Normative Narratives


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Economic Outlook: The High Cost(S) of Being Poor

I have previously written about different poverty traps in America, including our outdated criminal justice system (the “prisoner paradox”) and the developmental impacts of stress passed from mother to child. If these poverty traps seemed a bit abstract, consider a more traditional poverty trap–poor people shut out of traditional credit markets and relying on “payday” loans:

The Consumer Financial Protection Bureau, the agency created at President Obama’s urging in the aftermath of the financial crisis, took its most aggressive step yet on behalf of consumers on Thursday, proposing regulations to rein in short-term payday loans that often have interest rates of 400 percent or more.

“We are taking an important step toward ending the debt traps that are so pervasive in both the short-term and longer-term credit markets,” Richard Cordray, the director of the Consumer Financial Protection Bureau, said in a statement on Thursday.

The borrowing patterns speak to a stark reality underpinning the roughly $46 billion payday loan industry: The working poor in America, a group with virtually no savings and little access to traditional bank loans, borrow to cover basic expenses.

In drafting the rules, according to interviews with people briefed on the matter, the Consumer Financial Protection Bureau, and its director, Mr. Cordray, wrestled with how to protect some of the most vulnerable consumers, without choking off credit entirely.

Driving the proposal was an analysis of 15 million payday loans by the consumer bureau that found that few people who have tapped short-term loans can repay them. Borrowers took out a median of 10 loans during a 12-month span, the bureau said. More than 80 percent of loans were rolled over or renewed within a two-week period.

Nearly 70 percent of borrowers use the loans, tied to their next paycheck, to pay for basic expenses, not one-time emergencies — as some within the payday lending industry have claimed.

Until now, payday lending has largely been regulated by the states. The Consumer Financial Protection Bureau’s foray into the regulation has incited concerns among consumer advocates and some state regulators who fear that payday lenders will seize on the federal rules to water down tougher state restrictions. Fifteen states including New York, where the loans are capped at 16 percent, effectively ban the loans.

Martin Wegbreit, a legal aid lawyer in Virginia, called payday loans “toxic,” noting that “they are the leading cause of bankruptcy right behind medical and credit card debt.”

The current economic model of low minimum wages and high payday loan fees drives people into poverty, triggering welfare payments. The U.S. government is basically transferring welfare funds to the payday loan industry.

Proposed CFPB regulations don’t go far enough, a maximum cap on loan repayments is needed. There is room for generous profit margins to compensate for the risk of lending to low income individuals without creating a “debt-trap”.

The stress and time dedicated to satisfying debt collectors amplifies the cost of being poor. Surely it would be more effective to provide access to credit, instead of wringing societies least financially secure through the payday loan system. Perhaps more money would be spent on its intended purposes, instead of paying off predatory loans.

Part of the solution could be using Post Offices as low cost banks for the poor. Sure there would be costs associated with effectively providing financial services, but the physical infrastructure and a trustworthy brand already exist. Furthermore, such a plan would provide renewed social value to an American Institution constantly under budgetary scrutiny.

Postal Banks would inject competition into the credit market, leading to better services at more competitive rates. Even if Post Office banks operated at a loss (say, giving preferential rates to low income borrowers for certain purposes), this loss may be more than offset by reduced spending on entitlement programs. More research on the cross-section between welfare recipients and payday loan borrowers is needed.

It is not a question of which of these poverty traps exists–they all exist and for some people are mutually reinforcing. This is one of the reasons social mobility is such a difficult  issue to address. Countering these different reinforcing poverty traps require the right mix of regulation, fiscal policy (progressive taxation, adequate spending on welfare programs and public services), and livable minimum wages.

In the end, lower income Americans need to overcome negative perceptions of government and vote in large numbers. Again the time crunch associated with poverty rears its ugly head; voting isn’t just a decision to go to the polls, it is also a time commitment that many cannot afford.

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Happy Labor Day

Hello All,

Happy Labor Day, a day to celebrate the hard working men and women in America. Today seems like an appropriate time to reaffirm Normative Narratives support of a livable minimum wage.

I miss blogging, and hope to get back on a regular schedule this week!

 


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Economic Outlook: A Living Minimum Wage in Seattle

https://normativenarratives.files.wordpress.com/2014/06/91ea7-minimumwagecartoon.jpg

The Seattle City Council has unanimously approved an ordinance Monday to phase in a $15 hourly minimum wage — the highest in the nation.

Drafted by an advisory group of labor, business and nonprofit representatives convened by Mayor Ed Murray, the ordinance phases in wage increases over three to seven years, depending on the size of the business and employee benefits.

The issue has dominated politics in the liberal municipality for months. Murray, who was elected last year, had promised in his campaign to raise the minimum wage to $15 an hour. A newly elected socialist City Council member, Kshama Sawant, had pushed the idea as well.

“This legislation sends a message heard around the world: Seattle wants to stop the race to the bottom in wages and that we deplore the growth in income inequality and the widening gap between the rich and the poor,” Councilmember Tom Rasmussen said.

The increase in minimum wage comes amid a national movement from low-wage workers for higher pay, and a more livable minimum wage.

An individual working full time–$40 hours a week for 52 weeks at $15/hr–would earn a pretax income over $31,000 (or $62,000, for a two minimum wage income family) enough to put most U.S. families over the official poverty line. Furthermore, such an income level would lead to substantial savings on welfare programs, pushing many households into positive net tax brackets (taxes owed minus transfer payments) while unlocking public resources for other deserving causes (investments in human capital, infrastructure, R & D, etc). One would also expect a drop in crime rates (and perhaps the ability to save money throughout the law enforcement and criminal justice systems), as it becomes easier for people to earn a comfortable living legitimately.

A $15 minimum wage is an ambitious plan, as a proponent of economic populism I hope it is a resounding success. People from both sides of the political divide will be paying close attention to Seattle’s socioeconomic indicators–specifically, poverty rates, unemployment rates, crime rates and economic growth rates–in order to support their position on minimum wage laws. It is notable that businesses will have a period of between 3-7 years to phase in higher wages, which should temper any potential adverse economic shocks resulting from this policy.

When it comes to socioeconomic outcomes, there are too many variables to come to definitive conclusions by running experiments; even sophisticated randomized control trials and cohort studies have their limitations. Economics is always context sensitive, and while it may not be fair to extrapolate lessons learned from Seattle across the country, this will inevitably occur. And in these extrapolater’s defense, the only way to see how a living minimum wage works is to test it out on a sufficiently large scale. Seattle has become this testing grounds, and based councilman Rasmussen’s comments, the city welcomes this distinction.

Proponents of this minimum wage hike will likely frame it as the harbinger of a golden age of shared prosperity, while its critics will foretell of rampant unemployment and economic decline; the truth invariably lies somewhere in the middle. For what it’s worth, in the context of the modern American economy, I believe the results will be much closer to the former rather than the latter.