Vol. 71/No. 21      May 28, 2007

The article details how a growing number of businesses have made hefty profits by offering high-interest credit to “the working poor,” driving hundreds of thousands if not millions of low-paid workers into “a thicket of debt from which many never emerge.”

It notes the concern of some in big-business circles that this expanding bubble of “subprime lending” will hasten a financial crisis for U.S. capitalism and heighten class tensions as workers’ living standards are driven down even further.

The authors describe how companies, in their drive for the highest return, have found an easy source of “untapped profits” among the most exploited workers. “Once, major banks and companies avoided the poor side of town,” they note. But now “a growing number of sizable corporations are realizing that viewed in the aggregate, the working poor are a choice target.”

They lure working people, squeezed by low wages and rising medical costs, rent or mortgage payments, and previous debt, into getting fast cash in exchange for high interest rates and fees.

The volume of such “alternative financial services” has risen to $250 billion a year, with companies that offer auto financing, check cashing, remittances, credit cards, rent-to-own sales, tax preparation services, home mortgages, and student loans. There has been a proliferation of “payday lenders” providing expensive cash advances due on the customer’s next payday.

Such usury involves major companies like Bank of America, HSBC Finance, and GMAC Financial Services (formerly owned by General Motors). Wells Fargo, for example, offers “emergency” payday loans at an annual interest rate of 120 percent.

J.D. Byrider Systems, which sells used cars through dealerships nationwide, has raked in fat profits from selling highly financed autos to low-paid workers—what its CEO calls the “huge market of people with subprime and unconventional credit.”

BusinessWeek highlights the case of Roxanne Tsosie, a Navajo worker in Albuquerque, whose $15,000-a-year job as a home health-care aide requires a car. At Byrider, she was persuaded to buy a 1999 Saturn subcompact for $7,922 entirely on credit—at 25 percent interest.

Only later did Tsosie discover in the fine print that she was required to make $150 payments every two weeks rather than monthly. She was unable to keep up, and after she had shelled out $900, the company repossessed the car in order to resell it. “Nearly half of Byrider sales in Albuquerque do not result in a final payoff and many vehicles are repossessed,” the article notes.

Another example cited is Jackson Hewitt Tax Service, Inc. Its founder told the BusinessWeek reporters that as his company grew in the 1980s, “we focused on the low-hanging fruit, the less-affluent people who wanted their money quick.” The company charges impoverished workers steep fees for tax preparation and “Money Now” cash advances on tax credits.

Lakissisha Thomas, a store clerk in Hilton Head Island, South Carolina, was anxious to receive her $4,351 Earned-Income Tax Credit and “took out a refund-anticipation loan from Jackson Hewitt. She used the money to pay overdue rent and utility bills,” the article reported. After paying a 10.4 percent fee of $453, she found out she could have received the refund through various free services.

SLM Corp. offers high-interest student loans. Molley Cosgrove of Portland, Oregon, took such a loan from “Sallie Mae,” as the company is known, in order to enroll in a culinary institute to become a chef. Three years later she is saddled with a $43,000 debt, most of it accruing interest at 18.5 percent. Now, unable to get a job as a chef for more than $8.50 an hour, she is faced with impossible payments of $553 a month.

A host of other companies aggressively promote “pre-approved credit cards” to low-paid workers, who soon find themselves trapped by high interest rates—28 percent is typical—and payments eating up more than half their paychecks.  
 
Widening gap in wages, debt
The BusinessWeek article describes how debt is becoming disproportionately more expensive for lower-income workers. In 1989, households earning $30,000 or less a year paid 16.8 percent more in interest rates for auto loans than what was paid by households earning more than $90,000. By 2004 the gap had soared to 56.1 percent. With mortgage loans, this gap has jumped from 6.4 percent to 25.5 percent.

“The only feasible way to run a capitalist society is to allow companies to maximize their profits,” economist Tyler Cowen told BusinessWeek in defense of this unabashed gouging of the most exploited. “That will sometimes include allowing them to sell things to people that will sometimes make them worse off.”

The magazine added, “Others worry, however, that the widening income gap between the wealthy and the less fortunate is being exacerbated by the spread of high-interest, high-fee financing.”

It noted, “Wages for the working poor have been stagnant for three decades. Meanwhile, their spending has consistently and significantly exceeded their income since the mid-1980s. They are making up the difference by borrowing more.”

Real wages (that is, adjusted for inflation), medical and pension coverage, and other components of workers’ basic living standards have declined, often sharply, for the majority of working people in the United States. Average real weekly earnings of employed workers have dropped from about $325 in 1972 to $275 in 2003.

At the same time, the debt burden has become more crushing. Household debt grew from about 60 percent of disposable income in 1980 to more than 110 percent in 2003, according to U.S. government statistics. Household payments on mortgage and consumer debts rose from about 10 percent to 13 percent of disposable income during this period.
 
 
Related articles:
Capitalism's winter has begun  
 
 
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