Tuesday, July 18, 2006

Brookings study: lower income families pay more for services

Recommended at Booman Tribune. Front paged at ePluribus Media

Not that we need any more information that shows how much wider the gap is getting between the "haves" and everyone else, but alas, today brings us another study showing how much everyday purchases and services by lower income families cost more than the same (or similar) services and purchases by higher-income families.


We have seen a number of studies showing how the wage gap is widening, how executive pay as a multiple of average salaries is at ridiculous levels, how recent tax cuts benefit the wealthy much more than lower income and middle class families and how many services for lower and middle income families have been gutted recently.


And today, the Brookings Institution has released a report summarizing 13 major cities and the differential between the costs of everyday services and purchases by lower income families can cost thousands of dollars more per year than their higher income counterparts.


For those who are not familiar with Brookings, it has been around for 90 years or so, and in its own words:

For policy-makers and the media, Brookings scholars provide the highest quality research, policy recommendations, and analysis on the full range of public policy issues.


Research at the Brookings Institution is conducted to inform the public debate, not advance a political agenda. Our scholars are drawn from the United States and abroad--with experience in government and academia--and hold diverse points of view.


---snip---


Brookings traces its beginnings to 1916, when a group of leading reformers founded the Institute for Government Research (IGR), the first private organization devoted to analyzing public policy issues at the national level. In 1922 and 1924, one of IGR's backers, Robert Somers Brookings (1850-1932), established two supporting sister organizations: the Institute of Economics and a graduate school bearing his name. In 1927, the three groups merged to form the Brookings Institution, honoring the businessman from St. Louis whose leadership shaped the earlier organizations.


Anyway, back to their study, titled "From Poverty, Opportunity: Putting the Market to Work for Lower-Income Families". An Executive Summary of the 80 page report can be found here. The study covered national data, as well as data in Atlanta, Baltimore, Chicago, Denver, DC, Hartford, Indianapolis, Los Angeles, New York, Oakland, Pittsburgh, San Francisco and Seattle (links to the individual city summaries can be found here. It touched on services such as check cashing, loans, fees for expedited tax refunds, mortgages, car and homeowners insurance, groceries, furniture and other similar items.


Thankfully, the study isn't just all "doom and gloom" statistics. Since the title does mention the word "Opportunity", it also looks at ways for the public and private sectors to help lower income families increase their buying power, their cash and take home pay, reduce their bills, pay down debt and get their finances under control. The problem here, as is with anything relating to thinking outside the "I've got mine" mentality is that squeezing those extra few dollars from lower and middle income people for a bit more profit is still way more important to many people in a position to actually do something for the greater good.


While some of this is what we would expect on an overall basis, it is stunning to see the magnitude of the impact the fees, higher rates, financing plans and general costs are for things that many people take for granted. The most telling piece of information is as follows:

Reducing the costs of living for lower income families by just one percent would add up to over $6.5 billion in new spending power for these families. This would enable lower and modest-income families to save for, and invest in, incoming-growing assets, like homes and retirement savings, or to pay for critical expenses for their children, like education and health care.


I want to highlight three things briefly - (1) some of the details on the disparity between the lower income and higher income families relating to these services, (2) the reasons for the disparity and (3) some of the suggestions made to help these families.


General Cost Discrepancies


Without getting into each of the areas (and each of the localities), the study had some startling findings. For example:

4.2 million lower income homeowners that earn less than $30,000 a year pay higher than average prices for their mortgages. About 4.5 million lower income households pay higher than average prices for auto loans. At least 1.6 million lower income adults pay excessive fees for furniture, appliances, and electronics. And, countless more pay high prices for other necessities, such as basic financial services, groceries, and insurance. Together, these extra costs add up to hundreds, sometimes thousands, of dollars unnecessarily spent by lower income families every year.


With respect to the higher costs paid by lower income families, the study noted that most people that use check cashing services earn under $30,000 per year, and the fees for check cashing can be around 2% of the total. Contrasted with banks where there is a low (if any) fee for depositing or cashing checks if you have a bank account (which many lower income families do not have). Additionally, it touches on short term loans that are much more popular with lower income families - these fees can be up to 15% of the total loan as well (also much higher than a bank loan which many lower income families may not even qualify for).


When it comes to automobiles and car costs, the differences are glaring. Consider the following:

On average, lower income families who purchase cars in a lower income neighborhood pay $50 and $500 more, on average, to buy the exact same car as a consumer from a higher income neighborhood.


Nationwide, 4.5 million lower income consumers pay, on average, two percentage points more in interest for an auto loan than the average, higher income consumer.


Drivers from lower income neighborhoods in the 12 sample metropolitan areas pay between $50 to over $1,000 more per year in higher premiums for auto insurance than those living in higher income neighborhoods.


Other areas noted include home loans (around 1% higher in mortgage interest rates), home insurance (around $300 more per year in lower income neighborhoods), furniture and appliances (by shopping at "rent-to-own" places the costs could be significantly higher) and of course, groceries (on a "per unit" basis for similar items, since there is such an overall discrepancy in prices in general).


Reasons for the Disparity


I don't want to spend too much time on this, because some of it is obvious. Generally, the risks to companies include the higher likelihood to default on loans, lower credit scores, etc. Now, there is an obvious self-feeding cycle here that creates this situation, but it does exist.


Additionally, the "high fee" type of service institutions (like check cashing) tend to be more heavily concentrated in the lower income areas. The study noted that:

Today, over 23 percent of lower income households do not have a checking account, and another 64 percent do not have a savings account. Certainly, these millions of lower income consumers represent an unmet market demand. However, if the businesses that fill that void are primarily those that that tend to charge high fees or interest rates, then lower income consumers are not being exposed to a broader array of mainstream, competitively-priced products.


The last two reasons provided are ones where the most can be done to make the situation a bit better - unscrupulous business practices is higher in these areas, and the lower income families have less access to "good market information" related to many of these goods and services.


Obviously, there is some underlying issues that are way above "public and private sector" fixes as they are deeply rooted social and economic issues that are being hurt further by the Republican policies of the past few years. But as far as the things that can be controlled, Brookings has a few suggestions that it says won't cost too much to implement.


Potential Solutions


As I stated above, the obstacles to make things easier and less costly for lower income families may not require a lot of costs, but it does involve a tremendous (but well worth it) effort by the public and private sectors. It may initially bring in less "fees and revenue" to some of the businesses who make their living on milking every penny from the lower income families, but even lowering the overall costs by 1% would infuse an additional $6.5 BILLION in spending power to these families. Obviously, this could have a huge positive impact on the economy as a whole, and especially on those lower income families who can save money, pay down their debt, or make more informed decisions as consumers.


There are three ways that the Brookings study indicates that this can work. These three ways are as follows:

In concert with community outreach efforts to dispel myths and misperceptions, political and community leaders need to engage the business community to take down the roadblocks to entry into lower income markets.


---snip---


Public and private leaders need to crack down on alternative, high-priced businesses that have blossomed in lower income neighborhoods.


---snip---


Public and private leaders need to promote consumer responsibility and empower lower income consumers with better market information.


The first way may be the easiest to tackle, while the second is likely the toughest. The study gave suggestion such as regulating the level of fees that can be charged for some of these financial transactions and services, as well as changing the local zoning and licensing laws to keep these types of business out, while inviting other businesses into these neighborhood.


Overall, while the findings from the study are fairly stunning in terms of the magnitude and overall commonality of the disparities from city to city, it is also promising in that there are some constructive (and fairly low cost) ways that this disparity can be decreased.


The problem, as with most things like this, is that it is hard work and takes a lot of coordination, effort and sacrifice. But the longer term advantages and savings are too great (as well as the consequences of doing nothing) to sit back and let this continue.


Hopefully, this will spur some cities to address these matters, as we know that the Republican policies are not going to do anything other than increase this problem.

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