Does debt make you poor?

In a discussion about the national debt ceiling, someone asked, “What is the difference between poverty and high debt?”

High debt can make money scarce, but debt and poverty have little in common.

Poverty is a social circumstance. Debt is a financial contract.

A person in poverty does not have the basic resources to live, eat, have shelter, and so on. He has less control over his environment (such as his home) and has fewer things that are predictable (such as work hours) than higher-income people. Yes, he might owe money to others, but the contours of his life are shaped by the social circumstance of poverty.

For example, a low-income person is more likely to rent than own his home. That might seem like a minor detail – having a lease versus having a mortgage --  but social circumstances shape a person’s health and even how long he lives. Renters have higher levels of C-reactive proteins, a biomarker for stress linked to heart disease and heart attacks, than homeowners.

By contrast, a higher-income person can have high debts and be “poor” on paper, but he is not in a social circumstance like poverty. He has more control over the environment, the home he likely owns, for example. He has many things in his life that are reliable. Even his demanding job gives him more say than an hourly, low-wage worker gets. He does not face the daily, trivial stresses that a person in poverty does; he can go into a store and the security guards do not follow him around.

The idea that a person is likely to change his social economic class by his actions – either by piling on debt all the way to poverty or by bootstrapping the way to riches – is largely a myth in this country. The majority of people remain in the social circumstance to which they were born – both high and low. If you were born into the lowest 20% (economically), you have a slightly better than coin flip’s chance of rising higher (57%). If you are born in the highest 20%, you have only a 7% chance of slipping downward.

High debt does not by itself put a person or a country into poverty. Poverty is much more than not having enough money. It’s a social construct that we build for one another. The good news is that since we built it, we can tear down poverty and build in its place hope.