My dad, bless his heart, used to have this talk he’d give us at the dinner table periodically – an hour-long, rapturous monologue about The Miracle of Compounding Interest.
He’d start with the bit about how anybody in America could be wealthy if they worked hard, lived within their means, and knew about investing. Then his voice would get all thick with emotion while he got out paper and pencils and calculators to demonstrate –
“See, if you put $10,000 in an interest bearing account, and you get, say, 4% per year, then at the end of one year, your money has earned you an extra $400. If you earn 4% interest on that $10,000 every year, then you get an extra $400 every year. You’d earn $4000 in a decade. That’s simple interest.”
And, oh! the gleam would come into his eye, and we could feel the tension building towards catharsis. Simple interest was good – a smarter move than keeping your allowance under your mattress, but everybody in our house over the age of 4 knew that the real magic was in compounding interest. We sat with rapt attention as the pencil scribbled figures down the paper:
The Miracle of Compounding Interest, in graphic form
“But if you put your money into an account that has compounding interest, then after that first year, the interest you earned gets added back into the account, and so in the second year, instead of earning 4% interest on $10,000, you are now earning 4% interest on $10,400. So at the end of the second year, your money would have earned you $416. So you’ve received an extra $16 without doing a thing! Repeat that for another year, and you’ll get 432.64, again without doing a thing. After ten years, you would have earned [scribble, scribble, scribble…] $4798!”
And there it was. The golden truth. Without doing a single thing except keeping your money in the right place, you, the savvy allowance-saver, the shrewd mower of lawns, could receive untold riches through the Miracle of Compounding Interest.
Man, I love my dad. He’s a hoot.
Anyway, the whole reason I bring this up is because I want to explore in some more detail a point I made in another post about unequal opportunity in America.
I think this idea deserves its own post because I keep having the same conversation over and over and over again with my libertarian/conservative/Tea Party friends.
(Yes, I actually have friends in those camps. Lovely people for the most part.)
The conversation goes like this.
I post a link about Occupy Wall Street.
My friend will insist that OWS has it all wrong in protesting rich people.
I will then spend a moment deliberating whether I want to make the point that Occupy Wall Street is not about protesting rich people in the first place (see here and here and here).
While I deliberate, my friend will say something like, “Taxes should not be raised on a particular set of people simply because they have more money. I don’t believe in taking from one to give to the other. Everyone needs to do their own part.”
Or, “Government is force: The ability to take money and redistribute it based on the whims of those in charge.”
Or, “When government acts beyond its legitimate grounds of defending people from force, this is the kind of thing that happens. And that’s true whether the government is targeting hapless progressive protestors or people who balk at having half of their peacefully-acquired income plundered.”
Those are cut and pasted from actual facebook threads.
Notice the key words: “taking from one to give to the other,” “to take money and redistribute it,” and “having half of their peacefully-acquired income plundered.”
My image of gov't when I was about 10.
Underlying most of the conservative arguments against government in general and social programs in particular is this idea that taxation equals theft.
Especially when the tax money is used to fund social safety-net programs for all those bottom-dwelling freeloaders who aren’t doing their part.
I might agree with this idea if I believed that a) poor people are poor because they are lazy, and b) I am well-off because I earned it through hard work.
But I can’t ignore the fact that my face to face experience with life says otherwise.
Take for example the fates of me and one of my oldest friends, J. We met when we were 9 years old. In the immediate way of 9-year-olds, we knew we were kindred spirits because we both liked to draw horses.
J. has always been brilliant. She is at least as smart as me and twice as creative. She’s also a hard, hard worker.
And she’s a welder on food stamps, while I have a master’s degree, debt-free.
Money isn’t the only commodity that works on the principle of compounding interest; opportunity does too.
The thing about compounding interest is that it only really works if the account is allowed to accumulate and re-invest in an uninterrupted fashion. If, every year, you debited out the interest you’d earned, it would never accumulate, and at the end of 10 years, you’d have the same 10,000 that you’d started with. Plus maybe some gadgets.
Worse, if you were to remove chunks of the principle investment, then you’d have to back track and play catch-up to build the principal up again before you could achieve the old level of interest. You’d have to work much harder to achieve the same result.
Opportunities wax and wane in much the same way.
First of all, if you are born in America, you already start with a bigger deposit in the Opportunity Bank than most people in most of the world. Even with all our problems.
If you are then born into a family that can afford to give you lots of personal attention and nurturing in your early years (when you are acquiring the most language), you get another big deposit in your account.
Go to a good school staffed mostly by well-trained professionals (either because your family can afford to live in a good school district, or because they can afford to send you to private school). Deposit.
Three square meals a day. Deposit.
Supportive family. Deposit.
Continuous good health. Deposit.
Music lessons. Deposit.
Culture-rich family vacation(s). Deposit.
Summer camp, after-school tutor, sports team – deposit, deposit, deposit.
Compound all of these together, and you get a hard-working, college-bound young adult. Probably going to a good school with at least some scholarship money, and headed for a productive career.
But what if those compounding benefits are interrupted? Debits in opportunity, like debits in banking, can send you backward, not forward, and leave you playing catch-up.
Mom works two jobs and can’t read you to sleep every night, stunting your early literary language acquisition. Debit. (Or at least a lower interest rate.)
Go to an underfunded school staffed mostly by overstressed and inexperienced newbies still in their first five years of teaching. Debit.
Don’t speak the “standard” American dialect of English. Debit.
Lose valuable study hours being hungry. Debit.
Lose valuable school hours being distracted because there’s no grocery store for miles around, so you ate M&M’s and Pepsi for breakfast (again) and you’re on a pure sugar high. Debit.
Lose a few weeks of school every year to hospital visits for your asthma. Debit.
Move schools several times a year because your housing situation isn’t permanent. Debit.
No quiet place to do homework because you’re sharing a tiny space with too many people. Debit.
Nobody ever told you about responsible credit card use. Debit.
Family illness, death, or divorce eats your college fund. Debit.
Emotional trauma from abuse, divorce, or neglect. Debit.
Rape, or assault, and the accompanying PTSD. Debit.
Lose a parent early to death, imprisonment, or abandonment. Debit.
One parent (or more) deals or uses drugs. Double debit.
Never being able to take your safety for granted. Debit.
What would the cartoon of your life look like?
The list goes on, and on, and on, and on.
No one debit, not even a small cluster of debits, can derail a life forever. Everyone, including one-percenters, experiences hardship and tragedy. Everyone, including the poorest, gets second chances.
But in America, some people get many more second chances than others.
And some people need many more second chances than others.
And those two groups often fail to overlap.
J. and I, who are still good friends, didn’t end up in wildly different circumstances because I’m “doing my part” while she’s sitting around expecting handouts. We ended up in wildly different circumstances because she struggled through three times as many debits as I did. Even with my setbacks, the overall arc of my circumstances opened doors for me. J. got a PhD in the School of Hard Knocks.
Or, as my buddy Sebastian said at Occupy Wall Street, “I’ve worked with the homeless for years, and the things some of these people have gone through are just unimaginable to anyone from a middle class background. If someone pulls a knife on me in an alley, I don’t assume that they’re a morally deficient person who needs to be punished – probably that knife has been the only semblance of safety they’ve had for a long time.”
So, to go back to the original proposition: a) poor people are poor because they are lazy, and b) I am well-off because I earned it through hard work.
I think I made my point about (a).
Regarding (b), I say, of course I worked hard. I worked my ass off for both my degrees. But it would be a more accurate statement to say, “I am well off because I worked hard, and also because the privileges of my birth and circumstances gave me a huge head start.”
If you are also a hard worker from even somewhat privileged circumstances, then I applaud your discipline, and I invite you to acknowledge that maybe, just maybe, there was also some luck working in your favor.
Libertarians love to say that government is force, and that the only legitimate use of a government’s power is to defend its citizenry from the use of force by others.
I think that a properly representative government can be used a little more actively and creatively than this, but essentially, I agree. Who wants more government than absolutely necessary?
Where I disagree with libertarians is in their assumption that government is the only institutional arbiter of force in America.
Consider this quote from Nikolai Berdyaev –
“There is a still more deep-seated form of violence, and that is the strong hand of the power of money. This is the hidden dictatorship in a capitalist society. They do not use violence upon a man directly, in a noticeable fashion. The life of a man depends upon money, the most impersonal, the most unqualitative power in the world, and the most readily convertible into everything else alike. It is not directly, by way of physical violence, that a man is deprived of his freedom of conscience, freedom of thought, and freedom of judgment, but he is placed in a position of dependence materially, he finds himself under the threat of death by starvation and in this way he is deprived of his freedom. Money confers independence; the absence of it places a man in a position of dependence.”
Government is not the only agent of force acting in our society. America hasn’t been agrarian for several generations now. Gone are the days when being middle class meant having a homestead and raising your own food, relying on outsiders for the few things you couldn’t make yourself.
American citizens are deeply dependent on the systems and corporations that organize our labor and our supply of goods and services.
So when a few people at the top abuse the system, they are abusing all the people dependent on the system.
It is right, just, and appropriate for government to intervene on behalf of those who have been left behind, left out, and crushed by the powers of compounding interest.
What does it mean that we believe that all people are created equal, with the rights to life, liberty, and the pursuit of happiness?
If we believe that the poor are usually at fault for faltering in a system in which we participate, and which we perpetuate by continuing to buy, bank, and brand, if we believe that those who falter have earned their distress, that the price of faltering is to go hungry, fight for shelter, be denied healthcare, receive a second-class education that won’t prepare their children to rise above the circumstances of their parents, if we deny certain people the most basic economic security necessary to secure individual liberty, then what we really mean is that some people are created more equal than others.