PDF Summary:Poverty, by America, by Matthew Desmond

In Poverty, by America, social scientist Matthew Desmond writes that the United States, despite its vast wealth and prosperity, suffers from poverty and inequality unseen anywhere else in the developed world.

According to him, poverty in America persists because it benefits many Americans to keep a share of their fellow Americans in a state of want—and he issues a call to arms to readers to examine their role in benefiting from and perpetuating the cycle of poverty.

In this guide, we’ll explore the key points raised by Desmond, including:

• The experience of poverty in America and its devastating social consequences
• The false explanations for why people are poor—and stay poor
• How non-poor Americans benefit from the poverty of their fellow Americans
• The choices we can make—both at a policy and individual level—to empower the poor and eradicate poverty

Throughout the guide, we’ll supplement Desmond’s findings with arguments from other poverty scholars, journalists, and economists—both to provide additional support and context for Desmond’s ideas, and to challenge his conclusions.

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2) Poverty Prevents Family Formation

Desmond further writes that those who cite non-traditional family structures as a reason for poverty’s staying power get the causal relationship wrong. People aren't poor because they don’t start families; they can’t start families because they’re poor.

According to Desmond, it requires a certain level of financial stability to get married in the first place. When individuals or couples are struggling to make ends meet, they may delay or forgo marriage and starting a family because they believe they lack the financial resources to support a family. This can be particularly pronounced in communities with high living costs, limited job opportunities, or inadequate social safety nets. In other words, writes Desmond, marriage and family formation is something people do after they’ve achieved a certain level of financial stability. It’s a marker of prosperity, not a cause of it.

(Shortform note: Other writers have noted that marriage in America has evolved into a privilege for the wealthy, marking a stark departure from the past. Marriage now tends to be concentrated among more educated and affluent individuals, who often enjoy more stable financial lives as a result. While marriage rates have declined across all income groups, they’ve declined far more for poor and working-class Americans than they have for wealthy Americans, and the “marriage gap” between the groups is much greater than a generation ago. Today, 26% of poor, 39% of working-class, and 56% of middle- and upper-class adults aged 18 to 55 are married; compared with 51%, 57%, and 65%, respectively, in 1990.)

False Explanation #3: Lack of Work Ethic

Desmond observes that politicians often associate poverty with a perceived lack of work ethic.

Desmond also finds this argument lacking. He notes that during the Covid-19 pandemic, the CARES Act, which among other provisions provided direct cash assistance and expanded unemployment insurance to families living in poverty, demonstrably alleviated poverty rates during the time those benefits were being distributed. He writes that some politicians saw the cash transfers as a negative, believing it disincentivized people from seeking employment if it was more lucrative to stay home and collect government checks. According to Desmond, this is a manifestation of an ideology that the poor must be kept miserable and starving—so they’ll be motivated to work.

(Shortform note: Many economists argue that deficit-financed cash transfer programs—like those in the CARES Act—actually boost employment and economic growth, rather than hinder it. It happens through a dynamic called the “multiplier effect”: When people spend the extra money they receive from the government, businesses experience increased demand for their products and services. As a result, they hire more employees and increase production to meet this rising demand. This, in turn, boosts household income and encourages even more consumer spending. The cycle continues, creating a ripple effect throughout the economy, increasing output, employment, and economic growth.)

If it were true, however, that the benefits from the CARES Act were discouraging work, then we’d expect to see an increase in the employment rate once the benefits expired. But, as Desmond notes, this isn’t what happened at all. The expiration of benefits brought no appreciable increase in the employment rate—unsurprising, since during the pandemic, people likely stayed home from work for other reasons (such as to care for children during school shutdowns or out of fear of getting infected).

The Post-Covid Great Resignation

Desmond isn’t the only one to point to the phenomenon of people being far more willing to quit their jobs during and after the Covid-19 pandemic. Indeed, the pandemic sparked a massive voluntary resignation from the workforce—described by economists as the “Great Resignation” or the “Big Quit.” The impact of this was a significant labor shortage that boosted the wages of those workers who were willing and able to remain in the workforce.

Over 38 million people quit their jobs in 2021, citing a desire for greater work-life balance, less potential exposure to the coronavirus, and higher pay. One historian argues that shocks to the labor supply—and the social unrest that ensues—have consistently followed deadly pandemics as the working class seeks to use its increased bargaining power to assert greater control over the economy.

Covid-19 proved to be no exception, as wages soared in previously low-wage sectors of the economy, with the accommodation and food services sector seeing wage hikes of over 18% since the start of the pandemic. However, in 2023, this trend showed some signs of abating, as the rate at which workers voluntarily quit their jobs dropped significantly. Moreover, wage growth slowed, especially in low-paying service jobs, and employers reported that hiring and retaining workers had become easier. This decline in quitting raised questions about whether the gains made by workers during the Great Resignation will persist or if employers will regain the upper hand, particularly if the economy faces a recession.

Part 3: How Wealthy Americans Exploit Poverty

Since we’ve explored how and why the commonly cited explanations for poverty fall flat, let’s turn our attention to what Desmond argues does explain the persistence of poverty in America. He writes that the primary force perpetuating poverty is the non-poor Americans who benefit from keeping their fellow Americans poor. According to Desmond, it's a story of exploitation and appropriation, where choices made by individuals and society at large contribute to the immiseration of millions.

Does Wealth Cause Poverty?

Desmond argues that the wealth of some Americans comes at the expense of the poverty of others. But is this analysis oversimplified? Some argue that the true relationship between wealth and poverty is more complicated. According to this argument, increased wealth among the world's richest individuals does not necessarily come at the expense of the poor: As the super-rich accumulate wealth, it’s often a result of creating new businesses, innovations, and jobs that can help alleviate poverty.

Notably, there’s a distinction between wealth created through innovation and entrepreneurial activities and wealth accumulated through exploitation and corruption. While there’s a problem with wealth inequality in cases of crony capitalism or economic rent-seeking, critics of the “wealth causes poverty” argument say that attacking the existence of wealth itself is misguided. Instead, the focus should be on addressing the root causes of poverty, such as corruption, lack of access to education and healthcare, and barriers to economic opportunity.

In this section, we’ll explore the choices we make to create the poverty of others, including our demands as consumers for cheap goods and convenient services, how and where we invest our money, and where we choose to live. We’ll also explore some of the more specific modes of exploitation, including rent gouging by unscrupulous landlords, the predatory shadow banking system, and housing discrimination.

The Consequences of Our Consumer Choices

Desmond writes that the choices we make as consumers contribute to the poverty of others.

Many of these choices are related to our demands for cheap goods and our expectations of instantaneous service and deliveries of those goods. The low prices and same-day deliveries offered by e-commerce giants like Amazon or food delivery services like Seamless aren’t possible solely because of technological innovation. Rather, writes Desmond, behind these conveniences is a vast underclass of underpaid drivers, exploited kitchen workers, and un-unionized warehouse employees. Their poverty and exploitation are the hidden costs of our material comfort.

Are Consumers Willing to Pay More for Products Made Under Fair Labor Conditions?

Although Desmond asserts that consumer demand for cheap goods fuels labor exploitation, some research suggests that there is a substantial demand for products made under fair labor conditions.

Many consumers are willing to pay a premium for such products. However, this demand is not uniform across all consumers but is influenced by various factors, including income, education, and political ideology. Consumers with higher incomes, more education, and left-leaning political views are more likely to value fair labor practices and express a willingness to pay extra for ethically produced goods. Further, preferences for fair labor practices have a more significant impact on certain industries, such as clothing and electronics, which are more labor-intensive and likely to face labor rights concerns.

Investment Decisions and Privilege

According to Desmond, we also contribute to poverty through our investment decisions.

The most profitable companies to invest in and buy stock in are often those that boost their profit margins by keeping workers underpaid, without union representation, and laboring under poor and unsafe conditions. When you invest in those companies—whether you’re an active stock trader or are just passively and indirectly investing in them through a retirement account like a 401k—you’re both rewarding those companies for exploiting their workers and profiting off that exploitation.

Does It Make a Difference to Divest From Irresponsible Corporations?

Although Desmond chastises individuals for investing in companies that exploit their labor forces, some scholars contend that divestment campaigns, wherein individual shareholders dump the stock of such companies, have little effect on those companies’ financial performance. In some cases, it may even benefit them, as other investors who don’t share the same concerns may see an opportunity to buy undervalued shares—potentially stabilizing or even increasing the stock price.

These critics write that divestment is often a form of symbolic protest and moral expression, and the actual economic consequences for the targeted companies can be limited. Instead, shareholder engagement can be an alternative strategy to divestment, where investors use their leverage as shareholders to engage with companies to encourage positive change in their practices. This approach can be more effective in driving sustainable corporate change.

Keeping the Poor Out of Our Neighborhoods

Desmond writes that the places we choose to live and the local housing rules we make are powerful contributors to entrenched poverty.

Wealthier neighborhoods often pass zoning laws that prohibit the construction of multi-family houses and apartment buildings. Because these latter types of homes tend to be more affordable, these policies have the effect of locking poor people out of more affluent neighborhoods—trapping them in poor communities with generational poverty.

These policies also keep the supply of available and affordable housing low. This means they raise the cost of housing and protect the real estate investments of incumbent homeowners—another way that our lifestyle choices increase our material comfort at the expense of the poor.

(Shortform note: Desmond writes that exclusionary zoning laws prevent people from leaving poverty-stricken communities and settling in wealthier neighborhoods. But some critics have noted that he may be oversimplifying this issue. The Wall Street Journal review of the book argues that the poor may sometimes prefer to stay in their neighborhoods rather than move to areas with different demographics—even when there are opportunities to move to more prosperous areas. The review notes that many poor individuals choose to remain in their communities due to social and familial ties, even if these areas lack economic opportunities.)

Rents and Landlords

Desmond writes that one effect of these exclusionary zoning policies is to pack poor people—who are disproportionately Black and Latino—into pockets of poverty, often in urban slums. And those urban slums are often a gold mine for landlords who charge higher rents for dilapidated buildings and apartments compared to those in more affluent neighborhoods.

This is because landlords can extract every dollar out of old and inadequate housing stock by dividing them into smaller and smaller apartments for people who have no other option of where to live. The desperation and disempowerment of their tenants is what allows landlords to gouge them this way. Indeed, writes Desmond, in many parts of America it's more profitable to be a landlord in a poor neighborhood than in a wealthy one. The situation has only gotten worse since 2000, with median rent increasing more than two and a half times—far outpacing inflation and the meager wage increases over that time.

(Shortform note: Desmond notes that landlords have gained increased leverage over tenants, which gives them the economic power to raise rents. But some data suggest that this trend may be reversing. The US rental market has seen a substantial increase in housing supply, with available units exceeding the demand. This growing supply of apartments, combined with a potential slowdown in demand, is putting downward pressure on rental prices. Some analysts predict that this oversupply situation may lead to rental rates either stabilizing or declining in the near future. However, the situation varies by region: Some markets may experience more significant declines in rental prices, while others with strong demand dynamics may remain stable.)

The Rise of Rent Strikes

In some cities, like New York, the skyrocketing costs of rent have led some tenants to organize rent strikes and protests to demand better protections and to address the unaffordability of housing. These tenants demand enhanced protections and advocate solutions to address the widening gap between incomes and housing costs.

The collective actions of these tenants draw attention to the persistent challenges within the housing markets of high-cost-of-living cities, where escalating rents and gentrification have contributed to the ongoing crisis of housing affordability. The rent strikers argue that government intervention and the reinforcement of tenant protections are essential to ensuring that residents can continue to live without the constant specter of eviction.

The Shadow Banking System

Another way that the economic system preys on the poor is through the system of “shadow banking.” According to Desmond, many individuals experiencing poverty find themselves locked out of the traditional banking system because they lack credit or proper paperwork to open accounts. Consequently, shadow banking options, like payday lenders and check cashers, step in to fill the void. They charge exorbitant rates and fees, effectively taking around $61 million in such fees per day from the poorest Americans. Desmond writes that this essentially amounts to the theft of labor.

And, he notes, it’s a self-reinforcing cycle. The bad credit that comes from poverty forces people to rely more on fringe banking options, whose ruinous interest charges drive them even further into poverty. All of this creates a lucrative industry for the lenders.

The Case for Payday Lenders

Although Desmond decries the practices of payday lenders and other financial services that operate separately from mainstream financial institutions, some writers contend that they are a vital lifeline for working and poor people.

In Hillbilly Elegy, JD Vance—who went on to become a US Senator—writes that during his undergraduate years, while working for a state legislator at the Ohio state capitol, he came to share his boss’s conservative political views. In particular, they had a shared opposition to a bill to curb payday lending practices. Vance writes that his boss was one of the few legislators to oppose the measure.

Vance recalls that he had occasionally relied on payday loans to cover basic expenses, as had many people in his community. He writes that without them, such people would have overdrawn their bank accounts and faced potentially worse financial consequences than the interest from the loans.

For him, the problem was that well-meaning politicians were pushing measures that would actually harm the very people they were intended to help. In examining his political evolution, Vance sees the anti-payday lending bill as an experience that cemented his commitment to free-market conservatism and his rejection of well-meaning but ultimately misguided welfare state liberalism.

Part 4: Empowering the Poor: A Multifaceted Approach to Eradicate Poverty

To truly alleviate poverty, writes Desmond, it's essential to go beyond providing financial assistance, although that's undeniably important. He argues that to eradicate poverty, we need to empower the poor, granting them economic and political agency to shape their economic futures.

This section explores the necessary multifaceted approach: strengthening unions to enhance collective bargaining power, creating paths to homeownership, ending exclusionary zoning policies, and cracking down on welfare for the rich.

Empowerment Strategy #1: Strengthen Unions

One powerful way to empower workers, writes Desmond, is to reinvigorate the labor movement and strengthen unions. The existing legal framework, which requires workers to organize company by company, often puts unions in a disadvantaged position—since employees at each company need to mobilize and negotiate separately, requiring unions to invest significant time, effort, and resources in the logistics of coordinating this. This fragmentation of organizing efforts can also make it easier for employers to target and disrupt specific campaigns.

Sectoral bargaining, writes Desmond, offers an alternative that would empower labor in negotiations with employers, benefitting even employees who are not union members. Sectoral bargaining allows workers from multiple companies within the same industry or sector to negotiate collectively. This increases workers' leverage and can lead to potentially better outcomes in terms of wages, benefits, and working conditions. And when agreements are reached that cover all employees in a sector, non-union members often receive the same improvements in their conditions as union members. This inclusivity promotes solidarity among workers.

The Argument Against Sectoral Bargaining

Despite Desmond’s claims that sectoral bargaining would be a lift for American workers, some critics contend that it would have a negative impact on the economy.

Sectoral bargaining could undermine the flexibility of the labor market. Imposing uniform labor standards across entire sectors may reduce adaptability to changing economic conditions, making it harder for businesses to adjust their workforce as needed. This could potentially hinder job creation and economic growth.

Moreover, sectoral bargaining could limit individual worker choices. Rather than allowing workers to negotiate their own terms with employers, sectoral bargaining sets collective agreements that apply to all workers in a given industry. This may not align with the preferences and needs of individual workers.

Finally, sectoral bargaining could diminish competition among businesses. When labor standards are uniform across an industry, there may be less incentive for companies to compete by offering better employment terms, such as higher wages, benefits, or working conditions.

Empowerment Strategy #2: Create Paths to Homeownership

Desmond writes that homeownership can be a path to financial stability for many. However, as we’ve seen, people in poverty face significant hurdles along the path to homeownership—further perpetuating the cycle of poverty. One proposal, writes Desmond, is government guarantees of home loans for disadvantaged borrowers. This would help such borrowers bypass the banks (who, as we saw, see little profit in mortgages for affordable homes and are therefore less likely to issue those kinds of mortgages) and open the doors to generational wealth.

Is Homeownership the Best Path to Financial Security?

Some research suggests that homeownership is actually not a consistent path to generational wealth and financial stability. One study suggests that in certain circumstances, renting can be a more financially advantageous choice than owning a home.

Based on data from 1983 to 2013, the study shows that when you consider the costs associated with homeownership, such as maintenance and property taxes, renting a home and investing the extra cash that would have gone into homeownership can lead to more substantial financial gains. In particular, homeownership does not necessarily guarantee appreciation in property value, which is crucial for generating wealth through real estate. Additionally, the study underscores the opportunity cost of using a large portion of your income to own a home when these funds could have been invested elsewhere (such as in stocks or bonds) for higher returns.

Empowerment Strategy #3: End Exclusionary Zoning

Desmond writes that providing people in poverty with the opportunity to move into wealthier neighborhoods has a demonstrable impact on their economic well-being. But, as we’ve seen, exclusionary zoning rules often create an impossible barrier. Abolishing exclusionary zoning rules (like bans on multifamily housing) and implementing mandatory inclusionary zoning rules (like requiring a certain proportion of multifamily housing) can break down that barrier. And, despite the fears of incumbent homeowners, affordable housing—when managed properly—does not negatively affect neighboring property values.

Desmond urges individuals to become anti-poverty crusaders in this regard by actively participating in local zoning or planning boards to help ensure affordable housing and integrated neighborhoods become a reality.

The Rise of the YIMBY Movement

Desmond’s call for people to push for more inclusive neighborhood housing policies evokes the rise of a social and political movement known as YIMBYism. "YIMBYs," which stands for "Yes In My Back Yard," are predominantly young people frustrated with the current state of housing affordability and availability in major cities. They are pushing for radical changes to housing policies and zoning regulations to address the housing crisis.

YIMBYs argue that restrictive zoning laws, which often prioritize single-family homes and limit high-density development, have contributed to soaring housing prices and housing shortages in urban areas. They contend that these policies have led to exclusionary practices, making it difficult for young people, low-income families, and minorities to find affordable housing. YIMBYs advocate for more diverse housing options, increased density, and an overall change in the approach to urban development.

There are several key demands of the YIMBY movement:

• Diversity in housing: YIMBYs believe in promoting diversity in housing types, including affordable housing, co-living spaces, and micro-apartments, to address the various needs of urban populations.

• Density and transit: They advocate for increased urban density, which is often linked to improved public transportation systems, making cities more accessible and reducing the need for car ownership.

• Community engagement: YIMBYs argue for greater community involvement in shaping housing policy. They want to include more voices in the decision-making process to avoid gentrification and displacement while increasing housing supply.

• Inclusivity: The movement emphasizes that housing should be affordable and accessible for all, regardless of income or background, and aims to create more equitable urban environments.

Empowerment Strategy #4: Crack Down on Welfare for the Rich

Desmond further recommends cracking down on the nation’s exorbitant welfare for the rich—largely through preferential treatment in the tax code—and reinvesting it into anti-poverty initiatives.

He notes that there is approximately $1 trillion in unpaid tax annually, a disproportionate share of which comes from the wealthy. He recommends stepping up enforcement of these unpaid taxes, while also increasing the top marginal rate (the taxes on the portion of income that falls within the highest income bracket) and corporate tax rates, which currently stand at nearly half of what they were in the 1970s. Finally, he urges lawmakers to close tax loopholes, such as the mortgage interest deduction which overwhelmingly benefits the affluent, and tax capital gains (taxes on profits earned from the sale of assets, such as stocks or real estate) at rates equal to ordinary income, so that corporate shareholders pay the same rate as workers.

The Failures of Progressive Taxation

What Desmond is advocating is a more progressive tax system—one that taxes higher-income earners at a higher rate than lower-income earners, so that the government can address income inequality. However, some economists argue that this approach is economically harmful and ultimately self-defeating.

In Capitalism and Freedom, Milton Friedman writes that the problem with progressive taxation is that it increases pre-tax income inequality. If high earners know that their top marginal tax rate is going to be high, lucrative jobs become less attractive than they would otherwise be. The only way to compensate for this is to make these kinds of jobs even more well-paid—thereby increasing pre-tax inequality.

Friedman observes that progressive tax codes are also nearly always more complex than alternatives. This creates a strong incentive for wealthy people to devote inordinate resources to devising complex and wasteful tax-avoidance schemes. Instead, he argues, a flat tax is more efficient and equitable than a progressive tax. Under a flat tax, everyone would pay the same rate, regardless of income level or income type. Because the rates would be uniform and all types of income would be equally subject to taxation, there would be far less incentive for individuals and businesses to waste resources on tax avoidance schemes.