From Our Blog

Think being poor is expensive? You’ve no idea.

Darryl Lorenzo Wellington
11.December.16

I struggle to make ends meet and as a middle-aged black man who has had his share of health scares, I have struggled for some time. So I deeply appreciated a recent conversation with Stanford economist Xavier Jaravel, who wrote a 2015 paper on retail economics called “Unequal Gains from Product Innovations“ that has raised quite a stir in the economics community by exposing how badly the economy undermines people in my income bracket.

It’s no secret that the poor pay more. The poor pay more by living in food deserts, by having to drive longer distances and stand in longer lines to buy or do just about anything, by not having enough cash on hand to shop when items are on sale, by receiving less efficient . At the same time, prices increase every year, even as wages stagnate. For those who struggle to make ends meet, it means paying for anything takes deeper chunks out of their limited income.

Jaravel conducted a ten year study of the retail market, looking at “purchasing power,” which is the capacity consumers have to purchase necessary goods. He examined consumers of all income levels.

Guess what he discovered?

The old saying, “The rich get richer, and the poor get poorer,” repeated in the back of my mind while he guided me through his well-reasoned lesson showing that the purchasing power of low income Americans has remarkably dwindled. Poor people can afford to buy fewer things, even when buying very inexpensive products. The poor have gotten poorer, and the rich have gotten richer – and it’s worse than economists previously believed.

Some of the ways that poverty disadvantages consumers are more evident than others. Jaravel’s study of retail market patterns from 2004-2013 exposed a less visible, but insidious poverty trap stymieing low income Americans: high inflation.

Economists define inflation as the annual increase on the cost of goods. In a healthy economy, the annual inflation rate is low. Jaravel’s study shows the prices on low priced and inexpensive goods, the ones most likely to be bought by those with little money, have had the highest annual inflation rates in the last 10 years.

Jaravel’s estimates the annual price increase on retail goods has been 0.65 percent lower for household making $100,000 than for household making $30,000 or less. A 0.65 percent difference sounds like an insignificant number. If you are low-income and you shop at low-cost retailers, such as Wal-mart, you may only see an increase in nickels and dimes on individual products, but that increase is on every product you buy. That adds up to hundreds, if not thousands of dollars, that is drained from your income every year.

The reason that the poor pay higher rates of inflation, Jaravel said, is that over the past decade profit-driven companies have begun exclusively catering their products to wealthy and upper middle class consumers. New companies haven’t entered the market for low-priced food and retail goods. Consequently, those markets have stagnated. (“Stagnant“ is an economist’s word for a market that lacks new ideas or competition.) Jaravel said that in a stagnant market, companies and retailers “can make the price whatever they want it.”

That’s also known as unchecked greed. And that – in a nutshell – is exactly what has happened. Companies driven by greed that is unchecked by fair competition or government intervention have been free to hike prices on the poor, who are captive consumers.

Ironically, the week after I spoke with Jaravel, I learned my $725 rent was increasing by $100. My landlord claimed he had to raise the rent because of the cost of buying a new refrigerator and garbage disposal for my apartment.

I had a hard time sympathizing. My landlord’s argument for the rent increase is a living example of Professor Jaravel’s explanation of how the poor pay more for the cost of goods.

Professor Jaravel says it’s time for better solutions that bolster poor consumers who face excessive inflation.

He recommends increasing the amount of money the federal food stamp program provides families to buy food. This enhances the purchasing power of low-income Americans, making them a more attractive demographic and encouraging new markets to cater to them.

Professor Jaravel also speculates that future studies might show that raising the minimum wage to $15 an hour would have a similar effect.

I hope important people have been listening. Professor Jaravel’s lessons encourage the nation to ease economic disenfranchisement by building the poor up, rather than always cutting social programs.

In the meantime, those in need of an emergency $100 for rent money can go to nearby payday or car title loan business, which until recently have forwarded small cash loans, at interest rates as exorbitant as 700 percent. I’m keeping my finger crossed that I won’t fall into that poverty trap.

Yet.

Darryl Lorenzo Wellington is a writing fellow for the Center for Community Change.

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