Edit Alert: During the process of this article, some people more knowledgeable than me on one of the questions popped up - I’ve edited the article a bit to include their help.
>an internet person I know named Cassander explained to me that the basic cause of this is that because the US is richer than Spain, the quality of our good is higher and the the cost of labor similarly so;
I disagree partially.
I would say that the pricer are higher because US is richer. You have more people in the US with more disposable income - the US residents are wealthy enough to consider a $2.5 coffee cheap, so most decent coffee places charge you $5. The higher prices in the US does not mean the quality of goods/services are higher - it only means that the US can _afford_ a higher price for these goods/services.
Example - I live in Germany, and I visited the US for 3 weeks last month. I had coffee in 5 different cities, and almost all of them (with the exception of the chain "Le Pain Quotidien" in the east coast) served me coffee in a paper cup, even when I said that I was dining in. $3-4, plus taxes and tips, for mediocre (ok this is subjective) coffee in a to-go cup. I pay 2 euros (including taxes, no mandatory tips) for much better coffee served in porcelain cups here in Cologne, Germany. In this particular example, quality was actually _lower_ in the US though the prices were higher. Ergo the high prices in the US has more to do with US being a richer country, and people being able to afford stuff, rather than actual quality of goods consumed.
I feel weird asking a stranger about his personal life, but since we're doing this...can you talk about the role of debt, if any, in lives at this income level? I assume you're not using a credit card to cover the need for cash reserves because you either don't have one or aren't confident you can pay the money back within a month.
I've gotten richer than I used to be within the last few years, and I've noticed my appetite for risk has appreciably increased, in terms of the type of investments I make, my willingness to explore new job opportunities, my attitude to big debt-financed purchases like a car or house. This is unsurprising in some respects—if I lose $1000 doing stupid trades on Robinhood, I'll be fine, poorer people might not be fine, so it's logical that I am more willing to put my money into Robinhood. But I also think that the confidence coming from financial security spills over into a more general level of risk aversion, even for things that aren't obviously connected to money. Do rich people feel more secure in the world in general?
I have a half-baked theory that this sort of generalized difference in risk aversion is part of why poorer people favor chain restaurants more than independent ones. You know what to expect with your millionth Subway or Friday's. Class-based aesthetic preferences obviously too.
So debt is tricky - it works in a couple ways that aren't exactly counterintuitive but may not work exactly like you think.
Regarding things like credit cards:
Getting a credit card is fairly easy - most people with no credit at all can still get into a card by securing it - I.E. by putting some amount of money up front as a deposit on future debt you might incur. Think of it like plopping down $100 to get a card with a $300 limit.
If you are then "responsible" with the card, you eventually get that deposit back, as well as a higher limit. Responsibility here is the same as it is for you - use the card, pay the payments. This is turn would help you build credit and all that good stuff.
What goes wrong with this (assuming something does) comes in a variety of flavors. First, some people just don't have the background/character/whatever to know how to or want to be responsible with the card. So you might see someone get the card, max it out, and then simply not ever make a single payment.
Some people do want to be responsible with the cards and are, but a disaster of some kind comes along that requires them to max it out (say, a car repair or the loss of a job). Once that happens they are now that much more behind, and paying interest on the amount they are behind. And even then all is not lost, unless you get to where you can't make the payments. But sometimes you can't make the payments - again, maybe you lost your job and this was your buffer, but you still don't have a job, something like that.
Both the irresponsible and the responsible-but-unlucky guys end up in the same place; you lose the credit card, the debt goes to collection (you still owe it, but now there's a guy who calls you on the phone to bother you about it) and your credit is now severely hurt. After that credit just doesn't play that big of a role in your life anymore - you can't get it, for the most part. This means you can't buy a house at all and you can't finance cars at reasonable interest rates - that's the big impact here from my point of view.
Some places will still extend credit even if your credit is really bad - think used car lots. But this is generally a really bad deal for the buyer; it's a car that's worth a lot less than what it's being sold for, is minimally backed (read: It's a fight to the death to get the lot to do the minimum amount it legally needs to in the event of a problem), comes with a high interest rate, will be immediately repo'd as soon as it's legally permissible to do so, etc.
One mismatch here between your mentality and mine at my poorest I can see is you are talking about things like the risk of doing trades or exploring job opportunities or financing a house. I think that risk assessment plays less into those kinds of decisions than you would think at the really low levels - you can't risk what you don't have or take a risk you aren't allowed to take. A really broke person isn't thinking about the risk of buying a house or investing, because that's not typically something they can do anyway.
In some parts of town, poor people eat at independent places a lot - find yourself a liquor store that sells pizza, and everyone in that neighborhood buys the pizza because it's cheap; that's pretty much true of anything that's really, truly cheaper. My experience is most independent food places aren't cheaper in the first place and that's why we didn't/don't use them as much, but that's in my neck of the woods and your mileage may vary.
Another “interest”ing point that speaks to Kayla's question has to do with interest rates.
An interest rate connects money from the future to the present, so at a 30% APR, I can buy a $200 TV in exchange for spending $5/mo into the indefinite future on interest. Of course the bank will want me to pay more than just interest, but then they won't mind too much if I re-spend the payment over that amount...
You can also think of this backwards, and I don't know why more people don't. So you might cancel the Netflix account that is costing $5/mo. In some real sense you have just gained $200. That is, assuming your card isn't maxed out, you can put $200 more on it for the price of that subscription.
What this means is that an APR actually puts a finite time on the indefinite future. A 30%/year APR is actually 2.5%/month and this gets flipped turned upside down to 40 months. $5/month × 40 months = $200.
20% interest = 60 months, 10% interest = 120 months, payday loans can get into 400% interest = 3 months territory.
It's not just credit cards, once your credit cards are paid off it becomes about the same interest rates on investments. That 10% = 10 years figure is the typical return for an index fund based on the S&P 500. For rich people the indefinite future is 10 years away, for lower middle class it is 3 years away, for ultra poor people it might be months away. Poor people literally have a much shorter notion of the indefinite future, at least financially. “Thinking past tomorrow” is a real problem.
All different ways of saying that it's expensive to be poor I guess, like you can't buy your groceries in bulk so you don't get to save on them so you spend twice as much on groceries as people who are better off... To say nothing of pernicious cycles where to get the job you need the car, to get the car you need the job.
If you think about something that makes your life inconvenient for a year, for a rich person that might be a tenth of their indefinite future, no big deal, for a lower middle class person that might be a third of their indefinite future, a serious undertaking, and for a poor person it might be all of there indefinite future, and it might look like they will never recover from it. (Speaking purely rationally of course, because different people have different tolerances of those sorts of pains, some rich people might be unable to lose that comfortably and some poor people might be super robust.)
>an internet person I know named Cassander explained to me that the basic cause of this is that because the US is richer than Spain, the quality of our good is higher and the the cost of labor similarly so;
I disagree partially.
I would say that the pricer are higher because US is richer. You have more people in the US with more disposable income - the US residents are wealthy enough to consider a $2.5 coffee cheap, so most decent coffee places charge you $5. The higher prices in the US does not mean the quality of goods/services are higher - it only means that the US can _afford_ a higher price for these goods/services.
Example - I live in Germany, and I visited the US for 3 weeks last month. I had coffee in 5 different cities, and almost all of them (with the exception of the chain "Le Pain Quotidien" in the east coast) served me coffee in a paper cup, even when I said that I was dining in. $3-4, plus taxes and tips, for mediocre (ok this is subjective) coffee in a to-go cup. I pay 2 euros (including taxes, no mandatory tips) for much better coffee served in porcelain cups here in Cologne, Germany. In this particular example, quality was actually _lower_ in the US though the prices were higher. Ergo the high prices in the US has more to do with US being a richer country, and people being able to afford stuff, rather than actual quality of goods consumed.
I feel weird asking a stranger about his personal life, but since we're doing this...can you talk about the role of debt, if any, in lives at this income level? I assume you're not using a credit card to cover the need for cash reserves because you either don't have one or aren't confident you can pay the money back within a month.
I've gotten richer than I used to be within the last few years, and I've noticed my appetite for risk has appreciably increased, in terms of the type of investments I make, my willingness to explore new job opportunities, my attitude to big debt-financed purchases like a car or house. This is unsurprising in some respects—if I lose $1000 doing stupid trades on Robinhood, I'll be fine, poorer people might not be fine, so it's logical that I am more willing to put my money into Robinhood. But I also think that the confidence coming from financial security spills over into a more general level of risk aversion, even for things that aren't obviously connected to money. Do rich people feel more secure in the world in general?
I have a half-baked theory that this sort of generalized difference in risk aversion is part of why poorer people favor chain restaurants more than independent ones. You know what to expect with your millionth Subway or Friday's. Class-based aesthetic preferences obviously too.
So debt is tricky - it works in a couple ways that aren't exactly counterintuitive but may not work exactly like you think.
Regarding things like credit cards:
Getting a credit card is fairly easy - most people with no credit at all can still get into a card by securing it - I.E. by putting some amount of money up front as a deposit on future debt you might incur. Think of it like plopping down $100 to get a card with a $300 limit.
If you are then "responsible" with the card, you eventually get that deposit back, as well as a higher limit. Responsibility here is the same as it is for you - use the card, pay the payments. This is turn would help you build credit and all that good stuff.
What goes wrong with this (assuming something does) comes in a variety of flavors. First, some people just don't have the background/character/whatever to know how to or want to be responsible with the card. So you might see someone get the card, max it out, and then simply not ever make a single payment.
Some people do want to be responsible with the cards and are, but a disaster of some kind comes along that requires them to max it out (say, a car repair or the loss of a job). Once that happens they are now that much more behind, and paying interest on the amount they are behind. And even then all is not lost, unless you get to where you can't make the payments. But sometimes you can't make the payments - again, maybe you lost your job and this was your buffer, but you still don't have a job, something like that.
Both the irresponsible and the responsible-but-unlucky guys end up in the same place; you lose the credit card, the debt goes to collection (you still owe it, but now there's a guy who calls you on the phone to bother you about it) and your credit is now severely hurt. After that credit just doesn't play that big of a role in your life anymore - you can't get it, for the most part. This means you can't buy a house at all and you can't finance cars at reasonable interest rates - that's the big impact here from my point of view.
Some places will still extend credit even if your credit is really bad - think used car lots. But this is generally a really bad deal for the buyer; it's a car that's worth a lot less than what it's being sold for, is minimally backed (read: It's a fight to the death to get the lot to do the minimum amount it legally needs to in the event of a problem), comes with a high interest rate, will be immediately repo'd as soon as it's legally permissible to do so, etc.
One mismatch here between your mentality and mine at my poorest I can see is you are talking about things like the risk of doing trades or exploring job opportunities or financing a house. I think that risk assessment plays less into those kinds of decisions than you would think at the really low levels - you can't risk what you don't have or take a risk you aren't allowed to take. A really broke person isn't thinking about the risk of buying a house or investing, because that's not typically something they can do anyway.
In some parts of town, poor people eat at independent places a lot - find yourself a liquor store that sells pizza, and everyone in that neighborhood buys the pizza because it's cheap; that's pretty much true of anything that's really, truly cheaper. My experience is most independent food places aren't cheaper in the first place and that's why we didn't/don't use them as much, but that's in my neck of the woods and your mileage may vary.
Another “interest”ing point that speaks to Kayla's question has to do with interest rates.
An interest rate connects money from the future to the present, so at a 30% APR, I can buy a $200 TV in exchange for spending $5/mo into the indefinite future on interest. Of course the bank will want me to pay more than just interest, but then they won't mind too much if I re-spend the payment over that amount...
You can also think of this backwards, and I don't know why more people don't. So you might cancel the Netflix account that is costing $5/mo. In some real sense you have just gained $200. That is, assuming your card isn't maxed out, you can put $200 more on it for the price of that subscription.
What this means is that an APR actually puts a finite time on the indefinite future. A 30%/year APR is actually 2.5%/month and this gets flipped turned upside down to 40 months. $5/month × 40 months = $200.
20% interest = 60 months, 10% interest = 120 months, payday loans can get into 400% interest = 3 months territory.
It's not just credit cards, once your credit cards are paid off it becomes about the same interest rates on investments. That 10% = 10 years figure is the typical return for an index fund based on the S&P 500. For rich people the indefinite future is 10 years away, for lower middle class it is 3 years away, for ultra poor people it might be months away. Poor people literally have a much shorter notion of the indefinite future, at least financially. “Thinking past tomorrow” is a real problem.
All different ways of saying that it's expensive to be poor I guess, like you can't buy your groceries in bulk so you don't get to save on them so you spend twice as much on groceries as people who are better off... To say nothing of pernicious cycles where to get the job you need the car, to get the car you need the job.
If you think about something that makes your life inconvenient for a year, for a rich person that might be a tenth of their indefinite future, no big deal, for a lower middle class person that might be a third of their indefinite future, a serious undertaking, and for a poor person it might be all of there indefinite future, and it might look like they will never recover from it. (Speaking purely rationally of course, because different people have different tolerances of those sorts of pains, some rich people might be unable to lose that comfortably and some poor people might be super robust.)