San Lorenzo provides the main setting of the novel, and what a setting it is. It's as if Vonnegut was trying to compact the dirtiest aspects of history and human existence and squeeze them onto a single island, just like clowns in a phone booth.
San Lorenzo's share of natural resources is akin to "the Sahara or the Polar Icecap" while its population is denser than anywhere else in the world, "India and China not excluded" (60.12-13). In other words, its people are some of the most impoverished on Earth.
Of course, this doesn't mean other countries haven't tried to wring what money they can from the place. The Spanish, Danish, Dutch, French, English, Americans, and freed slaves all conquered the island in a bid for land and profit. No one complained when the others came to take San Lorenzo away (57.3). Even the Castle Sugar Company tried to grow sugar cane on the island. Setting up a system somewhere between capitalism and feudalism, they treated the natives horribly and saw no profit to boot (56.6).
And it doesn't stop there. Every solider they sent to fight in World War II was killed when the ship sank just outside of harbor. Heck, they even got hit with an outbreak of bubonic plague.
(Quick brain snack: San Lorenzo isn't a real island. But that paragraph up there about all the countries trying to wring money from it? That's pretty much what happened to every real Caribbean island since the first Europeans wandered over.)
And then, into all this tragic history came Earl McCabe and Lionel Boyd Johnson, the men who would try to make San Lorenzo a paradise, a place you'd want to win a trip to on Wheel of Fortune. But the island was too poor. So they went for the next best thing: a dictatorship.
Johnson realized that San Lorenzo would never be a paradise, so he created the lies of Bokononism to give the people something to ease their painful existences. He had McCabe outlaw the religion to "give [it] more zest, more tang" (78.5). He even conceived of the hook to punish followers of his own religion. You know, extra zest.
The result is a dystopian society that everyone imagines is a utopia. Why? Because the "[The San Lorenzans] were all employed full time as actors in a play they understood, that any human being anywhere could understand and applaud" (79.2). As actors in the play, the San Lorenzans' minds aren't focused on their miserable existence. Instead, they see McCabe and later "Papa" Monzano as their enemy, Bokonon as their hero, and themselves as important parts of the ever unfolding, society-encompassing drama.
And that's priceless.
Dr. Breed refers to the place as a "family town," (13.10), but Cat's Cradle paints an undesirable underbelly to this typical American town somewhere in central New York. During John's visit to Ilium, the weather is awful with grey overcast and sleet. And don't forget that Ilium's main social hub is the Cape Cod Room, a gathering place for prostitutes.
Although the novel may make the city of Ilium seem a rotten place, the novel doesn't make villains of the citizens simply because they live there. Several characters such as Marvin Breed, Naomi Faust, Sandra, and John read like perfectly decent and flawed human beings. Rather, it's the town itself that feels slightly unsanitary.