DC is not a source of solutions but of problems for the poor and minorities
Making ends meet is much harder today than it was a year ago or before the pandemic.
Galloping inflation at 8.3% forces Americans to work harder just to buy less. If you weren’t working with a large income to begin with, the rising costs of essential items robs your quality of life and your ability to progress in America.
That’s why many Americans find the White House’s celebration of the Cut Inflation Act on Tuesday insulting to their plight.
The misleadingly named bill will not slow inflation because non-partisan analysis confirms, but in the short term can increase it depending on The Penn Wharton budget model. Meanwhile, grocery bills have been rising 13.5% in August compared to the previous year, with food prices rising at a rate not seen in 43 years.
Americans need solutions to pay for groceries, haircuts and home heating bills. Right now, Washington is not the source of solutions, but of problems, especially if they enact policies that restrict poor and minority Americans’ access to money when they need it.
Many minorities, especially women, are carving out a better life for themselves and their families while working in lower-paying jobs. Then a pandemic hit. It revealed how vulnerable the (minority) industries in which women tend to concentrate – leisure and hospitality, personal services and retail – were to prolonged shutdowns and an uneven recovery.
Today there is 1.2 million fewer leisure and hospitality jobs than before the pandemic began.
A recent NPR/Harvard survey indicates that due to inflation, black Americans are significantly more likely than whites to report serious financial problems (55% to 38%), are more likely than whites to report not having enough savings emergency for a month of expenses (58% to 36%) and food (32% against 21%). No wonder more than half of non-white voters (54%) disapprove of the work the President is doing.
Many non-white families are unbanked and cannot access traditional sources of credit or bank loans for unexpected expenses. About 5.4% of U.S. households (about 7.1 million) were unbanked in 2019. These are typically non-Asian minorities, low-income households, less educated households, young households, and households with disabled members are more likely to be unbanked.
They often rely on short-term installment loans (pejoratively called payday loans) to pay a bill until they receive their paychecks. These products often carry high nominal interest rates at the annual percentage rate (APR).
If not repaid in a timely manner, loans can become very expensive. However, most borrowers repay the original amount borrowed within six months, depending on to research.
It is common for those who claim to care about the poor to deride the short-term lending industry. Worse still, legislators want to effectively eliminate these financial institutions by imposing arbitrary caps on interest rates. The Senate is considering a national interest rate ceiling by 36%.
The unintended – or perhaps intended – consequences of rate caps would be to prevent lenders from offering these loans. Higher interest rates reflect the risk of lending to someone with poor or no credit.
Like a Document from the Federal Deposit Insurance Corporation (FDIC) concluded, “The fixed operating costs and high loan loss rates justify much of the high APR charged on the payday loan.” For the unbanked, these loans are a better option than more expensive and, frankly more dangerous, alternatives.
Amazingly, now even the institutions we trust to weed out scammers and bad businesses have targeted small dollar loans. The Better Business Bureau (BBB) has released a new survey report in payday loan scams.
Operating in the shadow of a legitimate industry, individuals engage in fraudulent activities by taking advantage of vulnerable people.
The report is correct that the fraud is illegal and should be prosecuted. Unfortunately, the BBB unfairly groups small lenders with scammers as if they were one and the same.
To be clear, most small lenders don’t get an F rating from the BBB, and at less than half earning an A. But the BBB is encouraging industry critics and clinging to rate cap proposals that would make offering such lending services financially untenable.
The result would be disastrous, making the situation worse for vulnerable Americans. When Georgia enacted a ceiling rateborrowers bounced more checks, complained more about lenders and debt collectors, and were more likely to file for Chapter 7 bankruptcy.
Inflation doesn’t go away, so helping unbanked Americans access resources to meet their unexpected needs is critical. This is the message minorities want to hear from the president and national leaders.