Institute Notes: A Dialogue on Overcoming Hunger and Poverty

Lending Circles

Last year while in Kenya with some Bread colleagues, I visited one of the most densely packed areas of extreme poverty in the world, the Kabira slum in Nairobi. The sight of open sewers and children playing in the street in bare feet has left a permanent impression of me. But I was also impressed to find hope in this place.

One of the most interesting projects I observed in the three weeks I was in Africa was a 'lending circle' made up of a dozen women in Kabira. Basically, a lending circle pools small investments from a group of people to provide loans to its members. Loans are used for enterprise development or to pay for an urgent household need. The members of the group I met with are living on a dollar a day and a small loan of ten dollars or so can make an enormous difference. They don't charge each other interest and this is also crucial. Paying a loan back with interest for someone living on a dollar a day can make even the smallest of loans impossible to pay back.

Many of these women run small microenterprises right outside their homes, for example, setting up a stand to sell vegetables or to do sewing, or to pay a child's school fees. Lending circles work because the people in the group know each other and so the peer pressure to pay back the loan on time is enough to keep them honest. If you don't pay you get tossed out of the circle.

When I returned to the states, I wondered were any nonprofits running lending circles here. Not long afterwards I ran into a former Bread staffer at a conference. Jose Quinonez is now the Executive Director of the Mission Asset Fund in the Mission District of San Francisco and his organization runs lending circles. The Mission District has a large percentage of Hispanic families living there. Informal lending circles spring up all the time in Hispanic communities, I've since learned. Jose's is the first attempt by a nonprofit in the country to operate lending circles formally.

The lending circles run by the Mission Asset Fund do more than just formalize a practice that already exists inside their community. The Mission Asset Fund is partnering with financial institutions to recognize these lending circles and allow their transactions to qualify towards boosting credit scores of the members of the circle. This story broadcast on a San Francisco news station can tell you more about this exciting and innovative program. 

Bring Back the Layaway

Elizabeth Warren, lawyer, professor, author and blogger, had an interesting post a week ago at TPM Cafe on “layaway” shopping. How many people remember layaway? Isn’t that something our grandparents did way back in the era before TV? Warren notes, “For more than a decade, I have had to explain these transactions to a roomful of students who have never even heard of pay-in-advance.”

For better or worse, layaway may be making a come back. Consumption fell 3.1 percent the last quarter, the biggest drop since 1980, reports the Center for Economic and Policy Research. Department store giant K-Mart is now advertising layaway plans, as Warren points out: “If we needed evidence of the constriction of consumer credit, here it is. K-Mart is advertising the layaway plan that department stores used for decades before the free flow of credit turned the layaway plan into a relic.” Whether this is the beginning of a trend, we’ll know soon. The Christmas shopping season is swiftly approaching.

Notes from VITA Volunteer Emily Nohner

Emily Nohner has joined Bread for the World Institute to work with me on the 2009 Hunger Report and will be blogging on Institute Notes over the course of the next year. Below is her first entry (after this she will be blogging under her own name). From January to April of this year, Emily worked on a Volunteer Income Tax Assistance Program in the District of Columbia.  You may recall the Institute published a study in April on VITA programs nationwide. Emily was also an intern on that project.

"On April 15th, the final day to file state and federal taxes, volunteers were working ‘round the clock at the Martin Luther King Jr. Library in the heart of the District of Columbia. It was our final push to the finish line, and as the clock ticked closer to our 9PM closing time the volunteers had to restrain their urge to get swept away in the last minute frenzy.

The Debtor's Dilemma

Last Saturday I attended a presentation on debt at a church by where I live. A friend of mine is a financial counselor and volunteers to speak at churches, at women's shelters and other venues where people who want professional advice on managing their money can't afford to pay for it.

Debt is a big problem in the United States, and not only at the household level. It's a problem for our government, presently running a record $9 trillion debt. Carrying that much debt makes it hard for government to invest in national assets like infrastructure (remember the bridge that collapsed in Minnesota last year) or our country's most important assets, its people. When individuals carry too much debt, it also makes it difficult to invest in productive assets (e.g. education) that in the long run would increase their economic security and self-sufficiency.

Of course not all debt is bad debt. You can't buy a house without accumulating lots of debt. If you don't have a record of paying down your debts, you have a lot harder time getting credit at reasonable interest rates. To some extent, we all need to carry some amount of debt.

One of the paradoxes about being poor is that you pay more for credit in the form of higher interest rates. When you think about it, if anyone needs credit at low interest it's poor people. Lending to the poor entails more risk to creditors, and this is why the credit industry says they have to charge poor people higher interest. The poor get into trouble paying down debt because that's the nature of being poor, living from paycheck to paycheck. It all seems like a self-fulfilling prophecy if you ask me, but hey I'm just a guy who works at a nonprofit.

The Racial Wealth Divide Revisited

Income inequality between whites and blacks is widely known. It’s a serious problem and I would not want to understate it. However, wealth inequality is an even greater problem. Let’s have a quick refresher: Income is what you make and spend, wealth what you own and what appreciates in value over time. A home is the best example of wealth there is. For most people, it is the single biggest wealth-building asset they'll ever have.

Income inequality between whites and blacks is not quite 2:1; wealth inequality is 10:1, and if you factor out homeownership, it balloons to more than 100:1.

The racial wealth gap is an important topic in Bread for the World Institute’s work on asset building, and I’ve blogged about this before. I’m revisiting it now because of a recent article that appeared on the Economic Policy Institute’s website as part of its economic “snapshot” series.

“The Drive for Economic Equality…Stuck in Neutral” by Christian Dorsey and James Lin ponders where we are forty years after Dr. Martin Luther King’s death in achieving "[King's] vision of economic equality.”

In 2004, blacks held $11,800 in net worth, or about 10% of the $118,300 held by whites (see Chart). When home equity is subtracted, blacks held, at the median, only $300 in net financial assets, or less than 1% of the $36,100 held by whites. Contrary to conventional wisdom, the picture has not improved in recent years. The wealth gap was narrowest in 1992, and even then, median total wealth for blacks was a mere 16% of their white counterparts.

This is a depressing graph, and I'm afraid future ones are not likely to look better any time soon. In the coming years, I expect the racial wealth gap to widen still more because of the bust in the subprime housing market. We don't know much of the details now because the full effects of the subprime debacle won’t be in for a couple of years. What we do know is that blacks (and Hispanics) were targeted by subprime lenders at far higher rates than whites were, and we also know from other work we've done at Bread for the World Institute how much subprime lending there is in poor communities.

Subprime mortgages, once touted as a way to increase minority homeownership, and thereby increase minority wealth, will probably strip more wealth from minority families than what anybody can imagine at this point. One can only imagine what Dr. King would say. 

New Institute Study on Earned Income Tax Credit

Yesterday, Bread for the World Institute released a study on the unassuming Volunteer Income Tax Assistance (VITA) program that helps low-income families receiving the Earned Income Tax Credit (EITC) keep more of their benefits. I've written about the EITC before, but it's importance comes into focus again as tax day, April 15, approaches. The EITC lifts millions of people out of poverty. It is hands down the most effective anti-poverty program.

Meanwhile VITA makes up a small percentage (1%) of how people file for the EITC. Most filers use commercial tax-preparation services like H&R Block, whose fees eat away a good chunk of the EITC. Families use commercial preparers because of the complexity of filing for the EITC, and because they either don’t know about or don’t have access to VITA. To claim the EITC, you don’t simply check a box on your tax form. It's much more complicated than that. IRS puts out a 52-page instruction booklet to help preparers make sense of all the rules associated with the EITC.

We estimate the costs of using a commercial tax preparer to be about $300. For a family in poverty or one using food stamps, $300 is by no means an insignificant sum of money. $300 equals three months of food stamp benefits—the average food stamp benefit is $100 per month, or a little over $1 per meal; $300 also equals 4,500 disposable diapers, 3 visits to a pediatrician for routine care, and 12 college application fees.

$300 is also the equivalent of what families in this income group are getting as their part of the economic stimulus package settled on earlier in the year. The $300 families save by using VITA instead of a commercial preparer is the equivalent of an economic stimulus package for them every year.

A two-generation approach to economic mobility

Economic mobility makes for a great story. Allow me to share a little bit of my own family background to illustrate this point. My dad graduated high school and joined the Navy during World War II. Afterwards, he did not go to college but took advantage of the GI Bill to study a trade, carpentry. After meeting my mom, they left New York City and bought a house on Long Island (not far from the actual Levitown), where they raised a family that included my brother and me. Through hard work, savings and the good fortune of being a member of a union, he was able to provide for all of us and send my brother and me to college. Here I am now, sitting behind this desk, writing this blog once a week, helping Bread for the World Institute work to end hunger. Not all that uncommon an example of the American Dream at work.

Ah, that golden age of economic mobility, some readers may be saying—if ever it could be that way again. My response: Why can’t it? This question, “Why can’t it be that way again?” has been eating at me ever since I left a discussion at the Brooking Institution last week on economic mobility in America.

Is inequality making us sick?

The United States spends more on health care than any other industrialized nation and yet ranks 30th in the world in life expectancy and 31st in infant mortality. How do other countries manage to do better and spend less? Policies that mitigate inequality are the key, starting with universal access to health care.

When we talk about our dysfunctional health care system, we tend to fix on access issues. But lack of aspirin is not the reason people get headaches. For sure, access is a big, big problem, but dig deeper to the root of the health disparities in our society and you’ll find a lot of other issues clustered there.

The social determinants of health are the subject of an upcoming PBS documentary, Unnatural Causes: Is Inequality Making Us Sick? I had a chance to view the first episode in this four-part series that begins airing next week. I highly recommend it. The screening of Unnatural Causes that I attended was hosted by the Joint Center for Political and Economic Studies. One of the nice things about living in Washington is there are countless events like this. It makes up for the many other liabilities.

Subprime Mortgages and Poverty

It’s hard to escape the depressing news about the subprime mortgage collapse. Almost every day it seems to get a little worse. Before things get better, it's apparently still going to get worse. Realtytrac.com reports there were 233,000 forclosures in January. Multiply this number over the rest of the year and we're talking about 2.8 million forclosures in 2008. That's a lot of pain in America.

Just when you think you've heard it all, Bread for the World Institute enters the fray. Our new study reports there is something else to be concerned about that so far we think has flown under the radar. Homeownership, Subprime Loans and Poverty examines the poorest counties in all 50 states and the District of Columbia. In almost every state, we find subprime mortgages in high-poverty counties make up an astonishingly high percentage of all home mortgages loans.

Let’s look at Illinois. The following chart is from our state fact sheet for Illinois:

What you see here are the highest poverty counties in Illinois listed across the bottom of the chart, their corresponding poverty and subprime rates running vertically, and that thin black line in the center of the chart is the state subprime average. You can see how much higher the subprime rates in these counties are compared to the state average.

Our study includes fact sheets for all 50 states and the District of Columbia. State after state, as you look at these charts, you see virtually the same pattern, and so you get a pretty clear picture from the study of where things are worst. The most reliable indicator of where to find high subprime loan rates within any state is where the poverty rates are highest.

Our study is the most comprehensive treatment to date showing how widespread subprime lending is in poor communities. Hunger is an ever-present risk in these communities, a risk sure to be exacerbated by epidemic numbers of foreclosures. I'm not sure any of us have really come to grips with what this will mean in communities and for the nation as a whole.

A valuable new asset-building resource on the web

I want to tell you about the Institute’s latest web resource dedicated to asset-building, launched only yesterday.

If you're reading this blog regularly, you know we often write about asset-building—and that will continue. Our new web resource will provide you with information on asset-building in more convenient and compartmentalized formats, and it will allow you to explore more in-depth analysis with us than we can offer you on the blog.

The new resource focuses on four main areas of asset-building: homeownership, post-secondary education, entrepreneurship, and savings accounts.

We will be updating it with special features regularly. The first feature explains asset poverty and includes a comparison of asset poverty rates with income poverty rates in all 50 states and the District of Columbia. Asset poverty rates typically run double the rates of income poverty.

The next feature will be on the subprime loan crisis and how low-income families in particular have been affected. We’ll include data on the rates of subprime mortgage lending in the poorest areas of the country. We'll also put it all in context for you, explaining the asset-stripping ramifications and how low-income families have been victimized by predatory lending.

Asset-building is about creating opportunity for all people, including the poor.

Opportunity is not equally distributed. Some people are born into poverty and never receive the opportunity they need to begin reaching for their dreams. All their lives they struggle against the forces of poverty and hunger.

Ultimately, we hope the Institute’s asset-building work will establish us as one of the lead anti-poverty groups in this area. The website builds on the work we already started on asset-building in the 2008 Hunger Report, Working Harder for Working Families.

The United States needs a safety net to protect people in poverty, but it also needs a ladder of opportunity. One is there to catch people when they fall, the other to allow them to reach higher levels.