Lots of attention is paid, rightfully so, to those in extreme poverty in the developing world. However, those living in relative poverty in wealthier countries face similar problems as those living in extreme poverty (albeit generally to a lesser degree) : malnourishment, an underestimation of the value of education, and poor financial choices due to a very high “discount rate” (a little pleasure now is worth more than a lot of pleasure in the future, possibly because of a pessimistic view of the future driven by living in poverty).

Another important similarity is that financial shocks always affect poorer people more than wealthier people; with less income to go around, an unexpected strain causes a poorer family to have to make difficult financial decisions with potentially serious ramifications. This problem is compounded by the fact that poorer people tend have worse credit ratings, further hurting their ability to utilize the financial tools available to them and deal with unexpected financial shocks.

“When there is no cushion, one small mistake can be catastrophic — if you rely on a car to get to work, for example, missing a car payment can result in the loss of a job.”

A major difference is that in the developed world, the institutions, organizations, and infrastructure already exist to help these people. In the developing world, projects often have to be built from the ground up, financing is harder to find, and projects are more susceptible to corruption and general volatility/insecurity that could threaten its success. In the developed world, it is not so much about building a financial system, (and a strong government / judicial system to oversee that financial system) as it is teaching people how to use systems already in place to their advantage. This simplifies the job of poverty reduction in the developed world immensely.

The social “safety net” is a good system, however providing welfare services does not address the root cause of of poverty, it simply mitigates the human suffering being poor can cause. By doing more to prevent people from having to rely on entitlement spending, and helping people avoid entitlement spending by being more financially responsible, the sustainability and integrity of the social safety net is preserved.

“Ideally, the coach can help clients set up systems that keep them on track: automatic savings, automatic bill payment, automatic reminders by text. ‘Distress is an economic state but also a psychological state,’ said Mullainathan. ‘The remedies have to address both.’”

A large part of this process is helping people overcome the fear associated with handling financial problems. This process will depend on experts simplifying ones budget and teaching them about simple financial tools that will help their problems more accessible (and then signing them up for those programs).

People often feel overwhelmed by financial troubles and ignore the situation, which only compounds the problem. By addressing the fear behind getting finances in order, poor people are empowered to take control of their finances. By setting up simple automatic measures, one’s financial position can change drastically.

“Jaimes said that most of his clients come to their first meeting with a stack of collection letters — unopened. ‘Can I open these envelopes for you? We have to deal with them,’ Jaimes tells them.”

 “Lisser begins by addressing clients’ stress, step by step: ‘You will feel relieved after you settle the first one,’ she says. She leads them through opening the debt notices, calling the collections agencies and beginning negotiations. When the client takes over making the calls, she will coach by scribbling notes.”

The process is appealing because it is not “giving” in the sense of a traditional welfare program, but is “empowering”. This empowerment should build confidence when handling financial issues and help build optimism towards the future (and therefore better decision making skills), increasing social mobility while breaking the root causes of “poverty traps”.

This program is currently being championed by, guess who, Michael Bloomberg (you knew it had to be either Bloomberg, Gates, or Buffet right?):
“Currently there are more than 30 centers lodged in neighborhood organizations around the city, offering counseling in multiple languages. Bloomberg Philanthropies, the mayor’s personal charity, is now providing grants to Living Cities’ Cities for Financial Empowerment Fund to replicate and customize the model in Philadelphia, Nashville, Denver, San Antonio and Lansing, Mich., — places that won out over 45 others for these grants. The first centers will open in March.”

It will be interesting to see how successful this program is when tried in different locations. If it is successful, the U.S. government should seriously consider further investing in this empowering model of poverty and debt reduction.  

(Note: debt reduction and poverty reduction are not the same thing, but they are very closely related)