The American Dream is built on the myth that if you work hard, you’ll be successful and move up in society. You’ll be able to give your kids a better life.
Although it is true for some, especially those born into the middle class, it isn’t true for everyone.
The American dream myth completely ignores the poverty trap.
What is the Poverty Trap?
The poverty trap is a mechanism that keeps individuals, families, and generations stuck in a cycle of poverty. The working poor can’t achieve the dream of upward mobility because it requires money they cannot access.
In this sense, the adage that it takes money to make money is true. The working poor don’t have access to the money it takes to claw their way out of poverty. They are trapped in a cycle of generational poverty.
What Causes the Poverty Trap
The poverty trap has been studied extensively, mostly in underdeveloped countries. The causes of the trap generally include limited access to credit & capital markets, the destruction of agriculture, disease, lack of access to health care, war, and degrading infrastructure.
This means that people get trapped in a cycle of poverty because they don’t have access to savings accounts, investments, or credit. They can’t borrow if they get in a bind, and they have no way to beat inflation on any money they do have.
Due to the destruction of agriculture, they can’t afford to buy food. If they get sick, they can’t stay home and get better or see a doctor. Their homes and communities start falling apart, and they can’t afford to fix them.
This is how people get caught up in cycles of generational poverty.
The Poverty Trap in the United States
The poverty trap is not a phenomenon only experienced in underdeveloped countries on the other side of the planet.
The poverty trap affects millions of Americans. Many mechanisms in the United States make it impossible for the working poor to dig themselves out of poverty and provide better lives for their families.
Many of them correspond to the studied causes of the poverty trap.
Limited Access to Credit and Capital Markets
Banks are all over the place. You can almost find one on every corner. So, if you’re comfortable in your middle-class bubble, you might not realize that millions of the working poor don’t have access to bank accounts.
Opening bank accounts is more challenging for people in poor neighborhoods. Instead of banks on every corner, you’ll find insidious “check cashing” stores.
People who live in these under-served areas will have to find a way to make it to a bank, and because most don’t have cars, that means a potentially hour-long bus trip.
Even if people in poorer communities have access to a bank, many can’t afford to maintain the account.
Free Checking isn’t Free if you are Poor
Most banks offer free checking only if you meet specific requirements. Generally, you need to have a certain amount of money direct-deposited each month, maintain a certain balance or make a certain number of transactions.
Middle-class people can easily get free checking virtually anywhere because many companies offer direct deposit, and because they get paid a living wage, they can maintain the minimum required balance for free checking.
Many people can’t meet those requirements. Some work side gigs and don’t know when the next paycheck will come. Others work for small businesses that don’t offer direct deposits. Some can’t afford to make five debit card transactions a month.
These people get charged for the checking accounts – upwards of ten dollars a month!
Those who can least afford to lose that money are the ones that get charged for it. Why would they even try to have a bank account if they lose money each month? And when they have a low balance, they still get charged the monthly fee, and then they get charged an overdraft fee on top of that, leaving them in debt to the bank.
If they can’t pay, it goes on their credit report, and they get blacklisted from getting a new checking account for nearly seven years.
Access to capital markets isn’t given in the US.
Destruction of Agriculture
The destruction of American agriculture is the most interesting cause of poverty traps on this list. That’s because American agriculture isn’t actually being destroyed, not in the way that agriculture is destroyed in developing nations. There, they suffer floods, droughts, crop diseases, and pests which cause poor harvests that lead to starvation.
In the United States, we still have a lot of wealth being generated by Agriculture. It’s one of our top exports and plays a huge factor in our economy. We have tons of fertile land throughout the heartland and are one of the world’s leading livestock producers.
So how is agriculture being destroyed?
It’s not, technically. But it’s being taken away from the people. Small family farms are being destroyed to make way for giant corporations. Two major companies own most of the seeds and sue small farms if there’s any hint of cross-contamination. Small farmers are going bankrupt due to the trade wars, while corporations are buying up their lands.
Although agriculture isn’t being destroyed in the US, the result is the same. Millions of people live in food deserts without access to healthy food options.
Disease & Lack of Access to Health Care
There is no question that health care is an enormous problem in the United States. Most of the working poor do not get healthcare through their employers. They don’t get time off for sick leave, either.
Their choices are to go to work sick or stay home and not get paid (and even risk getting fired). They can’t see a doctor because it’s prohibitively expensive, so they stay sick or even die of curable diseases.
Millions of Americans lack access to affordable healthcare, and millions more are an illness away from poverty.
The United States has been at war for over 15 years. In fact, a recent study showed that the US has been at war in some form for all but 20 years of its 240 years of existence.
Luckily for us (not so much for the other countries), most wars in our current eras are being fought overseas. That means they aren’t affecting our infrastructure or hurting our civilians. Therefore, war is one of the few things on this list that isn’t directly contributing to the poverty trap in the United States.
There might be indirect links between funding for war vs. funding our communities or sending soldiers from poverty-stricken communities off to fight, but I haven’t seen any direct correlations.
The infrastructure of the United States is definitely degrading. A recent study showed nearly fifty thousand structurally deficient bridges in the United States. Schools in low-income communities have historically lacked proper funding to educate students, and roads are in such bad shape that private companies have stepped in and used filling potholes as a new form of marketing.
It’s so bad that the American Society of Civil Engineers gave American infrastructure a D+ on its yearly report card. That organization estimates we’d need to spend a whopping 4.5 trillion dollars to fix the problems with our roads, dams, schools, airports, and more.
Digging Out of Poverty
Some people can indeed escape the poverty trap. The media loves pointing to these exceptions and proudly proclaiming there’s no problem. If this one person out of millions could do it, you can too!
Celebrating the exceptional serves the system. It makes people feel like poverty is their fault and not a result of a mechanism that systematically keeps them trapped.
It’s like that episode of Black Mirror – Fifteen Million Merits. The system allows one or two people to escape (only to be trapped in a different system). This gives millions of others a false hope that they can do it too. The reality is that digging out is so much harder than it sounds.
People get gouged at every turn. Whenever they try to claw themselves out, something else puts a boot on their necks and keeps them down.
The Poverty Trap is Real, but Fixable
The most important thing people can do to help those caught up in the poverty trap is to acknowledge its existence. Far too many people claim it’s the fault of low-income people. If they just made better decisions, they, too, could escape poverty.
Empathizing with them and realizing it isn’t easy is an essential first step. Educating our friends in our middle-class bubbles helps get the word out.
Then, we should vote for policies that will actually help these people. Look at the causes of poverty traps, and vote for the people addressing them.
This is how we can change things and end the poverty trap in the United States. It won’t be easy, and it may cost the middle class a little more money. But in the end, a rising tide lifts all the boats, and we should be happy to fix an unjust system and allow everyone equal opportunity.
Melanie launched Partners in Fire in 2017 to document her quest for financial independence with a mix of finance, fun, and solving the world’s problems. She’s self educated in personal finance and passionate about fighting systematic problems that prevent others from achieving their own financial goals. She also loves travel, anthropology, gaming and her cats.
8 thoughts on “Trapped in Poverty: The Harsh Reality of the American Dream”
Honestly I believe the reality is somewhere between you and the boot strap folks. I grew up lower middle class and am no longer such. Our country financial setup does make it difficult to change.
But as someone who grew up lower middle class there’s another part of poverty you ignore. Culture.
Using my own example my wider families culture was configured in such a way to keep me from climbing out. Education was not valued and something to be avoided so you didn’t become unrelatable. Saving for a rainy day was not something you did. You spent before the rainy day took it away. You have to break that culture and ease the transition. It’s not either or.
Note your small farm section is a bit of a red herring. Small farms have largely been dead in the US for most of anyone under 40s lifetime. The percent of ppl in poverty in the US who’ve ever set foot on a farm is probably statistically insignificant.
I think part of the reasons why that type of culture develops is because it’s the reality for most people. Why save money when it’s just going to be gone in the next emergency and I won’t get ahead anyway? Why not reward myself now with a new TV? People who live hand to mouth do tend to have that mindset.
I also don’t think my section on farming was a red herring at all. I agree that most people haven’t set foot on a farm, but that’s kind of the point. They can’t grow their own food, and they can’t afford to buy healthy options because they live in food deserts. I completely acknowledged that the agricultural industry in the US isn’t exactly suffering. It was just my opinion that the inability of America’s poor to access healthy food contributed to the poverty gap in the US, extrapolated from the fact that family farms aren’t a thing anymore. I’d love to really be able to study it though.
Thanks for the well thought out comment and discussion!
I really enjoyed this article and it’s a topic that interests me deeply. Being U.K. based I find some of the things in the US strange (lack of free healthcare). I visited California last year and the gulf between rich and poor was unbelievable. Even for me, a relatively well off person from London, I found things so expensive compared to Europe.
Also the US banking system seemed outdated and clunky compared with the European system. No contactless payments, and having to sign to pay! I don’t think I’ve used a cheque for about 10 years. I guess this article explains why as it makes them so much money.
Thanks for your input. I think it’s fascinating to see the ways the US differs from other countries on these issues. It seems like we can’t break away from the idea of “individual responsibility” enough to help anyone else, and that’s really sad to me. I want to be European so badly.
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