The Debt Trap

The Very Serious People are once again shocked, shocked, to discover that being poor is an exhausting job:

…. The usual explanations for reckless borrowing focus on people’s character, or social norms that promote free spending and instant gratification. But recent research has shown that scarcity by itself is enough to cause this kind of financial self-sabotage.

“When we put people in situations of scarcity in experiments, they get into poverty traps,” said Eldar Shafir, a professor of psychology and public affairs at Princeton. “They borrow at high interest rates that hurt them, in ways they knew to avoid when there was less scarcity.”

The psychological burden of debt not only saps intellectual resources, it also reinforces the reckless behavior, and quickly, Dr. Shafir and other experts said. Millions of Americans have been keeping the lights on through hard times with borrowed money, running a kind of shell game to keep bill collectors away. The average debt for households earning $20,000 a year or less more than doubled to $26,000 between 2001 and 2010, according to the Urban Institute. The averages for households in slightly higher brackets grew by 50 to 90 percent in the same period.

People dig deeper precisely because they long to escape….

In a paper published in November, a trio of researchers led by Anuj K. Shah of the University of Chicago’s school of business showed how pronounced this effect can be.

In one experiment, participants competed in rounds of the game “Family Feud,” a trivia contest in which each question allows for multiple guesses. One team was “poor,” allotted only 15 seconds per round; another was “rich,” having budgets of nearly a minute per round. Both groups could borrow time against future rounds, but the poor borrowed far more, progressively shrinking their future paychecks while the rich mostly avoided debt.

The research team, which included Sendhil Mullainathan and Dr. Shafir of Princeton, demonstrated that same effect in a series of related experiments. Scarcity by itself — independent of personality or any other factors — fuels a drive to borrow recklessly…

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52 replies
  1. 1
    General Stuck says:

    bad link

  2. 2
    Mister Harvest says:

    There is nothing more expensive than being poor.

  3. 3
    Anne Laurie says:

    @General Stuck: Fixed, thanks GS (no thanks, FYWP!)

  4. 4
    John Cole says:

    Well, I had top billing for a minute.

    Guess I can’t complain since I don’t even pay the damned bills.

  5. 5
    a hip hop artist from Idaho (fka Bella Q) says:

    @Mister Harvest: True dat.

  6. 6
    Villago Delenda Est says:

    Who profits from this artificial scarcity?

    Give you a hint: it’s not ordinary everyday people.

    The bankster parasites must be eradicated.

  7. 7

    @Mister Harvest:

    To begin with even basics like food are more expensive because many people don’t have cars and either have to shop for food a convenience stores or add the cost of a cab onto the grocery bill to get to the grocery store. I often think when I see people loading a month’s worth of groceries into a taxi cab what did they have to go without in order to pay for the cab fare?

    I remember talking to a kid who was working at McDonalds and he didn’t have a car. He used to take a cab to and from work everyday and after a full day of work he was making just a couple of dollars more than he was spending on the cab fare, but to him it was worth it because at least he was working. The same goes for single mothers who work all week and earn just a little more than what their daycare costs, it is worth it cause at least they are working.

    Being poor is hard work.

  8. 8

    @John Cole:

    How’s the coffee pot vodka tonic John? (I really really wish I had thought of that years ago rather than drinking wine out of those tiny plastic glasses).

  9. 9
    aimai says:

    Fascinating. And such a rebuke to the “culture of poverty” meme. The thing is that if you talk to people who are actually at the low end of the SES scale they also buy into the “personal responsibility” and “personal choice” model–at least for other people around them. Everyone can tell you a story of a friend of theirs who could have done ok except for their poor choices. People see the choice factor when it is applied to other people and see the force/necessity factor when it comes to their own situation. Its a variant on the just world model.

  10. 10
    sal says:

    Perhaps they get into more debt because they have to borrow/use credit to get by, pay rent, gas, food, heat, etc. Necessity, not sapped ‘intellectual resources’. Maybe an idea to consider.

  11. 11
  12. 12
    El Cid says:

    Remember, though, all the well-off people reading that article are just far more rational in their planning and far more entrepreneurial in their efforts so surely given being placed in the same position, they’ll sail through easily without debt and have all bills properly paid and even a profitable startup, all in time to get back to signing internet petitions demanding we tackle all these over-extended entitlement programs what disincentivize people from working as hard as they do.

  13. 13
    cathyx says:

    It’s really hard work being poor. Not to mention stressful. Always weighing out everything you buy, timing bill payments in order not overdraft the account, often doing without things that would make life easier because you can’t afford it.

  14. 14
    muddy says:

    @John Cole: I really think a pic of that tiny coffee pot in your big mitt is in order. Really, please. Could become a classic in the BJ store.

  15. 15

    Damn you Ronaldus Magnus for your Welfare Queen meme. WE’re still battling it today.

    So you know the infamous “Obamaphone”, does that come with a prepaid plan?

  16. 16
    ruemara says:

    Well, fuck those people. I just missed earning $21k for a years work and thanks to hospital costs, I now owe 3k for all my emergency room visits. Take home is less than 1100, so I’m in hock to the hospital for the next 10 years at the lowest rate I can pay. Now I need to go to an endocrinologist. Who knows where the bleeding will end, but somehow it’s always the poors fault. I’d love to grab some Very Serious People and offer them a piece of my mind. And then beat them about the head and shoulders with whatever marked down produce I can find that is large, heavy and potentially bone-breaking. Poverty not only sucks, but it is also a massive sucking morass of a swamp that grabs you, holds you and actively works to pull you under. Fucking them gently with a chainsaw is probably too good for these pundits.

  17. 17
    Evolving Deep Southerner says:

    Kind of surprised none of the FPers have posted about the fucking genius new debt ceiling strategy that came out of the Republican retreat (in both senses).

    If we don’t pass a budget in three months, nobody up here gets paid is the most potentially hilarious stunt the teabillies have ever thought up, I think. How in the FUCK do they think this is going to work? And what if they can’t do it, blame Obama?

    Shit, Obama could call a presser just to say “Look, my name’s Paul, that’s just between y’all. I got my paycheck Friday. Work something out and I’ll be happy to take it under advisement.”

  18. 18
    muddy says:

    If you have adequate money, you can buy 4 tubes of toothpaste when it’s on sale. If you don’t, you can buy them for full price later, and have to go to the trouble 4 times. Low interest rates are for people who don’t carry a balance on their card, or not too much. Free banking services, no interest on car loans etc for the people who don’t need the break, those who do go full fare. It’s just institutionalized.

  19. 19
  20. 20
    NotMax says:

    Precisely the dynamic exploited in the payday loan racket.

  21. 21
    S. cerevisiae says:

    Reminds me of the old saying about loans – in order to get one you first have to prove you don’t need it.

  22. 22

    We have a close friend who’s poor. She’s 36 and we’ve known her for 10 years. She grew up poor with an abusive father who (thankfully) left home when she was young, and a neglectful mother. When one of her mother’s brothers molested her as a child, her mother didn’t do anything about it, and didn’t even believe it happened.

    By the time we met her, she had a four year old boy who had a serious medical condition (it’s gone now), that took a shitload of time to deal with every day. She had dropped out of high school, and had trouble holding a job because, as might be expected, the abuse left ligering scars, and one of them was that she was oversensitive to anything that anybody did or said that might be taken as even vaguely threatening.

    In the time we’ve known her, she’s gotten her GED, she got an associate degree, and now she’s at George Mason, working on her B.A. And she’s gotten a lot of psychological help, and is far more stable than she was when we first met. But it’s been hard. She’s had to move at least 9 or 10 times since we’ve known her (we first met when we lived in the same building in Alexandria).

    I’d like to think that we might have helped in some small way in the time we’ve been friends. At the least, we’ve always given her a safe haven she could come to when whatever shit she was dealing with in her succession of sometimes hard to deal with landlords or rommates. And she once told me that my wife and I were the first “normal”, “healthy” friends she’d ever had. Because we were so far from what she was used to, she had trouble dealing with us and understanding us early on, and even had trouble trusting us, that we weren’t hiding some pathology that was going to lead us to screw her over somehow sooner or later.

    he’s had a string of jobs, all low-paying and unsympathetic to whatever she might have to do as a mother or a student.

    It really galls me how vicious we are as a society to poor people. We blamethem for their lot, and then, when they strive to do what we tell them they should, and try to pull themselves up out of poverty, we shit all over them and throw every hurdle up before them that we can. And then, when they trip over them, as they will now and then, we blame them for that, too.

    Our friend is an amazing person, and I’m proud that she couts us as her friends. I really believe that she’s going to make it. She’ll have a B.A. in psychology in a year and a half, and, I hope, that will really open some doors for her to good, well-paying work. But it will have taken her 38 years to get to where a lot of us, through no credit of our own, end up at 22 or 23 or 24. That’s unconscienable.

    Our friend is one person. She’s pretty remarkable, and I think it took a remarkable person to climb out of the hole life had shoved her into. And she could have tripped up along the way and fallen even deeper at any time, if something bad had befallen her at just the right time, even if she is remarkable.

    And the problem is, most of us, poor or not, are not remarkable. It took incredible discipline and hard work and ambition for her to get as far as she had. And any stroke of bad luck any time aong the way could have pretty much ruined any chance she had to get as far as she has. Most people don’t start with as enviable personal qualities as she has, and so, have an even harder time getting out if the hole. Indeed, most poor people never do get out of he hole, nor do their children, or their children.

    It pisses me off no end how unhelpful American society is to poor people trying to do the “right thing” and help themselves. We fuck them over at every turn, and then blame them for not overcoming everything we throw in their paths. And what’s even more galling is that we could choose as a society to do better. These are people, just like us. They deserve help from us, not scorn and contempt. I hope someday we all learn that.

  23. 23
    A moocher says:

    @ruemara: I would suggest butternut squash for the solid whacking. Nothing else in the produce aisle comes close.

  24. 24
    Rosie Outlook says:

    @Zapruder F. Mashtots, D.D.S. (Mumphrey, et al.): Very well put. I used to be poor. Poverty in modern America is a full-time job, and it doesn’t pay well.

  25. 25
    Machine-Gun Preacher (formerly Ben Franklin) says:

    Can we get early approval for those check-cashing usurists? You know, the money-changers in the Temple who elicit their con to the poor who can’t live on this week’s paycheck, but think they can get by on LESS, next week?

  26. 26
    Mnemosyne says:

    @sal:

    Perhaps they get into more debt because they have to borrow/use credit to get by, pay rent, gas, food, heat, etc. Necessity, not sapped ‘intellectual resources’. Maybe an idea to consider

    I think you misunderstood what they meant by “intellectual resources.” They don’t mean that dumb people who lack intellectual resources are the ones who get into trouble. I think they mean that the process of constantly having to juggle debt takes a lot of time and energy, which saps the time and energy (aka intellectual resources) you could be putting towards other things, like your job search or taking care of your family.

  27. 27
    BethanyAnne says:

    John Scalzi – Being Poor

  28. 28
    Bubblegum Tate says:

    @sal:

    Yup, this.

    It took me years to pay off the credit card debt I had racked up during an extended stretch of unemployment–and I was in a much better position than the long-term poor.

    Being poor is brutally hard. Conservatives who talk about “the poor choose to be poor” should have terrible, terrible things happen to them.

  29. 29
    WereBear says:

    Oh, yeah, known as the wot-the-hell effect.

    When you know the game is rigged, yet must play.

  30. 30
    👽 Martin says:

    And people wonder why the CFPB is such a big deal. They should put Elizabeth Warren on money in the future.

  31. 31
    muddy says:

    @👽 Martin: Thank you for those links about being poor. Really right on. Then I started reading other stuff in there, and just now had to take a break because I’ve laughed so hard I have a pain. I don’t remember when I laughed like that, thanks.

  32. 32
    Bobby Thomson says:

    This is what frosts me about economists. Look, jackasses, the “poors” didn’t borrow more in the experiment because scarcity made them stupid. They borrowed more because they didn’t have enough time to complete the exercise – just as IRL the poors borrow more because they have to in order to make ends meet. It’s a lot easier to scold people for their borrowing choices when you have 300% more resources. And then when you confront them about the gaping hole in their analysis, they wave it off as “pocketbook constraints.”

  33. 33
    Bobby Thomson says:

    @sal: Fuckin’ A.

  34. 34
    Machine-Gun Preacher (formerly Ben Franklin) says:

    When you lose John Cornyn………..

    http://www.chron.com/news/hous.....203978.php

  35. 35
    Omnes Omnibus says:

    @Bobby Thomson: See what Mnem said above.

  36. 36
    Bobby Thomson says:

    @Mnemosyne:

    They don’t mean that dumb people who lack intellectual resources are the ones who get into trouble. I think they mean that the process of constantly having to juggle debt takes a lot of time and energy, which saps the time and energy (aka intellectual resources) you could be putting towards other things, like your job search or taking care of your family.

    No, I think they do. I think they mean that the stress of scarcity causes people to make mental mistakes that they otherwise wouldn’t – of course overlooking that choices that are disastrous in the long term may be the only way to buy tomorrow in the short term.

  37. 37
    PurpleGirl says:

    @BethanyAnne: Scalzi’s post is very good, but so are the comments. People should read both.

  38. 38
    Bobby Thomson says:

    @Omnes Omnibus: Yeah, I just did. And I respectfully disagree.

  39. 39
  40. 40
    Mnemosyne says:

    @Bobby Thomson:

    I think they mean that the stress of scarcity causes people to make mental mistakes that they otherwise wouldn’t – of course overlooking that choices that are disastrous in the long term may be the only way to buy tomorrow in the short term.

    Uh, aren’t you both saying the same thing? That the stress of the situation pushes people into making short-term decisions that turn out very badly for them in the long run?

    Again, they’re not saying that people get themselves into these bad situations because people are stupid. They’re saying that the problems are created by the situation itself. The fact that it’s the only decision open to them in that moment doesn’t make it a good decision.

    I really don’t understand why people are upset that economists are starting to realize that people’s choices are constrained by their circumstances and we are not, in fact, all a bunch of equally free consumers making a leisurely decision from a full menu of choices.

  41. 41
  42. 42
    Zach says:

    I don’t understand the concept of reckless borrowing at all. Unless there’s misrepresentation going on on the part of the borrower, the problem is overwhelmingly dominated by reckless lending (and laws that incentivize it). Lenders are the experts; not borrowers. Talking about “digging an even deeper hole” from the perspective of the borrower ignores the fact that someone provided the shovel.

  43. 43
    ruemara says:

    On the issue of borrowing, I’d like to say, what are you supposed to do, not take any chances at all? Not die? No one ever condemns a wealthy person when they get in a bit over their head. The concept of risky, yet worthwhile investment is understood. I took a lot of risks going into debt to get my first mac a bajillion years ago. And then getting dtp software, but I would not have gotten so damn close to stability without it. And I wouldn’t even have my piss poor employment. There was an entire semester where I edited video on blue clamshell mac with a 12″ screen, but it was worth it, so I could get the next phase of production job. Risk pays off, the more you are worth. Sometimes, you have no choice but to consign yourself to the gods, fate or FSM and jump off the cliff. Your health or possible solvency depend on it. When you have no resources, everything is a goddamn risk.

  44. 44
    RossInDetroit, Rational Subjectivist says:

    I recently spent 3+ years working among people making just above minimum wage. I don’t have to tell you how hard and frustrating it is for a young family with 2.5 jobs and 2 kids. It was painful to watch.

    The worst part is they were stuck. No wiggle room at all. I could walk out any time the BS got too deep, and did, but they needed every possible hour on their paycheck just to make ends meet.
    That crushes your self esteem and makes it so much harder to advance above the bottom rung.

    To his credit, our boss offered anyone who wanted it his time and assistance in getting ahead. He was a cheerleader and a coach when he could have been a slave driver and gotten away with it.

  45. 45
    WereBear says:

    It was a couple of years ago that Mr WereBear and I decided that the Vanderbilt Protocol was our best shot at improving his situation with his (CFIDS) auto-immune disease.

    And we gambled. We went into credit card debt to pay for the antibiotics when the insurance company refused. (Even though these are old drugs and dirt cheap. They said it was “off label use.”) By the time our doctor and pharmacist got them to pay for it, we had run up a balance. Which got translated into leg-breaking interest when, under the Bush Administration, playing with the due date until we were eligible for 29.9% was LEGAL.

    We gambled and we won: Mr WereBear is more functional than he used to be. Not employable; not even reliably able to wash the dishes every friggin’ day; but better. Sooooo; we managed to go into debt consolidation (highly reccced, really) and paid down the debt over YEARS because; (hey, nonny nonny, it was LEGAL) and now we are POOR but out of debt.

    Something to celebrate, amirite?

  46. 46
    karen says:

    @Zach:

    It’s easy to moralize when you’re not desperate.

    I work for an international collection agency/law firm and I see this all the time. People buy things they had money for at the time, whether it’s a car, a house, a business or they’re desperate in situations like medical bills. But things happen. They lose their jobs. They get sick. They go bankrupt. A lot of the people were expats who were working overseas then got stuck overseas with no job but no way to get home. When you’re in that kind of situation, then you can get back on your high horse.

  47. 47
    WereBear says:

    In Ammurica, the greatist crime is being poor.

    When you owe the bank hundred of dollars, it is YOUR problem.

    When you owe the bank millions of dollars, like Donald Trump…. it is the bank’s problem.

  48. 48
    Bobby Thomson says:

    @Mnemosyne: No, that’s not the language they use. You’re being far too charitable. They talk about the “psychological burden of debt” and “reckless behavior.” They’re trying to do social psychology, and failing at it, as economists always so, especially at Chicago and Rochester. “Scarcity by itself — independent of personality or any other factors — fuels a drive to borrow recklessly…” Bullshit. There’s no “drive to borrow recklessly.” There’s a need to find enough resources to fill the gap by any means necessary. That’s a gap that people with adequate resources never need to fill, and it’s got nothing to do with anyone’s “drive” or “psychological burden.”

  49. 49
    WereBear says:

    Let me give you a definition of “reckless behavior.” In the classic sense, it’s “nothing to lose.”

    When medical science has done NOTHING to help an auto-immune disorder that is destroying a wonderful person, you do something about it. You gamble on a long shot, and pay for it with borrowed money, which gets multiplied INCREDIBLY due to the “miracle” of loan-shark interest.

    Thank you, George W. Bush. Oh, yeah, we shouldn’t have have used our credit cards to pay for drugs that might save a life. Because we have the best “health care in the world” and if we have to go into debt to pay for it, wot-the-hell.

    There still isn’t a standard of care. People get experimented on. And when a person realizes that and bails… they get tagged as looney, and don’t get any respect.

    Tough old world.

  50. 50
    weaselone says:

    From what I have read their are several things that tend to trap people in poverty. The one this speaks of is intellectual/emotional resources. It’s not suggesting that the poor have less of either and are in someway inferior, but rather that being poor in and of itself saps these resources leading to inferior choices even when better choices are available. The general gist is that because of their circumstances and lack of resources poor people have to spend emotional and intellectual energy thinking about things that the middle and upper classes do not. This leaves them less able to do long term planning or make other difficult decisions when faced with them.

    This combines with other factors of being poor, like the reality that for many things being poor is more expensive. As was brought up earlier in the thread, if you’re poor it’s difficult to stock up on an item when it’s cheap because your lack the cash to purchase multiple items and you may even lack the capacity or stability in living situation to make it worthwhile. Instead of having reliable transportation you may be stuck depending on others for rides, taking cabs, or using an old car prone to breaking down. This can be both more expensive and also cost you opportunities to work and better yourself. Credit is another serious issue. Middle class and above have numerous credit options available, much of it at low rates. The poor have to rely on payday loans and at best high interest credit cards if they even have credit available through normal channels.

    And there’s the impact of unforeseen difficulties. Higher income people/families can absorb hits with the help of their own reserves, resources, and the assistance of people in their circle that would completely devastate those living in or on the edge of poverty.

  51. 51
    weaselone says:

    @Bobby Thomson:

    I think both factors come into play. Certainly there are needs that must be filled by any means possible, but there’s also a certain mental fatigue that comes with having to commit serious thought to decisions that either don’t exist or are nearly trivial for those with more resources.

  52. 52
    Rosie Outlook says:

    @RossInDetroit, Rational Subjectivist: I had a boss like that too.

    Another thing I found helpful was to take the blue pill or red pill or whatever color it was (it’s been a long time since I’ve seen The Matrix, sorry) and withdraw as much as possible from frantic consuming, and hoard money. I will warn you that, particularly if you are female, this may be lonely at first, but you’ll soon learn to recognize other frugal folk. (You’ll see us at the library and the park, rather than the mall or the big box home improvement store.)

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