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In 1996 the Personal Responsibility and Work Opportunity Reconciliation Act transformed welfare to workfare, and the lives of the poor were radically altered. In 2001 Barbara Ehrenreich (Nickel and Dimed) showed us the health and housing woes of the working poor, concluding, among other things, that minimum wages must rise. Last year David Shipler (The Working Poor) expanded Ehrenreich’s experience, concluding:
“. . . [W]orking poverty is a constellation of difficulties that magnify one another: not just low wages but also low education, not just dead-in jobs but also limited abilities, not just insufficient savings but also unwise spending, not just poor housing but also poor parenting, not just the lack of health insurance but also the lack of healthy households” (p. 285).
In this volume Howard Karger makes an amazing contribution to our understanding of the working poor. He moves beyond Ehrenreich’s simple solution (give the poor more money and they will not be poor), and he avoids the scent of victim-blaming that clings to Shipler’s work despite his sensitivity and compassion. Instead, Karger analyzes the alternative financial services sector, or fringe economy, and shows how it systematically stalks the poor, working poor, and vulnerable middle class.
What is the fringe economy? Karger describes it as “corporate and business practices that have a predatory relationship with the poor by charging excessive interest rates or fees, or exorbitant prices for goods or services” (p. x). Laying aside the obvious counter-argument that high risk deserves high rates of return, who are the primary customers for the fringe economy? Karger notes that it is the 28% of American adults without a bank account, the 40 million Americans without health insurance, the 33.1 million foreign born residents, especially the undocumented segment, and the high debt, low asset segment of the middle class.
Does high risk justify high rates of return? Secured credit cards assume no risk, yet charge high origination fees, high monthly service fees, and high interest rates. Pawnshops rarely loan up to 50% of the value of surrendered collateral with interest charges as high as 24% for a single month. Payday loans are secured by check or electronic debit with the debtor liable for criminal charges for non-payment and earn interest equivalent to 800% a year. In 2002 tax preparation services, refund loans, and check cashing fees related to government-backed Earned Income Tax Credits cost the working poor $1.31 billion. Rent-to-own stores routinely price furniture and electronics at more than double the prevailing purchase price. Independent used car lots do the same.
The sad fact is that the fringe economy assumes almost no risk. Because the clientele does not have access to mainstream sources of credit, the fringe economy is able to set prices at will, and does. Whether one is looking at the credit card industry, used car sales, housing, telecommunications, or even the get-out-of-debt industry, the story is the same. Almost no one is barred from access, but for those without good credit, the costs just continue to escalate.
I have been a certified public accountant for over 20 years, but I learned a lot by reading this book. I can think of no better source of information on how our American consumer economy actually operates. I became more enthusiastic about the book with each chapter I read, and you will, too. Reading it, however, might entail a bit of risk. It is likely to change your own consumption patterns, and it is likely to result in the purchase of multiple copies, especially if you have people close to you that you would like to help!
Shortchanged: Life and Debt in the Fringe Economy
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