Duane Gran’s log of thoughts

Being poor is expensive

For years I’ve been what you might call a critic of the poor. I never hated the poor, but from my point of view there seems a multitude of simple steps that the poor can take to dramatically alter their station in life. I still believe this but over the past few years I’ve been gradually adjusting to some new information that suggests that we need a change in our public policy regarding the poor. Aa fantastic essay from Senator John Edwards clarifies some of the key price discrepancies the poor face.

He references a Brookings Institute study of the cost of basic services for the poor in Philadelphia. See the full PDF (3mb) for more detail. There are a few explainable reasons for this, but I want to focus for a moment on the illegitimate gouging of the poor — an appropriate matter for public policy.

I believe we need to raise awareness about a “poverty industry” that has emerged to take advantage of people with limited means. In an age of spam and all manner of crass opportunism it may be difficult to prevent fraud, but we shouldn’t tolerate pay-day advance businesses and their ilk. Any business that not only exists on the backs of the working poor, but also perpetuates their condition, should not be permitted. In case anyone thinks the marketplace can solve this, I quote the following from the report:

A perfect marketplace would automatically set the lowest possible price for everyday goods and services. But, markets are often far from perfect and fringe suppliers of these necessities can take advantage of these imperfections by charging excessively high prices.

For instance, a gap in state regulations allows short-term lenders to charge an annual percentage rate over 450 percent for short-term loans, even though the state law caps interest rates at 23.75 percent.

The report mentions many practical things that Philadelphia, and I would suspect many US cities, can do to address the problem. Namely, city and state government needs to intervene to stop predatory businesses and they should provide financial training to those in need.

This entry was posted on Thursday, June 2nd, 2005 at 5:23 pm and is filed under social science. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

4 Responses to “Being poor is expensive”

KC June 2nd, 2005 at 6:43 pm
Well, since you say markets aren’t efficient, then I’m convinced…

I think it’s interesting that the article admits that these are “fringe suppliers” and yet you and the article still castigate the market place. They’re already FRINGE. Only the consumers in the market have the power to shut these groups down… all they have to do is stop using them.

Unfortunately, an education today focuses little on basic math and economics sense.
Aaron June 3rd, 2005 at 7:29 am
I’ve done a project for a check-cashing/payday-loan provider before, and it is an interesting business. Their clientele is only extremely high credit risk individuals, ones they have almost no chance of collecting anything from when they default - if they were not such a high credit risk, they’d get credit through a more traditional route such as VISA or Bank of America.

The predatory short-term loan provider allows high risk individuals to have credit at all, albeit obviously at higher rates which covers their losses on the many defaults. The compassionate bureaucrats that wish to cap acceptable interest rates prefer instead that high risk individuals have no options for credit at all.
Duane Gran June 3rd, 2005 at 8:28 am
I can understand the perspective that payday lenders provide a service, but I believe they over state their risks to justify the predatory nature of their business. A MSN article discusses the prospects of investing in these market and glows about their exceptional profit:

Cash America and First Cash Financial shares have doubled since early spring. But with a forward P/E of 12.7, First Cash Financial still trades well below its expected growth rate of 21%. Cash America trades only slightly below its medium-term growth rate of 15%, with a forward P/E of 13.7. Both stocks have strong upward earnings-estimate revisions, suggesting more earnings growth ahead.

I’m not taking issue with their profit per se, but it shouldn’t surprise anyone that they turn an exceptional profit when charging exorbitant rates. Another theory is that they are in part at fault for their own collection woes, as they perpetuate the cycle of poverty that makes it hard for their clients to pay them back. At what point do these businesses accept some responsibility for their market impact?
KC June 3rd, 2005 at 11:09 am
The only difference between these people and mobsters are the violin cases.

As Aaron points out, if these places didn’t exist, they’d have no credit at all. Maybe this is the solution. If you can start getting rid of the high-risk borrowers, rates should go lower for the rest of us, right?

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Being poor is expensive

4 Responses to “Being poor is expensive”

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