Desperation as business model (8 June 2007)

A few days ago, Amanda Marcotte wrote an astute entry regarding this BusinessWeek story about subprime lending and other poverty exploiting rackets. The general gist of the article is that the poor are often in tenuous and desperate situations that make them easy to exploit with usurious interest rates, rent-to-own ripoffs, exorbitant mark-ups and other opportunistic schemes. Just go into a ghetto "grocery store" or check the storefronts in a rundown shopping center on the wrong side of town and you'll get the picture. Paycheck loans, rent-to-own outfits, dollar stores, Chinese takeout, etc -- businesses that set high margins on small-ticket transactions. As Marcotte points out, desperation is an opportunity, as long as you lack the requisite scruples. You can take advantage of the lack of social capital in poor neighborhoods and present your exploitative behavior as a service. Without social capital, without the education to understand complex financial transactions, without legal protections being enforced for them or the political clout to see their interests protected, without the potentially powerful word-of-mouth networks or plain old money to smooth over life's frictions, the poor have no leverage over the businesses that deign to serve them, and the result is they are served only on vulturous terms. (One of the many ways disparate power among participants distorts the workings of the market, one of the heterodox views of the economists Chris Hayes considers in this Nation story.)

Insecurity in general is the basis of a lot of retail business, which is why so many ads are designed to generate feelings of insecurity and inadequacy. The poor, of course, don't need ads to make them feel insecure, which makes them a cost-effective target -- though ads are part of the discourse that establishes what is culturally normal, defining what it means to be impoverished. The bogus premise of equal opportunity is widely enough held in America that the poor must keep up appearances lest it seem that their poverty is their own personal fault. Of course, to keep up, they must take on risks and terms that sink them in debt traps and assure their continued failure to achieve the bourgeoisdom the signals normalcy -- that allows you to feel that you are the target of so much of the media's messages. The added bonus is that the working poor assume responsibility for their poverty as a kind of personal, moral failure -- this is what The Hidden Injuries of Class, by Sennett and Cobb, is all about.

We can fault business for following their incentives to profit at the expense of those with little defense and no social safety net, but it seems the counterveiling power of government is more likely to correct the problem then a sudden and complete change of heart among competitive firms. But politicians rely on business contributions to finance their campaigns, which leads to legislation that rewards business (the recent bankruptcy bill exemplifies this). So without any institutional power, the working poor has no reason not to seize the only form of power left to them. From Marcotte's entry:

Charles H. Green points out that this untenable exploitation of the working poor has become such a morally troubling issue that up-and-coming capitalists are beginning to turn on the system.

"One healthy sign: my 30th reunion at Harvard Business School last fall. The most heavily attended lecture was by Professor Bruce Scott, who spoke about the global trend toward concentration of wealth. We’re moving toward looking like Rio de Janeiro—armed gated communities surrounded by violent gangs. Scott’s lecture got a standing ovation—both in his lecture room, and in the audio-connected overflow room, hastily put together to accommodate the crowd. This from the old school crowd at HBS—the West Point of capitalism. There is hope."

It’s an interesting dilemma, from the capitalist point of view. Keeping the poor living from paycheck to paycheck and in constant debt serves two purposes. From the article, you can see that it’s actually quite profitable, especially in a deregulated era like ours. Second of all, desperation breeds complacency, to a degree. Workers who are constantly treading water and robbing Peter to pay Paul are likely to suffer all sorts of indignities to keep their jobs, including taking lower pay than they’re really worth if it means securing the jobs that much more quickly. But it has to be controlled desperation—there’s a tipping point where the poor are so much in debt to the rich that they simply can’t pay it all back and the system could collapse on itself. It’s happened before in history, many times, and it can happen again. Opposition to usury isn’t just about morals, but protecting a system that ultimately benefits the rich by keeping a check on the excesses that threaten the entire situation.

Very depressing, that, and the classic dilemma of all ameliorating, incrementalist approaches to social change: You end up perpetuating systems of oppression, making them more tolerable for the oppressed. But then you consider how much misery, chaos, and evil the typical revolution unleashes, and it's hard to think of any course of action worth advocating.

Consumption inequality (13 December 2006)

The debate about increasing income inequality continues and the rationalizations for it are always being refined. (See Paul Krugman's recent Rolling Stone article for a cogent explanation of the situation.) The social Darwinist notion (sometimes masquerading as a paean to meritocracy) underlying most defenses is that unequal distributions of the gains from an economy's growth and productivity mirror the just deserts of the fittest; outcomes are unequal because some people are smarter and some people work harder than others. Extending that, some people come from a lineage that is rich in social and human capital, providing them with networks of well-connected people to exploit and habits that connote success and attract rewards; these people have inherited "fitness" and are rewarded accordingly. The alternative would be to punish them unjustly for their inherent advantages, to dim their bright light when we should really let it shine.

This explanation is hard for most people to swallow, particularly when they suspect that not only are outcomes unequal, but so are opportunities. The problem is outcomes and opportunities are often blended, such that one of the perks of being on the better side of unequal outcome is greater opportunity. In other words, we could measure outcomes in terms of opportunities, rather than presume we all begin from some par level and achieve to different levels. Social advantages, and the attendant opportunities, accrue to those already privileged, and these become entitlements, protected by wider access to state power. And those lacking such fortuitous placement in the social hierarchy are consigned to a permanent underclass, all while being told they earned their place there. This is a recipe for political unrest, as the growing fears among the privileged classes of a rising tide of economic populism, heralded by 2006 election results, can attest.

So other excuses for income inequality are put forward. One is that it is an inevitable result due to the scale of the American economy, which allows small differences in talent to be leveraged to yield massive differences in resulting incomes. This yields a handful of superstars, reaping what appears to be a disproportionate income, and a mass of average earners falling behind them. So should we tax that disproportionate earning and redistribute it through lower tax rates for the lower classes or through the purchase of much-needed public goods (environmental protections, parks, services, transportation infrastructure, etc.)? Some say yes, but some argue this will discourage those uniquely positioned to have such superstar effects on the economy from making the maximum use of their talent. Then we all suffer: CEOs would less ruthlessly squeeze efficiency from their companies; Allen Iverson might take fewer shots; Tom Cruise might deliver his lines with slightly less gusto. The productivity gains yielded by superstars at the top of their game working their magic at the largest scale would ideally trickle down, raise all of our boats. The rewards given to the true innovators, the argument goes, provoke them to do and make things that ultimately benefit us all and increase our own purchasing power -- we get cheap TVs and computer chips, so it doesn't matter that we aren't making our fair share relative to the national increase in productivity (all economic gains, theoretically, derive from increased productivity -- we make more goods and services from the same total inputs, thus there is more to go around; in recent years, that surplus has been going disproportionately to the economic superstars). We're getting our share in barter, essentially. Gains are embedded in the cheap stuff we can buy more of. The message: "Be happy with your consumer goods, since really, what more do you want? What is fairness, anyway, but an utopian ideal that's caused nothing but trouble in this fallen world? Be glad that you can come home from your job, open a cheap beverage and turn on a technological marvel in your living room and experience top-notch entertainment to whisk you away from it all." We shouldn't worry that other people have more stuff, more leisure time, more opportunity. Such comparisons will make us needlessly unhappy. (Fortunately, we are so atomized by the workings of consumer capitalism that we have far fewer interactions with people outside our households. Unfrtunately, we compensate by watching TV, where we learn to make comparisons with even more unrealistic analogues for ourselves.)

An editorial in yesterday's NY Times broached this myth.

Conservative economists often argue that wage stagnation and income inequality are not as big a threat to Americans’ standard of living as they’ve been made out to be. In their view, how much one buys — rather than how much one makes — is a better measure of economic well-being.
In a recent article in The National Review, researchers at the American Enterprise Institute asserted just that, saying that when you look at how much the middle class is consuming, they’re “even doing better than the upper crust.”
Why make a fuss over other grim economic statistics if everyone manages to keep buying things?
Here’s why. The assertion — that the middle class has out-consumed the “upper crust” during the Bush years — is false, the result of rosy assumptions that turned out to be wrong.

What is in fact happening is this: "Overall consumption is growing. But the growth is unbalanced, consistent with the wide disparity in wages and income that has characterized the Bush years. Consumer spending by low-income households is way down since 2001. Over the same period, spending by high-income Americans has been robust, supported, in part, by generous tax cuts. In 2005, the top 20 percent of households made 39 percent of all consumer expenditures, the highest share since the government started keeping track in 1984."

This kind of statistic puts me in a bind. On the one hand, consuming less seems like a good idea; the hedonic treadmill of unsatisfying shopping and spending and consuming and rejecting goods seems like an enormous waste of energy. So it shouldn't matter that rich people are doing more of what I have generally argued is a counterproductive thing. But I think my arguments stemmed from a non-economic definition of consumption that excluded everything but retail shopping -- leisure, public goods, etc. Fold those back in, and then these statistics about consumption inequality seem to provide you a picture of what feels like is happening: The rich are getting more of the things produced by society that enhance the quality of life, and everyone else is getting better acquainted with the insecurities that rob us of it.