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Sunday, March 30, 2008

Is Poverty Caused by Irrational Behavior?

Is the poverty trap caused by a fundamental change in behavior once the number of problems an individual faces crosses some critical threshold?:

The sting of poverty, by Drake Bennett, Boston Globe: ...In the community of people dedicated to analyzing poverty, one of the sharpest debates is over why some poor people act in ways that ensure their continued indigence. Compared with the middle class or the wealthy, the poor are disproportionately likely to drop out of school, to have children while in their teens, to abuse drugs, to commit crimes, to not save when extra money comes their way, to not work.

To an economist, this is irrational behavior. It might make sense for a wealthy person to quit his job, or to eschew education or develop a costly drug habit. But a poor person ... would seem to have the strongest incentive to subscribe to the Puritan work ethic, since each dollar earned would be worth more ... than to someone higher on the income scale. Social conservatives have tended to argue that poor people lack the smarts or willpower to make the right choices. Social liberals have countered by blaming racial prejudice and the crippling conditions of the ghetto... Neoconservatives have argued that antipoverty programs themselves are to blame for essentially bribing people to stay poor.

[Charles] Karelis, a professor at George Washington University, has a simpler but far more radical argument to make: traditional economics just doesn't apply to the poor.

When we're poor, Karelis argues, our economic worldview is shaped by deprivation, and we see the world around us not in terms of goods to be consumed but as problems to be alleviated. This is where ... bee stings come in: A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The ... poorer one is ... the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems.

Poverty and wealth, by this logic, don't just fall along a continuum... They are instead fundamentally different experiences... At some point between the two, people stop thinking in terms of goods and start thinking in terms of problems, and that shift has enormous consequences. ...

If Karelis is right, antipoverty initiatives championed all along the ideological spectrum are unlikely to work - from work requirements, time-limited benefits, and marriage and drug counseling to overhauling inner-city education and replacing ghettos with commercially vibrant mixed-income neighborhoods. ... "It's Econ 101 that's to blame," Karelis says. "It's created this tired, phony debate about what causes poverty." ...

Karelis ... remains relatively unknown... A few, though, have taken notice... "There's not much evidence in the book, and there are a lot of bold claims, but it's great that he's making them," says Tyler Cowen, an economics professor at George Mason University. It "was a really great book, and it was totally neglected."

The economist's term for the idea Karelis takes issue with is the law of diminishing marginal utility. In brief, it means the more we have of something, the less any additional unit of that thing means to us. ... In many cases, Karelis says, diminishing marginal utility certainly does apply: Our seventh ice cream cone will no doubt be less pleasurable than our first. But the logic flips when we are dealing with privation rather than plenty.

To understand why, he argues, we need only think about how we all deal with certain familiar situations. If, for example, our car has several dents on it, and then we get one more, we're far less likely to get that one fixed than if the car was pristine before. ...

Karelis argues that being poor is defined by having to deal with a multitude of problems: One doesn't have enough money to pay rent or car insurance or credit card bills or day care or sometimes even food. Even if one works hard enough to pay off half of those costs, some fairly imposing ones still remain, which creates a large disincentive to bestir oneself to work at all.

"The core of the problem has not been self-discipline or a lack of opportunity," Karelis says. ... The upshot ... for policy makers, Karelis believes, is that they don't need to fret so much about the fragility of the work ethic among the poor. In recent decades, experts and policy makers all along the ideological spectrum have worried that the more aid the government gives the poor, the less likely they are to work to provide for themselves. ... It was this concern that drove the Clinton administration's welfare reform efforts.

But, according to Karelis, that argument is exactly backward. Reducing the number of economic hardships that the poor have to deal with actually make them more, not less, likely to work, just as repairing most of the dents on a car makes the owner more likely to fix the last couple on his own. ... (One federal measure Karelis particularly likes is the Earned Income Tax Credit, which, by subsidizing work, helps strengthen the "reliever" effect he identifies.) ...

Karelis ... believes ... the strength of his arguments is less in how they fit with the economic work that's been done to date on poverty - much of which he is suspicious of anyway - but in how familiar they feel to all of us, rich or poor. "The bee sting argument, or the car dent one," he says, "I've never had anybody say that that isn't true." [See also On Poverty, Maybe We're All Wrong]

    Posted by on Sunday, March 30, 2008 at 03:03 AM in Economics | Permalink  TrackBack (0)  Comments (126)

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