Innovating Our Way Up: New Strategies to Fight Poverty

In the liberty movement of which I am a part, it’s commonplace to lament the stickiness of public policy. Ideas come from special interests and grow based on the logic of bureaucracy. It can seem that no amount of failure is enough to end a government program, and even when the data is crystal clear, the campaign to finally let a program end isn’t politically viable. Since all government programs are “for the children” or some other undeniably wonderful goal, the efforts to end them are inevitably read as “against the children,” even if they accomplished little or created negative unintended consequences.

This phenomenon is perhaps best illustrated by the government’s “war on poverty.” However, rather than nursing resentment over never-ending boondoggles, some are finding creative and innovative approaches to alleviate poverty. A spate of new projects find market-based work-arounds; suggest small, more politically viable policy changes with massive benefits; or shoot for big changes in the nonprofit world’s approach to aid.

Poverty is a complex web that can become a cage for the least well-off. Our society is teeming with individuals and institutions, from multiple layers of government to private enterprise and nonprofit or religious groups, who share the goal of lifting people out of poverty and empowering them to flourish. Yet many, if not most, are ineffective in achieving that goal. In this essay, I aim to highlight how entrepreneurial, evidence-based solutions can be applied to four critical issues for upward mobility: transportation, the welfare trap, home ownership, and strong neighborhoods.

Transportation

In the short film “Bus Stop Jobs,” single mother Brittany Marshall spends hours every morning to get her child to school and herself to work using the bus system. One can’t help but admire her determination, walking in the cold and rain. She’s up before the sun and doesn’t see her son again till 7 at night. On average, bus riders will spend four times the amount of time on transportation than car riders, and they’re still limited as to where they can go by the bus stop locations. We don’t just go to work; we also go to doctor’s appointments, the grocery store, and to visit friends and family. While Brittany shows incredible determination, how many like her will give up in despair, choosing dependence on the social safety net instead? Lack of transportation or the ‘time tax’ of long and exhausting bus routes are the first barrier for many in our economically isolated inner-cities to be able to get to the work that could lead to real financial independence.

At the Center for the Study of Economic Mobility housed at Winston-Salem State University, Craig Richardson is thinking through poverty alleviation one obstacle at a time in an attempt to creatively solve the real, on-the-ground issues that arise in our most struggling communities. Through conversations with real people, he began to discern which problems arose in which order, and how he could use his knowledge of economics to look for creative market solutions. He produced “Bus Stop Jobs” to draw attention to the kinds of day-to-day struggles that high-level, ivory tower analysis can fail to grasp. He joins groups like the Georgia Center for Opportunity and True Charity in thinking through the role of governments, markets, and civil society efforts in either slowing or catalyzing the ability of the poor to genuinely transform their lives.

Richardson makes a suggestion for his own city, based on a small-town experiment that he believes could go much bigger. In Wilson, North Carolina, a city of 50,000, the city simply replaced its entire bus system with Via, a publicly-funded version of Uber. For $1.50 per person, citizens can wait an average of 13 minutes (rather than the usual 45) to go straight to their destination with just a few fellow passengers (rather than lengthy walks, bus changes, and constant stops). This not only saves them time but drastically improves their geographic reach, dropping off directly at the destination and reaching areas of town the bus system didn’t go near. The citizens are thrilled and the cost to the city is only slightly higher than the costs of the bus system.

Why can’t Richardson’s own Winston-Salem do the same thing? There’s some openness among city leaders to using Via as a supplementary source of transportation, but none to actually replacing the bus system. The idea that Winston-Salem is “too big” to adopt Via outright seems absurd, especially since it’s already been adopted by others like Jersey City and Sarasota. The advantage of a point-to-point service like Via is that it can reach a much larger and more varied set of geographic locations than the bus system. Train and light rail systems work well in dense cities with a highly concentrated central business district, while most American cities are far too spread out to make such systems very effective. In my own city of St. Louis, the addition of our MetroLink system coincided with less ridership on public transportation. You read that right – rather than adding riders to supplement the bus system, 11% fewer people used buses or the Metro, and the Metro is already 50% more expensive per ride than the bus system. Of workers living under the poverty line in St. Louis, only 4.4% use public transit to go to work.

Why do we struggle to replace terribly inconvenient and under-used buses and light rail expansions with a service like Via? Perhaps nothing more than good old “path dependency.” Uber itself had to break into most cities by asking forgiveness rather than permission from the taxi lobby. It’s much harder to imagine this kind of permissionless innovation in an environment determined by public funding. The bus system is the status quo, and entrenched interests would punish the politician that suggests replacing it. This kind of unwillingness to play fair with competitive and innovative ideas has a sad history: Richardson has a forthcoming paper outlining how more than 100 years ago, the white-owned streetcar system shut down the entrepreneurial Black-owned jitney system in Winston-Salem, which was a kind of inexpensive taxi service for Black neighborhoods. For 10 years, up to 1926, the jitneys served as an essential economic connection for Blacks, transporting them efficiently to work in the downtown factories and to shop in Black-owned businesses nearby. It was an inexpensive way to connect with the economic network, promoting economic mobility for those families who could not afford a relatively expensive vehicle. That is, until the city forced them out of business, replacing the jitneys with a bus company.

The most frustrating part is that the persistence of this kind of systemic stubbornness spells the difference between life-changing employment, health care, and food availability for the poor. Were the ‘social justice’ implications of the switch to Via clear to all we might be able to raise a hubbub and get some city-wide experiments going. Too often, unfortunately, the concept of social justice that means standing up for the poor and voiceless is assumed to be at odds with ‘capitalist’ solutions like the ones we’re suggesting here. This is because the term ‘social justice’ can also mean something like ‘perfect equality of material outcomes’, a goal totally at odds with a market-based system that needs big investment in long-term production processes. Our polarized ideologies have caused the left to reject market solutions, while the right rejects the idea of putting out extra effort for those on the margins. It’s a crying shame, because what those on the margins need most desperately is access to economic exchange, and many of the social ills that frustrate conservatives so much – crumbling families, crime, and poor education – can’t be solved without heroic efforts to rebuild the institutions that have been lost or denied in our toughest neighborhoods.

The Welfare Trap

The next great obstacle to economic mobility is a counterintuitive one, although conservatives have been harping on it for decades. While the social safety net serves the important purpose of supporting those who are between jobs, dealing with health issues, or incapable of work, it’s set up in such a way as to make it difficult to escape. It was never meant to become a permanent source of income for those able to work, but the incentive structures it creates are so perverse that it has become just that.

At the Georgia Center for Opportunity’s BenefitsCliffs.Org, Joyelle shares her story of having to move into public housing for the first time in her life to escape domestic violence. Suddenly a single mom, she was excited to get a better job working for the state of Georgia, and rearranged her life to move closer to her new job. However, she was stunned to find out that her pay increase resulted in her rent increasing to $1000/month, meaning that she was paying as much as one might spend on a home mortgage to live in public housing. The increase in rent not only canceled out her pay increase, but actually made her worse off financially. The Georgia Center for Opportunity (GCO) calls this a “pay window,” a gap in which one’s loss of benefits outstrips one’s gain in pay. As you can imagine, workers respond to the existence of this gap by avoiding promotions or moves to better jobs. In some cases, they may give up work altogether. The sudden loss of benefits before one has reached an income that can match or exceed what the benefits provided is a benefits cliff.

Depending on the situation, a benefits cliff can turn into what Craig Richardson has coined a disincentive desert.For example, a single mother with two children earning $2,000 a month can qualify for $2,771 in potential rental assistance, day care support, and food stamps, for a total of $4,171 in wages and benefits. Now suppose she gets a raise or works more hours and gets her income up to say, $3,000 a month. The result: her government benefits drop to $1,280 and the new combined total is $4,280. Consider this: that $1,000 raise in monthly income for this single mother yields just $109 in net wages and benefits, with an “effective marginal tax rate” of 89 percent. This happens for every extra dollar she earns over a long range of income—only 11 cents on the dollar is collected.

Richardson’s research points out that these disincentive deserts are far more pernicious than so-called “benefits cliffs” with sudden large drop-offs, which occur only at certain income levels. Since the majority of welfare recipients work inconsistently, the gap between current income and total government benefits becomes a stretch of untraversable proportions. Faced by such an economically irrational choice, very few people will choose to work full-time in order to gain so little. What’s worse, this choice leads to a situation in which the recipient never gains the work experience to earn an income that exceeds their government benefits, and therefore remains economically stuck for a lifetime.

At BenefitsCliffs.Org, I can type in my family situation, benefits program participation, and income change to find out just how bad of a hit I’m going to take if I get a raise or switch to a better paying position. Is this just a research tool? Not at all. The GCO wants employers to use the tool to create alternative compensation packages for their employees. Do you employ workers who receive government benefits? Instead of compensating them with more income, you can provide on-site day care, a company car, more time off, meals, or medical assistance. That way, the employee can continue to advance in title and experience without experiencing the pay window. This allows the worker to cross the incentive desert, finally reaching the point at which their loss of benefits is surpassed by their gain in income.

The Starter Home

For most Americans, the majority of their family wealth is held in their home, and homes are often an important way to pass on wealth between generations. While home ownership is no panacea, it can make more sense to pay a mortgage that helps build equity than to pay rent to someone else, if one has the credit score and down payment to make it possible. Traditionally, young couples often purchased starter homes: a small home in an unremarkable neighborhood that allowed them to build equity while moving up in their careers. When they could afford it, they’d move to something with more space for a growing family. But today, that’s becoming increasingly difficult, which means that small homes are bought up by large banks like Wells Fargo and rented out, rather than owned. This discourages the property improvements, stability, and neighborhood formation that comes with ownership.

In the aftermath of the 2008 financial crisis, the Dodd-Frank Act was passed, which piles on layers and layers of regulatory process for bank formation and mortgage formation. One example is the Qualified Mortgage Rule, implemented by the Consumer Protection Financial Bureau (CFPB), which capped the fees and points that lenders can charge for processing a loan on a sliding scale, based on the size of a loan. A study by Richardson and a team of researchers showed that, as a result, the smaller the loan, the less profit a bank can make, creating an additional disincentive for banks to originate small loans, even as the intent is to protect buyers from excessive fees.Their ongoing research indicates this collapse of lending at the bottom of the mortgage market may even be tied to falling property values in our nation’s poorest neighborhoods, leading to long-term economic stagnation.

A local banker here in St. Louis told me that Dodd-Frank regulations have pushed up the costs of loan origination by as much as $2500 per loan, and pushed up sales and marketing costs by as much as 1% of the cost of the house as well. So-called “high-cost” mortgages cannot exceed 5% of the sale price in processing fees, so that if it costs $6000 to process a loan for a $100,000 house (which is about right under the current regulatory scheme) we have, at base, made that loan illegal. The only alternative banks have is to raise rates on borrowers with small mortgages to make up for the losses in processing fees. Large banks like Wells Fargo, however, can purchase dozens of homes at a time, in cash. Once a whole neighborhood becomes permanent rental property, the culture of the place changes to something more transient, with less of a sense of personal investment. Tenants don’t tend to form neighborhood watches, plant flowers, or hold block parties.

Many banks use their required Community Reinvestment Act resources to fund a few of these loans, but this can only make a dent in the damage being done to new families who want to buy starter homes. A better solution involves a policy change that might be limited enough to have some political viability. Carve out exceptions to the regulatory burden of Dodd-Frank for local community banks. These banks will be far better at assessing the risks of their loan recipients than some massive federal program judging from thousands of miles away, and they’re more likely to be run by members of the community themselves. Too often we see the federal government as coming to the rescue of poor helpless recipients. Instead, we ought to see our lower-income neighbors’ capabilities to create and run banks and businesses, and to own and care for homes. Many of these neighbors could and would do it if we could remove these frustrating barriers.

The Neighborhood

Let us suppose that we got these more doable policy changes approved: a switch away from the bus system to something like Via, employers offering alternative compensation to work around the benefits cliff problem, and special carve-outs from Dodd-Frank requirements for small community banks. Many, many people would be able to get to work, keep advancing professionally, and get into their first home. This is life-changing stuff. But many more may not have the bandwidth to get to that first step. The bald fact is that our toughest neighborhoods are full of traumatized people. Many grow up without dads or are reared entirely by someone other than their parents; eat nutritionally deficient foods; witness terrible crimes on a regular basis; go to seriously underperforming and unsafe schools; and are economically isolated by highways, territorialism, and historical red-lining.

When my friend Lucas hurt his back, he described the cascade of problems it caused, radiating to his knee, affecting his walking so that he stubbed his toe, and affecting his mood because of the pain. By the end of the day, he hardly remembered what caused it all; he just knew he felt horrible. Lucas is a practitioner in the Enright neighborhood of North city St. Louis with an organization called LOVEtheLOU. He has dedicated his life to empowering his neighbors and helping to stabilize his block. He described his back pain to me as a metaphor for the situation of his neighbors. With so many overlapping issues, it’s easy to feel depressed, overwhelmed, and aimless without being able to pinpoint the problem or get down to the root of the matter. Many of these neighbors need support from the bottom-up if they are to start the process of finding full-time work and envisioning a transformed future. They need a stronger sense of stability, one that can only come through the kind of face-to-face, hyper-local, long-term, deep personal presence that we see from organizations like the Christian Community Development Association. Practitioners commit to an 8-10 year process of stabilization per block, with the first priority to build relationships of trust. Knowing people deeply and walking through life with them is the only way to discover their needs, hear about their dreams, and support their talents. No banks, no government offices, and no amount of food pantries or coat drives can do this for our neighbors.

Unfortunately, while Americans are exceptionally generous in terms of charitable contributions, we don’t always consider how dignifying or effective those charities are. In a recent conversation with an ex-offender, my interlocutor lamented, “When I got out of prison, there were so many organizations giving me food and clothing and even a place to live. What I really wanted was to be able to get those things for myself! None of the organizations were helping me do that.” Frankly, it’s easier to hand someone what they need to get through this week or this month than it is to find out what they’d really need to become self-sustaining. After reading Marvin Olasky’s The Tragedy of American Compassion, Bob Lupton’s Toxic Charity, Brian Fikkert’s When Helping Hurts, or most anything by Bob Woodson or John Perkins, we really have no excuse in continuing with low-effort charity that is neither dignifying nor transformative. Conservatives famously complain about the perverse incentives of the welfare state. If they’re concerned about people becoming unduly dependent on the state, why aren’t they just as concerned about them becoming unduly dependent on private charity?

In particular, the church in America ought to lead by example, transforming their philanthropic models and techniques to support the neighborhood stabilization model described in the works above. This model is based on the concept of shalom, or wholeness, in which personal healing and flourishing corresponds to the stability and sense of community where one lives. Only by presenting the healthy alternative will a critique of the welfare state carry any credibility.

The work of Olasky, Lupton, Fikkert, Woodson, and Perkins has been sinking in over the last several decades. It’s not unusual to hear critiques of charity as ‘poverty tourism’ or ‘white saviorism.’ To quote Ian Rowe, however, we must “demystify the how” of transforming our own efforts such that we empower people to flourish economically rather than simply helping them survive in poverty. Fikkert’s Chalmers Center helps churches to reorganize their efforts around these principles, and the new organization True Charity hosts a network of dignity-oriented non-profits, providing them with training so that they can shift their model away from toxic forms of charity to something economically empowering.

“O! Just begin!” –John Wesley

It can be frustrating to contend with the bureaucratic logic of our government policies. They run on the power of the status quo rather than on real effectiveness. And it can be overwhelming to think about all of the struggles in our inner-cities, or for that matter, many of our rural areas as well. I recall that in the light of eternity, every individual human person is a universe unto themselves. As image-bearers of their Creator, each one has inherent dignity and value. What if we stabilized just one block? Fifty kids graduate high school and get jobs or go to college rather than join gangs or go to prison. Crime is down on that block because Ms. Sharon and the other matriarchs coordinated with the police and kicked out the drug dealers. Our church partner remodels a home, and we set up a rent-to-own agreement with Tawana, a ‘person of peace’, an anchor in the neighborhood. She moves in with all her grandchildren and turns right around to bless her neighbors with hospitality. Community gardens fill the empty lotsand serve as job training for all comers and as a spot for regular block parties. Community artists are featured at the farmer’s market every Saturday morning. Tiffany opens an in-home daycare. Michelle gets set up in the storefront with her flavored pickle business.

If that’s all we could do, it would be worth it. But as what’s happening on that block spreads to the next and the next, we buy the old community center and church building on the corner. Now there are Thursday night family dinners with spoken word poetry, Tuesday night small groups, a skills center for woodworking, beautiful murals on the walls, and a safe place to play basketball and watch movies. Christian business people who catch the vision begin talking about installing a wing of their manufacturing business on site so that the graduates of the program can manage it, with an ownership stake in the company. We turn the upstairs into apartments for the young people who are determined to reinvest in the neighborhood. I’ve just described what LOVEtheLOU is doing in year 12. In Atlanta, Bob Lupton’s Community Strategies has a café and a grocery store, too. He replaced a section of projects with multi-income townhomes to bring in economic networks without running residents out of the neighborhood. Now multiply this by all the churches and people of good will that we can convince to change their approach. Were we also to succeed with the policy work-arounds discussed above, we would now have a pipeline from the neighborhood to the job, from the job to the vision for advancement, from the job promotion to the starter home.

It takes all three: business, government, and civil society. The businesses can offer alternative compensation, the government can remove barriers that are actually politically viable to jettison, and our philanthropic efforts can be reoriented to raise up our neighbors high enough to grasp that bottom rung of the economic ladder and start climbing. One soul at a time, one block at a time, one neighborhood at a time, one church at a time. O! Just begin!

Rachel Ferguson
Rachel Ferguson
Rachel Ferguson is the Director of the Free Enterprise Center at Concordia University Chicago, Assistant Dean of the College of Business, and Professor of Business Ethics. She is an affiliate scholar of the Acton Institute and co-author of Black Liberation Through the Marketplace: Hope, Heartbreak, and the Promise of America. Her commentary has been featured at National Review, The Christian Post, the Acton Power Blog, Discourse Magazine, Law and Liberty, EconLib, and the Online Library of Liberty. She completed her PhD in Philosophy from Saint Louis University in 2008. Ferguson also serves on the board of LOVEtheLOU and is a founding member of Gateway2Flourishing, both of which work toward economically empowering models of philanthropy in the St. Louis area.
Explore additional categories