The way poverty is defined will dictate the appropriate response to impoverished households. If poverty is a lack of physical goods or money, then the answer is to simply give the individual things or money. If poverty is defined by a lack of education or improper thinking, then the answer is to give individuals information. If poverty is just a lack of opportunity, then the answer is to give people access–to employment, education, financial services, etc. Obviously, the problem is that poverty is not easily typified. It is complex, and its manifestations vary, often drastically, from context to context. Kenyan poverty looks much different than poverty in Memphis. However, both are real, and both are devastating.
As a Christian organization, Advance Memphis is deeply concerned about justice. We therefore find statistics like the following to be extremely disturbing:
Wolff, E. N. (2007). Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze. Working Paper No. 502. The Levy Economics Institute of Bard College. New York University.
If this were simply a monetary issue, it would be bad enough. But this growing disparity betrays some serious problems over the past 50 years. Behavioral economists suggest that incentives play a large part in facilitating the accumulation of assets. The middle and upper classes have access to incentives that the poor do not, such as tax incentivized retirement savings and the home mortgage interest tax deduction. According to the Center for Social Development at Washington University 90% of the benefits from these two tax policies go to households earning more than $50,000. Moreover, because of means-tested public assistance programs, there is a disincentive for poor households to build assets. This leaves them more likely to remain stuck in poverty.
Assets play four key roles in the life of every household. They:
1. provide a buffer against economic shocks, like job loss;
2. generate income;
3. generate more assets;
4. affect future outlook and thus current behavior.
The first three roles are fairly self explanatory. However, the final role has some unique implications. Think about it. If you have a good bit of home equity, some non-liquid financial assets, a good education, a car, college savings for your children and a retirement plan, how do you feel about the future? That question may be hard to answer and depend on other things going on in your life. However, it is certain that you feel better about the future than you would if you were in the same situation and had none of these assets. These assets provide hope of future economic survival, even thriving. And if “tomorrow” looks good, you are less likely to make choices today that endanger that future. However, if the future is bleak, your time horizons shorten and you become more focused immediate gratification.
Individual Development Accounts (IDAs) allow Advance Memphis to address a number of these issues at once. There is an incentive (the match) for individuals to save and create assets. But the goal is more than mere asset creation. If you have assets, but lack the knowledge to manage them well, they won’t do you much good. That is why, in order to be eligible, an individual must first graduate from the Jobs for Life Program which includes financial literacy education, and work for two months. Graduates then they have to save for at least six months before a withdrawal can be made. This program structure provides an opportunity to fuse knowledge and practice. When those come together, savers develop new long-run behaviors, which in the long term are much, much more valuable than $2,000.
brandon@advancememphis.org
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