Poverty and start-up costs

Andrew Samwick's experience of a Barbara Ehrenreich talk at Dartmouth highlights what I thought was an important and original observation in Nickel and Dimed, though I am not a big fan of the book as a whole: the fact that poor people without savings are often forced into higher-cost alternatives than middle-class people. If you don't have the deposit and first and last month's rent for an apartment, you end up in a residential hotel that costs more but will let you pay by the week. If you only have a small refrigerator, it's hard to be thrifty by buying in bulk. If you can only afford a battered used car, a lot of your paycheck may get eaten up in expensive car repairs. It seems to me that this is actually a fairly easy poverty intervention, one that I know is sometimes done by churches and other charity groups, but could probably stand a more systematic implementation.

Of course, we already do have one way to give the working poor small chunks of capital: the earned income tax credit. Because most people take it out in a lump sum, rather than getting it refunded to their paycheck every week, it gives them a large chunk of cash to use for things like a decent car or a housing deposit. This is no guarantee that it will get spent that way; in American Dream, one of the best books out there on poverty and welfare reform, Jason DeParle recounts his dismay at watching one of the women he was following decide to use her EITC check for nicer furniture instead of a reliable car that could take her to higher-earning jobs in the suburbs. But they often do go to these sorts of capital investments.

This is one of the reasons that being a middle-class person with a low income is fundamentally different from being born poor. Middle-class people generally have relatives that they can draw on for help with those kinds of upfront expenses. People who are born poor generally have social networks that are rich with mechanisms for surviving poverty, but rarely flush with cash.

Comments

"...but could probably stand a more systematic implementation. "

More and more farther down the road of Liberalism we trod.

Posted by Blaine | February 27, 2008 3:46 PM

Why do you assume that "systematic" means "government"?

Posted by Megan McArdle | February 27, 2008 3:48 PM

the fact that poor people without savings are often forced into higher-cost alternatives than middle-class people

This is an original observation?

It seems to me that this is actually a fairly easy poverty intervention

More like, this should be actually a fairly easy poverty intervention...

The reason it is not, is because - as you noted - people will use 'their' money in ways that are short-sighted, irrational, and not in their best (or their children's') interest. Until this kind of thinking can be changed, aren't we just throwing money down a rat hole and feeling good about ourselves?

But they often do go to these sorts of capital investments.

I bet they more often don't, but would love to see some numbers either way.

Posted by TakeFlight | February 27, 2008 4:00 PM

The boom-and-bust mentality is unfortunately common in low-income brackets, and very difficult to break. Often the low-income earner came from a similar background and has no experience in long-term budgeting and allocation of resources, so rather than live at the margin and make an effort to save for better things, s/he lives above his or her means at the beginning of a pay cycle and falls below poverty level at the end. Combine that with the fact that some people have poor impulse control -- particularly if they were not trained to exercise it from a young age -- and the paycheck-to-paycheck mentality continues strong.

The EIC is a nice way of at least giving people the opportunity to make a wise fiscal investment without micromanagement, but if their problem is defined by the above, the EIC will too readily be treated as lottery winnings.

Posted by anony-mouse | February 27, 2008 4:10 PM

What's wrong with Nickel and Dimed as a whole?

Posted by Sameer | February 27, 2008 4:28 PM

The Unbanked:

http://online.wsj.com/public/article/SB120113610711211855.html

"Full-time workers without a checking account typically pay $40 on average to cash their paychecks."

"Many nonbank customers are either leery of banks or believe they do not have the products they need."

Why are they leery? Can someone please explain to me why people who maybe only make $800 every two weeks are spending %5 of their income on check cashing?

It's all direct deposit ant ATM cards - it's not like the bank needs to be in the neighborhood.

I really don't understand it.

Posted by jmo | February 27, 2008 4:39 PM

Someone else said this too somewhere in an earlier post, but I am simply astonished at the lack of financial instruction/curriculum in our schools. It's inexcusable, especially in an age where this knowledge is such a big deal. Granted, it won't necessarily prevent people from making poor decisions, but a decent idea of how things work would give someone a good start, wouldn't it?

How do you get past the 6th grade without knowing some financial basics?

Posted by TakeFlight | February 27, 2008 4:51 PM

re: The Unbanked:

"And consider that, according to a new Brookings Institution report, as much as $360,000 in pre-tax wealth could be created if the average, full-time unbanked worker invested in the stock market what he will spend over his lifetime paying to cash his paychecks. That would allow one of those workers to finance about 25 years of retirement at his current standard of living."

Case in point. This isn't something we need millions of tax dollars and a ton of legislation to solve. This is a simple knowledge deficit.

Posted by TakeFlight | February 27, 2008 4:54 PM

Why are they leery? Can someone please explain to me why people who maybe only make $800 every two weeks are spending %5 of their income on check cashing?

It's all direct deposit ant ATM cards - it's not like the bank needs to be in the neighborhood.

If I work for a small company, or a series of temp jobs, I might not have access to direct deposit. Many banks also have minimum balance fees or make you wait days before you can access your money that you just deposited.

So this Friday, I get a $800 paycheck and I need to pay $400 to the landlord for rent (which is due by Saturday the first).

If I goto a bank, I can't access the check I just deposited until Tuesday at the earliest. If I write a check to my landlord, it will probably bounce.

I goto a check cashing place and give them my $800 check, get back $720 and pay my landlord that day.

The bank just won't meet my needs.

Posted by Mark S. | February 27, 2008 4:58 PM

To answer TakeFlight's question, there is a simple reason for the lack of financial education.

Once upon a time (middle of the last century) children got split up into tracks according to their apparent abilities. One of the standard classes in my high school for the "General" track was a semester on financial matters, including budgetting, insurance, etc. I only ended up there (instead of the usual "Honors" classes) because I had a schedule conflict. But it was certainly the most long-term useful class I had in my entire 4 years of high school.

But we got rid of all those classifications for students. And at the same time, we got rid of the classes which would have provided (for those who couldn't pick up accounting in their spare time) some idea of how to cope with personal economics. No doubt those who demanded the change feel that the improvement in "self esteem" was worth the economic pain. But then, they are never the ones feeling the pain personally.

Posted by wj | February 27, 2008 5:08 PM

WalMart, scourge of the left, cashes payroll and government checks for a maximum fee of $3.

If you want to send money home to Mexico, WalMart is also a good choice.

And yet we have a movement to keep these stores out of poor neighborhoods.

Posted by Thomas | February 27, 2008 5:09 PM

Why are they leery? Can someone please explain to me why people who maybe only make $800 every two weeks are spending %5 of their income on check cashing?

Because money in a bank account can be taken, legally, for all kinds of reasons, and getting it back is either impossible or slow. If you owe back child support, or have unpaid parking tickets, or have an outstanding debt that is owned by a collection agency...money under a mattress is far safer than money in a bank account.

Posted by SamChevre | February 27, 2008 5:26 PM

SamChevre,

Good points. I suppose evading the IRS is also an issue?

Posted by Amy P | February 27, 2008 5:47 PM

There is another sociological reason for the 'boom and bust' cycles at the low income bracket: if you save your money, extended family members come out of the woodwork demanding a piece. If you spend it as you earn, nobody's going to come knocking asking to borrow your sofa.

Posted by Independent George | February 27, 2008 5:49 PM

IG, you gave me an idea.. a bank that gives you crappy furniture as a "rental". Your money gets saved, but you have something tangible to say you spent your money on.. (tongue at least partly in cheek)

Posted by anomdebus | February 27, 2008 5:58 PM

"If I go to a bank, I can't access the check I just deposited until Tuesday at the earliest. If I write a check to my landlord, it will probably bounce."

Every bank I've ever used is more than happy to credit a paycheck immediately. If it's a third person out of state check, they make you wait, but I've never had them make me wait for a paycheck. You just ask the teller - they've always been more than happy to do it.

But, maybe if no one ever told you that a bank would make a paycheck immediately available, you might use a check cashing place....

Posted by Jmo | February 27, 2008 6:01 PM

"If I go to a bank, I can't access the check I just deposited until Tuesday at the earliest. If I write a check to my landlord, it will probably bounce."

Every bank I've ever used is more than happy to credit a paycheck immediately. If it's a third person out of state check, they make you wait, but I've never had them make me wait for a paycheck. You just ask the teller - they've always been more than happy to do it.

But, maybe if no one ever told you that a bank would make a paycheck immediately available, you might use a check cashing place....

Posted by Jmo | February 27, 2008 6:01 PM

Amy P,

Evading the IRS is a reason for keeping cash income in cash; using a check-casher rather than a bank to cash a check made out to you is not going to help with any IRS-evading scheme that I'm aware of.

Posted by SamChevre | February 27, 2008 6:15 PM

Why are they leery? Can someone please explain to me why people who maybe only make $800 every two weeks are spending %5 of their income on check cashing?

In addition to the reasons already cited -- fees and minimum balances, transfer delays, lack of education, seizability, tax issues (including unreported gray-market income) -- you've got to consider the crime and fraud risk, both at the individual and bank level.

Bank:

Are you going to open a branch of 2nd National in a neighborhood where it will be robbed on the same biweekly schedule as the convenience store a block over? Will you be able to convince bank tellers to work in that environment? Or are you going to open an EZ Al's Fast Cash & Pawn, and then keep a .357 under the counter?

Individual:

If you're living in a neighborhood commesurate with low income status, there are a thousand and one other low income earners who would like to supplement their cashflow by cheating you out of a piece of your income or property, posing as any number of legitimate enterprises. Trust breaks down, and you learn to deal in short-term transaction only. If the paycheck says you made $450 this week, and EZ Al's gives you the expected $410, you've mitigated your theft risk for the price of $40.

Worse, many low income immigrants may have experience with poorly regulated financial sectors in their home country, and are thus steeped in the idea that any fiancial institution is merely a complex way of cheating poor people who have no ready legal recourse.

Posted by anony-mouse | February 27, 2008 6:19 PM

the fact that poor people without savings are often forced into higher-cost alternatives than middle-class people.

Mmm, McArdle, are you sure you haven't inverted cause and effect here? I mean, how do you suppose people become poor? Modern poverty is, notwithstanding the Dickensian fabulists of the story-telling left, rarely a condition you inherit and which you in turn will pass on to your children. Few people who are poor today were always poor. Almost all of them will have some period of better luck in the future, a chance to climb out of the hole, Luck being the unpredictable gamester she is.

Consider the possibility that chronic poverty does not cause but is caused by a chronic inability to efficiently divide current income into immediate expenditure and an appropriate accumulation of capital.

Posted by Carl Pham | February 27, 2008 7:20 PM

Sameer asks what is wrong with Nickel and Dimed...

It takes the premise of working-class poverty and deftly proves that it is at best outrageously unfair, and at worst a trap. While Ehrenreich does a good job of laying out the factors which contribute to the problem, she does little to lay out the methods by which one can escape it.

My opinion is that it is more of a social justice tract - albeit one that "prosperity gospel" evangelicals would be well-advised to read - than any example of serious research.

...Serious, at least, by the standards of anyone but the author.

That said, I do not think that my decision to purchase and read it was a waste of any resources.

P.S. As a thirtysomething I distinctly recall a required course I took (at a school where the student body was largely lower middle class) in which we students were familiarized at length with the fundamentals of applying for work, securing housing, maintaining a checking account, and writing budgets. I also remember that when I took the course, I carried the burden of team work because that was the path of least resistance to avoiding a poor grade for the course. ...And yes, I would not be at all surprised to discover that Home Ec. and Consumer Math courses are artifacts of earlier generations' school experience, but really wouldn't know from reality TV either way.

Posted by ben | February 27, 2008 8:00 PM

Here is my not so original thought: most people go through life taking the default options, never investing much thought into their decisions.

That works out great if your dad is a cardiologist or a software executive. It doesn't work so well if you have dysfunctional parents.

I know as a kid, when my friends and I got our first paychecks, we went to the bank to open an account and get ATM cards... that's just what one did. I assume that if I had grown up in rural or urban poverty, I might have just gone to the check cashing place. In both cases, there was no thought put into it, you just did what your peers did.

Same goes for college. In my town, if you didn't put any thought into what you were going to do after high school, if you just did what your friends did, you went off to college.

I'd be interested to hear what Liberalrob and ScentofViolets would have to say to this. To my mind, poverty isn't so much a lack of money, as it is sub-optimal default settings. Societies problem - to a great degree - is that our default settings are set by our parents and our peers. What can the state - or any other entity - do to change people's default settings?

Posted by Jmo | February 27, 2008 8:09 PM

Not that my suburban Oregon experience accounts for much, but my high school classmates and I were required to take a one-semester "Personal Finance" class by the state, I believe. Highlights included the famous "Theo meets a budget" episode of "The Cosby Show." You could test out of it, but it required >75% on a 100-question test.

Being the child of immigrants, though, there was a much greater emphasis on saving rather than consumption in my family. I'll depart from Asian-Am orthodoxy and say that I know plenty "real Americans" who believe the same thing.

Posted by Klug | February 27, 2008 8:21 PM

I like Jmo's "default" theory. I'd add that in some parts of the world at different times, it's been very unwise to put money in the bank (due to risk of hyperinflation, currency change, confiscation, or fraud). In that unstable environment, a wiser idea would be to immediately convert pay into dollars, buy gold, or (if you've got enough money) to buy an apartment. That's what people did when I lived in Russia in the mid-90s. It's no way to build an economy, but from an individual point of view, it did keep people's earnings from turning into piles of worthless paper.

Posted by Amy P | February 27, 2008 9:00 PM

What the state can do to reset these defaults for some is to actually make such things a far more important part of the education system. Things like banking and personal financial management should be as important as studying history or biology.

Posted by Yancey Ward | February 27, 2008 10:08 PM

You can give people the freedom to act stupid or you can end poverty, but you can't do both.

Posted by Nelson | February 27, 2008 11:46 PM

Maybe it was just New York City, but I remember when I first moved there from Canada how much of a hassle it was to open a bank account. The banks wanted these ridiculous fees for the privilege of opening an account with them. Citibank at least had something called a "basic bank account" which allowed a limited number of withdrawals, but was free, and so I took that and was able to convert to a regular account once I started getting paycheques and had a balance. And this was in Park Slope, which is a richer part of New York!

Also, many banks in the U.S. have, well, bankers’ hours, and so if you can’t get to a bank during those times it is open it doesn’t matter how free the service is.

So I can sympathize with people not going to a bank; even though I came from a middle-class family in Canada it seemed an awful lot like the US banks did not want your business unless you were rich.

Posted by Jay | February 27, 2008 11:52 PM

A year or two back, the NY Times Magazine had an article about a study about savings attitudes among the poor. One reason they were averse to saving money: fear that having some assets would make them ineligible for welfare.

There is also a huge savings gap between blacks and whites, on average. Among blacks and whites earning the same income, whites on average save twice as much. I had a job once where I counseled hundreds of participants in a large state's public employee retirement system, and this disparity was pretty obvious. Every time a state worker quit or was laid off, I'd explain their options and mention that they could avoid paying taxes and a 10% early-withdrawal penalty if they either kept their money in the plan or rolled it over to an IRA or another qualified plan; overwhelmingly, the black employees would demand to be cashed out. The majority of white employees would avoid the taxes an penalties and keep the money in a retirement account.

Posted by Fred | February 28, 2008 1:21 AM

"If I go to a bank, I can't access the check I just deposited until Tuesday at the earliest. If I write a check to my landlord, it will probably bounce."

Every bank I've ever used is more than happy to credit a paycheck immediately. If it's a third person out of state check, they make you wait, but I've never had them make me wait for a paycheck. You just ask the teller - they've always been more than happy to do it.

Looking my bank (Wells Fargo) and also other banks deposit issues. The most common "deposit hold" is making the check available the next business day. So if I deposit my check on Friday, the earliest it will clear is Monday (I was incorrect about Tuesday).

However, if the bank thinks there is any risk in the deposit (due to multiple bad deposits or bounced checks) it can hold the deposit for longer. So while you might be able to get access to the money on Monday, the bank still has the ability to restrict your access for longer.

If my landlord refuses personal checks (which low income landlords might do to avoid bounced checks) and insists on cash or money order, then the earliest I could pay them is when the check clears. This would still make my rent late and probably make the check cashing places a better fit for me.

Posted by Mark S. | February 28, 2008 10:22 AM

Hello Amy P,

You might have noticed the price of gold lately - at this rate it will hit the thousand-dollar mark in a matter of weeks, if not days. As I've recently posted, I think this augurs a serious upcoming event, such as a major war or catastrophic terrorist attack and its aftermath.

Carl Pham, I suspect you and Megan McArdle are both right, in different ways. You certainly are right in that personal initiative, gumption and self-discipline may make a difference. Ms. McArdle is definitely right in that in some situations the poor pay more.

(For that matter, if you took one or more economics courses you know about fixed costs, which in and of themselves imply lower unit costs for those who can afford larger expenditures.)

Anony-mouse, you may be right about immigrants' historical suspicion of banks based on their and their families' experience. I'm from New York, and a few years back my mother, who still lives there, told me of a bank run by a neighborhood of immigrants who had heard rumors about the bank going under - but hadn't heard anything about deposit insurance here in the U.S.

Cheers,

Jeff Deutsch

Posted by Jeffrey Deutsch | February 28, 2008 10:10 PM