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Fast Way Up the Ladder: Borrow from Your Family
An interesting study that comes to the wrong conclusion, in Forbes:
It’s no surprise that friends and family are a valuable resource providing help and support when needed in America, at all levels of income. But in a new study released today, The Pew Charitable Trusts has quantified the financial support they’re most apt to provide—showing that the persistent debate over income inequality in the United States extends deeper than you might think. While households of all incomes help members of their families financially, wealthier families tend to provide financial assistance toward paying for education or housing—areas that build wealth. But when lower-income families turn to their relatives for help, it is most often to cover short-term financial needs and emergencies according to Diana Elliott, research manager in financial security and mobility with Pew.
The conclusion, wrapped in a now-familiar evocation of the problems with income inequality, is here:
Households that experienced a “material hardship” defined as skipping a bill payment, not going to the doctor, or overdrawing a bank account, were five times more likely to receive money from friends or family.
“If you come from a more advantaged family your friends and family often set you up for advantage in the future,” Elliott says.
All of this is (probably) true. Richer families tend to have the advantage in wealth accumulation and formation: education, down payments on a house, that sort of thing. But that doesn’t have to be so and, in some communities, it isn’t.
Asian immigrants — especially those from Vietnam, Korea, and India — routinely form lending clubs with family and close friends, where they lend money (under a watchful eye) to others to start businesses or engage in other forms of wealth accumulation. When the debt is paid off, the former debtor stays in the club, providing funds for loans.
This is familiar, right? It’s a savings-and-loan, essentially; what we all used to call a “building society.”
A thought experiment: How fast would wealth grow among Hispanic Americans if these clubs became more popular? How fast, for that matter, would they grow among poor whites? Or African Americans?
Lending to, and borrowing, from family members isn’t something that should be a privilege of the rich. It’s something that should be more prevalent among the poor and working class. But it isn’t. Because (and here’s my thesis, delivered with zero evidence but still…) we, as a country and a culture, ceded the most important things in our lives — our retirement savings, our children’s education, our health, our community’s prosperity — to government and regulators and big business systems. We did this despite knowing what has worked for centuries: Borrowing from people who know you, who love you, who want you to succeed, with whom you share bonds and responsibilities, and to whom you owe a faithful and true account.
Put it this way: Welfare and other handouts don’t come with strings attached; lending club funds do. Which is the better way to wealth accumulation and, ultimately, financial security?
Published in Culture, Domestic Policy
I agree completely, but this works in the east Asian communities because of the value of honor and sense of shame. Without those values, the lending clubs won’t work.
How do you instill community wide values such as honor and shame? Not sure I know, but I suspect that at its base religion has a lot to do with it.
Are Trans-Himalayan Asians particularly religious?
Poor family relations don’t help each other when they don’t stay together. Many of our poor never had fathers. Few are encouraged by cultural norms to commit to family regardless of personal conflicts.
Even many wealthier people these days don’t keep in contact with aunts and uncles, cousins, grandparents, and friends of family, let alone commit to that extended family as well.
I am blessed in that I have known even 2nd and 3rd cousins, thanks to deliberately arranged family reunions and frequent trips. I grew up in close contact with distant relations… and commitment even to the most troubled. Furthermore, my family is quick to adopt friends, neighbors, fellow parishioners, coworkers, and others into the fold. So our network for both encouragement and tangible help is vast, ever growing and replacing the lost.
Such networks are what enable limited government.
I wish the lexicon would change to something other than “we” being used when one really means “others.” As in, other people are doing this to us. Stop implicating everyone as if the people who are correct could have done anything to stop it.
This cow-towing to paternalism really is the problem, your analysis is spot-on. I think it says quite a lot that some immigrant cultures actually resist the predominant American culture of entitlement to government handouts.
Now, Trump supporters are claiming we need protection from imports as if the real problem in America is caused by the wide availability of inexpensive consumer goods.
We, the people, need protection from our own government. We have it. It’s called the Constitution.
I will acknowledge that when I bought my first house, I borrowed money from parents for the downpayment, but at a higher interest rate than I paid on the mortgage (nearly twice as I recall) and I made annual interest payments until I paid him back in full when I sold the house (for a sizable profit).
The entire profit on the sale was used to fund the downpayment on my current house, which I’ve now just a few years away from paying off completely.
“Lending to, and borrowing, from family members isn’t something that should be a privilege of the rich. It’s something that should be more prevalent among the poor and working class. But it isn’t. Because (and here’s my thesis, delivered with zero evidence but still…) we, as a country and a culture, ceded the most important things in our lives — our retirement savings, our children’s education, our health, our community’s prosperity — to government and regulators and big business systems”
This is about more than just financial support. My parents were part of the poor and working class when they fled the Castro Revolution in Cuba. None of their family and friends had money either. What they did provide for each other were other forms of assistance. They helped each other find jobs. They helped each other with advice on where to find goods and services at the lowest prices. They helped each other by pitching in when someone needed to paint an apartment or move furniture. A friend who was an auto mechanic would help fix cars in exchange for a free dinner or some other favor in return. These are just some examples.
The key is to maintain close ties with family and friends. The problem is not income inequality, it is “family inequality”. I am sure we can find many examples of wealthy families where members do not get along and don’t lend each other any assistance, financial or otherwise.
I recall a modest debate in the 1990s about whether homelessness should be defined more in terms of a lack of “affiliative bonds”: If you have to crash at your aunt and uncle’s place for a couple months until you are back on your feet financially, are you “homeless” in the same way as a guy on a cardboard mattress in an alley who moves to a shelter? Of course not.
Ideologues tend to resist concepts like “affiliative bonds” because that kind of thinking is a competitor to the ideal of direct dependence on the national collective.
We have successfully destroyed the affiliative bonds for many Americans with systematic programmatic and ideological assaults on family and community. That destruction seems to be widening rather than retreating and the success of the politics of the left will grow in direct proportion. They have perfected the art of “helping” in ways that worsen the problem.
As is the case with many Pew studies, it contains a hard kernel of truth wrapped in soft, fleshy leftist fruit. Pew studies and surveys generally have an agenda and it’s showing in this case. Income inequality is all the rage among the leftist so it’s timely to gin up some more studies to promote it.
Or, as one of my professors used to say, what’s true about this isn’t new and what’s new about it isn’t true.
Yes, yes yes! Rob you are totally spot on!
Government pushes out people.
Ukrainian Americans like just about every other immigrant group formed Fraternal Organizations for this reason, and they worked great. Its how my family was able to get a mortgage for the house I grew up in . The organization also had scholarships, ran a summer camp for kids, helped people start small business, in short the way America used to work before we automatically turned to Leviathan for every need.
I think you’re correct, and I’d like to see such a study that used something other than money as the criterion. My ancestors moved rather quickly up the income ladder in the early to mid 20th century based not on family monetary support (they were subsistence farmers), but on lots of emotional support from family and community, and strong expectations of taking advantage of opportunities presented. I and our children have benefitted enormously from the family legacy that they worked so hard to provide.
This metaphor is hilarious.
I’ve got to put this on my letterhead.
Nailed it, Rob.
The professor was Hungarian so he knew something about the ways of the Left.
I like that phrase a lot: family inequality.
It correctly identifies the problem, and also the solution.
Is this true of other ethnic groups? I’d love to see a study or something – maybe even a history — depicting how groups in America lent and borrowed and invested, all without going to a bank or the government.
A little googling turned this up…
http://hsp.org/sites/default/files/legacy_files/migrated/bodnarbenassocreadingact1.pdf
When my parents built their house in 1976, they had initially borrowed money from both of their families (and Mom’s family were farmers and not particularly well-off). Then they took out a standard mortgage and paid their families back. I think that was the order of things. The reason for borrowing from their families first might have been the high interest rates at the time, but I’m not sure.
When my wife and I needed to buy two cars at once, my own parents offered to lend us the money at a rate below that of the bank. We took them up on it and will pay off the last of the debt this October. They made the same deal with my sister. I think that this has let them get a higher return than their bank has, and it lets us borrow at a lower rate than we’d get from the bank. It’s good for all sides.
I think this is why the leftwing emphasis on children living in poverty bugged me so much. It’s not children living in poverty that’s the problem, as if they are lone, unconnected individuals. And if they are lone, unconnected individuals, the problem is a lot deeper than poverty.
This may get me barred, but it has everything to do with culture. As someone else said, East- & South-Asians heap shame on their own when expectations are not attempted to be met; failure isn’t fun, but it does happen sometimes and at least you *tried*.
If one of the group, to whom funds were given, is found lacking in attempting to meet responsibilities he is shunned.
Other cultures simply don’t have a history of such. But we daren’t think such things, lest we be ostracized, ourselves…
I think another piece, besides cultural values of honor and shame, is that you have to lead a fairly organized life to participate in a lending club. When I’ve worked with kids/families who were on the lower income rungs of society, much of the family inequality grew out of an ability to construct the baseline structure or a home or family life, including things like regular meals (whether there was a lot of food or not), regular bedtimes, maintaining a bank account, and a general routine to the day. Without those you sure can’t take advantage of informal associations a lending club offers; especially when the only structure in your life is when the check comes in monthly.
The following is [at best] third hand information, but I have long appreciated the concept, and it makes sense to me:
In the 1980’s and 1990’s many of the independent donut shops in southern California were owned by Cambodian immigrants because a Cambodian immigrant had become very successful in the donut business, became a distributor of donut-making equipment, and helped other Cambodian immigrants who were related or otherwise connected get started in the business.
Part I.
There is truth to the article. I married a girl from the maybe-upper-middle class. Her dad had five kids and made more than 100k a year, his dad had five kids and is a retired dentist who owns a lot of real estate in San Diego. This makes him a modest millionaire. Her family pays for college, cars, and helps with down payments on houses. But when it comes to someone not paying bills, they are not so sympathetic. In part I think this is because they have given the tools need to be successful to that person, so why do they need help?
My sister-in-law got her bachelor’s degree and masters. Then she decided to be a nanny. She has some mental health issues that lead to a lot of anger and interpersonal conflict, for which she refuses to take prescribed medication. She is broke, and the family is not terribly interested in helping. I find that interesting, especially from her dad.
My father-in-law left capital one in 2007 to find a better job. Then everything tanked. He picked a really bad time, but his family wasn’t very helpful. He lived off of his saving and survived, but now he doesn’t have the same wealth to draw on. I thought he would be more understanding, but I think his reasoning is: I was set up for success and saved and survived. She needs to do the same.
Part II
My dad had eight kids and made between 30-40k a year when I was growing up. My grandpa still lives on the small family farm. Everyone owes each other in my extended family. We are always helping cover doctors visits, water bills, car payments, etc. I think thanks to my wife’s much better budgeting, we haven’t had to ask for help since our second year of marriage. But when we did need help, we didn’t ask her much wealthier family, we asked mine.
I would never expect my family to help with college, cars, or a mortgage. We’ve started saving so our kids will have nest eggs for college and homes, but I often wonder at this. I’m not sure I like the idea of easing their lives. I don’t my children to feel entitled, but I do want them to be successful.
My family is humble and they will never be accused of being rich. But they own homes, take care of each other, and lead happy lives. I would be okay staying in that socioeconomic class if it also meant having a sense of belonging and support. Not that that doesn’t exist in other classes-only that as long as I have that I’m happy anywhere. Unfortunately, I think increasingly the classes differ as much in values as in wealth.
The values and good habits that led to the acquisition of wealth by the family in the first place is what makes them unsympathetic to family members who flout those values and fail to adopt those habits. This makes sense.
If I understand your meaning correctly, you seem to be saying that your wife carries on her family’s approach to finances, which resulted in improved circumstances. This is consistent with the first passage: the same tools that lead to the acquisition of wealth are also useful in retaining wealth.