Thursday, October 16, 2014

"Few other places to turn"

Storyline is probably my favorite of the new websites this year (after Clickhole, of course; and 538 puts out awesome stuff too). Here's a great story about rent-to-own culture by Chico Harlan.

And yet low-income Americans increasingly have few other places to turn. “Congratulations, You are Pre-Approved,” Buddy’s says on its Web site, and the message plays to America’s bottom 40 percent. This is a group that makes less money than it did 20 years ago, a group increasingly likely to string together paychecks by holding multiple part-time jobs with variable hours.

And then there's the family that spent $4150 worth of monthly payments on a $1500 sofa set. They're paying $110 per week for the sofa, a smartphone, and some speakers. I think most of us know that this sort of thing is going on, yet that number is still pretty shocking. Part of the reason it's shocking is that their weekly payment exceeds the total cost of the sofa on which I'm sitting, which my wife found on Craigslist for $80 four years ago (at the time, neither of us owned a smart phone or decent speakers). And it's a pretty nice couch.

Buddy's--the rent-to-own retailer described in the article--will also sell you an "early model iPad" for $1440. This is a device that did not exist 20 years ago (or even 10). The skyrocketing price of iPads, then, isn't great support for the story about people having to get by with less in the time series. The cost of the two cell phone bills mentioned in the article isn't either.

The story reminded me of this:

Image source 
Over the last 20 years, even the lowest income group has spent less on necessities as a share of total expenditures. This is probably not the final word on the necessities/luxuries question, but it is suggestive.

So there's something that doesn't fit here. We're talking about people feeling increasingly squeezed over time (and I have no doubt that they feel that way), and we're talking about how income has fallen; yet the problems listed are that a couch has a sticker price almost 20 times as much as my couch's and costs even more when financed, and iPads are going for twice their original retail value. Meanwhile "necessities" are accounting for a smaller and smaller share of spending, or at least don't seem to be increasingly crowding other things out.

Low income is definitely a problem, but it's not the problem behind the troubling behavior in the story. I think that conclusion probably implies something about policy, though it's not immediately obvious to me what it is. Regardless, I can think of what the lessons are for me; it's all right there in Garett Jones' Piketty review.

I'm in no position to decide whether the choices being made by the people in the story are wrong for them. My point is only that something else is going on besides just stagnant incomes. 

4 comments:

  1. I'm not a commercial law expert, but I'll pretend to be one for a second. The Uniform Commercial Code tries to create a bright distinction between sales and leases. Even if the party’s intend to create a lease, if in practice their agreement is a sale, the law governing the transaction bumps it into the more complex world of secured transactions. This gives the party possessing the good a whole slew of consumer protections, whereas if a lease runs its course the lessor can just go get the good. If a purported lease agreement is for a longer term than the remaining useful life of the good, it will render the transaction a sale. Likewise, if at the end of the term of the purported lease the lessor takes the good free of any encumbrances or only has to pay a nominal fee to take the good free of any encumbrances, that too will render the transaction a sale. So, in some part, the rent-to-own lessors are bound by commercial law to charge something more than a nominal price if they give the option to purchase at the end of a lease. That may have something to do with the policy reason behind such high prices for these goods.

    But now as I’ve poked around the internet looking at where these rent-to-own arrangements fit in the sale/lease dichotomy (they are leases in the vast majority of states), it appears the person who uses rent-to-own as a method of taking full ownership of is quite rare. Wikipedia cites a UMass Dartmouth study that says “90% of rent-to-own merchandise is returned with less than 36% of the scheduled weekly payments made, suggesting that transactions of this type are ‘more frequently used for short-term needs rather than as a method of acquisition.’” The person buying a $4k sofa is probably someone who prioritizes possessing, even of for a short time, new items versus you (far more prudently, in my view) purchasing outright a used item for a much lower total cost.

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  2. Well, there's "short term needs" as in I need extra furniture for a party or a short term house guest. And there's "short term needs" as in I'd like to keep it long term but I can't afford to keep making the payments. The same words can describe two very different situations.

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  3. My point is only that something else is going on besides just stagnant incomes.

    No kidding. I'd start with the 37 year old grandmother referenced in the article. The article merely describes the symptoms of a much larger problem.

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    1. Indeed. That's what I was getting at (though I didn't catch that 37-year-old grandmother thing, wow).

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