An agenda for the Federal Reserve’s review of its monetary policy framework


An agenda for the Federal Reserve’s review of its monetary policy framework



Poor Should Get More for Their Money

Matt Fellowes
Matt Fellowes Former Brookings Expert, CEO and Founder - United Income

August 7, 2006

Most elected Republicans have not in recent years supported any increase in the minimum wage. Yet the Republican-led U.S. House of Representatives did exactly that this month, voting to raise the federal minimum wage for the first time in nine years. (The GOP-controlled Michigan Legislature did the same thing at the state level in the spring.) And the majority of Senate Republicans also supported a similar bill that failed to clear the Senate last week.

Too bad this opportunity will likely be squandered.

What I’m talking about, if the House bill ever becomes the law of the land, is what minimum-wage earners would actually end up doing with that extra dollar or two an hour.

That’s because, when it comes to helping the poor get ahead, nearly all of our public policy today is focused on how to boost their income. From the minimum wage to job-training programs to the earned-income-tax-credit, there are dozens of policies now in place that strive to help lower income families earn more money every year.

But nearly no attention is given to how that money is actually spent. That’s a big mistake, because it turns out that every year the poor often pay hundreds, sometimes thousands, of dollars in inflated prices for everyday goods and services.

The statistics are staggering. About 4.2 million lower-income homeowners paid higher than average prices for their mortgages in 2004. About 4.5 million lower-income households paid higher than average rates for auto loans. And countless more paid higher prices for other necessities like basic financial services, food and insurance than did their wealthier neighbors.

Those higher prices add up to the difference between a poor family that is just making ends meet and one that is able to tuck away the critical savings needed to get ahead.

Take a poor household, for instance, that lives in Detroit today, rents its home, rides the bus to and from work, and earns the federal minimum wage—$10,712 a year. Costs are minimal, except for the fact that most households that earn so little do not have a bank account, instead relying on high-priced check-cashing businesses. And there’s the problem, because using that service quickly adds up to a substantial amount of money for poor households.

One of the biggest check-cashing chains in Detroit, for instance, slices between 2% and 16% off each check in fees, depending on who writes the check. Before taxes, that’s anywhere from about $200 to $1,700 every year that this family would have to pay just for cashing checks.

That may not sound like a lot, but imagine if that money were instead put away in savings every year? Slicing just one $200 overcharge out of the budget of poor families would add up to nearly a third of their annual salary in 10 years if it were instead locked away in a money market account. That’s money for a child’s education, a car to get to a better job, or even a down payment for a house in Detroit today.

To make a minimum wage increase count for something, then, public and private leaders have to get serious about bringing down these inflated prices.

That means investing in the financial education lower income families need to avoid bad deals, manage their money strategically, and make smart bets for getting ahead.

It also means that public and private leaders need to bring down the higher business costs that drive up prices for the poor. California, for instance, recently created a subsidized insurance plan for low-income drivers in nine urban counties because of the high, relative business costs in those areas. And New York has recently used subsidies to spur the opening of 26 bank branches in lower-income neighborhoods. The banks will now directly compete with high-priced check-cashing businesses.

At the same time, leaders need to curb the unscrupulous business practices that drive up prices for the poor. The first target should be the high-priced alternative financial services, like check-cashers, payday lenders and pawnshops that swamp many lower-income neighborhoods today.

Some of these reforms can happen at the state and local levels. But only Washington policymakers can lead a truly nationwide campaign to bring down these inflated prices for poor families in every part of the country—not just in select areas where leaders are ahead of the curve.

That’s why an increase in the minimum wage has to be paired with a national campaign to lower the higher prices being paid by the poor today. It’s the only way to ensure that this increase is not squandered.