmond, Virginia; Tulsa, Oklahoma; Albuquerque, New Mexico; Wilmington, Delaware—are not cities that are suffering from the kinds of housing crises that we see in the coastal, big cities. And so, I think that there are many drivers to the rental crisis that aren’t fully understood yet, actually.
But I think that attacking exclusionary zoning, both as a policy point, but also just as a cultural change and building the political will that allows neighborhoods not to let their property lines dictate where their values stop is really important. I have never really accounted for or seen serious pieces of evidence pointing to immigration as a leading cause of the housing crisis.
One of the arguments of the book is about exploitation and the housing crisis. And one of the things that was really mind-opening to me, I was living in a mobile-home park in Milwaukee, and the landlord let me see his rent books so I could calculate his bottom line. And I learned that the landlord that I was renting from, which was a really poor mobile-home park in the fourth-poorest city in the country at the time, he was making over $400,000 a year after expenses.
And so, that set him in a completely different life than many of us tenants who were on disability or working minimum wage. And that got me thinking, how unique is that? And we actually have data for that. It’s called the Rental Housing Finance Survey. It’s a nationwide survey of landlords. It’s not perfect, but it’s pretty good. And if you look at that data, you learn that landlords in poor neighborhoods have much higher margins than landlords in middle-class neighborhoods. They don’t just make more, they often make double. And so, the arguments about immigration and increased housing costs might not come down to supply-and-demand dynamics. They might come down to plain old exploitation dynamics, where when you have a captive tenant group that doesn’t have a lot of choice, then you can charge them more for less.
Luigi: My reading of what you’re saying, which I don’t dispute, is that the system actually subsidizes homeownership because we don’t pay taxes on the rent that we receive from ourselves, while we do pay taxes if we rent to somebody else. And so, as long as you have access to credit, it’s very convenient to become an owner. Competition drives prices down as long as you have an alternative.
But for the people who don’t have an alternative because they don’t have access to credit . . . and whether they don’t have access to credit because the system is wrong or because they are not creditworthy, that’s a different story. But as a result of that, there’s not enough supply. So, people take advantage of the situation, but in part it is also because they end up paying taxes on that rent. When I rent to a poor person and I receive that as income, I pay taxes on that rent. If I own directly, I don’t pay any tax.
If you want, the taxation system subsidizes homeownership in a way that is unfair to the bottom of the income distribution because they cannot afford to own houses. That is something that needs to be changed. The other thing that maybe needs to be changed is to increase some government supply of houses in some form or another. In other countries, this has been the solution to resolve the problem. And the United States, at least in the last 40 years, has been very reluctant to do so.
Matthew Desmond: Yes. In 2020, the United States spent about $193 billion on homeowner tax subsidies and about $53 billion on direct housing assistance to the needy. Most of those homeowner tax subsidies just accrue to rich families, the top 20 percent of families. And we do have agreement in economics that things like the mortgage-interest deduction do not increase homeownership. It just makes our homes more valuable than they would be without it. For me, this is a clearly regressive imbalance in the tax code.
What’s interesting about homeownership as a solution to the affordable housing crisis is that in a lot of markets, it’s much cheaper to own your home than to rent. I remember meeting a woman named Lakia Higbee that I write about in the book. She was in Cleveland, working for Amazon as a picker, and she was paying, I think, $950 a month to rent a four-bedroom home in Cleveland.
But if she bought that home under conventional mortgage standards, her mortgage payment and insurance would be about $570 a month. Literally $4,500 more in her pocket every year with no rent hikes.
She could afford it, so to speak. There’s just no on-ramps for someone like Lakia because banks aren’t super interested in small-dollar mortgages, not because they’re riskier—the data suggests that they’re not—but they’re less profitable. You could just make a lot more money issuing a million-dollar mortgage than a $75,000 mortgage. This is why the book suggests on-ramps to homeownership for low-income families as one of many solutions to the housing crisis. Last year, 27 percent of homes sold for $100,000 or less, affordable homes, but only 23 percent of those were financed with a mortgage. I think this is another place that we can kind of help with down-payment assistance and incentivize lending institutions to get more of those families like Lakia’s into homes like that.
Bethany: I agree with you on homeownership. I think it’s also a solution to, or partly a solution to, what’s going to be a retirement crisis. If you have a whole subset of Americans getting to retirement age and they don’t have a home in which to retire, then you have a mammoth problem. And Luigi and I have talked about this before on the podcast, the idea that homeownership for poor people was responsible for the financial crisis in 2008 is just one of the worst tropes that’s been put out there because it’s just completely wrong.
But anyway, on a different topic, one not-unbiased review of your work claims that less than 10 percent of poor, working-age adults actually work full time year round. And he was raising this to rebut your idea of raising the minimum wage because his point was, if nobody in a family works full time, or nobody works at all, then paying workers more money isn’t going to do much to lift them out of poverty. What’s your response to that? Is that number wrong, less than 10 percent of poor, working-age adults working full time, or is something else about that piece of analysis not correct?
Matthew Desmond: I’m not sure. I mean, it sounds wrong to me. I’d have to look into it. The best evidence I’ve seen about the relationship between not working—folks completely disconnected from the labor market for reasons we don’t understand—and poverty is from the Urban Institute, which suggests there’s only about 2 percent of folks that are in poverty and not working for reasons that don’t have to do with going to school or having a documented disability or something like that.
The minimum wage hasn’t been raised in 13 years and counting. And so, I think that the idea that raising the minimum wage and instituting a policy where we don’t have to wait around for Congress to get their act together before it raises it again, like so many other countries do already, seems to just be sensible and humane and decent and would make a big difference in ending poverty.
And I think that maybe that stat, even if it’s solid, only works if we take a really narrow and low view of what poverty is. And it seems like . . . I wrote about this guy, Julio Payes in the Bay Area, and he was working two jobs when I met him, both for minimum wage. He had to work that much to keep a really humble roof over the head of his mom, him, and his brother. And he didn’t have a life. He was just working, sleeping. At 24, he collapsed in the aisle of the grocery store from sheer exhaustion. I think that raising the minimum wage would matter to Julio and to millions of folks like him.
And one of the growing bodies of work that I really love is the health effects of raising the minimum wage. It’s just so encouraging. People smoke less. People eat better. There are really solid estimates out of medical science showing that infant mortality would go down with higher wages at the very bottom. I think that what we’re denying folks when we deny them a living wage is literally life itself, sometimes. I feel like I have to strongly disagree with that reviewer.
Bethany: There was another issue where I thought you were, obviously, absolutely right in your diagnosis of the problem, but I wasn’t so sure about your solution. And that was in banking services available for the poor and payday lending. And it’s obviously true that the less money you have, the more it costs you to use it and the more it costs you to get it. And the very people who need credit are the ones who do get exploited.
And yet this has been an incredibly thorny issue to fix. Sheila Bair started talking about it back in 2005. Everything we’ve done in the banking system has actually discouraged banks from making these kinds of loans. Solutions like one you mentioned, the post office, their staff isn’t even close to trained enough to disburse these kinds of loans. I’m wondering if you’ve gotten either any pushback on your proposed solutions or thoughts from people coming in, saying, “Actually, I don’t think you’ve nailed the solution, but here’s a better one.” Or do you still like your solutions?
Matthew Desmond: No, I mean, I think that my biggest point here on financial exploitation is it’s incredibly rampant, right? It’s about $61 million a day in fines and fees from banks, from payday loans, from check cashiers. That’s an incredibly high amount of financial exploitation. I don’t think there’s agreement about what we should do. There are really smart folks that say the government should intervene. There are smart folks that say that there should be interventions within conventional lending institutions.
I personally would like faith-based organizations to get more involved in this and start issuing low-interest loans or character loans in a way that competes and undercuts payday lending. I’m unsettled, and I think that the research is unsettled on the solutions. I do think that many of us who use conventional banks need to recognize our free checking accounts aren’t free. And I think that they’re subsidized by $11 billion in overdraft fees mostly charged to just 9 percent of bank customers. And I think that recognition is important.
Luigi: In 2020, the poorest districts ended up voting for Donald Trump and the richest ones for Biden. And as you said in your book, many of the conscious consumers are willing to boycott companies if they don’t do fair trade or if they don’t protect animal rights, but they’re not so keen about boycotting companies that don’t pay workers properly or don’t have safety measures. To what extent is the lack of a push for protection from poverty a result of the type of the left that we have in this country?
Matthew Desmond: I think that is exactly right. I think that I would love more of us to start taking personal responsibility for this. And I know on an academic podcast out of UChicago, this might sound like a fuzzy point, but I don’t think it is. You and I and many people listening probably have been to conferences where we say, “Well, we have the resources. We know what works. We just don’t have the political will.” And this is the stuff of political will, I think.
I was in London a few months ago, and you go to the shops, and the shops have stickers on the windows, some of them, and they say, “This shop pays a living wage.” And so, I’d go into the shops, and I was like, “Tell me about these stickers.” And there was a whole movement and branding behind it. And I think that works. And I think that we’ve got a lot of stickers on our shops these days, but often they don’t have anything to do with how much the worker’s getting paid.
I think that consumer activism along these lines and really taking a hard look at what we’re buying and what we’re investing in could, with enough people, make a dent and start changing the political will around the perpetuation of poverty.
Bethany: I’ve ended up thinking after this conversation that maybe part of our problem is a measurement problem, and maybe we need to scrap all these measures like the poverty line and the supplemental poverty measure and focus instead on these numbers that you outlined. Whether evictions are going up and children living in homeless situations and food shortages and define them in a very granular way and just get rid of these big-picture statistics that can both be misused and that may not actually be telling us anything. What do you think about that idea? Let’s just start from scratch, scrap it all and come up with a new definition of what poverty actually is.
Matthew Desmond: I think there’s really something to that. And I think that if we want to measure hardship, let’s measure hardship, and let’s kind of come together and agree on a set of indicators about human flourishing and basic necessities, and let’s track those. I think that that gives a real texture and reflection of the lived experience of poverty in a way that the poverty line doesn’t.
And the poverty line, too, it’s very susceptible to manipulation and change. You can tell really different stories about poverty depending on the inflation measure you use over the last 50 years, or if you anchor it or not. I think that gets you into these debates about completely different Americas, in a way, but it’s just based on really technical things. And so, I like that idea. I think England does this. One of the measures that England uses is, I think, they have a 20-or-so-point scale about child poverty that they use to measure hardship. I think adopting that over here makes a lot of sense.
Luigi: My last question: you said you grew up in poverty, and now you are a very well-respected professor in one of the most prestigious universities in the world. You write for one of the most important newspapers in the world, and you won a Pulitzer Prize. Your story is really the American Dream come true. Why is there not more optimism in your book?
Matthew Desmond: Oh, I feel like the book is super optimistic, actually. I think the book brings a lot of hope. The book doesn’t end on a pessimistic line. The book really thinks we could absolve poverty, right? Abolish poverty. The book makes a strong case for that. And it doesn’t have a few-paragraph concluding chapter. There’s a bunch of chapters devoted to how we can actually get there. So, I do think the book is, for me, a work of hope, a work of optimism, but it’s also a work of critique. And I think that this incredibly rich, abundant land doesn’t have to tolerate so much poverty and scarcity within its midst. And I think that the end of poverty is going to take some sacrifice from those of us, some of us, but it’s also something that results in a fairer, more equitable, freer society. I think it’s a country that all of us are pining for, in a way.
Bethany: I do actually have one more question because that made me think of something. It’s actually another similarity between you and Phil Gramm because you actually have sort of similar stories. Gramm grew up very poor as well, but he took his success from a poor upbringing and basically said, “More self-reliance from all. I did it, so can you.” And you’ve taken your success from a poor upbringing and not said that. Why do you think you’ve come out of your story with a different approach instead of saying, “See, everybody can be like me”? You’ve not said that.
Matthew Desmond: I don’t know Phil or his relationships, but I still do a lot of life with folks below the poverty line. I’m accountable to them, and a lot of my friends and family members are still wrestling with poverty. Making yourself accountable to them in your research and writing, I think, does make you work on a different level.
I remember I gave a talk in Princeton when the book came out and the first comment from the audience was . . . She stood up and she said: “I volunteer in Trenton, which is 15 minutes away from Princeton and is a pretty poor city. I volunteer in Trenton, and I do a lot of mentoring for the young kids, and shouldn’t we be mentoring the single moms?” And I looked out at the audience, and there’s my friend Vanessa Sullivan, who’s a single mom in Trenton. And I thought, “I have to answer this question and respond to this comment in a way that holds myself accountable to my relationship with Vanessa.” And I think that those relationships really matter for this kind of work.
Bethany: Thank you so much for your time and for your work.
Matthew Desmond: No, thanks both. I mean, thanks for doing such great homework, and thanks for having me on. I really appreciated this conversation.
Bethany: Luigi, who did you end up agreeing with more? Gramm or Desmond? Or maybe a better way to ask the question is, did Desmond change the way you thought about Gramm’s analysis?
Luigi: That’s a very good question. Yes. First of all, the analysis is different in so many dimensions that really, I think we should congratulate ourselves to pair the two because together they’re very useful. I think Gramm is all about numbers, and I think he’s right with the numbers, but as Mark Twain said, you can lie with statistics very effectively. They don’t give a full picture.
The thing that I like the most about Desmond is when he talks about the friction that makes poverty structural. The screw-ups in the tax system, the lack of competition or access to credit in housing—these are structural problems that have nothing to do with transfers. It’s very hard to disagree with Desmond on those issues.
Bethany: I agree with that. Interestingly enough, I was thinking that Gramm and Desmond are, in so many ways, the flip sides of each other, in their strengths and weaknesses as writers and analysts as well. And that Gramm’s strength is this, look at these top-line numbers, but his big weakness is that he doesn’t understand when the top-line numbers aren’t relevant because he doesn’t know any of the people who actually live this way, and he doesn’t have any sense of anecdote or things that don’t corroborate his top-line numbers.
And Desmond is exactly the opposite. I think the fact that he is on the ground seeing all of this and understanding it, and he’s able to document the ways in which the top-line numbers just don’t measure what poverty in America actually is. I saw them as a very weird flip of each other. Does that make sense?
Luigi: Yeah. And they do provide a picture of the fact that in America, we did make significant improvements in fighting poverty, but not enough. And particularly, a lot of money is misallocated. One of the factoids that Desmond was citing is how much money that is dedicated to fighting poverty ends up in somebody else’s hands, which is a serious, serious problem. And how many other things on the margin we can do to make this society more welcoming and giving more opportunities to everybody, which is something that Senator Gramm also wanted to do.
Bethany: I was stunned by one number in his book in particular, and there were bigger numbers, but the number that just jumped out at me was that a billion dollars of Social Security disability payments go into the hands of lawyers because anybody who needs a Social Security disability payment knows that you’re not going to get it at first, and that eventually you have to hire a lawyer, and the lawyer’s going to take a portion of the money you get. And I thought that if there’s anything that sums up the exploitation more, then it’s that.
But it was interesting listening to Desmond talk because he uses the phrase “I feel” a lot, which I just couldn’t help thinking, there’s the sociologist, not the economist. And there’s a strength to, “I feel,” there really is.
I just read this great quote from Bob Dylan that was, “They use their hearts, they don’t let their hearts use them.” And I like to think about that when it comes to the idea of “I feel.” Yes, use your heart, but don’t let it use you. And sorry, there’s a Doberman sneezing in the background, if everybody heard that noise. At least she’s not barking.
But I thought that sometimes it is . . . I guess I am still an analyst at heart in some ways. And I did get a little frustrated at points with Desmond’s use of anecdote because sometimes the anecdote does illustrate the larger hole, and sometimes it doesn’t illustrate the larger hole. And he himself is not entirely clear. He tells that wonderful story about Julio, who benefits so much from the increase in the minimum wage because he can finally not be exhausted, and he can spend time with his younger brother. Is Julio indicative or not of what happens if you put in place a higher minimum wage? I don’t know. I don’t think he knows, either.
And so, that frustrated me a little bit, even as I recognize that the strength of his book is in these anecdotes. But I did really like Desmond’s honesty around the point that transfer payments have gone up dramatically, even if I don’t necessarily agree with how he then uses them in his top-line definition of poverty. But I do think that he’s right. We have to grapple with that.
And I think the fact that he makes that point is very intellectually honest, that we do have to grapple with that rise in money, that rise in spending. And it did throw me back to Gramm’s argument that maybe we need to rethink all that money. If it’s not working to fundamentally change poverty, or if it’s only those payments that are changing poverty, and nothing is structurally changing, then maybe we need to think more deeply about what it is that we do, how we address both poverty and the labor market and things that contribute to people’s poverty.
Luigi: I feel that the problem is a political-economy problem because it’s much easier to help the poor if at the same time you subsidize the rich. If you expand Medicare, you are increasing demand for doctors, so you are subsidizing the poor, but you also are giving more money to the relatively well-off that are providing the services. If you simply give the money straight into the pockets of the poor, you’re not helping anybody else. From a coalitional point of view in Congress, it’s much more difficult to pass a measure like that.
Actually, I think it was George Stigler who said that most redistribution is redistribution toward the middle class because the middle class is more politically influential. The poor are not very politically influential, number one, because they are relatively few, and number two, because they don’t vote so massively. And so, the result is that there is not really a great political career in appealing to the poor.
Bethany: Luigi, one thing that I’m still struggling with is, how can they both be right? How can Gramm’s numbers be right? And I think most people agree that the numbers are right, even if we don’t agree with the story they tell. But how can Gramm’s numbers be right, and yet Desmond can have all these heartbreaking examples of really extreme poverty? How can those two things coexist at the same time?
Luigi: I’m looking at Phil Gramm’s number and thinking about the bottom quintile of the income distribution. You see that group receives $41,000 a year, but of this $41,000, $16,000 to $17,000 is Medicare/Medicaid, and another $10,000 is Social Security. Basically, for the old people who are not necessarily poor because they might own a house and they might have some wealth, et cetera, but they are in the bottom 20 percent of the income distribution, you have a lot of help. And part of that $10,000 in Medicaid and $8,000 in Medicare, those are also . . . I’m sorry to say, but all the money that you spend in the last 30 days of your life, where you spend a fortune, the statistics are that an enormous amount of money is spent there. So, that money does not really translate into helping the single mother with a kid struggling.
If you are a single mother, and you’re trying to raise a kid and trying to work at the same time, you don’t get Social Security. For sure, you don’t get Medicare. Maybe you get Medicaid and some food stamps, but the food stamps, at the end of the day, are only $1,500 on average. They’re not that much. The big chunk is Social Security and Medicare/Medicaid, and certainly Social Security and Medicare are mostly for the elderly.
That’s the reason why I asked this question about the misallocation. I think that there is a tale because if you are temporarily poor, and if you have made a decent amount of money through your life, you own a house, and now you’re not making a lot of money, but you’re receiving a lot of subsidies and Medicare, that is one thing, and that doesn’t compensate for the poor people who don’t receive anything.
Bethany: And I think it just points to this idea that these top-line measures of poverty are just so flawed as to be almost useless, because any top-line measure encompasses such different sets of people and such different sets of money that they’re getting or not getting, that it is almost irrelevant when it comes to the lived experience of poverty.
I did come away from his book thinking even more—and I’ve thought a fair amount about this—about the role that housing plays. And I do think that sensible housing policy . . . and I’m putting sensible in quotes, since you could ask me what I mean by that, and I’m not entirely sure. But sensible housing policy is something we really need to do if we’re going to address poverty and opportunity in America.
If you think about it, when you think about this idea of there being a bandwidth tax, can you imagine not knowing where you’re going to sleep at night and if you’re going to be able to continue to sleep in the same place, or if you’re going to have a home in six months, and what that would do to your ability to contemplate anything else? That’s, for me, where it feels the most visceral, where this idea that poverty in the form of not having a place to live becomes a tax on all the other aspects of your life, too.
And what’s amazing to me is that we know this, and we’ve known this for a long time. We understand the importance of homeownership, and yet we allowed the idea of homeownership to become very corrupted in the years running up to the financial crisis by allowing homeownership to be this cloak under which people got away with terrible things like cash-out refis. We allowed it all to go under the same banner. We allowed homeownership to be a cloak for terrible practices, and we haven’t figured it out in the years since the financial crisis.
That was supposed to be the one silver lining of the financial crisis. Joe Nocera and I wrote this in our book, All the Devils are Here, that the silver lining was that we would really think about housing. What should we do and how should we encourage it? And the more I think about how important it is for people’s lives and how important it is for people’s retirement in a world where we don’t provide that much else, the more I think we need to figure this out. There’s a real urgency around the question of housing.
Luigi: A long time ago, we had an episode with Kate about Senator Warren’s proposals when she was running for president. And one thing that I was struck with is that she had a combination of proposals that made a lot of sense because she was using a combination of demand and supply. She was using a combination of making it easier to build in a lot of places, but also creating some government supply to fill the void that the market will not create itself with some subsidies to towns, et cetera, that were willing to change their building code to allow more supply. I think something like that will be desperately needed. Unfortunately, I don’t see it becoming government policy anytime soon.
Bethany: No, you need to look no further than San Francisco and the Bay Area, the most liberal, blue part of the country, I think, at least in some ways, and yet the one absolutely most resistant to affordable housing.
Luigi: One thing that struck me is that I think he was really honest in saying that his constant contact with people who are poor forces him to be intellectually honest on that front. And I think that we don’t think about that enough. At the end of the day, we want to be able to be accountable to the people we deal with. And if we deal with a very limited fraction of the world, we are only accountable to that fraction of the world. If you are a Supreme Court justice and you always go on vacation with rich people, the only thing you are accountable to—
Bethany: Are we talking about a particular Supreme Court justice, Luigi?
Luigi: Actually, I forgot which one, because it seems that all of them—
Bethany: Maybe that’s true. No, I think that’s so true, and it does point to his incredibly poignant and truthful observation at the end of our conversation with him. It really does point to another reason why the increased segregation and isolationism in American life is so very dangerous, because if you don’t come in contact with people who aren’t like you, then you really lose touch in a way that is fundamentally about empathy.
And my parents would probably kill me if they heard this episode, but they moved to Belize right around the time that I got out of college. I grew up in a small iron-mining town in Minnesota. My parents had been pretty anti-gay when I was growing up. And when they got to Belize, this island, their best friends became a gay couple who lived there. And within six months, all of the bias was gone as if they never remembered it. And it just vanished because they got to know people. And I know that’s a cheesy, small example, but yet it is just so true, and it’s a truth that we forget and that I think Matthew reminded of us of really eloquently.
Luigi: But also, I think that if we want to change the left in the United States, we should create a civil service in which we send every hardcore Democrat, young Democrat, to do some real community work. Not the kind that they do to enter into college in which they pretend to do it, but they don’t really do anything, but the real one in which you deal with real poverty. Because I think that the Democratic Party has lost its roots and has become more a party of the rich billionaire, the Silicon Valley, rather than the party of the poor.
Bethany: Well, just to challenge you on that, why would you make it a rule only for members of the Democratic Party? Why not have it be a rule for every graduating high school senior that they take a gap year, and that gap year, instead of consisting of military service as it once upon a time did, now it consists of community service? And it’s an across-the-board rule, and I bet that would do a lot to cause change in this country and to bring a lot of really good ideas to work, too.
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