The Costs of Destroying Social Cohesion

During my week in small, wealthy, verdant Norway, I thought extensively about how societies create and sustain social cohesion.

As I was considering this process, U.S. Ambassador to the United Nations Nikki Haley publicized the administration’s rejection of a May report of the UN Human Rights Council documenting the immense scope of inequality and poverty in the United States.

The report, based on an intensive visit to the U.S. by U.N. Special Rapporteur on Extreme Poverty and Human Rights Philip Alston (who met with government representatives at every level as well as civil society organizations and poor people themselves) points out that inequality and poverty have long been higher in the U.S. than in other western countries.

As Alston, a scholar of international law and human rights, underscores, the United States clearly has the resources to ameliorate these problems, but simply lacks the political will.

What is distinctive, though, is the extent to which the current administration has embarked on a path deliberately designed to exacerbate inequalities of wealth, power and opportunity.

While handing out enormous tax breaks to the wealthy, the administration has embarked on reductions in benefits for the poor; a rollback of environmental, health and safety protections that are vital to the quality of life of the poor and the middle class; and an ongoing effort to narrow access to health care.

The report of the Human Rights Council, which also identifies serious problems of a high rate of infant mortality, broad discrimination and racism, systematic disenfranchisement and criminalization of poverty, should be a great embarrassment for the United States.

But rather than acknowledging flaws in outcomes and policy and identifying means by which the U.S. might achieve better results, the administration withdrew from the U.N.’s Human Rights Council (though the motive likely was broader than this report), scolded the U.N. for focusing on the United States rather than any of a number of developing countries with high rates of poverty, and attacked the Human Rights Council as a “cesspool of bias.”

Noting the contrasts involved in a country of such vast wealth and innovation, the U.N. Rapporteur writes that these attributes “stand in shocking contrast with the conditions in which vast numbers of its citizens live. About 40 million live in poverty, 18.5 million in extreme poverty, and 5.3 million live in Third World conditions of absolute poverty. It has the highest youth poverty rate in the Organization for Economic Cooperation and Development (OECD), and the highest infant mortality rates among comparable OECD States. Its citizens live shorter and sicker lives compared to those living in all other rich democracies.”

The U.N. report underscores that the dominant political narrative guiding attitudes toward social welfare policy begins from the (false) premise that past policies were a wasteful failure. In fact the evidence clearly shows that the War on Poverty initiated fifty years ago was highly successful in reducing poverty in the ensuing decades.

Also essential to this narrative is the notion that the poor themselves are unworthy: recipients largely consist of people dedicated to “cheating” the system, and the poor themselves are responsible for their situations because of laziness and bad decision making. Both elements are undoubtedly heavily tinged with racism, especially since prevailing conceptions of who receives social welfare assistance do not correspond to the actual racial makeup of recipients.

The report observes that “it is striking how much weight is given to caricatured narratives about the purported innate differences between rich and poor that are consistently peddled by some politicians and media. The rich are industrious, entrepreneurial, patriotic and the drivers of economic success. The poor are wasters, losers and scammers.”

In scrutinizing these narratives, the U.N. Rapporteur made the effort to gather real evidence those currently in charge of policy willfully refuse to see: “The Special Rapporteur wonders how many of those politicians have ever visited poor areas, let alone spoken to those who dwell there. There are anecdotes aplenty, but little evidence.”

In contrast with this divisive narrative and the socially destructive policies that follow, social democratic societies like Norway and Sweden engaged in sustained policy efforts to cultivate a broad sense of societal inclusion starting from the Great Depression. Norwegians pay much higher taxes than Americans. They like paying taxes no more than Americans do, but the willingness to pay is sustained by the services that Norwegians receive in return (including health care benefits, university education, modern and efficient public transportation, etc.) – and by the trust between citizens cultivated by inclusive policies.

Conservatives will respond that Norway is a “socialist” society whose relevance is to be dismissed. That’s completely wrong.

Norwegians are capitalist entrepreneurs par excellence, where technological strides in sectors such as aquaculture (primarily salmon farming, a booming and rapidly growing industry) are possible because of policy consistency that encourages long-term investment and innovation.

Similarly, Norway’s policy makers recognize that all policies affect market incentives. Innovations to reduce CO2 emissions in Norway have been hard fought, requiring a series of measures designed to alter market calculations, such as reductions in taxes, road tolls and parking fees for electric vehicles. These incentives rather than some inherent “green gene” account for a recent explosion of electric vehicle sales in Norway.

The current U.S. administration, in contrast, views the inequalities documented by the U.N. NOT as a series of policy problems requiring attention, but as an opportunity that can be exploited to deepen societal divisions for political gain. The administration, in other words, is invested in destroying rather than building social cohesion.

Social cohesion is under stress in Norway over contentious issues such as immigration and taxation. But past policy has mobilized a constituency dedicated to preserving that cohesion and the societal benefits it brings, so efforts to deepen societal divisions will meet with significant resistance.

Put differently, high levels of trust between citizens and a strong sense of social cohesion tend to reinforce themselves. Once destroyed, citizen trust of governing institutions and trust between citizens are extremely difficult to rebuild.

The U.S. is not Norway, nor can it be. But there is an important lesson here: policies that generate social cohesion have dramatically positive effects not only socially, but for longer-term economic innovation and growth.

Intergenerational economic mobility in the U.S. is among the very lowest of the world’s rich countries.

BarChart.jpg
The degree to which income of one generation determines the income of the next (0 = income completely independent of prior generation; 1.0 = income completely determined by prior generation)                                                                                         Source: the Norwegian American; https://www.norwegianamerican.com/opinion/opportunity-of-social-mobility-great-in-scandinavia/

The best predictor of where children will end up in the future is the zip code into which they were born.

Talent, entrepreneurship and innovation are lost.

As the U.N. report notes, “The United States already leads the developed world in income and wealth inequality, and it is now moving full steam ahead to make itself even more unequal. But this is a race that no one else would want to win, since almost all other nations, and all the major international institutions, such as OECD, the World Bank and IMF, have recognized that extreme inequalities are economically inefficient and socially damaging.”

An administration truly dedicated to the welfare of the country would receive the U.N. report as a call to action. Instead, the reaction of defensiveness, spite and lashing out only further erodes the sinking international reputation of the U.S.

On top of this, the destruction of social cohesion wrought by the administration will yield long-term economic costs.

Payday Lending Empowered by Executive Corruption

Predatory economic practices continue to expand in the American economy. Payday lending is perhaps the most egregious example.

Why do we permit such practices? The arguments for practices such as payday lending are twofold. First, defenders of the industry suggest payday lending firms fill a market niche. Those who cannot qualify for conventional loans from banks need access to credit; payday lending provides this service. Second, freedom of choice and individual responsibility. Individual consumers, that is, should have choices, and should be permitted scope for responsibility for their financial decisions.

So where’s the problem?

Let’s start with the second justification: choice. Those who avail themselves of such loans typically face desperate situations that skew their choices. The car has just broken down. Borrow money on a short-term basis to cover the cost of the repair, knowing the terms are painful, or fail to show up for work and lose one’s source of future income? With an unexpected reduction in shifts at work and a consequently smaller paycheck, there is not quite enough money to pay the rent. Borrow on a short-term basis to fill the shortfall, or let the rent go and face the risk of eviction and homelessness?  Among others, David Shipler documented precisely such cases in his 2005 book, The Working Poor and Barabara Ehrenreich revealed such dynamics in her 2001 work Nickel and Dimed: On (Not) Getting By in America.

In his recently released and acclaimed work, Evicted: Poverty and Profit in the American City, Matthew Desmond writes that “Most of the 12 million Americans who take out high-interest payday loans do not do so to buy luxury items or cover unexpected expenses but to pay the rent or gas bill, buy food, or meet other regular expenses. Payday loans are but one of many financial techniques . . . specifically designed to pull money from the pockets of the poor.”

The point is that living at the margins of subsistence alters the decision-making environment; for the poor, such choices are rational. As economists describe this, liquidity constraints affect intertemporal choices — that is, when money is very scarce, decision-making is more heavily weighted toward navigating the present.

The problem with arguments based blandly on individual responsibility is that they implicitly assume we all face the same temporal tradeoffs. (In other words, if I delay gratification and invest now, I’ll have more in the future. Sure, if you have the security of circumstances to comfortably move through the present. If not, the premise is fundamentally misguided.)

Turning to the first case for the existence of short-term lending secured by the borrower’s next paycheck, the implication is that the practice should be regulated because of the gross imbalance between the desperation of the borrower and the profit motive of the lender.

CFPB_Chartbook2.jpg
Source: The Pew Charitable Trusts, “CFPB Proposal for Payday and Other Small Loans: A survey of Americans,” http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2015/07/cfpb-proposal-for-payday-and-other-small-loans

The balanced solution, then, is to subject payday lending to reasonable regulation. Lenders can fill the market niche and earn a profit, without ruining the lives of people who live on the financial margins and who are readily tipped into despair. Organizations like the Center for Responsible Lending, which points out that the average payday loan carries an effective interest rate of 391% have been advocating for regulation for well over a decade.

Along the way, they have faced opposition from those who elevate “individual choice” to sacred status in complete abstraction of the conditions under which choices are made – such as this vapid assessment from the libertarian Mises Institute: “On the margin, it is the borrower and lender who are most fit to decide the appropriateness of any transaction—not the Center for Responsible Lending, or a congressman.”

But here’s where the story becomes truly disturbing. In the wake of the 2008-9 financial crisis and the numerous abuses by financial services firms revealed in the aftermath of the crisis, the U.S. Congress created the Consumer Financial Protection Bureau.

The CFPB was designed with an intense focus on consumer protection, and following the political battle to confirm its first director during the Obama Administration, it did just that. The Bureau brought cases and imposed fines on financial firms for racial discrimination in lending and for deceptive practices. The Bureau pursued abuses that ultimately returned $12 billion to 28 million consumers.

With the arrival of a new administration, the focus shifted dramatically. As with virtually all executive agencies from the State Department to the Department of Labor to the Department of the Interior to the Department of Education to Housing and Urban Development to the Environmental Protection Agency, directors were put in place with the mission of deconstructing the agency and giving free rein to private actors to take every advantage of the nation’s resources and profit making opportunities created by public sector withdrawal.

Demonstrating utter disdain for the Consumer Financial Protection Bureau, the administration appointed a director who already has a full-time job as Director of the Office of Management and Budget. In his spare time, Mick Mulvaney is systematically dismantling the CFPB, dropping open investigations of financial services firms –including at least one case in which a federal judge has already found the firm guilty of engaging in deceptive practices, and which was awaiting the penalty phase of its case — and actively urging Congress to “cripple” the agency he nominally leads.

Mr. Mulvaney suspended new regulation regulating payday lending scheduled to go into effect in January of this year. And here’s where the disturbing becomes truly grotesque.

As a member of Congress from South Carolina, Mulvaney accepted campaign contributions from the payday lending industry. Bad, but entirely consistent with the level of influence-purchasing that is by now deeply institutionalized in the U.S. Congress. About two weeks ago, at its annual convention, the payday lending industry celebrated Mulvaney’s decision to suspend new regulations.

Where did the convention take place? In the Miama area, at the Trump National Doral Golf Club. A few protestors gathered outside the event, but in the daily chaos and ethical sinkhole of the current administration, relatively few took notice. They took little notice, that is, that the occupant of the White House appointed someone to dismantle regulation of an industry that then acted to put money directly in the pocket of the White House occupant. How can this be?

Those on the political right may wish to defend an anti-regulatory leaning on ideological grounds. Fine. We can respectfully disagree. But why is there not universal outrage in the face of such naked corruption?

The absence of popular outrage demonstrates a couple of sad realities. The institutions responsible for oversight of the ethics of the executive branch are weak, depending for their effectiveness on the executive having a sense of duty and a sense of shame.

Additionally, corruption and profiteering have become normalized in the current administration; the more regularly it occurs, the less we notice.