Why the poor are poor

Analysts and economists like to fixate on two metrics for personal finance, income and net worth. They are in some sense a measurement of slope, and of the volume under the curve minus spending and debt. I don’t think either are a meaningful gauge for really understanding why the poor are frequently stuck being poor.

It’s that the poor are proverbially illiquid and can’t cope with disruption of their finances and lack the spare resources to cover anything. That’s what causes disaster and prevents ascent from poverty.

Even people with middle-class income who lack fiscal know-how or have exceptionally high expenses such as child support can get stuck. Obviously interest-bearing debts contribute to the malaise, but aren’t as prominent as some might think for the truly poor who never acquired a good enough credit profile to establish significant debt.

The problem with chasing metrics like this is that it leads to placebos that can cause more problems than they solve, like encouraging or subsidizing home ownership amongst the poor. Doing that leads to situations like this where people who can’t afford to maintain, sell, or manage their home get gradually dragged down by the attendant expenses.

Another problem is that health care introduces a major factor into the poor’s overall financial risk profile. One that greatly increases the cost of providing the poor with capital for things like real estate, loans, and small businesses. One of the greatest causes of bankruptcy in the US is unexpected/uncovered health crises. Insurance doesn’t always cover it either. Kicker, if they go bankrupt due to an unexpected health issue, lacked cash because they were getting hammered with a mortgage payment/upkeep for their home, they’ll lose the house too in many cases. You need money to retain a good bankruptcy lawyer…

I don’t know enough about Obamacare to express an opinion as to whether or not this’ll substantially help the poor. I strongly suspect it’ll do more for the strained middle class than the lower classes from what little I know of it.

What we need to be encouraging isn’t equity, home ownership, or income in any traditional sense. We spend too much time chasing silly things like SBA loans and home ownership/net worth pumping.

Social welfare isn’t necessarily the answer, instead we need to encourage savings and stop incentivizing actions that increase their risk profile.

Another problem of home ownership is that it aggravates unemployment rates because people lose a great deal net worth just trying to move. This contributes to labor market illiquidity. This is why we can live in a country where software companies offering $100-150k for experienced engineers can’t find any employees while there are people with families desperate for a job that makes more than $12/hour. Education / labor market demand mismatch and the evaporation of the traditional union jobs outside of New England has contributed as well.

All for the house they can’t seem to sell.

The rent may be too high, but it’s cheaper than the trap of misguided home ownership.

I know this site is a bit of a disaster zone, but if you like my writing or think you could learn something useful from me, please take a look at the book I've been writing with my coauthor Julie. There's a free sample available too!