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Comment by greedo | Hacker News Reader

And this is why many of the poor stay poor, and many in the middle class stay middle class. The poor don't have the capital to take advantage of the greater discount and the middle class tend to value short term "convenience" over long term savings.

If a poor family of four spends $600/month on groceries at standard pricing, their inability to "afford" the 33% discount costs them $2376 a year. For a middle class family spending $1200/month, that's $4752.

Many of the successful poverty programs try to elevate the savings of poor families so that they can stop buying groceries and supplies at the "convenient" prices.

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Poor people are poor because they don't make as much money as the middle class. Middle class people are middle class because they don't make as much money as the rich.

You can't explain that away by criticizing questionable spending at the margins.

I'm not criticizing them for questionable spending at all. They simply don't have the capital to take advantage of better purchasing options.

"They simply don't have the capital to take advantage of better purchasing options."

Similarly they will buy a used car at an inflated price because they are lacking the dollars to purchase a new car and/or have the credit to do so.

Having more money gives you the flexibility to consider all options at least. If you don't have the money you're not even in the game.

I get that you're trying to make a larger point, but this isn't a very good example with which to do it. Used cars are nearly always a better value than new cars.

Look,

(a) you screwed up the numbers. You should not be comparing, in this hypothetical scenario, 1.33 with 1, but rather 1/(1 - 0.33) with 1.33, which is instead 0.1625. That is, "these people who don't understand the numbers involved" in the above article includes you. :P And the article above does not make the pretense that this is a uniform problem affecting all of the consumption of the poor; rather just that certain deals may be irrationally treated because of how they are phrased. There is no mythical 33%-across-the-board discount for the poor at stake here; at best it's a 16.25% discount available in very limited circumstances.

The real point of the original article was that many people seem unable to determine the difference between 1/(1-0.33) and 1.33, which is only a 16% increased-cost gap

(b) It would be very tough to make these economics work out in the present market where even 5% returns seem overoptimistic. Suppose you could reliably convert a poor person into a rich person (and I'll take a modest $200k/year income to define "rich"), by giving them $5k per year and making sure that they spent it on "the right sort of thing," banks could probably do it.

I mean, just imagine making this pitch to a poor person: "I'm going to make it so that in 10 years you are earning $200k/year, and then I will take $20k of those every year for 20 years -- so that you only earn $180k/year -- as payment." To a poor person that's an unbelievably sweet deal. They would take that offer and might even offer a much larger cut of that salary to that bank. Suppose that with oversight the cost to the bank is as much as $10k/year, of which $5k goes directly to the person and $5k is administrative losses in making sure people don't misspend the money. From the bank's perspective that's a 10% return on investment, which is not amazing but not too shabby. Even if it only works 50% of the time, in today's economic climate that easily beats treasury bonds as investments go. It's in the bank's financial interests then to lift people out of poverty with this mechanism.

I don't see any banks doing this, and while it may be possible I would guess that it takes much more money to do it.

a) The article didn't say anything about the poor, nor did I say that it did. I simply made a correlation about how the poor are unable to take advantage of significant discounts due to capital constraints. And the example I was using didn't use the phony discount but the true discount offered by volume. Pay attention... :p I understand the differential between the two pricing strategies perfectly well.

b) I also never said nor implied that saving $200/month would make someone rich. But to dispute that there would be no improvement in a family with an extra $2400/year is silly. If you believe that to be the case, please send me a check in that sum. ;p

And further, you can't use the present market to determine long term returns. Today's market is quite lucrative if you pick the correct investments. If you just follow the Dow or NASDAQ up and down, day trade, or let management fees eat up your seed corn, you're at the whim of the market.

That's clearly true, but the following statement:

And this is why many of the poor stay poor, and many in the middle class stay middle class.

...does not follow.

The outlook for a typical working-class family living paycheck-to-paycheck isn't going to be materially improved by better purchasing options (because they don't have a lot of money with which to purchase things in the first place).

As a sort of reductio proof, imagine I gave you $500 to live on for an entire year. What good would better purchasing options do you? If you're merely trying to say that you'd be better off with more money, well, yes. But better purchasing options aren't going to move you into the middle class.

Sure you can. Being bad at earning and saving means you are always struggling, stuck in that state.

A poor person wins the lottery, and is poor again in a year. So habits work that way too. If you can't plan for the future, consider interest and principle and the time value of money, then you're doomed to poverty.

He's not criticizing the poor or middle class. He's simply noting that they frequently lack the resources to take advantage of these types of discounts. Even a 99% discount is useless if you don't have the resources to afford the 1% post-discount cost.

I'm not convinced by the argument that the middle class stay middle class because they spend too much on convenience. $4752 a year extra will not make me rich, far from it. $475,200 a year extra WILL make me rich.

Plug $400/month into an investment calculator (@6%) and see what 40 years would do you... You'd be surprised how much a modest amount of savings can do when compounded over time.

If you are 30 today, then in 40 years you would be 70. Good time to get rich

:-)

I'd rather be rich at 70, than poor...

You are not going to get rich for free. That would require extra effort over 40 years. You can put that effort elsewhere, for example launch 5 startups, or have 5 more kids, or extra vacation every year.

After investing $4700/year for 40 years you still won't be rich. The amount I could withdraw each year would still be much less than my current middle-class salary. In other words, I'd have less income than I do now.

In fact, I need to squirrel away a very large proportion of my salary to retire and be better off than I am now. I can't afford that, which is the point. The middle class is too poor to ever be rich.

Cut that daily $5 latte adored by the middle class, let the savings compound annually at 6% for 40 years, and you end up with $300,000.

That sounds like a lot. Would you say that the middle class is hamstringing their upward mobility by drinking lattes? There are several issues with this simplistic analysis. Here are just two. One, it's ignoring inflation and risk. Two, it's playing a psychological trick on readers (and perhaps on yourself) by asking them to superficially compare the utility of two things, $300,000 in the hand 40 years from now vs 14,600 lattes spread over 40 years, that will make the money seem like the obviously better choice to most people.

Actually, it's exceedingly difficult to get a handle on sparse, spread-out utility like in the latte scenario. Eliezer has the thought experiment where he asks you to compare the disutility of one person being tortured vs a million people suffering some trivial inconvenience like having a dust speck in their eyes. There he is spreading the utility over many people rather than over many years for one person, but the issues are strikingly parallel.

"Cut that daily $5 latte adored by the middle class"

In theory (as presented by David Bach's latte factor (haven't read it but have heard of it)) but in practice unless it's forced savings people tend to spend differently if they have money and resources just because they feel secure and have a safety net. So they can take more risk.

The other thing that the "latte factor" doesn't take into account is the positive benefits of that $5 purchase. You go somewhere, you feel good perhaps that has an impact greater than just drinking coffee that you make yourself. There is a psychic benefit.

Not hamstringing their upward mobility, but definitely hamstringing their retirement (assuming they're not funding it adequately). Of course inflation and risk are factors. I didn't realize that I need to include footnotes and references when discussing a common idea, that of investing for long term goals.

And I think Eliezer's experiment is a load of crap, imho.

Show me an investment right now that is returning 6% per year without substantial risk, also to be fair in 40 years $300k is highly likely to be worth much less.

For instance, 40 years ago, $3000 would buy a competent sports car, new, (MGB), and $7500 would buy a V-12 Jaguar (Source: http://www.teglerizer.com/new_car_prices_in_1972.htm). Imagine telling some in 1972 that if they put $50 a month in an investment account, in 2012 they'd have $37,500. That's sound like an enormous sum to them (10 new sports cars!), but when they cashed out this year I bet they'd be underwhelmed with the buying power of all that saving.

There is no investment without risk. And in fact, volatile times (as well as recessions) are some of the best times to invest. I wish I had had more liquidity in 2009.

And when comparing inflationary effects, I bet if you gave a true comparison between the quality of the cars available in 1972 and 2012, adjusted for inflation, that the 2012 cars would win out.

$4,752 of extra savings a year is an absolutely MASSIVE amount for a middle class person. For example, if you're already saving $20k a year, that will bump up savings to almost $25k.

Then, this is just one source of additional savings. Cut further on services you don't really need (coffee at $4 a pop, $150/mo cable TV bill, etc.) and now we're talking some serious money.

If people stop buying things, they won't get the 33%-off savings. Don't double-count.

Middle class people don't spend enough in a year ($40k per person, tops?) to be rich even if they spent NONE of it. And if they "got rich" saving money, what is that money for? To be spent on desirables.

None of this is going to make me rich though. Not by a long shot. Not even a tiny way there.

And this whole time I thought it was about jobs and education.

Funny how much education you can afford when you're not overpaying for basic necessities.

Assuming you save all of the $4752 a year, which is dubious, that's barely enough to send you to a low-tier university or community college. Mind you, that's better than nothing, but if you think the opportunities open to students who go to lower-tier universities are the same as those available to students who were able to afford top-tier universities' egregious tuition, then you've got another thing coming.

In short, it's a cycle: Those who can't afford to go to a good college have less career opportunities open to them, ensuring they have a hard time sending their children to a good college.

The solution, of course, is a wide and far-reaching scholarship program that lets students not worry about their socio-economic status when applying to colleges, but that's "socialism".

If you were to invest that at 6% for 18 years, (say when your child was born), you'd end up with $155K before adjusting for inflation. That would pay for a lot of college.

And for the poverty family, this would be about $77K.

That would be great, if you were living sometime between the years 1960 and 2000. I don't know if you've heard, but we've had a rather spectacular economic downturn since then. 5-year CDs are less than 2% interest; 1-years are a little less than 0.8%. (The corresponding rates for the stock market are too volatile to quote.)

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