Category Archives: Poverty & income gap

A Free Market Alternative to Payday Lenders

sasha_orloffby James A. Bacon

Most everyone recognizes that payday lenders create a poverty trap for poor and working class Virginians. While the lenders do provide a valuable service by extending short-term loans for emergency situations, the annualized interest rates are extremely high, and borrowers often find themselves rolling over their loans from month to month at considerable expense. On the other hand, half the U.S. population has a FICO score below 680, meaning they can’t be approved for credit by most banks. Say what you will about payday lenders, they aren’t as bad as Vito the Loan Shark. Even payday lenders don’t break borrowers’ kneecaps when they fall behind on their payments.

That’s why I have always opposed legislated restrictions on the lending of payday lenders. Taking away poor peoples’ only credit alternative, as unpalatable as it may be, may satiate the outrage felt by crusading social reformers, but it doesn’t actually do the poor people any favors. If the social reformers want to help, I have long suggested, perhaps they should get into the business themselves and provide a better deal.

Well, it appears that someone is doing just that.  LendUp, a lending institution backed by Silicon Valley money, has introduced a new approach to extending credit to the poor. The company came to my attention because it is opening an East Coast office in Chesterfield County to serve Eastern and Central time zones. The description provided by the Richmond Times-Dispatch article and the company website shows how the combination of innovation and competition is the best social reform one could ask for.

“We started LendUp because the traditional banking system wasn’t working for more than half of Americans and the payday market was fraught with abusive practices,” LendUp CEO and co-founder Sasha Orloff said in a statement. The RTD explains how the company works:

The company provides short-term loans to consumers with low credit scores through its LendUp Ladder product….

The process is handled entirely online — not at a store like most payday lenders operate — and decisions are usually made within five minutes, the company said on its website. If approved, consumers could have money in their account in about 15 minutes.

The company offers a single payment loan of between $100 and $250 that has to be repaid in seven to 30 days. It also offers an installment loan of between $260 and $500 that requires two payments and a credit check.

Annualized interest rates still can amount to 250%. LendUp offers the same justification as payday lenders: “Some customers do not pay us back and, like insurance, the interest covers what we lose.”

The difference is that LendUp allows borrowers to earn points to get larger loans at lower interest rates over time by making on-time payments, taking free financial education courses and referring friends to LendUp. The business model is built upon improving borrowers’ financial literacy, helping them build their credit scores, and ultimately charging them lower rates.

Ironically, although LendUp is locating its East Coast office in Virginia, the Old Dominion is not one of the states listed on the company’s website where the service is offered. The RTD article offered no explanation why that would be. Perhaps the company has more regulatory hoops to jump through here. If the social reformers want to accomplish some good, perhaps they could lend LendUp a hand.

Virginia Court Fines in 2015: $429 Million

Source: FY 2015 Fines and Fees Report

Source: FY 2015 Fines and Fees Report

by James A. Bacon

The Legal Aid Justice Center contends that Virginia courts are perpetuating a cycle of poverty by fining people, charging them court costs, and suspending their driver’s licenses. When people lose their licenses, they find it harder to get to work. Many lose their jobs, making it impossible to pay the fines. Unpaid penalties accumulate, which prompts more sanctions by the courts. That pitiable hard-luck cases do occur is undeniable. The question is how widespread the problem is. Are stories like those enumerated in the Justice Center’s class action lawsuit anecdotal, or is the problem systemic?

We know the problem is widespread enough that Richmonder O. Randolph Rollins felt moved to form Drive to Work,  a not-for-profit organization dedicated to help poor and working class citizens work their way out of the court debt-suspended license trap. According to a story I posted last year, the group had more than 600 clients.

Another way to get a handle on the scope of the vicious cycle is to peruse the 2015 Fines and Fees Report, which tallies assessments and collections by court clerks and commonwealth attorneys in Virginia. Last year, court clerks assessed $429 million and collected $251 million in fines and fees. (The report also notes that commonwealth attorneys, who take on delinquent assessments forwarded to them by the courts, collected another $29 million.)

For whatever reason, assessments have been heading steadily higher since 2013 — until last year, when they dropped sharply. Collections also headed higher through 2011, and then began declining. The report offers no explanation for the fall-off in assessments and collections.

Complicating the picture is the fact that practices differ from locality to locality, which means that the impact on local populations vary as well.

To get a sense of that variance, I tallied net collections by general district courts for Fiscal Year 2015. I focused on  general district courts because they account for 62% of all assessments and 75% of all court collections, way more than the circuit courts and juvenile and domestic relations courts (although sometimes the numbers for general district and juvenile/domestic courts are combined for reporting purposes, as noted by asterisk in the table below). It’s no surprise that jurisdictions with large populations see higher levels of fines and fees. To adjust for population size, I calculated fines and fees per capita, using 2015 population estimates.

The variation between localities is striking. In Craig County, collections of fines and fees averaged a mere $11.27 per capita, the lowest rate in the state last year. By contrast, Greensville County/Emporia logged an extraordinary $290 in fines and fees per resident. The mean level (half of localities above, half below) of collections was about $25 per capita.

There may be legitimate reasons for the wide variation. Perhaps the population of some localities is more prone than others to petty crime, traffic offenses, chaotic family lives and/or contempt toward the courts, characteristics that judges tend to punish with fines. But it’s also possible that some court systems view the assessment of fines and fees as a revenue-raising tool, engaging in practices that could be construed as preying upon the poor. I would conjecture that this might be the case among the eight localities where fees-and-fine collections exceed $100 per capita. While this analysis is too quick-and-dirty to prove the point, it does suggest the need for closer investigation.

Data source: 2015 Fines and Fees Report

Data source: 2015 Fines and Fees Report

To view the average fee-and-fine collections for all Virginia localities, click here.

For what it’s worth, the list of top fine collectors is dominated by rural counties, mostly in Southside and Southwestern Virginia. Is it pure coincidence that Greensville County and Emporia are located on Interstate 95? Are local courts and law enforcement targeting out-of-staters for traffic enforcement? Or are they coming down hard on the local population?

The General Assembly’s primary concern is improving the efficiency of collections, as witnessed by studies on the subject and the annual report on fines and fees. As I have noted elsewhere, courts need the ability to impose fines and penalties as a sanction for certain kinds of offenses. Likewise, it is reasonable to ask guilty parties to pay court costs. But courts must be impartial and even-handed administrators of justice, not revenue-raising arms of the state.

Map of the Day: Decline in Teen Birth Rate

Source: StatChat blog

Source: StatChat blog

The fertility rate for U.S. women reached an all-time low in 2015. All told, there have been 3.4 million fewer births since 2007 than would have occurred had fertility rates not declined, writes Hamilton Lombard in the StatChat blog.

There are reasons to be concerned. Fewer births means fewer Americans entering the workforce, fewer workers paying into Medicare and Social Security, and fewer taxpayers to support the swelling national debt, which now stands at $19 trillion and counting.

But Lombard finds a silver lining. A big one. The decline in births is concentrated among teens. That decline, he argues, is tied to the increase in the high school graduation rates and college attendance as teens put off starting families until they have earned a high school and/or college degree.

Teenage pregnancy was once fairly common and even socially acceptable, particularly after World War II, when there were plenty of well-paying jobs available that did not require a high school diploma, much less a college degree. As these low-skill jobs began to disappear, the teenage birth rate started to fall. By the mid-2000s the U.S. teen birth rate had declined by 50 percent since 1960.

Insofar as inter-generational poverty in America is demographic in nature — poor teens giving birth to children and raising them in poverty before acquiring skills needed to rise out of poverty — declining fertility is a very good thing.

The national trends do not play out evenly. As can be seen in Lombard’s map above, the change was dramatic in some Virginia jurisdictions between 20007 and 2014 and far less noticeable in others.

In the City of Richmond, the birth of children to teens fell from 470 to 149 over that period — an astonishing decline. The overwhelming number of those 331 never-born children would have been raised in poverty and at high risk of never rising out of it. By contrast, the decline was far more modest in rural localities of Southwest Virginia.

Here is the decline in teen births between 2007 and 2011 in Virginia broken down by race, according to Centers for Disease Control data:

All races — 28% decline
Non-Hispanic whites — 20%
Non-Hispanic blacks — 29%
Hispanics — 50%

And here is the 2011 birth rate per 1,000 teenagers aged 15-19:

All Races — 24.5 births
Non-Hispanic whites — 19.4
Non-Hispanic blacks — 37.4
Hispanics — 36.9

— JAB

Can Atlanta’s East Lake Experiment Work in Virginia?

The Drew Charter School Junior and Senior Academy in Atlanta's East Lake community.

The Drew Charter School Junior and Senior Academy in Atlanta’s East Lake community.

by James A. Bacon

It is axiomatic among social scientists that concentrating poor people in public housing projects accentuates the social pathologies that make poverty self-perpetuating and unbearable. The oft-touted solution is to create more mixed-income neighborhoods that de-concentrate poverty. Presumably, the presence of working- and middle-class households people would moderate the anti-social behavior of the poor. There’s just one problem: While the poor perceive mixed-income neighborhoods as beneficial, the non-poor do not. Typically, the non-poor flee poor neighborhoods associated with crime, poor schools and disorderly behavior.

How, then, does one develop mixed-use neighborhoods? The answer, according to Carol R. Naughton, president of the not-for-profit Purpose Built Communities: The developer needs to partner with allies who can provide amenities — grocery stores, recreational amenities, and above all else good schools — that make a neighborhood attractive to the non-poor.

“Poverty and place are tied together,” said Naughton Tuesday when addressing the Richmond chapter of the Urban Land Institute. Neighborhoods of concentrated poverty are “swamps” that breed inter-generational poverty that children can’t escape from. Changing the “place” can change the dynamic of poverty.

Naughton came to the view that developers can make a difference when working with the Atlanta Housing Authority. Her aha moment came when meeting Tom Cousins, a mega-developer and philanthropist with grand designs for repairing East Lake Meadows, a community dominated by public housing projects where the crime rate was 18 times the national average and the employment (not unemployment) rate was 12%.

Working through the East Lake Foundation, Cousins targeted 175 acres in East Lake Meadows to build mixed-use housing. But his approach differed from that of other such projects in several regards.

First, East Lake found people to start a charter school. The Atlanta Board of Education was too broken to help, said Naughton, but the George legislature had just passed a charter school bill. Second, upon the advice of local residents, mixed-use housing was limited to people who worked. Third, the foundation developed key partnerships: with the YMCA to build a community facility, with Publix to build the first grocery store to serve the area in 40 years, and with two Atlanta banks to put branches in the neighborhood. Fourth, the foundation morphed into a “community quarterback” pushing a vision for community wellness and cradle-to-college education.

Each element of the plan was important but the charter school proved decisive, Naughton said. In its first year, the school was the worst-performing school in Atlanta. But it improved year after year, and 20 years later now stands as one of the top schools in the city. “Our kids can compete against anybody, against the wealthiest kids in the city,” she says. “We’re serving more low-income kids than any other school in the community.”

The result is transformational, she said. “Now East Lake is an education destination. People want to live there. It’s a great neighborhood for kids.” Middle-class families are moving into the neighborhood. Indeed, the lure of the charter schools is driving revitalization of neighborhoods beyond the original project.

Naughton is not a big fan of the department of Housing and Urban Development. “HUD confuses funding streams with programs,” she says. Programs take more than money. They require local leadership to put it to good use. She believes that the backing of an entity like the East Lake Foundation, with a high-powered and well-connected board, is a critical ingredient to success.

The East Lake redevelopment model has proven so successful that it is being replicated by the Bayou Foundation in New Orleans, and Naughton runs her own organization, Purpose Built Communities, to work with dozens of other initiatives around the country.

Bacon’s bottom line: Even allowing for the fact that Naughton is a cheerleader for the East Lake project, the concept sounds enviably successful — certainly successful enough that it’s worth a try in Virginia. Could the concept work here? The biggest obstacle likely would be the hostility of Virginia’s educational establishment to charter schools. On the other hand, here in the Richmond area at least, there are dozens of entities — Tricycle Gardens and its community farms, Bon Secours and its community hospital, and the vibrant Communities in Schools program — that would make natural partners.

I am amazed by the number of Richmonders who are actively engaged in trying to ameliorate the concentrated, inter-generational poverty in the city’s East End. There is much good will, and there are many great anecdotal stories, but I don’t see much traction in actually vanquishing poverty. Perhaps the missing elements are a purpose-driven real estate developer and community foundation dedicated to building a physical community and institutions to support it.

War on the Poor Update: the Attack on Payday Lending

debra_grant

Debra Grant. Photo credit: Virginian-Pilot

by James A. Bacon

Once again the war drums are pounding as do-gooders unleash a wave of publicity against payday lending. A local case in point is a guest column in the Virginian-Pilot under the name of Debra Grant, who told her personal story. This is how it started:

I had a relative who needed to borrow $150, so I took out a payday loan to help. Every month, I would have to roll the loan over until the next month, for a $37 fee.

It took great sacrifice, but I was eventually able to pay off the loan. Soon after, another relative needed my help again, and I took out a loan of $300, plus an $87 fee every time I rolled that one over.

I was finally able to pay that one off — and then another family member needed help. Seeing no other alternatives, some of my relatives took out a car title loan, missed a payment and lost their car. Without a car, our whole family suffered. As a single mother and breadwinner for my family, I thought I had no other choice.

Any person of limited means who extends so much help to her relatives deserves kudos for her caring and generosity, and nothing I say here is meant to disparage Ms. Grant personally. But I have to question her logic.

Drawing upon her personal experience and her association with Virginia Organizing and the Virginia Poverty Law Center, Grant advocates two things: (1) support for the Bank On program, which teaches financial responsibility and runs a matched savings incentive program, and (2) support for a Consumer Financial Protection Bureau initiative to institute new underwriting rules that would reduce payday lending. The first expands options available to poor people, and is to be lauded. The second narrows the options available to the poor, and should be condemned.

Let’s parse what happened to Grant. She took out a payday loan on behalf of a relative. No one held a gun to her head and made her take out the loan. She could have availed herself of any number of available alternatives.

Er, she did have alternatives, didn’t she? What are you telling me — she didn’t? She couldn’t take out a bank loan? Perhaps that has something to do with the fact that over-regulated banks operating in a near-zero interest rate environment can’t make money on small personal loans and have largely gotten out of the business. How about credit cards? Grant doesn’t tell us, but it seems likely that she either didn’t have any credit cards or had maxed out her credit.

How about taking out a car title loan? Grant’s relatives did take out a car loan, and look what happened — they missed a payment and had the car repossessed. That didn’t turn out so well.

The fact is, there are no attractive borrowing alternatives for poor people (and people with bad credit). That dismal reality reflects the country’s super low interest rate environment, the high cost of government regulation, the high cost of administering small uncollateralized loans, and the high risk of default by people with poor credit. Rather than address the underlying causes, do-gooders respond by blaming one of the few groups willing to extend credit to the poor by excoriating them and removing one of the few options, as bad as it is, available to the poor.

According to Grant, research by the Pew Charitable Trust shows that if payday loans weren’t available, 81% of borrowers would cut expenses. Insofar as cutting expenses is possible for poor people, that sounds like something they should do whether they have access to payday lenders or not!

Grant also cites the work of the Matched Savings Incentive Program, in which consumers deposit money in a savings account and community-funded grants match the deposit to double the savings. “This helps create a cushion for low-income people to use instead of payday loans in an emergency,” she writes. “Instead of trying to pay off-high interest loans, Bank On customers can save money and even earn a little interest of their own.”

Ah, teaching personal thrift and responsibility. What a great idea. Instead of spending time and energy shutting down payday lenders, maybe consumer advocates should focus less on putting payday lenders out of business by regulatory fiat and more on out-competing them by providing better terms and superior service. That’s a revolutionary idea!

Will More Money Really Help Poor Students?

schoolby James A. Bacon

Once upon a time, the liberal critique of Virginia’s school funding system was that schools with rich kids got more money per student than schools with poor kids. The state of Virginia moved to address funding inequalities two-and-a-half decades ago. Now liberals have raised the bar. It’s not enough to provide equal resources. Now the state needs to provide poor students with more money per student than affluent students. Perhaps a lot more.

“The fact is it costs substantially more to help low-income students reach similar levels of performance as students from wealthier families,” states a new report by the Commonwealth Institute, a left-of-center think tank focusing on Virginia issues. “Studies in New York and Wisconsin find it can cost two to two-and-a-half times as much to educate lower-income students. Other studies in California, Kansas, and Missouri find costs ranging between 55 to 64 percent more.”

In Virginia, says the report, Virginia contributes 14 to 19 percent more per low-income student than other students. Yet that’s not enough, the authors say. Some other states do even more.

Virginia has more than 512,000 disadvantaged kids in its public schools, about four out of ten students.

These students face serious challenges that can make success in the classroom more difficult. For instance, they are more likely to have distractions in their home life, such as moving frequently, hunger, and parents coping with substance abuse. Many do not have the luxury of outside resources, such as private tutoring, that students from higher-income families may receive. They are less likely to be involved in organized activities like music lessons, clubs, or sports teams that can lead to social and mental development.

So, what’s the solution? The Commonwealth Institute says Virginia should increase funding for its “At-Risk Add-on,” a program created in 1992 to compensate for the fact that poor students cost more to educate than better-off students. The program pays 1% to 13% more funding per low-income student, depending upon the concentration of low-income students in the school district. The Commonwealth Institute proposes increasing that payout to 1% to 25%. “Making this adjustment would almost double the state’s share of add-on funding and would increase state support in Virginia’s highest poverty schools by more than $200 per student.”

Bacon’s bottom line. There are a number of issues here. Should we adopt the principle that it is the state’s obligation to provide a level of funding sufficient to ensure that poor kids have comparable educational outcomes to other kids? Rejiggering the At-Risk Add-On formula to steer an extra $200 per student to poor schools won’t get there. Once it’s apparent that $200 is not enough to make a difference, the Commonwealth Institute’s logic would suggest that there is no limit to what we would be morally obligated to pay.

Further, it is ridiculous to say, as the Commonwealth Institute does, that extra money for poor students “would not take away from school divisions in better off communities.” More money for the At Risk-Add On program has to come from somewhere — the pot of money the state uses to provide state aid to public education. Skimming more money off the top for poor schools would leave less to be distributed among all schools. How reasonable is it to ask middle-class families, who pay sales and property taxes to support schools in their own communities, to do with less so the kids of poor families, who already get 14% to 19% more state support than kids from middle-class families, can get even more — even as poor families pay very little into the system themselves?

It is especially unreasonable to dock funding for middle-class students when there is no guarantee that extra money would actually improve educational outcomes in schools plagued by disciplinary breakdowns, bloated and incompetent district administrations, decrepit school buildings suffering from short-changed maintenance, and a host of other ills. The underlying assumption of the Commonwealth Institute is that poor educational outcomes of poor kids is a problem that only more money can solve. That’s just not true.

I’m not heartless. I understand that little kids are not responsible for the poverty of their parents. I’d like to live in a country where poor kids get a decent shot at succeeding in life. I’m just not convinced that what we’ve been trying for the past 50 years is working, nor that doing more of the same, only with more money taken from the middle class, is the solution.

Is There Really a Problem Here?

washington_metro

by James A. Bacon

A new report by the Pew Research Center, “The Geography of America’s Shrinking Middle Class,” has garnered widespread attention by focusing on the erosion of America’s “middle class” between 2000 and 2014, confirming the dominant narrative of increasing income inequality across the United States. As a summary of the report emphasizes, “The middle class lost ground in nearly nine-in-ten U.S. metropolitan areas examined.”

The percentile share of the middle class fell in 203 of the 229 metropolitan statistical areas examined in the analysis. Meanwhile, the share of adults in upper-income households increased in 172 regions and the share in lower-income households increased in 160 regions over the same 14-year period.

The decline of the middle class is a reflection of rising income inequality in the U.S. Generally speaking, middle-class households are more prevalent in metropolitan areas where there is less of a gap between the incomes of households near the top and the bottom ends of the income distribution. Moreover, from 2000 to 2014, the middle-class share decreased more in areas with a greater increase in income inequality.

The study neglects to tell us how the shrinking middle class is faring nationally according to its methodology, or whether it is due primarily to upward or downward mobility. The trends vary widely from region to region, reflecting the circumstances of local economies. Manufacturing-oriented regions fared poorly, while energy-related economies prospered. At the same time, some regions are doing a better job of building their technology and professional-services sectors. If, as a generality, larger metros are making progress while smaller metros are sliding, that’s unfortunate for the smaller metros but it’s not necessarily a national crisis — it simply reflects the reality that competitive economic advantage is shifting from smaller to larger metros. It is a basic question but Pew ignores it.

While there is much to be said in favor of a strong middle class, a shrinking middle class (defined by Pew as between about $42,000 to $125,000 per year for a family of three) can be construed as a good thing if people are rising into the so-called upper-income class. The trend is clearly undesirable if it results from households sinking into the lower-income brackets. What appears to be happening is a little of both — although in Virginia upward mobility predominates.

Pew’s analysis covered five metropolitan regions in Virginia: Washington, Hampton Roads, Richmond, Lynchburg and Blacksburg. (Don’t ask me why Roanoke, Charlottesville and other smaller metros weren’t included, I don’t know.)

The Washington metro (see chart above) experienced what could be construed as an alarming decline in the middle class — 6.1 percentage points. But even a cursory look at the data shows that the lower-income group remained stable (actually declining 0.1%) while the upper-income group shot up. By Pew’s measure, the Washington region became more unequal. But it apparently did so by hundreds of thousands of households moving into higher income brackets. Is this “losing ground?” Are we supposed to flagellate ourselves over this?

Admittedly, Washington may be an outlier. It is, after all, America’s imperial city and, with the exception of occasional bouts of sequestration or defense cutbacks, it is largely immune from the trends that afflict other parts of the country. So, let’s take a look at Virginia’s second largest metropolitan area, Hampton Roads (labeled Virginia Beach).

virginia_beach_metro

Once again, the middle class shrunk. Oh, noooo! But look closer. So did the lower-income class. The affluent class increased by 4.8 percentage points. It is hard to spin this as anything but a positive development.

The outlook for the other three Virginia metros is less clear cut. Here’s Richmond:

richmond_metro

Continue reading