FAIR MONEY

Face to Face with Inequality


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Two Questions Suffice?

According to Susan Dynarski and Judith Scott-Clayton, the FAFSA could consist of just 2 questions and more people would manage to go to college and stay there until they get their degree (The Cost of Complexity in Federal Student Aid).

I have a lot of other questions. For instance, what would happen then? Would we have more college grads with good jobs and solid prospects? Or would we have even more young adults with staggering educational debt and a hard time finding a halfway decent job? It’s instructive to consider the post-graduation realities laid out in It’s Official: The Boomerang Won’t Leave. According to that article, “more than half of recent college graduates are unemployed or underemployed, meaning that they make substandard wages, in jobs that don’t require a college degree.”

One last question: how do you fix that?


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Reflection as a Luxury Good

Maria Konnikova has an excellent article in the New York Times today, entitled “No Money, No Time: The Poor Are Under a Deadline that Never Lifts.” She sums up the experimental work of Sendhil Mullainathan and Eldar Shafir on the effects of poverty and works her way backwards to reality, applying their conclusions to the lives of the people at the bottom of the heap. In the lab, people in artificially induced states of poverty perform worse than people operating under conditions of abundance. Mullainathan and Shafir also conclude that they tend to solve for the present moment more–meaning they borrow, handicapping their future performance.

Mullainathan and Shafir decompose poverty into three components: lack of money, lack of time, and lack of bandwidth (by which the mean the ability do dedicate sufficient mental resources to any given problem so as to make good decisions). Their argument is that a lack of money correlates with a lack of time in the real world, and that both conspire to reduce available bandwidth for decision-making.

Shafir recommends designing programs to reduce bandwidth demands and uses the FAFSA as an example:

“If I give people a very complicated form, it’s a big demand on cognitive capacity,” Mr. Shafir says. “Take something like the Fafsa” — the Free Application for Federal Student Aid — “Why is pickup for the low-income families less than 30 percent? People are already overwhelmed, and you go and give them an incredibly complicated form.”

To him, the obvious conclusion is to radically change our thinking. “Just like you wouldn’t charge them $1,000 to fill out a form, you shouldn’t charge them $1,000 in cognitive complexity,” he says. One study found that if you offer help with filling out the Fafsa form, pickup goes up significantly.

Interestingly, their work also seems to support one of the tentative findings from FAIR Money’s Payday loan study, that talking about one’s situation, even if only to a researcher who offered no comment, seemed to have an effect on decisions about how to handle one’s financial dilemmas. By paying people to participate in our study and talk about their situation, we paid them to take time to reflect, alleviating some of the pressure on two of those three dimensions of poverty.


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Economic Realities of the 21st Century

The Economic Policy Institute calculates that in 2010, six members of the Walton family siphoning profits from the Walmart empire were together worth $89.5 billion. That amount of wealth is equal to the total value held by the bottom 41.5% of Americans, a staggering 48.8 million US households.

For more insight into how Walmart beggars low-income families and lets the rest of us pay for the consequences, see the PBS documentary Store Wars or How McDonald’s and Walmart became Welfare Queens.


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Marshmallows for Grownups

In a recent New York Times article, Shaila Dewan wrote that “Encouraging low-income people to borrow money, and then to get a credit card enabling them to borrow more, may seem counterintuitive or even a little risky.”

It’s not at all counterintuitive if you realize that credit is doled out based on a version of the famous marshmallow test: those disciplined souls who can refrain from using the credit that they have are worthy of more credit. Or: much shall be given to those who have their needs and desires under a tight rein. I recently learned that if you use 15-45% of the credit that you have, your FICO score goes up. Now, some people will be able to game this really easily. You can shut down a credit card if you are low in the “approved range.” You can open another credit card account if you’re a little on the high side. These are just cosmetic changes and can’t have any real bearing on your power to repay any additional debt. All the same, I’m fairly confident that it will turn out to be true that those who have the wherewithal to manage their spending to stay in the credit usage band will turn out to be more financially successful and able to repay debts in the long run. Consider the following reasons:

  1. Their needs and their income are reasonably matched, so they are in a pretty sustainable pattern. (That is, most of them probably don’t have to consider that the marshmallows lying on the table may be the only way to feed their kids today.)
  2. They get really inexpensive credit and so they can buy a house, get a boat, start a business, and so on, without taking scary risks, like poor people with low credit scores have to do.
  3. The probability that a health-related expense will have brought them to their knees is probably also quite a bit lower, as they are more likely to be in jobs with decent health plans attached.  (Perhaps the Affordable Care Act will rejigger the equations a little bit here.)

Given the financial regime we live under, getting poor people to improve their credit rating by showing that they have the discipline to leave the marshmallows on the table makes perfect sense. They probably are a better bet to repay whatever credit they use than the poor devils who are daily trying to figure out which bill they can pay this week and whether they have enough gas to swing by the food pantry.

I suspect that it’s nevertheless highly “counterintuitive” (as per Dewan) because there is something very squirrelly about the ethics of the case. It is cruel to dangle money in front of folks who desperately need it and then reward them for not spending it. It is just another example of levying a surcharge on poor people for being poor. Punishing and further impoverishing the poor doesn’t sound quite right to most of us, even if we are willing to concede that the logic of the financial institutions getting wealthier by this mechanism have a corner on the publicly recognized logic.

I think this is why the vast majority of parents fail to raise their kids by the general principles brought to bear by the financial institutions that rule much of our lives. I have only ever run into one person, an Ethiopian, who had received parental training that prepared him for this reality. His parents gave him an allowance in the same spirit that we receive credit cards–if he spent it, he would be grounded. While this young man thought that he had learned something useful from his frequent punishments, he didn’t think he would raise his own kids that way.

We may bow to the power of the banks in the management of our financial affairs and in our social judgment, but our intuition tells us pretty clearly that setting traps for the most vulnerable among us is no way to treat people.


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How about that post office?

Mehrsa Baradaran, a law professor with an interest in the “social contract” underlying the financial industry, proposes that the post office start offering financial services to the underbanked.  It makes sense, she says, because the postal service has a presence in neighborhoods that commercial banks have pulled out of. It’s the best idea I have heard of to apply positive pressure on the subprime financial services industry and change the competitive landscape those services operate in.


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Educational Inequality and Increasing Social Rigidity

In a New York Times op-ed on the self-reinforcing nature of inequality, Robert Frank writes “perhaps the most import new feedback loop shows up in higher education. Tighter budgets in middle-class families make it harder for them to afford the special tutors and other environmental advantages that help more affluent students win admission to elite universities. Financial aid helps alleviate these problems, but the children of affluent families graduate debt-free and move quickly into top-paying jobs, while the children of other families face lesser job prospects and heavy loads of student debt. All too often, the less affluent experience the miracle of compound interest in reverse.” (See full article, The Vicious Circle of Income Inequality.) What does that mean for higher education? Frank proposes that “we’ll want to think more creatively about public policies that might contain” any of the feedback loops that increase inequality. How about a little more self-scrutiny and creative thinking on the part of institutions of higher education?


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Is It Worth It? – Part III

Economists suggest college is a great value, as every year of higher education translates on average into 6% more pay every year (see Part I). But if you ask the American public, the answer is not so rosy.

Pew Research Center poll showing different perceptions of the value of college among the general public and college presidents.

A Pew Research Center survey from 2011 shows that the majority of  Americans think college is less than a good value. This raises the question of what informs that judgment. Is it that tuition has gone up without a concomitant rise in quality of the education offered? Is there an underlying perception of unfairness? Do people see other avenues to getting a higher wage? Does the hardship of coming up with the funds during college cause so much pain that future earnings don’t feel like adequate compensation? Do people really think they are subsidizing research that doesn’t actually improve the quality of the education one receives?

Gaining a better understanding of what the real answers are would probably make a big difference to the overall college experience and to the way that colleges can market their services.


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Wretched Refuse of our Teeming Shore

The National Bureau of Economic Research recently released a study of the impact of contingent faculty at Northwestern University on student outcomes, concluding that they did better than their tenure-track counterparts. “We find consistent evidence that students learn relatively more from non-tenure line professors in their introductory courses,” the authors write. They also found that students in classes taught by contingent faculty are more likely to take another class in the same subject. Most interestingly, these differences “are particularly pronounced for Northwestern’s average students and less-qualified students.”

A couple of data points are in order:

1, There are more contingent faculty than tenured and tenure-track faculty in American universities, and they account for the overwhelming majority of courses taught.

2. At many universities, contingent faculty make at or even below the minimum wage. They typically receive a set amount per course–a pittance more often than not–that bears no relationship to the work required to do the work.

Bully for them that they are actually better teachers, and bully for the students that this be so. But exactly how does it compute that tuition has been going up by leaps and bounds year after year even as teaching happens more and more on the dirt cheap?


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Pawn Shop Financial Services

The New York Times DealBook reports that the number of pawn shops in the U.S. increased from 6400 in 2007 to 10,000 late last year. Not only do they offer small-dollar loans to those desperate enough for cash to put their prized possessions in hock, they are also offering financial services to people whom the banks no longer feel the wish to serve. Check cashing. Pre-paid debit cards. Money orders. All offered at a price, of course. It is just one more way in which the haves get sorted from the have-nots.

Just how does it make sense that poor people pay for services that the wealthy get for free?


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Postal Banking: A Once and Future Good Idea

Is Postal Banking an idea whose time has come (again)?

One problem we encountered time and again in our initial project was the lack of banking options open to many of those who participated in our study. Left outside the banking system (and the reasons for this varied) many participants turned to money orders and pre-paid debit cards to pay their bills. Saving, when it was possible, was ad hoc and often involved storing or carrying cash. Hence, transaction fees for basic financial services were much higher than necessary and the logistical worries and safety concerns that come with cash were omnipresent.

However, a recent resurgence of interest in postal and public banks hold the hope of positive change. As the first paragraph of this USPS sponsored history of Postal Banking in the US makes clear, it has certain advantages that no other financial institution can match:

An Act of Congress of June 25, 1910, established the Postal Savings System in designated Post Offices, effective January 1, 1911. The legislation aimed to get money out of hiding, attract the savings of immigrants accustomed to saving at Post Offices in their native countries, provide safe depositories for people who had lost confidence in banks, and furnish more convenient depositories for working people. Although bankers first viewed the Postal Savings System as competition, they later were convinced that the Postal Savings System brought a considerable amount of money out of hiding from mattresses and cookie jars.