No Slack: The Financial Lives of Low-Income Americans

308 Pages·2012·12.36 MB·English

by  Michael S. Barr

BARR he fnancial crisis exposed the
Advance Praise for potentially unsavory results of the
interaction between low- and moderate-
Michael S. Barr income households and alternative and
No Slack mainstream fnancial institutions. Many
Thouseholds were overleveraged or paid
“It is so nice to have Michael Barr back in academia, where he has resumed his scholarly high costs for fnancial services, while others
research into the challenge of providing affordable fnancial services for the poor. In this lacked access to useful fnancial products that
book, he vividly illustrates that while the hidden fees and surprise charges embedded in can cushion against economic instability. The
so many fnancial products irritate and annoy us, for those with ‘no slack’ they can have fnancial services system is not well designed
devastating fnancial consequences. There has got to be a better way, and Barr has devoted to serve low- and moderate-income households,
MICHAEL S. BARR is a professor of law at his career to fnding it.” leaving them without fnancial slack: they did not
the University of Michigan Law School and a No Slack have adequate breathing room for making the
nonresident senior fellow in Economic Studies at k SHEILA BAIR, former chair of the Federal Deposit Insurance Corporation fnancial adjustments that would permit them
the Brookings Institution. In 2009–10 he served The Financial Lives of to better meet their own needs. No Slack shows
as assistant secretary for fnancial institutions “It is inspiring to see such a thoughtful analysis of the deep fnancial problems that make us why these families were the least prepared to
with the U.S. Department of the Treasury, and he life miserable for so many people, and to see that many of these problems can be solved Low-Income Americans handle the shock of the deep recession.
was a key architect of the Dodd-Frank Wall Street with suitable behaviorally informed fnancial innovations. Barr faces the real subtlety and
Reform and Consumer Protection Act of 2010. complexity of the problems that leave so many people with no slack.” This pivotal analysis focuses on the Detroit
metropolitan area’s low- and moderate-income
k ROBERT SHILLER, Arthur M. Okun Professor of Economics, Yale University neighborhoods, which are similar to those of
other Rust Belt communities. The Detroit Area
“In many respects the American economy is too fnancialized. But as Michael Barr highlights Household Financial Services study—conducted
in this important book, millions lack access to basic fnancial services and protections. at the height of the subprime lending boom—
Barr draws on his unmatched combination of academic expertise and policy experience to examines these households’ decisionmaking
defne the challenge and suggest ways to meet it. This book deserves to be an important processes, behaviors, and attitudes toward a full
range of fnancial transactions.
part of any discussion of the future of the fnancial sector or the prospects for low-income
Americans.”
No Slack reveals widespread problems in home
k LAWRENCE H. SUMMERS, former U.S. Secretary of the Treasury, president emeritus mortgage lending, the common threads among
and the Charles W. Eliot Professor, Harvard University people who fle for bankruptcy, the reasons
so many households are unbanked, and how
behaviorally informed fnancial regulation can
make the market work better. Drawing on his
deep policy experience, Michael Barr advocates
helping families seek fnancial stability in three
primary ways: enhancing individuals’ fnancial
BROOKINGS INSTITUTION PRESS capability, using technology to promote access
Washington, D.C. to fnancial products and services that meet their
www.brookings.edu needs, and establishing strong protections for
consumers.
Cover image: Martin Poole/Photos.com
Cover: Beth Schlenoff Design
final_barr jacket.indd 1 3/19/12 11:29 PM
No Slack
BARR he fnancial crisis exposed the
Advance Praise for potentially unsavory results of the
interaction between low- and moderate-
Michael S. Barr income households and alternative and
No Slack mainstream fnancial institutions. Many
Thouseholds were overleveraged or paid
“It is so nice to have Michael Barr back in academia, where he has resumed his scholarly high costs for fnancial services, while others
research into the challenge of providing affordable fnancial services for the poor. In this lacked access to useful fnancial products that
book, he vividly illustrates that while the hidden fees and surprise charges embedded in can cushion against economic instability. The
so many fnancial products irritate and annoy us, for those with ‘no slack’ they can have fnancial services system is not well designed
devastating fnancial consequences. There has got to be a better way, and Barr has devoted to serve low- and moderate-income households,
MICHAEL S. BARR is a professor of law at his career to fnding it.” leaving them without fnancial slack: they did not
the University of Michigan Law School and a No Slack have adequate breathing room for making the
nonresident senior fellow in Economic Studies at k SHEILA BAIR, former chair of the Federal Deposit Insurance Corporation fnancial adjustments that would permit them
the Brookings Institution. In 2009–10 he served The Financial Lives of to better meet their own needs. No Slack shows
as assistant secretary for fnancial institutions “It is inspiring to see such a thoughtful analysis of the deep fnancial problems that make us why these families were the least prepared to
with the U.S. Department of the Treasury, and he life miserable for so many people, and to see that many of these problems can be solved Low-Income Americans handle the shock of the deep recession.
was a key architect of the Dodd-Frank Wall Street with suitable behaviorally informed fnancial innovations. Barr faces the real subtlety and
Reform and Consumer Protection Act of 2010. complexity of the problems that leave so many people with no slack.” This pivotal analysis focuses on the Detroit
metropolitan area’s low- and moderate-income
k ROBERT SHILLER, Arthur M. Okun Professor of Economics, Yale University neighborhoods, which are similar to those of
other Rust Belt communities. The Detroit Area
“In many respects the American economy is too fnancialized. But as Michael Barr highlights Household Financial Services study—conducted
in this important book, millions lack access to basic fnancial services and protections. at the height of the subprime lending boom—
Barr draws on his unmatched combination of academic expertise and policy experience to examines these households’ decisionmaking
defne the challenge and suggest ways to meet it. This book deserves to be an important processes, behaviors, and attitudes toward a full
range of fnancial transactions.
part of any discussion of the future of the fnancial sector or the prospects for low-income
Americans.”
No Slack reveals widespread problems in home
k LAWRENCE H. SUMMERS, former U.S. Secretary of the Treasury, president emeritus mortgage lending, the common threads among
and the Charles W. Eliot Professor, Harvard University people who fle for bankruptcy, the reasons
so many households are unbanked, and how
behaviorally informed fnancial regulation can
make the market work better. Drawing on his
deep policy experience, Michael Barr advocates
helping families seek fnancial stability in three
primary ways: enhancing individuals’ fnancial
BROOKINGS INSTITUTION PRESS capability, using technology to promote access
Washington, D.C. to fnancial products and services that meet their
www.brookings.edu needs, and establishing strong protections for
consumers.
Cover image: Martin Poole/Photos.com
Cover: Beth Schlenoff Design
final_barr jacket.indd 1 3/19/12 11:29 PM
No Slack
NO SLACK
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NO SLACK
The Financial Lives of
Low-Income Americans
michael s. barr
brookings institution press
Washington, D.C.
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ABOUT BROOKINGS
The Brookings Institution is a private nonproft organization devoted to research,
education, and publication on important issues of domestic and foreign policy.
Its principal purpose is to bring the highest quality independent research
and analysis to bear on current and emerging policy problems.
Interpretations or conclusions in Brookings publications should
be understood to be solely those of the authors.
Copyright © 2012
THE BROOKINGS INSTITUTION
1775 Massachusetts Avenue, N.W., Washington, D.C. 20036
www.brookings.edu
All rights reserved. No part of this publication may be reproduced or transmitted
in any form or by any means without permission in writing from the
Brookings Institution Press.
Library of Congress Cataloging-in-Publication data
Barr, Michael S.
No slack : the fnancial lives of low-income Americans / Michael S. Barr.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-8157-2233-5 (hbk. : alk. paper)
1. Financial services industry—United States. 2. Banks and banking—Social aspects—United
States. 3. Poor—Finance, Personal—United States. 4. Low-income consumers—Finance,
Personal—United States. I. Title.
HG181.B33 2012
330.9730086'942—dc23 2012005711
9 8 7 6 5 4 3 2 1
Printed on acid-free paper
Typeset in Adobe Garamond
Composition by Circle Graphics
Columbia, Maryland
Printed by R. R. Donnelley
Harrisonburg, Virginia
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Contents
Acknowledgments vi
1 Introduction 1
Michael S. Barr
2 Managing Money 22
Michael S. Barr
3 And Banking for All? 54
Michael S. Barr, Jane K. Dokko, and Benjamin J. Keys
4 Preferences for Plastic 83
Michael S. Barr, Jane K. Dokko, and Eleanor McDonnell Feit
5 Which Way to the Bank? 115
Michael S. Barr, Jane K. Dokko, Ron Borzekowski,
and Elizabeth K. Kiser
6 Borrowing to Make Ends Meet 133
Michael S. Barr, Jane K. Dokko, and Benjamin J. Keys
v
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vi contents
7 High-Cost Home Ownership 156
Michael S. Barr, Jane K. Dokko, and Benjamin J. Keys
8 Living on the Edge of Bankruptcy 179
Michael S. Barr and Jane K. Dokko
9 Expensive Tax Refunds 204
Michael S. Barr and Jane K. Dokko
10 Paying to Save 218
Michael S. Barr and Jane K. Dokko
11 Behaviorally Informed Regulation 246
Michael S. Barr, Sendhil Mullainathan, and Eldar Shafr
12 Epilogue: Crisis and Reform 279
Michael S. Barr
About the Authors 287
Index 289
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Acknowledgments
he data presented and analyzed in this book are from the 2005–06 Detroit
TArea Household Financial Services (DAHFS) study, for which I served as
principal investigator. The interviews were conducted by the Survey Research
Center of the University of Michigan. Jane Dokko was a true partner in designing
the survey. Jane and I were joined in analyzing the data by Benjamin Keys, and
most of the chapters in this volume refect our joint work. I could not have under-
taken this project without them. In several chapters, other researchers joined in
our analysis: Eleanor Feit coauthored chapter 4; Ron Borzekowski and Elizabeth
Kiser coauthored chapter 5; and Sendhil Mullainathan and Eldar Shafr coauthored
chapter 11. They are wonderful colleagues, and I have learned a great deal from
working with them. When the book refers to “we” in the text, it is referring to
me and the coauthors of that chapter. With respect to my coauthors from the
Federal Reserve, I point out that the material in this volume does not refect the
views of the Federal Reserve Board or the Federal Reserve System. Similarly, my
co-authors who are affliated with the Consumer Financial Protection Bureau
or with the President’s Advisory Council on Financial Capability wish to make
clear that the views expressed here are their own and not those of the bureau or
of the council.
The DAHFS was generously supported by the Ford Foundation; the MacArthur
Foundation; the Annie E. Casey Foundation; the Fannie Mae Foundation; the
Mott Foundation; the Community Foundation of Southeast Michigan; the
National Poverty Center; the Center on Local, State, and Urban Policy (CLOSUP);
the Provost and Vice President for Research of the University of Michigan; and
the Law School of the University of Michigan. Many individuals at these
vi
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viii acknowledgments
organizations helped me along the way, but I want in particular to thank Rebecca
Blank, Evan Caminker, Paul Courant, Sheldon Danziger, Frank DeGiovanni,
Elisabeth Gerber, Bob Groves, Ellen Lazar, Benita Melton, Mariam Noland,
Marvin Parnes, Gwendolyn Robinson, Irene Skricki, Julia Stasch, Stacey Stewart,
and Eric Wanner. I am grateful for their support and advice. The views presented
here are mine alone, not those of the supporting organizations or these individuals.
The Survey Research Center is a phenomenal institution, and one of the
wonderful aspects of the University of Michigan is its strong tradition of inter-
disciplinary research, which made working across departments such a pleasure. I
would like to thank our project manager, Esther Ullman; our production manager,
Sara Freeland; our sampling and design expert, Terry Adams; the leadership,
staff, and faculty of the Survey Research Center; the members of our advisory
board—Phoebe Ellsworth, Robert Schoeni, and Rebecca Blank—who gave so
generously of their time and expertise; Kirsten Alcser, Judith Clemens, and Fred
Conrad for conducting cognitive interviews during pretesting of the survey;
Ed Bachelder, for technical assistance in developing the discrete-choice portion
of the survey and earlier analysis of the results; and my wife, Hannah Smotrich, for
the graphic design of the discrete-choice survey cards presented to the respondents.
Many of these chapters received valuable comments from Ian Ayres, Bob Shiller,
John Caskey, Reuven Aviyonah, Rick Lempert, Jeff Kling, Jeff Liebman, Nada
Eissa, Karen Dynan, Fred Feinberg, Neil Bhutta, Glenn Canner, and Andreas
Lehnert; participants in seminars or presentations at American Economic As-
sociation meetings, the American Law and Economics Annual Conference, the
Conference on Empirical Legal Studies, the Federal Deposit Insurance Corpora-
tion, the Federal Reserve Board, Harvard University’s Seminar on Inequality and
Social Policy, the Internal Revenue Service Research Conference, the National
Tax Association, New York University School of Law, Princeton University,
University of Illinois–Chicago, University of Michigan Law School, University
of Pennsylvania Law School, and Yale Law School; and a number of anonymous
referees. I am also grateful to Neal Bajema, Dario Borghesan, Erika Brandner,
Chester Choi, Maria Dooner, Evan Enarson-Hering, Andrew Hartlage, Robyn
Konkel, and Christopher Reynolds for invaluable research assistance. I am
thankful for the invaluable advice and editorial oversight of Robert Faherty,
Janet Walker, Larry Converse, Eileen Hughes, and their team at the Brookings
Institution Press. I want to thank my assistant, Linda Wielfaert, for her ongoing
support of all of my research.
A number of these chapters have appeared in earlier form elsewhere. Chapter 1
draws from Michael S. Barr and Rebecca M. Blank, “Savings, Assets, Credit,
and Banking: Introduction and Overview,” in Insuffcient Funds: Savings, Assets,
Credit, and Banking among Low-Income Households, edited by Rebecca M. Blank
and Michael S. Barr (New York: Russell Sage Foundation, 2009), pp. 1–24
Chapter 2 is an updated version of my chapter, “Financial Services, Saving, and
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