Poverty’s Inconveniences Create More Poverty

by Darwin on March 13, 2012

It’s hardly groundbreaking science, but poverty creates even more poverty. A recent article at Haaretz cited one study in which Indian farmers were tested for IQ before and after harvests. Before the harvest, farmers were the most financially strained – it was a full-year since the last lump sum payment for their annual work. After the harvest, farmers scored much better, having a new capacity for problem-solving that was found with a little help from another dose of cash flow.

Living Life a Day at a Time

The biggest problem is obviously structural. A quote from the article notes that the people who need to think the heaviest about the future lack any time or emotional energy to do so. The people who need to think about the future the least obviously have the most time and energy to think it through. Poverty incites almost a basic instinct in humans to make short-run decisions at all costs.

Interestingly, finance seems to be different in some way from other needs. Previous research has shown that people make better decisions when they have to pee. Not only are decisions made more quickly, but each decision is likely to provide for better outcomes, as those who are thinking about the bathroom are more willing to put a new problem behind them. It just might be that the bathroom is the future; people who can think about the bathroom can then focus on what needs to be done today.

Capital Allocation Wins

The most important lesson is the positive one: it takes bad decision-making to remain poor, and good decision-making to rise out of poverty. In particular, the ability to allocate capital is most important. Professor Eldar Shafir from Princeton University, one of three professors involved in the study, finds that capital differences result in economic differences.

Capital means far more than dollars and cents. A single person equipped with a $10 alarm clock is much better suited for maintaining a job than someone without. A clock can be very valuable economic capital, just like any other consumer good. Anything that I might take for granted in my suburban, middle-class life might make all the world to someone on the brink of financial catastrophe.

I’ve seen this first hand. I recently returned cable equipment to the cable company. Inside the building was a line at least 10 people long. As it was nearing the first of the month – it was February 29 – the only reason for long lines would be the many people waiting to pay. Why would so many people bother to take the time to hand deliver a check?

And then I concluded it had to be cash flow and capital.  This is how people on minimum wage and below live moreso than those with higher incomes.

I have a roll of stamps in my desk, for which I paid only $22 for 50 stamps. If at any time I need to mail a letter, I can open the drawer, pull off a stamp and slap it on an envelope for pickup at the office. The $22 I “invested” into a roll of stamps provides a very terrible return. They’re “Forever stamps,” so their value appreciates with the cost to send a letter, but the real value is in time savings. Going to a gas station for a single stamp would take as long as 10 minutes out of my day. (See Why You Should Always Buy Forever Stamps).

If for $22 I can save as much as 500 minutes, I’ve done very well in allocating my capital. If I need cash flow, I have a credit card, which I can use to borrow the money I need until next payday. Surely, many of the people in line at the cable company had only recently received their wages from a full two weeks work. With available credit, those in line would not have to face a long wait at the cable company to drop off a payment. Payment could have been made well in advance of the due date and repaid later so long as one had the access to credit. These are luxuries that I have never seen as such. Stamps won’t make me feel rich like a new Bentley GT might, nor will a credit card ever get love from the personal finance blogosphere, but both items are very important forms of capital.

The Intermediate Experience

I have a new perspective on government social programs thanks to this article. It might just be the intermediate phases of wealth-building, ignored by most social programs, which never allow for improvement. Most social programs give for the immediate need – food stamps for immediate food purchases, or unemployment for immediate income.

There are long-term programs, of course, including college aid, which requires a minimum commitment of 2 years. Never impoverished, and having made my own good financial decisions, I still was not prepared for the commitment to my own college experience (See Unemployment by Major). It was after a semester off that I reorganized my priorities and told myself that I could graduate that I went back to school with vigor I never had.

At 18 years old, I had never, not once, made a commitment myself to anything that would require 4 years of consistent effort. Fueled with scholarships covering my every expense, funding mattered very little if I had never thought so far ahead.

Having never dealt with decisions affecting the intermediate term, it was difficult to do something in the short-term that might provide for long-term benefits. I can’t help but to think that the gap in short- and long-term government social programs might create very similar barriers.

{ 6 comments… read them below or add one }

krantcents March 13, 2012 at 12:48 pm

As a teacher, I deal with this all the time. If the students do not have breakfast their scores or learning goes down. There are a lot of factors affecting learning and attitude. Poor people tend to spend their money on the wrong things such as gadgets (iPhones, iPods, new cars etc) instead of saving.


JT March 14, 2012 at 11:35 am

I’ve always wondered if the poor do actually spend more on luxuries or gadgets or if its just more noticeable. I mean, if you’re broke and have an iPhone, it’s easy to say your cell phone isn’t helping. But it may just be that the individual spends no more as a percentage of his or her income on a certain category than someone with far more wealth.


Darwin March 13, 2012 at 7:28 pm

This is interesting data; glad these assertions are backed up with the studies you linked to because the findings aren’t immediately intuitive. On one level, people tend to assign blame to laziness or lack of ambition, but as you point out, the deck is often further stacked against those starting out pour and stacked in favor of those who can put capital to work.


JT March 14, 2012 at 11:37 am

Exactly. That’s really all there is to finance, really. He who creates the best return on invested capital wins. For many people, returns on invested capital extend far beyond equity holdings and fixed-income securities.

Yeah, the studies really interested me. Why someone would make better decisions when stressed with the necessity to relieve themselves in the bathroom but fail to make good financial choices under other stress is beyond me.


cashflowmantra March 14, 2012 at 10:57 am

It only makes sense that if you are most concerned about your next meal, that will be your only focus and not ways to improve your overall lot in life. It is a bad cycle to find yourself in.


JT March 14, 2012 at 11:39 am

Likely so. It’s a constant struggle with immediacy that keeps people away from the future. I suppose this confirms why opt-out retirement plans are more successful – forcing people to opt-out creates a different kind of barrier. The people with the most financial stress – people who might not otherwise save – are essentially “forced” to do so.


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