FAIR MONEY

Face to Face with Inequality


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The Feeling of Scarcity

In their book Scarcity, Sendhil Mullainathan and Eldar Shafir blame the apparently irrational act of taking out a payday loan (and taking out a second one to pay off the first, etc.) by poor people on the mindset induced by scarcity–that is, being poor makes it difficult to think about anything but getting money, the sooner the better. An interesting proposition.

In our research, we found some indications that talking about one’s financial straights leads to smarter decision-making, which would mean that if Mullainathan and Shafir are correct about the tunnel vision imposed by poverty, then talking to another person about the issue counteracts scarcity’s tendency to focus the mind on the getting of abundance ASAP.


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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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Calling for Humanism

Peter Buffett has a spot-on op-ed in the New York Times today, in which he calls out the complicity of philanthropy in a culture of exploitation and inequality, by which the right hand gives a little philanthropy as a sop to problems the profit-mongering left hand has created.

Especially relevant to the mission of FAIR Money is his indictment of philanthropic financial services to the poor:

“Microlending and financial literacy (now I’m going to upset people who are wonderful folks and a few dear friends) — what is this really about? People will certainly learn how to integrate into our system of debt and repayment with interest. People will rise above making $2 a day to enter our world of goods and services so they can buy more. But doesn’t all this just feed the beast?”

Buffett says he is not calling for an end to capitalism, he is calling for humanism.

FAIR Money has started talking about what it takes to empower people (of all levels of income) to participate financially on their own terms. In Buffet’s words: what does it take to stop feeding the beast? I hope we can arrive at an answer using a thoughtful, inclusive, participatory process.


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Paying for Educational Value

Oregon is considering the pros and cons of an Australian model of paying for college education after the fact. In this model, students pay no tuition. Instead they pay a small percentage of their income post-college, regardless of how much they make. In essence, how much they pay is directly related to how much college was worth to them, which makes a lot of sense on the face of it. I wonder how it changes the students’ experience of their education and the educational institution’s conception of what and how to teach students. I was able to find a study of “participation rates,” which doesn’t answer my questions, but it does show an overall increase in men and especially women getting a college education, but no increase for students from low-income backgrounds. Perhaps that has something to do with financing living expenses.


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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.


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The Moral Hazards of Too Much Money

If you think the pursuit of happiness is essentially a private affair, then recent research findings regarding the impact of inequality will make a hash of your most cherished beliefs. A Greater Good article summarizing the research on inequality points out that people are happiest and most compassionate in countries with the least inequality. And it’s not the poor who are short on compassion, but the wealthy. People who are significantly wealthier than others, it turns out, are not only less generous but also more apt to drive over hapless pedestrians who find themselves in a crosswalk when the wealthy come barreling down the street. People who are given an obvious advantage in games of monopoly still think they are brilliant and deserving when they win. Food for thought. 


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Give students the same interest rates on loans as the big banks

There is an Elizabeth Warren sponsored petition winding its way through MoveOn.org aimed at putting pressure on congress to reduce the interest rate on student loans.

While reducing the interest rate would help with short term problems related to student loans, it doesn’t broach the broader question of why higher education in the United States is organized in such a way to require taking on so much debt. It will take more than a petition to force that question front and center.


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Breaking Up with Credit Cards

CNN Money has an article on young people and credit cards, which shows a decrease in credit card debt and a related increase in credit scores for people aged 18 to 29. Apparently, there are multiple causes, including an aversion to credit card debt among young people AND an aversion to young people among credit card issuers.

Oh, and then there is the aggressive campaign to get people to start using prepaid cards, where the fees are all up-front and the risk is all on the side of the consumer.


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Student Loans from 10,000 Feet

I’m sitting next to a marketing lead for a student loan program with a major bank. She explained how there is a lot of education about what student loans entail before you get into one. “It’s their responsibility,” she points out. “They sign for it.”

That’s how the societal problems of income and educational inequality and of unregulated educational institutions get translated into individual responsibility–by a very nice lady, who just happens to make a living from selling indenture as effectively as possible.