The poor are poor not because they make bad decisions but bad decisions are made because they are poor. So believes Sendhil Mullainathan, a tenured professor of economics at the Kennedy School, Harvard University who noticed critical changes in his own parents when faced with scarcity. Mullainathan’s father emigrated from India to work as an aerospace engineer in the United States in the 80s and found himself disqualified to continue in the same field of work because of security classification requirements of the defense industry. As reported in Harvard Magazine, “‘This was the first time I felt real economic insecurity,’ Mullainathan remembers. It was also the first time he saw scarcity’s effects in action.” Mullainathan goes on to elaborate that he saw his parents change when his father could not get a job. “They were much more stressed out and short-tempered, as if part of their personalities was different.”
According to Mullainathan and Eldar Shafir, who did extensive research on the problem, behavioral patterns of scarcity can be seen in situations where people are cash strapped, experiencing fewer opportunities because of their race or performing poorly in school.
In some cases, once you enter conditions of scarcity, it is very difficult to escape them, especially in our current society.
The Spiral of Scarcity
Take the case of pay day lending (PDL) schemes. It is estimated that there are over 23,000 such lenders registered in the country, exceeding the combined total of all the McDonalds and Starbucks fast food outlets. They provide “quick and easy” cash in exchange for payroll checks for those who do not have bank accounts.
The cash paid out is, after deducting a commission and an upfront discount, at least a few percentage points less than the check amount. Every payroll check, in effect, becomes a short term loan deed with stiff interest rates, penalties and the like. The payback period could be as short as a week or two. If the full amount is not paid back, the balance due obviously carries higher interest and penalties. In effect, every transaction of this type is a turnstile for debt. The borrower builds his own perpetual debt trap. The cumulative interest charged can exceed 400 percent.
Unlike the United States, most countries, large and small have postal savings banks available at very low cost for those who cannot afford the costs of commercial banking. In this way, the United States is unique in how it deals with banking opportunities for the poor. This is another skillfully built-in security blanket for regular banks to operate with minimum competition. It is estimated that about 12 million Americans are trapped in the pay day loan sink. Very few states have any meaningful control on this problem.
Escaping the Scarcity Trap
Several leaders have tried to redefine policies to help people in situations of scarcity. In a panel discussion on race and poverty in America recently, President Obama briefly traced attempts to tackle the problem in recent American history, starting with President Lyndon Johnson’s “war on poverty” slogan of the sixties to President Clinton’s “make work pay” for low income families. There was a sizeable fall in poverty rates during President Clinton’s term of office. The situation has worsened since then. President Obama has been making a case for the channeling of resources toward education and infrastructure in chronically poor communities in the country. This, in his estimation, would provide options for escaping the scarcity trap.
Education and Poverty
Shortfalls in scholastic achievements in the K-12 public schools in the United States is a hot topic in the blame game series. A contrarian analysis was presented by the screen-writer, actor, director and movie producer, M. Night Shyamalan. He came up with the astounding conclusion that “American schools are not failing.”
His findings are presented in the book I Got Schooled. Shyamalan found a key poverty link to the analysis of the data collected from the Program for International Student Assessment (PISA). This international test for achievement evaluation is given to fifteen year olds every three years. Demographics show that about 20 percent of the United States student body comes from inner city schools. They come from low income families at poverty levels exceeding ten percent. This segment of students bring the rankings to unacceptably low levels.
The reason for this is that a large percent of these inner city school students are hungry all day long. They cannot be motivated to achieve anything unless the root problem is solved. It is a shame that the richest country in the world faces hunger in this abysmal way. It also goes to prove Mullainathan’s postulate that much is known about the economics of poverty and far less of the “psychology it creates in individual populations.”
It is interesting to note that the problem of scarcity as well as the topic of scarcity is a much researched one. Recently the Nobel committee awarded the economics prize for 2015 to Professor Angus Deaton of Princeton University for his work on the toll of scarcity on various demographics. This recognition is the second one given to an economist for working on this same topic in the last two decades: the first went to Amartya Sen in 1998.
P. Mahadevan is a retired scientist with a Ph.D. in Atomic Physics from the University of London, England. His professional work includes basic and applied research and program management for the Dept. of Defense. He taught physics at the University of Kerala, at Thiruvananthapuram. He does very little now, very slowly.