Redistribution Up

[Cross-Posted from Inequality.org]

If redistribution is so terrible, why do our policy wonks pay so little attention to redistribution from poor to rich?

“Redistribution” is a four-letter word to many establishment policy wonks in DC, including quite a few who identify themselves as “center-left.”

But mention seldom is made of the constant redistribution of hard-earned income from those of little or modest means to those of enormous means.

Here’s one of the latest scams: Rent to own housing. After causing the housing crash, our friends on Wall Street took advantage of the depressed prices by snapping up tens of thousands of houses, now held in giant equity funds as rental units. ProPublica reports in Rent to Own: Wall Street’s Latest Housing Trick on this new twist to Wall Street’s rental housing empire. Renters pay extra each month in rent for the option to purchase at the end of the lease term, at a price above market value at the time of the lease. The result: The equity fund (that is, the wealthy investors) shift costs to the tenant and receives additional rent, but rarely has to sell the home at the end of the lease term. ProPublica reporter Jesse Eisinger attended a conference at which the scheme was promoted and relayed the pitch made to investment managers:

Then Shaashua delivered the kicker to the roomful of would-be investment managers: “Most times, given the reality, tenants do take it, but it’s hard for them to execute the option,” he said. “Our experience is that most stay until the end and then they say they cannot come up with the down payment or decide not to stay in the property.”

Voila, free money. This amounts to an admission that the product exploits consumers’ lack of financial savvy. This shouldn’t be surprising. Who are you going to bet gets the price right, an aspiring home buyer or analyst with access to oceans of data on prices and historic trends?

So, into whose pockets goes the extra cash of the fleeced middle-class and poor tenants? The ultra-rich Americans who invest in Wall Street’s housing funds, which generally require a minimum investment of one million dollars.

There you have it: Redistribution up.

But redistribution up is a part of everyday life in America. This new rent-to-own housing scheme is but one tiny facet of it.

Charles Blow of the New York Times recently wrote this in response to a report that most rich Americans think America’s poor have it too easy:

In addition, many low-income people are “unbanked” (not served by a financial institution), and thus nearly eaten alive by exorbitant fees. As the St. Louis Federal Reserve pointed out in 2010:

“Unbanked consumers spend approximately 2.5 to 3 percent of a government benefits check and between 4 percent and 5 percent of payroll check just to cash them. Additional dollars are spent to purchase money orders to pay routine monthly expenses. When you consider the cost for cashing a bi-weekly payroll check and buying about six money orders each month, a household with a net income of $20,000 may pay as much as $1,200 annually for alternative service fees — substantially more than the expense of a monthly checking account.”

Even when low-income people can become affiliated with a bank, those banks are increasingly making them pay “steep rates for loans and high fees on basic checking accounts,” as The Times’s DealBook blog put it last year.

The list of mechanisms through which hard-earned income is stripped from the pockets of the masses is endless. The more prominent items on the list are “pay-day loans,” “title loans’” bank service fees, and exorbitant credit card interest rates.

But there are subtle, yet equally pernicious, mechanisms as well. Consider subsidies for sports stadiums and arenas, which host events attended largely by the affluent, who pay exorbitant ticket prices. Those subsidies typically are funded by bond issuances, with an accompanying increase in local sales taxes to fund the resulting debt service. And who pays the local taxes needed to subsidize the profits of billionaire sports team owners? According to the most recent analysis by the Institute on Tax and Economic Policy, the poor and middle class do. Citing ITEP’s analysis, Patricia Cohen of the New York Times noted:

According to the study, in 2015 the poorest fifth of Americans will pay on average 10.9 percent of their income in state and local taxes, the middle fifth will pay 9.4 percent and the top 1 percent will average 5.4 percent.

Can it get any worse than that, fleecing poor people to subsidize billionaires?

I don’t agree with the policy wonks from both the right and left in Washington and our state capitals that redistribution is a four-letter word. But I know redistribution up should be. It almost makes me share Paul Ryan’s worldview of makers and takers. Except the groups we’d each place in the “takers” category would not have much overlap.

Bob Lord, an Institute for Policy Studies associate fellow, practices law in Phoenix. 

2 thoughts on “Redistribution Up”

  1. On ancient Crete, King Creosus felt the merchants were a threat to him because of the money they had accumulated. He felt they were plotting against him and their wealth would allow them to hire mercenary soldiers to take his throne.

    He hit upon a brilliant idea to stop the threat AND to make his people love him. He simply confiscated the money from the merchants and handed it out to the poor. Much to his chagrin, within 10 years, the merchants were again wealthy, and the poor were again poor. So, he did it again and within 10 years had the same result. Being a stubborn man, he made a third attempt, but this time it only took 8 years for the merchants to again be wealthy.

    Redistribution can be tricky.

  2. If you took all the money from the rich and gave it to the poor within 10 years the rich would get it all back. If you took what little money the poor have and give it to the rich as the republicans like to do, when the rich loose it on getting even richer schemes they have no where to go to get it back. That is why republicans cause depressions. As reagan like to call himself reaganhood he steals from the poor to give to the rich! Sorta of robin hood in reverse!

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