Can you see the humor in these observations, or does it hurt too much?
There are three ways to keep a “poor” neighborhood poor:
- Encourage retail (product sales to consumers) business development
- Buy from strangers
- Sell to friends
In Chicago, especially, we can see how this happens. Consider Englewood, Woodlawn, Cabrini Green, “the projects,” etc. Each has a high population of “low income” families. Many of these families are supported principally by “welfare” payments. Luxurious lifestyles are generally out of reach. There are virtually no businesses thriving in these neighborhoods (except possibly for illegal drug trafficking—by the way, that’s a “retail” business). What few “legitimate” businesses there are (pharmacies, grocery stores, clothing stores, car repair shops, etc.) sell products to local residents at (generally high) retail prices. Most of the business owners and many of their employees probably don’t live in the neighborhood themselves. The residents, who can, shop elsewhere.
Money comes into the neighborhood through a “garden hose” and drains through a “sewer pipe.” Government is a significant source of revenue (welfare payments) in a “poor” neighborhood. Virtually all of the goods a “poor” family buys are manufactured outside the neighborhood (cost ordinarily 60-90% of the selling price). The largest shares of other business operating costs are paid to vendors, employees and business owners who don’t reside in the neighborhood. Most of what a “poor” family buys is subject to sales tax (in Chicago, now 8-3/4%). There is virtually nothing left for a “low income” family to invest in the neighborhood. Savings (if any) are depleted to support a high cost (though subsistence) lifestyle. Savings are also a disqualifier for welfare. “The system” makes “things” (cars, TV’s, stereos, designer clothes, etc.), besides being status symbols, more valuable than money. Adults in “low income” families often are poorly educated and tend to make poor economic choices, besides (if not required by “the system” to do so).
Local governments encourage retail businesses because a significant share of revenues for local governments comes from sales tax revenues. Welfare payments increase dependency of the population on government. The incentive systems are very strong for governments at all levels to continue the “problem” rather than solving it.
Without “manufacturing” businesses to employ local residents and sell goods away from the neighborhood, community income and wealth are depleted quickly. Encouraging retail spending, whether local or elsewhere just drains wealth from a neighborhood as fast as it comes in. About 90 cents (or more) of a dollar spent in a local “retail” store leaves the community as soon as it is spent. Buying from merchants outside the neighborhood exports the whole dollar. If money paid to residents of a Chicago neighborhood is spent in the suburbs, not only is there absolutely no opportunity for any economic multiplier, but the sales tax revenue is gone, too. The banks are certainly no help. Just try to get a loan to open a business in a “disadvantaged” neighborhood. Even local service businesses that sell to local residents are not much help because of the payroll tax and income tax bites that deplete the money exchanged by at least 20% with each transaction. Local businesses that sell to “outsiders” are the ones that bring wealth to a community.
To summarize—keep a community poor by:
- Encouraging retail business development. It’s the “sewer pipe” to drain income and wealth from a community.
- Buying from strangers—Send money out of the community even faster.
- Selling to friends—Let the government systematically deplete your wealth with taxes.
Welfare is just a “garden hose” source for incoming money. Selling products and services to strangers is a “fire hose” by comparison. Spending on locally produced products and services rather than for “outside” retail products shrinks the “sewer pipe.” Compare the foregoing commentary to local “redevelopment” plans. Does any of this “problem” seem familiar to you?