View source for How the poor can (and should!) save money

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[[Category:Noah Smith]]
[[Category:The Financial Industry]]
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{{DES | des = "Most poor people, if they didn't take out payday loans, would not die. They would not be out on the street or crippled or starving. Instead, they would simply be wealthier. For this reason, many states, and the federal government, are all actively looking into legal restrictions on payday lending; some have already done this." | show=}}
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Although my Atlantic column on wealth inequality got a lot of publicity, the comments were mostly negative. Almost all of them said one basic thing: "The poor don't have any money to save!"

Now, first of all, this means that a lot of people just glossed over the column itself, and instead just guessed/assumed the message from the title and picture. These people assumed that my column was calling for the poor and middle class to help themselves instead of relying on society to help them (in other words, basically an "angry conservative uncle" column). Whereas if they read it closely, they'd find me saying this:
[O]ne obvious thing we could do to make wealth more equal is - surprise! - redistribution. It turns out that income redistribution and wealth redistribution have much the same effect on the wealth of the poor and middle-class. Income redistribution is probably a bit better, for two reasons. First, people with higher incomes tend to save more, meaning they build wealth more rapidly. Second, people with higher incomes tend to have less risk aversion, meaning they are more willing to invest in assets like stocks (which get high average rates of return, although they are risky) rather than safe assets like savings accounts and CDs that get low rates of return. 
In other words, giving the poor and middle-class more income will boost the amount they are able to save, the percentage they are willing to save, and the return they get on those savings. Part of the reason America's wealth distribution is so unequal in the first place is that our income distribution is very unequal.
So obviously I do realize that the poor have very little money; this is why I suggest that we tax the rich to give the poor more money, in order that they may save more (and consume more, of course)!

But it's also true that if we mail checks to poor people, they will still have to save part of those checks if they want to build wealth. 

Now here's where we come to the question of how, exactly, the poor can save money. Saving is not all about belt-tightening and going hungry. In fact, for the poor, it's mostly not about that at all! For the poor, the most important way to save is to avoid taking out high-interest debt. 

Remember, saving and borrowing are exact opposites! A dollar not borrowed from a payday loan or credit card is a dollar saved.

Take the case of payday loans. This is one case in which I think it's fairly obvious that debt is used to extract wealth from the poor. Payday lenders exploit poor people's ignorance and behavioral biases to trick them into taking out loans that they don't need to take out. 

To see this, go and read the recent Pew report on payday lending. Some of their most important findings are:

1. Most payday loans get paid back within a year. Since payday loans charge insane rates of interest (thousands of percent!), this represents a substantial loss to poor people.

2. Most payday loans are taken out to cover regular expenses (bills, etc.), not emergencies. 

3. If they couldn't use payday loans, most borrowers would either cut back on expenses or borrow from family and friends.

4. Payday loan borrowers typically repay their loans by...cutting back on expenses and borrowing from family and friends!

In other words, combining these findings, we see one simple truth: Most poor people, if they didn't take out payday loans, would not die. They would not be out on the street or crippled or starving. Instead, they would simply be wealthier. For this reason, many states, and the federal government, are all actively looking into legal restrictions on payday lending; some have already done this.

Regulation can help, but tricksters are ingenious. Poor people need to learn how to avoid the tricksters. My column was suggesting that government, through public school and through awareness campaigns, can help people avoid the tricksters just as fast as the tricksters can come up with new tricks. 

And this probably applies to middle class people as well, who almost certainly borrow way too much on credit cards. 22.5% interest?? You have to be kidding me! The whole credit card industry survives only because of the large number of people who make only their minimum payments and end up getting trapped in high-interest credit card debt for life. Some of those people borrow for emergency medical expenses, but even in those cases - where borrowing makes sense - I'm sure people could find much cheaper ways to borrow.

The point is, avoiding unnecessary high-interest debt is equivalent to saving lots and lots of money, while consuming the same amount overall. In other words, it;s a free lunch for people, as long as they known how to grab it.

Anyway, I think a lot of people saw my column as an "either/or" thing - they thought I was arguing that we should encourage self-reliance and ignore the social aspect of wealth inequality. But I don't see these things as substitutes. I see them as complements. We want society to help the poor and middle-class as much as possible. And we also want the poor and middle-class to help themselves as much as possible. That way, the poor and middle-class get the maximum amount of total help possible. There is no trade-off!

And remember, if you live in a corrupt, predatory kleptocracy, you want to A) fight to change your society for the better, and B) at the same time, rely as little as possible on the goodwill of the corrupt kleptocracy to provide you with your daily bread. "Just save your money" is not a cure-all for the poor. But "save your money while fighting to change the system" is way better advice better than "spend all your money and borrow at 3000% and pray for the revolution to come soon".
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