Karger, Howard. 2005. Shortchanged: Life and Debt in the Fringe Economy. illustrated edition. Berrett-Koehler Publishers.
Shortchanged examines the sector of the economy that caters to the credit-challenged and vulnerable; the author calls this the “fringe economy.” What marks a business or corporation as a participant in the fringe economy? The basic criteria is that their business practices are predatory, meaning they are preying on the vulnerable in ways designed to maximize profit and minimize benefit to the consumer. AND, these practices are extremely predatory, far beyond those deemed acceptable in our society generally – i.e., interest rates ranging from 19% for a home loan to 400% for a two week payday loan (p. x). Additionally, fringe economy institutions offer no financial services that will result in asset growth for consumers (p. 198); they are strictly designed to strip consumers of wealth.
The fringe economy is not made up of small mom-and-pop stores but rather is controlled by massive corporations, many of which have ties to mainstream banks and lenders (some of which participate in the fringe economy directly; p. x). It’s also worth noting how large the fringe economy is: There are more check-cashing and payday lender stores in the U.S. than there are Wal-Marts, Burger Kings, Targets, McDonald’s, Sears, and J.C. Penney outlets COMBINED! (About 33,000 when the book was published.) The revenues are also staggering. If you exclude subprime home mortgages and used car sales, the revenue of the fringe economy in 2001 was about $78 billion, which is more than half of what the Federal Government spends on poverty assistance programs (about $125 billion). If you include subprime mortgage lending and car loans, the fringe economy is about 3 times as large as the Federal Government’s anti-poverty programs (p. 6). This suggests that the structure of the U.S. Economy is designed to maintain stratification and poverty rather than to eradicate it.
The fringe economy makes most of its profit on financing and fees (p. 11). The goal is to charge high interest rates on whatever goods or services are being provided, whether it is renting-to-own furniture or a loan on a pawned item. Of course, goods and services are also over-priced, but the goal is to stretch out the payments for as long as possible to maximize the profit through interest. One good example of this is comes from the rent-to-own chapter, where a $100 VCR was described as having made a rent-to-own company over $1,000 by being financed and repossessed multiple times. It’s not about selling goods but rather getting people to finance goods and services at ridiculous rates.
Also discussed in detail in the book is the growth of the fringe economy. The number and percentage of people in the U.S. using the fringe economy has grown over the last 20-30 years (exact numbers are impossible to give, but it’s probably close to 40% of Americans). This seems a little counter-intuitive as we did have an economic boom in the late 1990s. But one of the driving forces of that boom was actually consumer spending, which was driving by consumers removing the equity from their homes (a fringe economy practice). Other factors that contributed were the growth of immigrants (who are particularly likely to use the fringe economy), the reforming of welfare policy and law in the U.S., which kicked a lot of people off of welfare but didn’t stop them from being poor, the rising cost of necessities (e.g., utilities, food, transportation, etc.), and the general stagnation of wages, which have not increased substantially since the 1970s for everyone but the very wealthy (p. 18-21). Basically, about 43% of Americans spend more every year than they earn (p. 18). These are the individuals who are targeted by the fringe economy (and are the individuals and the greedy bastards who took advantage of them that led to our recent recession). They are made up of single mothers, Americans living paycheck to paycheck (about 53% of Americans), the chronically underemployed (e.g., the over 50% of Wal-Mart employees who are underemployed so they don’t get benefits), and immigrants (p. 21).
While it’s hard to think that individual consumers aren’t 100% responsible for their spending habits (we’re awfully individualistic in the U.S.), it is worth noting that there is a lot of marketing in the U.S. that is specifically designed to increase consumer spending. And its not like our government doesn’t want us to spend money – consumer spending accounts for 2/3 of the U.S. economy (p. 31), which is a recipe for disaster considering we cannot continue to outspend our earnings, though we’ve certainly tried. What this has led to is a massive debt load for families in the U.S., totaling $19,000 on average in 2004 (not including mortgage debt). While the over-spending isn’t the only reason why we’re having problems, it is a major factor (p. 34).
After setting up all of the above, the book then digs into the different sectors of the fringe economy, looking at each in detail. It covers: credit cards (the most profitable banking sector; p. 49), FICO scores, payday lenders, pawn shops, check cashers, used-car loans, subprime lending, tax preparation, rent-to-own, and credit repair companies. A few points made about these sectors of the fringe economy are worth mentioning.
I didn’t realize before reading this book just how predatory the fringe economy is. What drove this point home to me was the discussion of tax preparation and “refund anticipation loans.” The Federal Government returns money to the working poor from their taxes. This is designed to help raise the poor out of poverty and is called the Earned Income Tax Credit (EITC; it’s for the working poor). Tax preparers target individuals who qualify for this by charging very high tax preparation fees and then offering a “refund anticipation loan,” which is basically money now rather than in two weeks. For the poor, that’s an exciting proposition. However, those loans, along with the other fees charged by these companies (the biggest is H&R Block), take $1.8 billion out of the EITC, or about 6% of the money that is supposed to go to the poor instead goes to those preying on the poor (p. 83). In other words, even programs designed to help the poor get out of poverty end up enriching the middle and upper class, who prey on the poor.
Many of the companies that provided subprime loans during their heyday claimed they were helping people achieve the American dream. They also targeted minorities, who are, statistically speaking, less affluent than whites. “In 2002, 27% of subprime loans went to African Americans, almost 20% to Hispanics, and 16% to Native Americans; by comparison, only 7.4% of subprime loans went to whites.” (p. 114). We now know, after the housing collapse (the book was written before it and predicted it), that minorities have been hit harder by the recession than have other groups. These statistics illustrate why.
I didn’t realize that used car dealerships are more profitable than new car dealerships (p. 155), but they are. This is because of their ridiculous financing rates and the fact that they repossess about 30% of the cars they sale. Oh, and the companies that attempt to consolidate debt – most of them are either owned by or closely allied with credit card companies, which have a vested interest in having people pay back their debt (p. 175).
The author includes suggestions for reform throughout, but concludes with the following four-pronged approach (p. 199):
-Instituting more-robust federal and state regulation of the fringe economy
-Empowering consumers through advocacy and helping them achieve financial literacy
-Encouraging traditional banks and other mainstream financial institutions to serve low-income populations in a nonpredatory fashion
-Developing more and better-funded community-based financial institutions”
I like this book enough that I use it in my Sociology of Stratification class to illustrate economic stratification. The book isn’t without its problems, but they are relatively minor. First, it is a bit repetitive at times, repeating facts and figures in multiple chapters. It’s also a bit dry at times, but tries to balance the boredom inducing recitation of numbers with stories to illustrate the points. Despite these minor problems, this book does a great job of driving home the point: the fringe economy preys on the poor and keeps them poor.
A couple of additional points that don’t receive enough discussion in the book are also worth noting. While the predatory practices of the fringe economy work to maintain stratification by unduly burdening the already poor with financial penalties for being poor, the major factor that keeps the poor poor is the structure of our society and economic system. This is mentioned only in passing at the very end of the book, when the author notes, “In 2004 the top 29,000 Americans had as much income as the bottom 96 million. In 1970 the bottom third of all Americans had more than ten times the income of the top 1/100 of 1%, or the top 29,000. By 2000 they were equal because the bottom third’s income fell while the top group’s income went through the roof. In short, it’s easy to blame the fringe economy for what is essentially an economic and labor market problem. Although labor market reforms are beyond the scope of this book, they must be part of any strategy to rein in the fringe economy.” (p. 200). I discuss this issue in detail in my class, but casual readers of this book won’t get the importance of this point from this passing note.
Another issue that is glossed over is the fact that there is virtually no financial education of Americans, “For example, when a group of adults were given a 14-question test of financial literacy, the average score was 42%. Eighty-two percent of high school seniors failed a 13-question quiz examining their knowledge of issues like interest rates, savings, loans, credit cards, and calculating net worth.” (p. 203). This is driven home in my classes by the fact that students are remarkably uneducated about most of the stuff we discuss. Having learned a lot of the information I know about finances in the school of “hard knocks,” I feel an obligation to inform my students about as much of this as I can. I’ve also seen this in every day life. Most of the people I’ve talked finances with have never heard of CDs, couldn’t tell me what bonds are, and have no idea how the stock market works. If they have any excess money, it’s either in their home or a checking account, earning them no interest. Why isn’t financial literacy taught in high school?
Two final points. First, the author does raise a question that you might have asked yourself, “Don’t the credit problems of some fringe economy customers justify the high interest rates?” (p. xv). It’s a good question. The author doesn’t answer it directly, but suggests it warrants scrutiny, “The obvious answer is yes. Most of us wouldn’t lend money to some fringe economy customers because it would be financially imprudent. But at what point does the profit so overshadow the risks that the transaction becomes predatory?” (p. xv). I don’t know that there is a good answer to that question, but it does warrant closer scrutiny.
Finally, there is one quote in the book that I thought was really, really good. David K. Shipler, author of the book “The Working Poor: Invisible in America” said this about the working poor, “The term by which they are usually described, ‘working poor,’ should be an oxymoron. Nobody who works hard should be poor in America.” (p. 21). I agree. Do you?
Overall, this is an excellent illustration of how our economic system takes from the poor, keeping them poor, and gives to the rich.