Tuesday, September 6, 2016

The Asshole Theory of Profits

I’m reading Evicted: Poverty and Profit in the American City by Matthew Desmond and it’s wonderful.  You should read it too if you haven’t already.

In the middle of the book is a section in which the likely profit of one of the two slumlords Desmond tracks is estimated.  Roughly speaking, he takes in about half a million net of all expenses from a single trailer park south of Milwaukee.  To do this he has to make decisions every day that crush the lives of desperately poor people.  (Yes, people with drug issues, chaotic family lives and spotty maintenance habits, but real, breathing human beings all the same.)  He evicts some who have no place to go.  He charges rents that absorb nearly all the renter’s monthly income.  He skimps on repairs.  He does things that most of us could never do, and his reward is an income a lot higher than ours.

So what is the economic explanation for raking in half a million with relatively little work or skill?  He paid just over two million for the entire park, so his rate of return is 25%—rather more than the opportunity cost of capital.  In a competitive economy, either there would be a flood of new trailer parks built to chase these superprofits, or, if that were prevented by regulation, the price of the property would be bid up so its return was back to normal.  We need to understand this.

That’s where my asshole theory comes in.  There are a lot of highly lucrative opportunities out there that require you to basically sell your soul, to act like a jerk.  These are businesses or managerial jobs where you gouge money out of people or force them to work longer and harder or more dangerously than they want.  Your kid is sick and you want to stay home with him?  Do that and you’re looking for another job.  I’m sorry, putting on that gear each time you’re exposed to this machine takes too long; if you don’t like the risk go somewhere else.  It’s not my problem you had to pay the utility to keep your heat on and you don’t have enough for rent this month; you’re out of here.  Most of us can’t do this, but a few can.

Incidentally, this should not be thought of as a compensating differential process.  Whatever their initial feelings, people who choose this way of life quickly become inured to it and may even derive some pleasure from taking out their frustrations on those below.  You can see this in the portrait of the other slumlord in Desmond’s book, who started out with a bit of idealism but is being transformed, step by step, into someone who sees herself meting out justice when she throws tenants out into the street.  In winter.  In Milwaukee.

My theory is it’s a scarcity rent, pure and simple.  There’s a shortage of qualified assholes, and the ones who have what it takes to do these jobs earn the rewards.  Indifference to the hardship of others could be described as a form of human capital, and it earns a high return in an exploitive society.

1 comment:

bbk said...

Very, very good post.

Disclaimer: I am kind of a "slumlord" in that I own rental property in a bad neighborhood.

I could make quite a bit more money than I do (and no one is crying for me. I'm not running a charity by any means). I bought a property and put in about 10k worth of repairs to make the place better than the bare minimum code requirements. I repair stuff and buy new appliances for my tenants. I let late rent slide sometimes.

This all costs me money. But I couldn't sleep at night otherwise. Other landlords probably make more money off their properties by just letting them go to hell knowing the tenants don't have other options and won't complain. Somehow it doesn't bother the owners. But it bothers me even though I know my tenants aren't angels (for example, I've had some tenants who get wasted and cause damage to the walls or doors)

Just as some people are smarter or better at numbers than other people and can use those talents to make money, some people are more talented at, for a lack of a better phrase "not giving a damn" about other people and they can use that talent to make more money.

My main hustle is being a lawyer that does wage and hour work (minimum wage, overtime etc.) on behalf of workers. I see everyday how much more money a business owner who breaks the law can make compared to one who is scrupulously honest. But again, how do those people who don't pay required overtime or just (and this happens all the time) decide not to pay an ex-employee their last paycheck, sleep at night? The business owner knows it's not "right". But they do it anyway.

That's why regulations are so important (as well as strong enforcement). We, as a society, can and must decide we don't want people competing on who can be the most terrible and sociopathic to gain a competitive advantage.

You are entirely right that under lightly regulated capitalism "There’s a shortage of qualified assholes, and the ones who have what it takes to do these jobs earn the rewards." We need to minimize peoples' ability to take advantage of that shortage.