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Post No.: 0234rich

 

Furrywisepuppy says:

 

There’ll eventually be a series of posts on this topic about how the rich find it much easier to get even richer by virtue of already being rich; which is tightly related to the ‘Matthew effect’ of accumulated and compounding advantages. (This effect is something that can be observed in numerous other contexts too, including nature and nurture, as explored in Post No.: 0053). I apologise if it results in a bit of a furry mess because it is based on a compilation of notes collected over several years but I want to start getting them out there so here it goes…

 

Borrowing money, on the face of it, helps the poor to build their lives and ventures (e.g. a poor person has a great business idea and just needs the money to make it happen) – but in reality, because of the perverse nature of interest rates and a lack of assets to offer as security/collateral for a loan, it’s the already-rich who end up borrowing the most to ultimately get richer. It’s the rich who find it easiest to borrow because they get the cheapest interest rates and it’s the poor who find it hardest to borrow because they get the worst interest rates, or the poor might not even receive an offer of credit at all without heading to unregulated lending sources (e.g. loan sharks). The relatively rich don’t even need to consider such predatory sources at all.

 

And of course if people are poor and in debt then the interest rates of borrowing and the possible charges/penalties they must pay then make it very hard for them to ever break out of their cycle of debt and poverty (e.g. high and repeated bank charges for being in overdraft and extortionate or usury interest rates, which compound too, before they even manage to pay off the principals of their loans). It’s quite understandable from the perspective of the risk to a lender, but poor and honest people must work harder to get the same results as those who can get cheaper and easier credit. It’s therefore relatively more difficult for a poorer person to even contemplate becoming an entrepreneur. Even countries have credit ratings, which means that the ‘rich get richer’ applies on all levels!

 

It’s part of the ‘poverty premium’ that the poor must pay. If you cannot afford to be on an electricity meter and must go on a prepay meter then you won’t be given the best energy rates i.e. the poor must perversely pay more for each single kWh of energy they use compared to those who can afford to pay more – it’s clearly a regressive rather than a progressive system. So the very poor pay more per unit of electricity and/or gas they use. And if they cannot open a bank account then they cannot take advantage of any discounts for paying by direct debit either.

 

Extremely rich people can realistically live off the bank interest from their savings forever too, even after taxes, if they can manage to live modestly (so like most people – hence that’s not actually a hardship!) Such savings are relatively low risk investments too, where, although inflation can reduce the value of savings held in regular bank accounts in real terms if the savings interest rate is insufficient to compensate, at least the nominal value isn’t at risk (unless a bank goes bust and there aren’t adequate consumer banking protections, or one doesn’t make the most of them). So if you’re born with rich inheritances then you might never need to do a day’s work at all, or at least you’ll not need to stress about your survival, which means you’ll have mental health advantages compared to the poor, along with physical health advantages compared to the malnourished.

 

If one should only risk what one is able and willing to lose then only the already-rich can risk big for a chance of winning big. Rich people can afford to bet or gamble in ‘all or nothing’-type scenarios e.g. risking £10k for either the outcome of £25k or £0, if £10k for them is considered ‘pocket change’. Note that if the above scenario has a 50:50 chance for each outcome then it’d be rational to take the bet according to the expected value because one could lose £10k yet could gain £15k with equal probabilities. Yet in the real world, £10k to a poor person would be quite life changing so not worth the risk to lose despite the positive chance for a gain, whilst £10k to a rich person is less significant in affecting their livelihood or lifestyle hence risking losing it all for the sake of potentially getting an extra £15k would be less risky for them. In the long run, we should take the rational bets but what if this type of opportunity is a one-off that’ll never likely come again? Risks are therefore borne differently by rich and poor people even when faced with the exact same opportunities, with poor people facing greater risks than rich people.

 

We tend to think in terms of relative gains and losses rather than merely absolute states. Along with loss aversion, this is why a poor person will more likely stick at a ‘low value but sure thing’ prize on a game show rather than bet/gamble for more, even if the expected value of the bet/gamble is positive. That ‘low value but sure thing’ will make a huge difference to their life already (e.g. to pay off some debts) even though they may have a good chance to win much more. On the other side, this is why already-rich people can often take overly reckless gambles because they know they can afford to lose big and still be okay in their lives. (And if an organisation is ‘too big to let fail’ for the economy then it might even get bailed out by the government/taxpayers if it does happen to lose big(!)) Rich people won’t feel as much emotional response to losing or gaining a few thousand pounds compared to poor people. Poor people tend to therefore (need to) be more risk-averse (e.g. take the out-of-court settlement), whilst rich people can afford to be more risk-seeking if they wish to be (e.g. take it to court). And if the markets are efficient, you cannot get rich(er) faster without taking on proportionately greater risk.

 

And one needs surplus capital in order to invest in anything in the first place – if your income only just covers your daily living costs then you’ll have nothing to try investing or even saving with at all. Your options will be more limited if you’re living from paw to mouth.

 

Note that playing the national lottery might only cost a couple of pounds per ticket (in the UK) so seems accessible for virtually all – but the expected value is deeply in the negative. For being accessible for virtually all despite these terrible odds, these forms of gambling arguably harm the poorest the most.

 

Even though it might be rational to, for instance, wait a year to receive £600 rather than take £500 today if economic discounting meant that one would need a 20% or more annual interest rate (which is not a fixed-rate bond you’re going to find anywhere right now) to turn £500 into at least £600 in a year’s time elsewhere – a poor person might have opportunity costs that are greater e.g. he/she needs some money to eat food today, pay for bills today, buy clothes for the children today, etc. hence needs that £500 today and cannot wait a year to receive £600 instead, no matter how rational it’d be to do so on paper when assessing that opportunity in isolation. Meanwhile, a rich person can take advantage of the best deals and returns because he/she can lock a lot of his/her money away for years at a time while it relatively safely accrues the best rates of interest or returns, for he/she doesn’t actually need (or even potentially ever need according to the true definition of ‘need’) that money to survive and live on in the immediate term.

 

…As expressed earlier, there’ll be many more posts on this topic so please keep checking in. This is not about being against rich people for merely being rich or to say that poor people cannot ever become rich – poverty is overall reducing across the world too – but this is about where the privileges and barriers are. Some poor can become rich, and some rich can fritter their money away to become poor, in spite of their backgrounds and the odds. But we shouldn’t cherry-pick less typical cases while ignoring the overall picture that the poor tend to stay or get even poorer in relative terms, while the rich tend to stay or get even richer in both absolute and relative terms. Social mobility is low for the poorest and the richest, especially in countries where there are high levels of socio-economic inequality. And it’d be erroneous and naïve to say that there is a level playing field for every child born into this world.

 

It can be argued that the lives of nearly everyone becomes lifted together as an economy grows, even though not equally – but widening wealth inequality is a problem of a widening power inequality, which is a problem for democracies that want to give the impression that political influence is equal, or meritocracies that want to give the impression that people always get what they deserve.

 

Woof. Life is unfair so let’s make it fairer, or at least first of all let’s all understand this unfairness to cut the arrogance that, not all but, some relatively rich people hold towards those who were born relatively less rich than them (whether it’s the ‘upper class’ towards the ‘middle class’, the ‘middle class’ towards the ‘working class’, or a child who only had second-hand clothes compared to another who didn’t even have a pair of shoes, for instance).

 

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