The Brookings Institution has issued a report documenting what people who live in the “ghetto” already know: it’s expensive to be one of the urban poor:
Drivers from low-income neighborhoods of New York, Hartford and Baltimore, insuring identical cars and with the same driving records as those from middle-class neighborhoods, paid $400 more on average for a year’s insurance.
The poor are also the main customers for appliances and furniture at “rent to own” stores, where payments are stretched out at very high interest rates; in Wisconsin, a $200 television can end up costing $700.
Those were just two examples among several cited in a report Tuesday showing that poor urban residents frequently pay hundreds if not thousands of dollars a year in extra costs for everyday necessities. The study said some of the disparities were due to real differences in the cost of doing business in poor areas, some to predatory financial practices and some to consumer ignorance.
Businesses have a hard time opening up in poor neighborhoods because banks redline them. Residents can’t get credit, either. So they have to rely on loan sharks or high-interest lenders and check cashing places that charge a pretty substantial fee to cash checks. And even if they do have bank accounts, sometimes they have problems using them — for instance, in high school, I worked in a grocery store in East Hartford where we were told to get the manager to approve checks with a Hartford address. White customers got their checks approved. Black customers did not, even if they did not live in the poor North End.
It was a huge deal several years ago when Magic Johnson started opening movie theaters in inner-city neighborhoods. The one up on 125th Street had been the first one in many years to be built in Harlem. And it’s a big success. Now, just that bit of push helped open up the area for development, as banks and businesses started seeing that they could get a return on their investment.
Supermarkets are another business that poor neighborhoods often lack. Whenever the subject of obesity comes up, someone inevitably points to poor people taking their kids to McDonald’s and sniffing about how irresponsible that is. But McDonald’s is one of the few major food businesses willing to do business uptown. Poor urban neighborhoods frequently lack for stores selling fresh, quality food at a fair price. What they get is a poor selection of rotten vegetables at prices jacked up higher than they are in wealthier white neighborhoods. So they can pay through the nose for sketchy food, or they can eat cheaper at McDonald’s.
What’s amazing about the report is seeing just how much impact the “ghetto tax” has on these families. How can you get ahead when you’re losing this kind of money?
“There’s a large and for the most part overlooked opportunity here to help low-income families get ahead,” Matt Fellowes, the Brookings researcher who wrote the report, said in an interview. “That is to reduce their costs.”
Measures that reduced the price of essential goods and services for low-income Americans by just 1 percent would put an additional $6.5 billion a year in their hands, said the report, titled “From Poverty, Opportunity.”
My emphasis. That’s an amazing figure, and it should make people in Washington sit up and take notice. Well, one hopes.
And all those little fees and points tacked on for poor customers add up as well:
Citing other examples of the ghetto tax, the report found that nationally, 4.5 million low-income customers, defined as families making less than $30,000 a year, paid an average of two percentage points more for car loans than did middle-class buyers. And the common use of storefront check-cashing services by poor people, it said, comes at a steep price that varies with local regulations; in 12 cities studied, the fee for cashing a $500 check ranged from $5 to $50.
Part of the problem, the study found, is a discrepancy between the poor and the middle class in consumer skills and mobility: people who comparison-shop, especially on the Internet, tend to pay hundreds less for the identical car than those who walk onto a city lot and buy.
But the disparities can be reduced, the report said, not only by consumer education but also by some combination of incentives to lure banks and stores into poor neighborhoods and tighter regulation on things like the fees of storefront lenders.
Some states are trying to encourage lenders to invest in poor neighborhoods using some creative tactics:
The New York State Banking Department has drawn major banks into underserved neighborhoods by placing deposits of government money, sometimes at below-market interest, in the new branches. These may enable more residents to open accounts and reduce reliance on costly check-cashers and lenders, said the state’s superintendent of banks, Diana L. Taylor.
In Pennsylvania, a program led by a Democratic state legislator, Dwight Evans, used state and private financing for construction of supermarkets in areas where residents had previously had to rely on costly small stores or drive long distances for groceries.
Washington State’s insurance commissioner, Mike Kreidler, described efforts to restrict the use of personal credit scores by sellers of home and car insurance.
I’m glad to see this study, and the efforts to force banks and businesses to stop victimizing poor people. I may write more later when I have time to look at the actual report.