Poor Entrepreneurs and Bad Incentives

Martin LongmanMartin Longman wrote a very insightful article over at Political Animal, What’s Really Offensive About Paul Ryan’s Remarks. It is mostly about his actual experience working for ACORN in the “inner city” North Philadelphia. His job was to hire and train young people in the area to work in a voter registration drive. And not surprisingly, he found people eager to work.

The people in impoverished inner city neighborhoods probably work harder than people in nice upper middle class neighborhoods. What is certainly true is that they are more entrepreneurial. We see the same thing in poor countries. When a group of people have access to a lot of jobs, they don’t have to work as hard nor do they need to be as creative. Longman described what he saw:

I discovered over time that nearly everyone had a way of making money, despite the fact that they were officially unemployed. I learned about a shadow economy that encompassed more than a mere black market. There were the legitimate under-the-table jobs that aren’t accounted for in government statistics and are taken on day-to-day: unloading trucks, working as a construction laborer. There were the semi-legitimate jobs: using your car as an unlicensed taxi. There were the hustles: making DVD’s of movies with a camcorder, selling fake auto-tags for inspection and registration. There were other non-violent criminal enterprises, like selling stolen t-shirts and the like. Ironically, I found that the people who were the best at getting people to register to vote were the people who set their alarm clocks for early in the morning so that they could go out and work their hustle and make some money. They worked extremely hard, and when given something legitimate to do, they excelled.

Longman thinks that the reason they wanted these low paying jobs was that they were starved for “socially-approved work.” That may be part of it. But I think there is a bigger issue. The truth is that the kind of freelance or pickup work that is the mainstay of economically depressed areas doesn’t pay that much. What’s more, it is uncertain. And it is hard. Just having a minimum wage job at McDonald’s brings in more money and is a hell of a lot easier than getting up early and hoping you might make some money today.

What’s interesting about this is how incentives play into all of this. Incentives work the same for poor people as they do for rich people. But public policy (especially from conservatives) is almost always focused on positive incentives for the rich and negative incentives for the poor. So we are told that if we raise the top tax rate, people won’t work as hard, even though the top tax bracket only applies to a very small number of people (about two percent). On the flip side, we are told that providing food stamps for the poor provides an incentive that stops them from working.

Note how absurd this is. Affluent people have all kinds of extremely generous safety nets—both public and private—that protect them from failure. These do not seem to suck the life out of their ambitions. But according to the public policy prescriptions of people like Paul Ryan, the extremely meager safety nets we provide for the poor do just that. This is very much like a parent with a “good” child and a “bad” child. The “good” child is constantly encouraged with positive reinforcement. The “bad” child is only given negative reinforcement. The problem is with the parent and not the children.

Taking this analogy a bit further, it is certainly the case that in some circumstances the “bad” child will grow up to be successful. The parent can then pat himself on the bad for the great job he did. See! All that belittling and beating worked! This is the way policy makers behave. Some people claw their way out of extreme poverty, therefore the politicians claim it doesn’t matter. The rest must just be lazy!

The truth is that people are mostly just dedicated to a certain outlook. I admit: I believe in a guaranteed minimum income. I think it is immoral that a wealthy country doesn’t provide for the bare necessities of life. I would be for this even if I thought it took a little incentive out of the system. On the other side, Paul Ryan believes in a kind of social Darwinian ideal of society. The problem is that he won’t admit to that. He wants to take support away from the poor but claims it is some kind of tough love. It is anything but. And we can’t have a real debate when one side hides its real intentions.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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