GUEST AUTHOR BLOG: “Lay off the Layaway” by Louis Hyman author of Borrow: The American Way of Debt
Recently Wal-Mart and other retailers have revived their mothballed layaway programs. Stores promote lay-away as a way for shoppers to avoid “debt” and still buy all the Christmas presents that they need. Lay-away is not debt, but like debt, it charges shoppers more money than the price of the goods. With credit, you get the goods today and pay the bill tomorrow. With layaway, however, you get the goods tomorrow and still have to pay the bill tomorrow. The downside of debt is not the instant gratification (which we all love), but the way in which an unpaid debt drains the pocketbook. Layaway does the same, but without the instant gratification.
Lay-away charges fees, though not in the form of interest. And unlike debt, the buyer doesn’t get the goods immediately but has to wait. It is like saving up for something in the future but instead of you getting the interest, the store gets the interest. Over the weeks leading up to Christmas, shoppers must dutifully return to the store and pay down their bill. If lay-away shoppers don’t pay the bill in full, they don’t get the presents and they are charged an additional penalty to get their money back.
The main impetus for this program appears to be Wal-Mart’s desire to rejuvenate consumer demand. Wal-Mart should expect that as customers come in every week that they will buy more. The rational way to use lay-away, moreover, is to buy everything at one store, which would minimize the fees. Wal-Mart no doubt hopes that it will be the one-stop shop for Christmas. After years of falling same-store sales, Wal-Mart needs to find a way to find its way back to growth. Yet while executives tell the New York Timesthat “shoppers are increasingly shunning credit” the reality is more complex. Rather than Wal-Mart customers deciding to shun credit, they are finding it harder to borrow.
Wal-Mart’s customers, concentrated at the lower end of the income spectrum, have found their supplies of easy-money to borrow disappearing.
Laid-off workers are the ones most likely to need layaway, particular those with less than a high school education, whose unemployment rate of 14.3% is more than triple that the 4.3% college graduate rate. In the last year, according the leading consumer-credit trade journal Nilson Report, the top three lenders, Chase Manhattan , Bank of America , and Citigroup , have all reduced the amount of their borrowers’ outstanding debt (-10%, -11%, and -9% respectively). Wal-Mart customers want to borrow; they just can’t.
Rather than a sign of national rehabilitation, we should view the resurgence in layaway as the desperation of Americans unable to borrow, unable to save, and most importantly unable to earn. While there has been a reduction in debt, there has not been an increase in wages. American wages have stagnated for the last 40 years and to some degree easy credit has filled that gap. For the last 40 years, the 1% has been willing to lend to the 99%, but not to pay them like they were paid in the postwar period.
Corporate profits may have returned, but wages and jobs have not. We think we have stabilized our financial system, but without returning some of those profits to working Americans, the system will continue to break down. Worse than missing a Black Friday sale would be not having anything to put under the tree. Worse than not having anything to put under the tree would not being able to afford the tree in the first place.
Louis Hyman attended Columbia University, where he received a BA in History and Mathematics. A former Fulbright scholar, he received his PhD in American history in 2007 from Harvard University. Recently he appeared as an economic expert in the 2010 documentary The Flaw, about the 2009 financial crisis. He is currently an assistant professor in Cornell University’s School of Industrial and Labor Relations. Read more in his forthcoming book from Vintage, BORROW: The American Way of Debt