You see this a lot in the annals of the working poor: People substitute debt for savings because it is too hard to accumulate savings in the face of demands on the money. This is especially true when your income is irregular, as it is for many of the people in the article. (You can see me talk more about that here.) Acquiring an obligation makes it much more likely that you will stick with the payments long enough to actually acquire the object, which is why people will pay nosebleed rates to borrow money or “buy” with plans such as rent-to-own.
The problem, of course, is that the irregular income that makes you partial to debt financing over saving is also the irregular income that makes you quite likely to default on your debts, trapping you in a high interest rate that is hard to emerge from. So while these articles are often framed around the size of the paycheck, it’s worth noting that the irregularity of low-income paychecks can be just as big a problem.
One reason Ryan Decker finds the story so “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”:
[T]he 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.
Hamilton Nolan’s plea:
Any business that allows you to walk out the door with something you can’t believe you can afford is ripping you off in the long run. Buy a cheaper couch. Buy it on Craigslist. Pick it up off the curb. Save up for IKEA. Steal it from a rich person’s guest house. Do anything but do not get it at a rent-to-own place.
(Photo by Steve Snodgrass)