Who is speaking for the poor?

By Felix Salmon
September 6, 2012
news that people like to go out at weekends, I hope you're sitting down for this one: people who aren't good at numbers tend to be bad at looking after their money.

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After shocking you this morning with the news that people like to go out at weekends, I hope you’re sitting down for this one: people who aren’t good at numbers tend to be bad at looking after their money.

My professional life is largely spent in a world of highly-numerate and highly-intelligent people, many of whom blow up spectacularly in the financial markets. And looking at hedge funds in particular, it’s very easy to find genius-level investors who have lost astonishing amounts of money: there’s clearly more to getting and holding on to vast sums than simply being off-the-charts smart. But the fact is that if you zoom out from the tiny group at the top, there’s a very strong correlation between numeracy, or intelligence, or financial literacy, on the one hand, and having a solid financial footing, on the other.

Bear with me here, for a minute, because it’s worth reviewing the literature. Financially literate people are more likely to plan for retirement. And if you plan for retirement, you have more wealth: a 2006 paper showed the median person who was planning for retirement as being worth between $307,750 and $410,000, while the median person who isn’t planning for retirement was worth just $122,000.

IQ also helps. Check out this chart, for instance, from a very long and detailed paper about the likelihood that a person of given intelligence will be invested in the stock market.

iq.tiff

The distribution is clear: the smarter you are (as measured by IQ), the more likely you are to be invested in the stock market. And this distribution is independent of wealth: it applies to the rich as much as it does to the poor. Or, as the paper puts it, “IQ’s role in the participation decisions of the affluent is about the same as it is for the less affluent. The definition of affluence—net worth or income—does not affect this finding.”

Most impressively, check out this paper from 2007. It asked just three “simple mathematical questions” of couples to judge the numeracy of each one. If neither got any questions right, the total wealth of the couple, on average, was $202,000. If they both got one question right, it was $505,000. If they both got two questions right, it was $853,000. And if they both got all three questions right, their average wealth on average was a whopping $1.7 million. (If they got different scores from each other, the wealth ended up somewhere in between.)

And similarly, at the other end of the spectrum, there’s huge amounts of research showing that if you’re particularly financially illiterate, or you’re not good at numbers, then you’re much more likely to be ripped off by predatory lenders or other scams, be they legal or otherwise.

There are various conclusions to be drawn here, one of which is that if we do a better job of financial education, then Americans as a whole will be better off. That’s true. But at the same time, financial illiteracy, and general innumeracy, and low IQs, are all perfectly common things which are never going to go away. It’s idiotic to try to blame people for having a low IQ: that’s not something people can control. And so it stands to reason that any fair society should look after people who are at such a natural disadvantage in life.

Which brings me to Nina Easton’s horrible new cover story for Fortune. Online, the headline is “Stop beating up the Rich”: even the capitalization grovels to the overclass. The magazine coverline is even worse: “In this political season,” it says, “the rich are an easy punching bag”.

But over the course of the story’s 2,700 words, Easton never really manages to give any examples of “people beating up the Rich”: she’s incredibly vague about the behavior she wants to stop. There’s a graphic, under the cute headline “Public Enemy No. 1%”, listing historical examples of Americans “taking shots at the wealthy”: it features things like the debut of Mr Burns in The Simpsons, and Enron’s Jeff Skilling getting pied.

By Easton’s own lights, that kind of thing is fair enough: there’s always a handful of evil rich people worthy of opprobrium. Her argument, quite explicitly, is that we shouldn’t tar all the rich with the same brush — but it’s precisely that kind of broad-based tarring which Easton has clearly failed to find. Yes, there are lots of impassioned pleas against rising inequality, but complaining about inequality is not at all the same thing as beating up on the rich.

So when Easton says that “it’s wrong to lump the 1% into a monolithic group of greedy, tax-avoiding, selfish capitalists”; when she complains of “diatribes against the 1%”; when she says those people are being vilified — what she’s actually doing is carefully constructing a straw man. She simply assumes that every time anybody stands up for the 99%, or complains that they’re not fully partaking in the fruits of America’s economic growth, that they’re vilifying the 1% who do partake in those fruits at the same time.

She’s also capable of writing highly mendacious stuff like this:

Obama’s tax proposal labels as “wealthy” households making more than $250,000 a year — a comfortable income in Indianapolis (where the median home price is $102,000) but barely enough to afford a studio apartment in Manhattan, where tax rates easily hit 50%.

This completely ignores how marginal tax rates work: to a first approximation, there are roughly zero people in Manhattan who pay 50% of their total income in taxes. It’s possible that marginal income ends up being taxed at that rate — but if you’re earning $250,000 a year, you’re not paying anything near $10,000 a month in taxes.

Even if you were having to suffer through life in New York on a post-tax income of a mere $125,000, you could still, quite easily, rent pretty much any studio apartment you wanted, with money to spare for nice meals and international holidays and the like. In Manhattan, the average studio apartment rents for $2,261 per month in non-doorman buildings, and $2,677 per month in doorman buildings. That’s just over $32,000 a year, or 12.8% of a $250,000 salary. I’d say that falls into the “easily afford” bucket, rather than the “barely afford” one.

The point here is that an income of $250,000 does, in fact, make you rich — and that if you increase marginal tax rates on people making more than that, then you’re only raising taxes on the income they make over and above a pretty hefty amount.

But Easton is too busy throwing out red herrings to notice: for instance, she says that “over the past four decades the global economy has left many behind, but it has also lifted tens of millions out of poverty”. Actually, the number of people lifted out of poverty, globally, over the past four decades is much bigger than that — but the number of Americans lifted out of poverty has been shamefully low for basically all this century.

“Raising taxes definitely won’t cure inequality,” says Easton, weirdly — if that’s the case, then the 1% really shouldn’t worry about higher taxes at all, since they’ll still be sitting happy, relatively super-rich, above everybody else.

In any case, the deep underlying problem with Easton’s article is the way in which she essentially says that the way to fix what ails us is for everybody to become intelligent and numerate and so on.

“Even if Occupy Wall Street’s wish came true and all the gains of the top 1% since 1979 were confiscated and redistributed to the 99%,” writes Easton, “household incomes would go up by less than half of what they would if everyone had a college degree.” She continues:

There’s a limit to what policymakers can do about the ravages on a middle-aged man’s job prospects after three decades’ worth of technological advances and global competition. But we can talk about education: College degrees, while not a panacea, not only carry huge salary premiums but also offer a measure of job protection.

This is true, but it also misses the crucial fact that not everybody can extract good value from college. There’s a reason that not everybody goes to college, and if you look at the predatory for-profit colleges pushing people into courses which they’re not remotely suitable for, it’s easy to see that the outcomes for people who do go to college are in large part a function of the fact that there’s a lot of self-selecting going on. The people who go to college are the literate and numerate and intelligent ones, and many of them would do well for themselves even if they had no college degree at all. Meanwhile, many of the people who don’t go to college would find it little more than a waste of time and money.

It seems to me that the current election campaign comes down in large part to a simple question: “who do you care about”? Do you care about the 1%, on the grounds that they are “job creators”? Or do you care about the bottom 40% — the people who have been left behind by US economic policy and who desperately need help and support? The Republicans clearly are the party of the 1%, and the Democrats are trying to paint themselves as the party of the middle class — of the 59%, you might say. But no one is standing up for the bottom 40%, the invisible poor, partly because they have a distressing tendency not to vote.

Easton concludes by saying that “mobility, in the form of equal opportunity rather than equal outcomes, is rooted in the very idea of America”. That’s true — and it’s also true that America has less equality of opportunity today than at any point in living memory. Once Easton has managed to provide the poor the same level of education afforded to the rich, then she can start talking about the open road to riches. But at that point, you might have a genuinely mobile society, where the people at the top know what it’s like to be at the bottom, and know that they might end up back down there themselves at some point. And in those societies, you tend to find much stronger safety nets, much more concern for people at the bottom, and many fewer tears shed for the plight of the 1%.

29 comments

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Is anybody truly surprised by this given the state of our public education system? Imagine if financial literacy was actually made a part of the standard educational curriculum?

These days probably 80-90% of the population doesn’t even know how to calculate the Net Present Value of a stream of interest payments, probably the most basic financial calculation there is.

Posted by mfw13 | Report as abusive

Wow. This almost qualifies as rabble-rousing, Felix. If that really is your name….

Do none of your editors read beyond the chart? Did someone hack the site again & paste in the bottom 60 of this post?

Well, if it’s really you, good luck.

Posted by Eericsonjr | Report as abusive

I was wondering if you could do a story on Social Security. As I see it Social Security is a wedge issue it will be paid unless the entire government collapses since it is a legally enforceable debt just like any other.

Even left as is the only thing that would happen is the benefits would be reduced in the future. The fund does not have the authority to tax, by law it cannot deficit spent. Social Security is an entirely self funded program ZERO government money goes into Social Security something many don’t seem to understand. It has NO EFFECT on the budget period other then when the fund actually cash’s in some of it’s IOU’s like it just started doing. Social Security owned 19% of the debt last year far more then China or any foreign creditor.

Think about this since it is a legally enforceable debt if anyone actually tried to dismantle the program right now where would they get the money to pay it off remember it was the largest holder of our debt? If you use entitlement in reference to Social Security in the sense that people are entitled to get back the money they were FORCED to pay in you are correct it’s the law. For those who say it is a Ponzi Scheme that really doesn’t matter now. The fault lies with the politicians who passed it into law to begin with long before the boomers who are starting to collect now had any say in it. Many people say it was not Constitutional to begin with but that’s water over the damn now just like Obamacare will be in a few years if it’s not repealed. If you want to correctly phrase something as a welfare program that would be the one that’s full of taxes that DO affect the budget.

Like I said a Wedge issue.

Medicare is the real issue right now that’s why they are campaigning on it. Unfortunately people lump Medicare in with Social Security.

People really need someone to tell the truth about Social Security. If my information is wrong then I’ll learn something. Please consider writing an article addressing this.

The TRUTH About Who Really Owns All Of America’s Debt

http://www.businessinsider.com/who-owns- us-debt-2011-7?op=1

Posted by UselessEater | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

Are you rich because you are smart–or smart because you are rich? Get it? People who are rich have higher IQs, especially because IQ favors those who grow up in rich families. You assume that intelligence is “natural,” but that is because you have a naive view of nature. The answer? Only once we have lowered the Gini coefficient will we have a fairer society. This will probably take political will. But that is not in the interests of the rich, and the rich are in power.

Posted by JustJustin | Report as abusive

I had a look at this paper. Hm. It doesn’t actually give the “simple mathematical problems,” just states that these were introduced to the Health and Retirement Study in 2002.

I THINK these are the problems [from Section D, Cognition]:

D178: If the chance of getting a disease is 10 percent, how many people out of 1000 would be expected to get the disease?

D179: If 5 people all have winning numbers in a lottery and the prize is $2 million, how much will each of them get?

D180: Let’s say you have $200 in a savings account. It earns 10% interest per year. How much would you have in the account at the end of two years?

[I feel vaguely uneasy when someone discusses the correlation of numeracy with wealth and doesn't tell me the data on which the measurement of numeracy is based.]

Anyhoo. The paper says: Table 8.C stratifies the data by the numeracy scores of husband and wife. Of all three attributes used in this series labeled Table 8, by far the selection of husband as financial respondent is most sensitive to this husband’s attribute and least sensitive to the wife’s attribute. Even when the husband scored a perfect zero on his numeracy test, it is basically 50-50 that he would be selected as the financial respondent, a result that is only slightly altered by his wife’s numeracy score. In sharp contrast, when the husband answered the numeracy questions with a perfect score of 3, he is the financial respondent in 80% of the cases, once again a result that is only slightly affected by his wife’s score.

Table 8.D highlights the tendency for a family to select as financial decision maker the partner with the highest numeracy score….In 2/3 of all cases of non-identical numeracy scores, the spouse with the higher of the 2 scores is the financial respondent. (On p 10 the paper says numeracy is higher among men…not clear how far 8.D really shows selection for numeracy.)

So, not to knock the importance of numeracy in general, but… seems as though one thing we’re seeing is that, even if a family has sufficient numeracy at its disposal to make good financial decisions, its value may often be lost if it is locked in the brain of the wife.

The terrible thing is… if a man scores 0 and the woman scores 2, and if (a big if) this accurately reflects the numeracy of both, it might look loopy to make him the FR (as 45% of families with those scores did). But as any poker player knows, you don’t play the cards, you play the people. Being numerate doesn’t help me if the men I do business with ignore questions, give careless answers, refuse to follow instructions. I’m guessing the percentage of male writers called “adorable” by their agents, for example, is 0; an innumerate dude with a big swinging dick might actually have better luck.

Posted by HelenDeWitt | Report as abusive

Congratulations on bringing some realism about ability differences to this discussion.

Posted by Chi019 | Report as abusive

Congratulations on bringing some realism about ability differences to this discussion.

Posted by Chi019 | Report as abusive

Felix, the way I read Easton’s feature and your rebuttal, she is well-reasoned, if sympathetic. You are the one taking pot shots. Your arguments are poor, rambling, and don’t well reflect her narrative.

Your longtime readers know what side of the political spectrum you reside, and if we find screeds such as this beneath you, we put up with it because you’re so damn good at the other stuff. And, of course, it is valuable to hear other points of view; few of your commenters are close minded. But you are much better than this.

Posted by Curmudgeon | Report as abusive

Please proofread 2nd sentence in last paragraph.

Good points about the defensive or straw man aspect of much rhetoric on this topic from Tampa.

The programs that benefit the 59% also help the 40% become part of the 59% and grow the middle class: better primary education, affordable secondary education (which could be trade or vocational school for many, not just traditional 4-year college, to answer “elitist” criticism), dependable infrastructure and public transportation, affordable health care. Considering that, it becomes clear which candidate wants to help the 40% better themselves, vs. who blames the 40% for the poverty they endure or struggle against

Posted by Decatur | Report as abusive

In the last paragraph, Felix is touching Rawls’ “veil of ignorance”. In a highly mobile society you do not know where you or your kids will end up, so even if you are in the top ten percent you will appreciate the benefit of a safety net. If the top ten percent today all had rich grand grand parents, they would be less likely to see any benefit in it.

So I it is hard to tell whether safety nets creates mobility or mobility creates support for safety nets. Maybe both.

Posted by Gaute | Report as abusive

Felix,

I don’t know how things work in the US, but here in Australia, I am happy when I manage to make ends meet. So, not much stock market for me.

I don’t like to talk about myself, but today I am making an exception. I have a masters’ degree and started a PhD (which I never finished) and that’s useless: to get a graduate job here you need to have local experience in a graduate position. And, take my word for it, I know plenty people in the same position.

Posted by TheMagpie | Report as abusive

I cringed when I read, “financial illiteracy, and general innumeracy, and low IQs, are all perfectly common things which are never going to go away.”

First, it is condescending to suggest that others don’t have the ability to learn financial literacy. They may need more time, or a different approach, but the essential concepts are basic. You don’t need to know how to calculate the present value of a future cash flow. You don’t even need to know how to do it on Excel. You DO need to understand the primacy of saving (as opposed to get-rich-quick schemes) and the cost of borrowing.

Second, there are battles that must be fought even if they can never be wholly won. Cancer is a perfectly common thing which will never go away. Should we stop trying to fight it? Literacy and financial literacy deserve a full effort, on par with health care. As long as it is squeezed into a one-semester elective course in high school, it isn’t getting this effort. Worse, there is big money spent to encourage financial ILLITERACY. Advertisers spend more effort destroying our understanding than we ever spent building it.

Being poor is not an incurable state of affairs.

Posted by TFF | Report as abusive

I cringed when I read, “financial illiteracy, and general innumeracy, and low IQs, are all perfectly common things which are never going to go away.”

First, it is condescending to suggest that others don’t have the ability to learn financial literacy. They may need more time, or a different approach, but the essential concepts are basic. You don’t need to know how to calculate the present value of a future cash flow. You don’t even need to know how to do it on Excel. You DO need to understand the primacy of saving (as opposed to get-rich-quick schemes) and the cost of borrowing.

Second, there are battles that must be fought even if they can never be wholly won. Cancer is a perfectly common thing which will never go away. Should we stop trying to fight it? Literacy and financial literacy deserve a full effort, on par with health care. As long as it is squeezed into a one-semester elective course in high school, it isn’t getting this effort. Worse, there is big money spent to encourage financial ILLITERACY. Advertisers spend more effort destroying our understanding than we ever spent building it.

Being poor is not an incurable state of affairs.

Posted by TFF | Report as abusive

Hum hum, you do realize you are in the US where this kind of talk will brand you as a raving mad communist? never mind that it is actually the truth, it won’t go down well with your audience, many of them think they are god-like finance workers who have got all they deserve through hard work and intelligence. Entirely discounting the very significant role luck played…
anyhow, how one can argue the rich are having it hard when earlier in the decade they were given 2 huge tax cuts and are effectively paying the lowest tax rates since the robber barons times, one really has to wonder. anyone who doesn’t recognize that fact is blinded by obscurantism and propaganda. I don’t know whether it makes sense to have such low rates on the rich, but it is a fact that the US has such low rates on the wealthy. So rather than harping on about some kind of persecution on the rich (which clearly doesn’t exist) let’s move on to discuss whether previous tax cuts on the rich have worked. (the objective answer is that they didn’t, but I guess contradicting any bs from the GOP will also brand me a socialist…) That’s the way life goes. truth and rational objective debate isn’t welcome in the us of 2012.

Posted by fxtrader7 | Report as abusive

I need to get a copy of the Finnish IQ test so I can decide whether I should be in stocks or bonds.

Posted by maynardGkeynes | Report as abusive

I need to get a copy of the Finnish IQ test so I can decide whether I should be in stocks or bonds.

Posted by maynardGkeynes | Report as abusive

Felix, if they are moderating comments, they need a popup or something, or you are going to get a lot of double posts, like my last one, sorry about that.

Posted by maynardGkeynes | Report as abusive

Felix, if they are moderating comments, they need a popup or something, or you are going to get a lot of double posts, like my last one, sorry about that.

Posted by maynardGkeynes | Report as abusive

Seconding, Curmudgeon’s comment, the idea that nothing is done for the bottom 40% is over the top partisanship. To give two examples – Medicaid spending (federal plus state) is $400 billion per year and growing and food stamp spending is $76 billon and growing. There are, of course, other programs also focused on the bottom 40% of the population. Felix clearly thinks that more should be spent, but the idea that nothing is being done is preposterous

Posted by realist50 | Report as abusive

Um, realist50, I have no clue as to how your comment follows from my general screed against Felix’s largely rambling post. I suspect that we’re the victims of the ongoing Reuters problems that Felix doesn’t acknowledge and Reuters doesn’t fix.

Posted by Curmudgeon | Report as abusive

Seconding, Curmudgeon’s comment, the idea that nothing is done for the bottom 40% is over the top partisanship. To give two examples – Medicaid spending (federal plus state) is $400 billion per year and growing and food stamp spending is $76 billon and growing. There are, of course, other programs also focused on the bottom 40% of the population. Felix clearly thinks that more should be spent, but the idea that nothing is being done is preposterous

Posted by realist50 | Report as abusive