Why Poverty Persists: A Critical Look at Matthew Desmond’s Analysis

Mathew Desmond’s New York Times piece, “Why Poverty Persists,” written in anticipation of his more-comprehensive book, highlights an important fact: Government anti-poverty measures and spending of the past 50 years have done little to reduce poverty. Something is preventing entrepreneurs from removing the last vestiges of involuntary misery, despite their massive success in reducing poverty from 90% before 1800 to 10%, by building the modern world. But Desmond offers no explanation of what is stopping them. Instead, he blames a system of exploitation.

His first suspect for why poverty continues is the banking deregulation of the 1980s. Unchained banks, he asserts, grew larger, and their services more expensive, while poor people’s access to banking and credit shrunk. The supposedly exploitative financial industry, however, isn’t and was never free of restraint in America. The number of restrictions on banking and securities markets in the Code of Federal Regulations has been steadily growing for 50 years. Yes, a few banking rules, like branching restrictions, were repealed in the 80s (which improved bank performance and boosted lower incomes). But if lack of banking regulation was the problem, we should have expected the Dodd-Frank Act of 2010, the biggest and most complex set of regulatory rules on the financial industry, to substantially improve the situation. It clearly did not. Instead Dodd-Frank increased the compliance costs for all: large, and small, and community banks. As a result, a third of independent banks went bust and financial services have become less accessible and more expensive for Americans, especially the poor.

How free or unfree is the financial and banking system, and the substantial effect that has on the economic well-being or misery of everyone, is less interesting for Desmond than scaremongering. He cites the up to 700% annualized interest rates on payday loans as proof of the exploitation “free” financial systems cause. Desmond the sociologist has mastered showing the hardship that breaks the reader’s heart. It is undoubtedly true that poor people are struggling and that “being poor is expensive,” because they must make heavy choices when and if they have alternatives at all. Desmond masquerading as economist, however, is less impressive.

First, the annualized interest rate is largely meaningless, as holding payday loans for a year runs counter to their purpose. Very few people do. Further, a crackdown on even the worst payday-loan lenders, who can be truly deceitful, will not help those who use them to gain better access to borrowing opportunities. Restricting payday lenders drives the pool of money they lend elsewhere, likely to lower-risk borrowers, making borrowing cheaper for the already well-off and pushing the poorest to search for credit in even-riskier places. Good intentions, coupled with economic illiteracy, leads to even-greater subsidizing of the affluent at the expense of the poor. Desmond wishes for the opposite, but wishing doesn’t make it so.

Desmond is similarly uninformed of the consequences of government encouragement of sub-prime lending and homeownership. The financial crisis of 2008 was the direct result of government’s policies pushing mortgage lenders to lend to borrowers with less capacity to repay. Through the Community Reinvestment Act, deposit insurance, and Fannie Mae and Freddie Mac’s guaranteed buying of mortgage-backed securities (MBS) from banks, the government encouraged, and often mandated, cheap mortgages. These mortgages often required no down payment, even from people with high risk of default because of policy pressure.

The government then mandated pension funds and insurance companies buy only AAA-rated securities often tied to those risky home loans; a tragic mistake, since they were the opposite of “safe.” Finally, the Fed fueled the agenda with historically low interest rates, which promote unsound lending. At each step of the way, the government’s pursuit of affordable housing led to lower lending standards (something Desmond champions) and to one of the worst economic periods in American history.

Addressing the rest of the misconceptions, even in the short NYT article (not to mention the book), would take at least as much space as Desmond uses. He notes rising fuel and utility prices, without even glancing at the effect of decades of anti-fossil-fuel policies. He doesn’t explore how government limits affordable housing through land-use regulation. Most fantastically, he says that the American economy is “less productive today than it was in the post-World War II period.” It is nonsense. While the rate of productivity growth is lower today, overall productivity – output per hour worked – has increased almost fourfold since 1950.

But the details are not important for Desmond. He ignores the uncomfortable fact that the period when the poor stopped getting wealthier (1970s-present) coincides with growing government action and spending. He ignores that poverty had been steadily declining until the US government decided to step in and “help.” He doesn’t recognize that as government involvement in a sector increases, prices rise; the very sectors he derides as exploitative are those where the government intervenes and regulates most.

Desmond is more concerned with inculcating unearned guilt in his readers. He claims that every time we see a person in poverty, we should search for someone benefiting from, and often orchestrating, their misery. Whether it’s a corporation, consumer, stockholder, landlord, homeowner, banker, lender, free-checking account holder, or check-cashing store manager, all “feed off” and exploit the poor. He asserts that we should all pay the price for “restored humanity and renewed country,” whatever that means.

His zero-sum mentality is ludicrous. Yes, in our mixed economy, some people’s wealth is not a result of merit and production, but of political pull and government-granted privileges. In a non-free market, sometimes it can be hard to tell which is which. But the idea that you are responsible for the hardship of others simply if you are “the secure, the insured, the housed, the college-educated, the protected, the lucky” is as absurd as it is unfounded.

Wealth, in the end, is not taken. It is created. The only way to help the poor is to create more of wealth through productive action, not redistribute what we have at the moment. If redistribution, not wealth-creation, were relied on to help the poor since the 1800s, we would all still be, at best, subsistence farmers. Instead of instilling unearned guilt, we should advocate returning to the source of prosperity and poverty elimination, economic liberty.

Ryan Yonk, Ph.D is Senior Research Faculty and Robertas Bakula is a Research Associate at the American Institute for Economic Research in Great Barrington, MA.