Sunday, February 10, 2013

Why are people poor and what can we do about it?

I recently read an article about the income distribution in the United States.  I'm always curious about why rich people are rich and poor people are poor.  This isn't so much of a personal interest: I've given up on "get rich" schemes and I'm content with my position in the income distribution.  The real interest for me is to distill truth from the political and media hype about how to fix these problems.  Regarding wealth: one side blames poor people for their condition and the other side says that the playing field isn't fair.  I think both sides are right, which makes this a hard problem to solve.

For example, there's the person who got wiped out by some natural catastrophe, illness, or other problem out of their control.  It would be nice if society reached out and helped that person.

But then there's the person who got wiped out by bad decisions, drugs, gambling, or whatever risky, fruitless path they chose.  Helping this person becomes very difficult.  Without reform, they become a life draining leech on society.

Then there are the rich.  Certainly the rich can afford to pay their fair share.  There are those for whom wealth came easy: inheritance, lucky timing or other opportunities, etc.

But then there's the wealthy person who got that way by saving every penny, that lived by the motto "Use it up, wear it out, make it do, or do without".  They shiver under a blanket to save money on heat, collect water in a bucket while the shower water is getting warm to use for a toilet flush later.  They've never had pizza delivered to their house since homemade costs less.  Most likely they are already helping through their favorite charity.  They know the value of a dime and are careful how they help others.  It's possible that this person made wealth accumulation such a priority that they sacrificed personal fulfillment, family or health.

Not all poor are created equal and not all rich are created equal.

So back to the numbers.  The income distribution is surprisingly "predictable".  To me, predictable means there is a mathematical description which lends itself to greater understanding.  It turns out a good fit is a "Log-Normal Distribution", something I'm not familiar with.  After reading up on it, it turns it's just a skewed "Normal Distribution" or the familiar "Bell Curve" and found often in science.  I found the simplest way to understand it is by comparing experimental devices for generating the two distributions [source].  These are like a pinball machine or Pachinko where balls are dropped from the top, bounce left or right at each row of triangles and continue until they end up in the bins at the bottom.  The number of balls in each bin shows the distribution.

Figure a is the Normal Distribution and Figure b is the "Log-Normal" Distribution.

Since Figure b results in the same as the U.S. income distribution, it can be instructive to helping understand wealth and poverty.  Think of each row as an event in someones life.  The ball (their wealth) can go either left (they get poorer) or right (they get richer).  It may look like it favors the rich, but the unique design is to favor winning over losing.    Figure a has equal numbers on each side of the drop, while Figure b has more one the "rich" side of the drop point.  Each triangle is shaped such that there is always more "upside" than "downside".  For example, you'll either make $100 or lose $80.  If you win, then the amount is greater but still you'll win more than you did last time but you can't lose any more than your last win.  If you keep losing, each time you lose less than you did last time so that you aren't wiped out.  Sounds like a pretty fair system to me.

So what are these events?

Some events you have control over:
WINS: hard work, save money, sacrifice today for more tomorrow.
LOSES: Wasting time, gambling, blowing your money, taking unnecessary risks (like building your house in a flood plane)
Some events you don't have control over:
WINS: Lucky break, knowing the right people, being in the right place at the right time
LOSES: Illness, disability, catastrophe

Of course, not everyone has the same "entry point" at the top.  Mitt Romney's "ball was dropped" far to the right.  However, if you go back enough generations, there was someone in everyone's line who started out on the left (poor).  For Mitt, it was his father George Romney.

I think that this "log-normal" distribution is the nature of the system; meaning it can't be changed with laws, taxes or other policies.  There will always be poverty and wealth in a similar distribution.  The goal should be to increase the overall wealth, so that everyone benefits.

Gandhi said:
I cannot picture to myself a time when no man shall be richer than another. But I do picture to myself a time when the rich will spurn to enrich themselves at the expense of the poor and the poor will cease to envy the rich. Even in a most perfect world, we shall fail to avoid inequalities, but we can and must avoid strife and bitterness.
Some examples of helping:
Promote healthy families - a stable, nurturing home promotes "rightward" thinking, opportunities and actions.
Promote healthy lifestyles - many diseases and illnesses are preventable.
Teach personal finance and emotional education in our schools.

Get rid of state run lotteries - gambling creates a mentality that moves people left and by it's nature destroys wealth.

For those who truly suffer, we need to figure out how to follow this counsel:
"For I was an hungered, and ye gave me meat: I was thirsty, and ye gave me drink: I was a stranger, and ye took me in:  Naked, and ye clothed me: I was sick, and ye visited me: I was in prison, and ye came unto me."