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Assets and Inequality

Bina PatelCascade Commentary

Summary

While instrumental in maintaining some degree of stability for lower-income persons, the traditional welfare system was not designed to promote inclusion or self-sufficiency. In contrast, building assets allows those once marginalized to become self-sufficient and provides hope for the future.

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Economic inequality is a central characteristic of poverty, but poverty is more complicated than simply lack of personal income. Economic inequality and poverty are closely related in that access to wealth building activities is constrained and inclusion in social and financial networks is extremely limited.

Sociologist Michael Sherraden’s groundbreaking work on welfare and assets (Assets and the Poor: A New American Welfare Policy, M.E. Sharpe, 1991) presented a new way to understand poverty, beyond just measuring personal income. Instead, poverty is more dynamic than merely lack of income and should be viewed in terms of assets, such as educational attainment, savings and property ownership.

Why would one come to believe that asset accumulation is a method of reducing economic inequality? Let us look at two methods of addressing economic inequality: The first is the traditional welfare system that includes income transfers, food stamps, housing vouchers and other entitlements. The second is asset building, which refers to activities like personal asset accounts used for homeownership and accessing education.

“…[P]overty is more dynamic than merely lack of income and should be viewed in terms of assets, such as educational attainment, savings and property ownership.”

Welfare, within its historical parameters, is meant to provide income used for daily consumption of food and shelter over a short period of time. It is one of the most widely used mechanisms for reducing poverty in the United States, based largely on the notion of leveling the unequal market “playing field.” While instrumental in maintaining some degree of stability for lower-income persons, the traditional welfare system was not designed to promote inclusion or self-sufficiency. Its main purpose is to help families survive: to keep individuals and families from homelessness and starvation.

The U.S. welfare system provides public income transfers for subsistence but leaves few opportunities for the recipients to engage in economic opportunities. For example, saving while on welfare is difficult. One may be able to pay for a portion of rent and continue to engage in some level of market activities, such as shopping with food stamps. Observers find, however, that welfare creates habits of day-to-day survival and does not necessarily promote equality in terms of choices in the marketplace.

Furthermore, when people enter the welfare system, their networks change, including professional, social and economic circles. Generally, living on welfare leads to drastic changes in social and economic status, which plays out through changes in behavioral choices, friendships and lifestyle. It is these changes that lead the welfare system itself to perpetuate economic stratification and inequality. On welfare, there is very little room to engage in activities that move families out of survival mode.

“At a fundamental level, asset accumulation provides opportunities to benefit from the market system, to participate in economic and social activities, and more importantly to stop the cycle of intergenerational poverty, which traditional welfare has been unable to do.”

A newer approach to addressing economic inequality is gaining momentum and widespread recognition. In contrast to the traditional welfare system that gives a man a fish, the asset building field is targeted on teaching a man to fish. At a fundamental level, asset accumulation provides opportunities to benefit from the market system, to participate in economic and social activities, and more importantly to stop the cycle of intergenerational poverty, which traditional welfare has been unable to do.

The asset building movement calls for public policies allowing greater opportunities for low-income people to benefit from the free-market system. These policies should focus on increasing access to education, earned income and asset ownership, while reducing incentives for public assistance.

Assets allow those once marginalized to access a new system that moves them to selfsufficiency and, even more importantly, provides hope for the future. Behavioral changes like thinking in longer time frames, saving for the future, and modeling positive behavior for children follow asset accumulation.

Assets reduce economic inequality, not through redistribution of income, but through supporting higher consumption of goods and services that can create longer-term stability and wealth. Public transfers that give a man a fish are simply not sustainable and do little to address inequalities, while arguably exacerbating them. In contrast, we see the everyday achievements of those who gainfully participate in the free market, even as simply as opening a money market account, or buying their first home.

Bina Patel is Director of the Oregon Asset Policy Initiative at Cascade Policy Institute, a think tank based in Portland, Oregon. To read other publications of the Oregon Asset Policy Initiative, visit www.cascadepolicy.org.

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