commentary070308.mp3 A report entitled For a New Thrift: Confronting the Debt Culture was released recently in Washington, D.C. (1) Its sixty-two signatories, called the "Commission on Thrift," aim to reduce debt and to cultivate a habit of saving among Americans of modest means. Today I'll deal with the first part of the report which tell us what went wrong in our culture and next time I'll deal with the second part which outlines a cure.
For a New Thrift points out that America's pro-thrift culture (2) of the post-depression era has been transformed over the past generation by anti-thrift organizations. These include credit card companies, payday lenders, check cashing outlets, rent-to-own stores, auto title lenders, private student loan companies, franchise tax preparers, subprime mortgage brokers and lenders, and state lotteries. (p. 7) The sad outcome of all this for Americans in the lower economic tier of society, who are the prime target of these groups, is that they forego saving and amass huge debt. Let's focus on credit cards, payday lenders, and the lottery.
The report explains that credit cards were initially sent to financially solvent customers who paid off their balances in full when they received their monthly bills. Since this generated little profit for the industry, it chose a new target in the 1990s - "lower-income users" who wanted or needed credit "but would be likely to carry a monthly balance." (p. 16) This move resulted in a staggering increase in credit card usage and higher revenues in interest and fees. Last year credit card debt reached $937.5 billion - nearly $1 trillion - and nearly half of all credit card holders missed at least one payment. (p. 18) Today there are more than a billion credit cards in use in America. (p. 15)
Next, payday lenders target customers with annual incomes between $18,000 and $25,000. Over 20,000 payday loan outlets dispense so-called "fast cash" to 15 million people every month typically at three digit annual interest rates. (p. 23) Why are such exorbitant interest rates legal, you ask? Because in the 1980s most states eliminated usury caps. (p. 16) Further, "(S)ix out of ten (borrowers) take out at least twelve loans per year, each time paying a fee for their 'cash advance'." (p. 24)
As to lotteries, the report tells us that:

• 42 states and the District of Columbia run lotteries which generate $57 billion a year in revenues, (p. 25)
• Twenty percent of all Americans are frequent (lottery) players, (p. 25)
• "Three-quarters of state advertising dollars go to the lottery," (p. 26)
• Public approval of lotteries is high - around 75%, (p. 26) and
• Household income varies inversely with lottery spending. For instance, households with incomes under $12,400 a year spend an average of $645 a year on the lottery while households with incomes ten times that amount spend an average of only $419 a year or $226 less. (p. 28) (3)

How, then, does the Commission on Thrift propose to bring consumer debt under control and to restore a habit of regular saving among people of low income? I'll outline their plan next time.

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1. © 2008 Institute for American Values. See http://www.newthrift.org/. References to this report hereinafter are by page number.
2. Pro-thrift institutions which the report lists include credit unions, mutual savings banks, savers' clubs, savings and loan associations, savings bond programs, labor-union sponsored savings plans, and low caps on loan interest rates mandated by law. (p. 6)
3. In Texas the lottery is targeting the 18 to 25 year old age group as the group most likely to produce greater revenues. In 2006 the median spending in this group was $50 a month, the highest level of lottery spending among all age groups. (p. 33)

© 2008 Tom Shipka