Scarcity: Why Having Too Little Means So Much (17 page)

Getting out of a scarcity trap first requires formulating a plan, something the scarcity mindset does not easily accommodate. Making a plan is important but not urgent, exactly the sort of thing that tunneling leads us to neglect. Planning requires stepping back, yet juggling keeps us locked into the current situation. Focusing on the ball that is about to drop makes it terribly difficult to see the big picture. You would love to stop playing catch-up, but you have too much to do to figure out how. Right now you must make your rent payment. Right now you must meet that project deadline. Long-term planning clearly falls outside the tunnel.

And, of course, perhaps most important, future planning requires bandwidth, which scarcity taxes heavily. The Koyambedu vendor is preoccupied each day with a dozen considerations. How much of each vegetable and fruit should she buy and at what quality? What goods does she have left to sell, and can this stock keep overnight? Why has this been a slow day, and will it stay that way? Every business owner has these kinds of thoughts. The well-off business owner, who can afford the occasional mishap, makes these decisions and moves on. For the vendor, though, these thoughts linger. They burden
her bandwidth, and as such her mind keeps going back to them even after she thought she had made a choice. Should she really stock up for next week’s festival? Is she taking a big risk? Thoughts like these tug at her mind. They create, as we have seen, a very real bandwidth tax. It is hard under those circumstances to focus on formulating a plan for escaping her scarcity trap.

To make matters a lot worse, the actual plan needed is significantly more complicated than the simple one we sketched. Is putting aside 5 rupees every day the right strategy? Should she put aside more on some days? What about days where she really needs the money? As always, this is not unique to the vendor. In the introduction, we described a simple “plan” for Sendhil and Shawn to get out of their predicaments: say no to all new commitments or new purchases. A real plan would be much more difficult to formulate. Should Shawn really not incur any new expenses? What about expenses that might save money in the long run, like a dental checkup or new tires for the car? And which debts get paid down first? The most immediate? The oldest? The biggest? Juggling and the scarcity trap make for a messy patchwork of obligations. Unraveling the best way out is no trivial challenge.

Finally, even if a plan were formulated, implementation can prove difficult. As we have seen, the best of intentions often fail to be realized. In the moment, faced with a particularly appealing project or purchase, we often can’t resist saying yes. Following through on a plan requires bandwidth and cognitive control, and scarcity leaves us with less of both.

Juggling makes getting out even harder. The unexpected happens. You have finally made a plan to climb out, and suddenly you are hit with a ticket for an expired car registration. Reregistering had been put off, one of the many balls tossed back in the air. Now it has landed. One more obligation, and you are back into the scarcity trap.

All this is complicated by the lack of slack. Suppose the vendor judiciously avoids spending on almost everything, day in and day out. She is vigilant and controlled and is accumulating cash as
described. Then one day, out of so many days, she slips and makes one impulse purchase. She gets distracted, she miscalculates, something looks so worthwhile; after all, the money is there. And now weeks of mental effort and physical restraint are all lost. Escaping the scarcity trap does not merely require an occasional act of vigilance. It requires constant, everlasting vigilance; almost all temptations must be resisted almost all the time.

Now, might not willpower build up with practice? Might not the poor, having to exercise it constantly, develop stronger willpower? There is
little evidence to show that willpower capacity increases with use
. (Think of how ironic this would be relative to common belief: the poor having
greater
willpower!) And even if poverty did increase willpower, there is reason to think that this still may not suffice to yield the near infallibility required. Be that as it may, there is instead fairly good evidence to the contrary.

Recent research shows that self-control may actually get depleted as we use it. One study, for example, put dieters
in a room with some highly tempting snacks
(Doritos, Skittles, M&Ms, salted peanuts) and gave them a computer task to perform. For some, the snacks were placed, highly visible, on the table right next to them. For others, the snacks were far away, out of mind. Having completed the computer task, subjects were given access to large containers of ice cream. Those who had been sitting next to the snacks, continuously resisting the urge, finally caved. They ate significantly more ice cream than those who were less tempted by the distant snacks. Researchers in this field have likened willpower to a muscle, which fatigues with use. By this account, a persistent need to resist temptation would deplete, making it all the more difficult to escape the scarcity trap.

Scarcity traps are particularly poignant because there is a feeling that with just one infusion, having just once gotten rid of all debt, a
person can break free of the cycle. “If only I had a bit more time,” bemoans the person who is perpetually behind, “I could get things done and then stay ahead.” For the vendor, if only she could get the cash to buy the fruit (rather than having to save it up in tiny installments), she would be out of the debt trap, and her income would double. In all these cases, a one-time infusion of resources would appear to solve the problem.

To see what happens, we decided to give the vendors at Koyambedu the cash they needed. Working with the economist Dean Karlan, we ran a study with hundreds of vendors. Half of them we simply followed for a year, recording their finances. We gave the other half a way out of the trap: we bought out all their debt. Overnight, we converted them from borrowers to potential savers. And their incomes effectively doubled.

We wanted to understand the how and why of scarcity traps. Consider, for example, some of the explanations usually given for why the vendors find themselves in a debt trap. One possible explanation is they would rather borrow than save because they have nowhere safe to put their savings. They may be unbanked and may worry about the safety of cash sitting around, easily to be stolen or expropriated by family members. If that were the case, then when we gave them the cash, they ought to have quickly bought something durable and safe with it, and then gone on borrowing. Which might have returned them to the scarcity trap eventually.

Another possible explanation is that the vendors are simply myopic: they are stuck in the debt trap because they do not think enough about the future. This view, it seems to us, cuts against the grain. The vendors wake up at 3 a.m. to ride in a crowded auto rickshaw for forty-five minutes to buy their wares; they spend all day in the hot sun. These hardly sound like the actions of a myopic person. Still, one might argue that at least in their finances the vendors focus too little on the future. If that were the case, then once we gave them the cash, the money would be squandered. You can imagine how quickly someone who is myopic would spend a large
sum of money. The vendor would quickly find herself back in the debt trap.

For a third explanation, suppose the vendors simply failed to understand the power of compounding. After all, the fact that it would take only thirty days to become debt free—how quickly the interest payments add up—was a surprise to us; perhaps it would also be a surprise to the vendor. To a vendor who would rather borrow and who does not appreciate the cumulative cost of her borrowing, the daily loan appears cheaper than it is. Since giving her the cash will not have altered her perception of compounding, she should continue to find the loan cheap and will soon fall back in the debt trap.

We thought there was quite a bit to be learned by simply giving the vendors the one-time infusion needed to break free of the debt trap. We then tracked the behavior of the now debt-free vendors over the following year.

During the first few months, the deft-free vendors did not fall back into the debt trap. They did not blow the cash on unwise expenses. They did not decide to store it in some other format for safety. They did not start borrowing again. It looked as if they now saw the hazards in the debt trap and persisted in staying out of it. This largely accords with the qualitative data: the vendors seemed to fully understand that being one step behind was costly. Like the busy person behind on his obligations, they seemed to be fully aware that they were paying a steep price for living in the scarcity trap.

But that was not the full story. In the ensuing months they fell back, bit by bit. Or, rather, we should say one by one. By the end of the year, they all had accumulated as much debt as those whose debt we had left alone. So while the standard explanations are not supported by the data—the vendors do not fall back right away—neither is the view that those in a scarcity trap just need a one-time infusion to rid them of the debt.

How are we to explain this behavior? Why do the vendors eventually fall back? What is it about the scarcity trap that operates so dramatically to alter their lives again, even after they have been given enough money to double their incomes?

The
core of the problem is a lack of slack. Even after our cash infusion, the vendor is still living on less than two dollars a day. After all, her income must feed more than just herself. When packed so tightly, suppose she hits a bump in the road—a relative’s wedding comes up and she has to buy a gift. In a place like India, social custom dictates buying a big-enough gift, so how this bump is managed partly depends on whether the vendor is in a debt cycle or a savings cycle.

In a debt cycle, the vendor faces a difficult challenge. She must make trade-offs: what to give up to buy the gift? Or perhaps she’ll simply buy a smaller gift. She tunnels, but credit is not much of an option; she is already using the moneylender to buy fruits and vegetables. She weathers the storm by sacrificing what little she can. She may feel the pain of what she has to sacrifice to buy the gift and may feel ashamed at the meager gift she is able to afford.

Now picture the vendor in a savings cycle, after we’ve absolved her of the debt. When she faces the sudden need to buy a gift, she also tunnels. She must address this pressing need. And for her there’s an “easy” solution at hand: she has cash sitting around. Of course, it is for emergency needs only, but this is one. She can borrow her working capital and use the available cash to handle the wedding gift. How will she exit another debt cycle? What are the costs? By now we know the answer to those questions: “I can’t worry about that now.” Those concerns fall strictly outside the tunnel.

In this view, the vendor falls back into the scarcity trap because she did not have enough slack in her budget to weather the shocks she faces. Shocks bigger than her slack push her right back into the psychology of scarcity. And once there, one of the first casualties is savings. Though such evidence is never direct, the data from the vendors support this interpretation. The vendors do not fall back immediately but gradually, one by one, as if being picked off, exactly what you would expect as shocks hit them sporadically. In many cases the vendors reported a shock as the trigger for their renewed borrowing and eventual decline.

All
this should be very familiar, when you think of it in the context of time. Imagine we give someone who is very busy and perpetually behind a gift of time: overdue obligations disappeared, all outstanding time commitments resolved. This formerly overwhelmed but now just very busy person might stay ahead for a while. But eventually she, too, will likely slip up: an unexpected glitch on a large project, a medical setback at home, just plain lethargy and a momentary loss in productivity—and she suddenly finds herself behind again.

Any slight instability is a threat hovering over a life lived at the edge of a scarcity trap, because with little slack to absorb it, instability is almost certain to be felt. In
Portfolios of the Poor
, the authors observe that the lives of the poor are full of instability and shocks; that those living on $2 a day are
not able to come by $2 every day
. They have some $3 days and some $1 days. Life at the bottom is volatile. In the United States and other developed nations, that volatility may be lower, but it is still pronounced. The poor face variable income from many sources. They often have multiple jobs, all potentially intermittent. Many of their jobs are by the hour, and hours vary quite a bit. And, of course, job loss is always a serious possibility. Sudden expenses—a broken-down car or illness—also pose a problem. Consider the following account, drawn from interviews at a community college in New Mexico:

[Automotive] repairs themselves are unexpected expenses
. These respondents describe repair bills in the hundreds of dollars, which represent a significant percentage of their reported monthly incomes. To pay for these repairs, respondents borrow money from friends and relatives, seek financial assistance … or wait for anticipated, lump-sum financial windfalls, like academic financial assistance.

What matters most is the slack available to weather each new shock. This is why instability can have such an impact. Without enough slack, where do you get the money to fix your car when it
breaks down? If you had liquid savings, you would use those. If you were well off, you would just cut back on other consumption, perhaps forgo that expensive dinner you’d been planning for the weekend. If you had a second car, you would perhaps delay making the repair until you carefully secured the money to fix this one. These are all easy or cheap options. But when you lack savings or a second car, and have no dinners to cancel, this becomes a serious challenge: where will you get the money? At that moment, you tunnel. You borrow. You start on a path back into a scarcity trap.