The perfect charity?

I have a brilliant idea for a charity.  The objective is to help people who are financially struggling become aware of how much of their money management problems are within their own power to control.

Here’s the concept:  Payday Loans.paydayloan3.img_assist_custom

I feel obligated to fill in some background here.  Payday lenders give loans to people that have very poor credit.  They don’t technically charge interest, as they prefer to call them “fees” and fees tend to run about $15 per 100 borrowed for a 2 week loan.  They typically hold a post-dated check for the amount of the loan as collateral.  People typically use these to cover short term budget gaps… You don’t have the $155 to pay the utility bill.  It’s embarrassing to ask your friends and family for the money, and they probably don’t have it anyway.  Or maybe you already owe them money and they’re unlikely to fork over more.  If you don’t get the money you’ll have to live life in the dark for 4 days until your paycheck, and then you’ll have to pay a late-fee and a reconnection fee and probably be out 30 bucks anyway.  It seems perfectly logical in that moment to pay a $30 fee to take out a $200 loan ($170 of which you actually keep) pay the bill on time to stay in hot showers and eat taco bell with the $15 left over.  So you write the payday loan company a post-dated check for $200 which they hold as collateral, get your $170, pay your bill and feel like you made the best decision in a bad situation.

The problem comes 14 days later when you don’t have the $200.  You can spare $85, but they’re not interested in partial payments.  So your only option is to hand over another $30 fee to buy yourself another 2 weeks.  If you don’t they’ll try and deposit that check they’re holding and it will bounce which will cost you $25, and you’ll still owe them $200 plus a $30 “extension fee” plus they’ll still be holding your check.  If you try and blow them off they will call your work and humiliate you and they will call the cops and charge you with passing bad checks (which is technically true).  So you get stuck on the poverty treadmill for months paying them $30 every 2 weeks while you try and scrape together $200 at once in a world where every dollar you make has someone already calling dibs on it.  Eventually a month rolls around where you get 3 paychecks, instead of 2 and you still only have to pay all your bills once and you can get out from under this thing.  If that took 3 months to happen you will have paid a total of $210 in fees to borrow $200.

And these companies have lots of repeat customers… so as horrible as this all sounds people go through it and then choose it again.  The average customer loan is $375, and they pay 140% in fees for an average of $520 and dealing with this stress every 2 weeks for 5 months.

They post-dated check as collateral is most common, but a car title will work too.  And pawn shops are similar, all that stuff was originally collateral for a loan.  Some of those were “loans” in name only and the seller had no intention of retrieving their stuff, but a lot of people cycle back in and out with the same valuables over and over again.

My charity is going to work just like that.  None of the employees will even know there’s anything else to it.  But after a year I’ll bring the customer into the back office and I will show them a tally of all their loan payments.  Showing them how much they borrowed and how much they paid in fees.  I’ll explain that as poor as they feel, they managed to squeeze this money out of their budgets when they had to.  They’ve proven they can do it.  I will then swear them to secrecy and refund all their fees.  I will recommend that they put it in a savings account and set up an automatic transfer to help it grow.  I will beg with them that if they ever have to pull the money out of their emergency fund for them to fight as hard as they did to come up with the extension fee every 2 weeks to get that emergency fund built back up.  And I will explain that they will never be allowed to borrow money from me again.

Debt is evil.  Sometimes it’s a necessary evil, but it’s an evil none the less.


What determines pay?

In a previous post I discussed what determines price with a look at the feedback of supply and demand over time.  I now want to apply a similar logic to labor and compensation.  When we talked about price there’s a bottom value determined by the cost of the materials.  No matter how low demand stays price can’t stay below this level because no-one would bother to make the product.  Similarly there’s a top value on pay determined by the amount of value an employee creates for the company.  If an employee assembles 1,000 widgets a day and each widget sells at a $0.30 profit then the maximum that he can be paid is $300/day without running a loss.  Of course it’s not that simple.  The employer also has to pay for electricity to build the widgets, and  the building where the widgets are built, and %6.5 of the pay has to cover his share of the employees Social Sec and medicare, and he contributes to the employees health insurance, and he has to pay for all the machines used to make the widgets, and a thousand other expenses I can’t think of because I’ve never run a business.

So if the upper limit on pay is based on the value created by the employee, what determines the lower limit?  Now we’re back to the question of supply and demand.  How many of this job are out there?  How many people are able to do it?  There’s also an issue of anchoring or “stickiness.”  Did I bring this up in “what determines price?”  Price stickiness refers to the human tendency to think that what we have been paying for something is the “fair” price and when the price is raised we feel cheated or betrayed.  This can overcome habit and brand loyalty and make us search for substitute goods.  This is more in the realm of psychology than traditional economics, but real-life is messy and involves both.  Stickiness applies to wages as well as to prices.  If your boss came up to you and said, “Sales are down, we’re going to have to ask you to take a 10% paycut”  you would be shocked.  Irate even.  Morale would drop.  Productivity would drop.  You would be far more likely to consider other job offers, after all if this is how he treats you why should he deserve your loyalty?  If you let them do it once what’s to stop them from doing it again?  Employers would love to do this.  The normal salary contract puts all the market risk on the employer and the employee gets a relatively free ride.  Of course if we had higher risk tolerances we’d all be self-employed.  (I know if I had a higher risk tolerance I’d be running a summer camp called “Ninja School.”)  Since employees won’t tolerate pay cuts the alternative is to get rid of the unproductive employees.  No fault of theirs, but if nobody’s buying widgets we can’t afford to pay people to stand around and not make them.  Then when the business cycle rolls back the other way and demand for widgets goes up we won’t have enough workers, and we’ll have to advertize, interview, hire, and train them… all the while profits are being lost.

Another thing that distorts supply vs demand in the wage market is the labor union or the trade guild.  When large groups of workers with similar skills act as a block and refuse to work for less than a certain wage (or benefits package, or vacation time…) it raises the wages even of those who aren’t part of the organization.  This is analogous to the oil cartels deliberately setting the amount oil produced to hit a certain target price.  In the price scenario the long term trend was for new businesses to come into the market and increase the supply until profit margins returned to average levels.  In the wage scenario it is unaffiliated workers and “scabs” that come into the market and increase the labor supply to drive wages back down.



  • Top wage is determined by productivity / value added
  • Bottom wage is determined by subsitance / safety-net effects
  • Actual wage is primarily determined by number of job openings and number of workers with requisite skills
    •                 Wages are driven up by organized labor
    •                 Wages are held up by stickiness
    •                 Wages are driven down by market corrections and corporate profit targets



What do you need to do everyday?

Work. Sleep. Eat.  Basic hygiene.

That’s it really.  When we get outside of that we get outside of the concept of “need.”  But honestly there are other things we need to feel ok.  To be normal and stable.  I don’t need them everyday, but how long can I go without them before I start to lose it?
I need to surf the internet for an un-interrupted hour.  I need to sit on the couch next to my lovely wife.  I need to read a book to my boy.  I need to pick up Joule and spin around to make my girl laugh.  I need to do some laundry.  I need to re-stock the fridge.  I need to exercise.  I need to socialize.

I’ve worked 12hr shifts for most of 4 years now.  It’s really not that big a deal.  You can’t get everything done on a work day that you probably would if you worked for the “normal” 8 hours, but that’s balanced out by working fewer days.  You settle for meeting fewer of your needs, and for only getting 6 hrs of sleep for 4 nights in a row.  Then you get caught up on your days off.

Well I’ve just gone through an outage and let me say that this pattern is unsustainable over longer periods.  From the time I go to sleep at 11PM to the time I get home from work at 6:30PM  uses up 19 +1/2hrs of my day.  The outage required shifts to double up, and the hours spent at work were more intense than usual.  Couple that with how the shifts happened to hit when we started and ended the outage and me having to cover for C-crew CRO rolling out of that and I end up working 29 of 32 days before I get 2 days off in a row.  Today is day 24 of this marathon.  The outage is over and I’m on “normal” night shifts.  I’ve missed 2 birthday parties, the pinkpalace crafts fair, and taking my zombie ballerina toddler to the haunted house.  I’m going to miss another birthday party for my nephew and will have worked all night before my sons birthday party, and then will be going back onto day shift the very next day.  I’m going to go 5 weeks without tutoring my sister in-law in physics.

And my precious wife is spread just as thin as I am.  She doesn’t get a break from the childcare unless I have time off to give it to her, and the (at most)2 hrs aday I’m giving her now is not sufficient to restore her.  It’s just enough to delay the collapse.

We’re all running around with red diamonds over our heads like angry little sims.

red diamond of misery

red diamond of misery

I can’t remember where  I put anything.  I can’t plan a meal.  If I can’t do it on automatic it doesn’t get done.  Oh sure, my paycheck is almost double what it would normally be, but I’m pretty sure I crossed the money/happiness threshold before overtimageddon.

When I was in the navy there were times when I was worked like a dog.  Times when we were preparing for an underway, or drilling and cleaning and training  to prepare for ORSE.  The hours were even more demanding.  The down time consisted of an hour I should’ve been sleeping spent reading in my rack.  Your rack barely has enough room to roll over in and I often woke with one of my arms asleep.  But in a lot of ways it was easier.  You didn’t have to think about food, and they guy the few guys that were worried about dishes weren’t worried about much else.  Your wife and kid might as well have been on a different planet.  There was a sense of purpose.  A sense that we were all in this together.  And on the worst days you’d sit around and fantasize about how good it would be to be a civilian, where you could tell your boss to go fuck himself and there was no threat of captains mast hanging over your head.

It seemed so logical that if an employer was forced to pay you time and a half (instead of owning you by the month), they would hesitate to ask you to work more than 40hrs/week.  And sometimes that seems true.  Other times it’s a farce that makes me weep with weakness.

From an economics standpoint the answer is obvious.  They value my contributions at more than 150% of my normal wage.  Clearly I should renegotiate.  However my ability to demand more money is limited by the availability of alternate jobs at similar wages.  There’s no teeth to my negotiation unless I’m willing/able to walk out if my demands aren’t met.

Discount Hurdle

In my previous post discussing how prices are determined, I talked about companies searching for the right price point.  Sometimes lower prices lead to higher sales which can lead to higher total profits even though the margin is slimmer.  Inversely raising prices can drive your customers to choose a cheaper substitute.  Higher margins, but fewer sales leads to less profit.  Reminds me of a Calvin and Hobbes comic in which he’s trying to sell lemonade at $15 a cup.  Since he wasn’t selling any he decided to raise his price, so that he wouldn’t have to sell as many to get the money he wanted.

I suppose while I’m going tangentially I should mention (as someone pointed out to me) that not follow the all products follow the normal rules of supply and demand.  Luxury goods in particular behave perversly.  The value of a $500,000 watch is largely the status you get from spending half a million dollars on a watch.  It’s not like you’d sell more than twice as many if you cut the price in half.

So when someone decides to sell a product, they naturally want to get as much money as they can from it.  They don’t actually care about what’s a “fair” price, nor do they worry about the justice that not everyone can afford to pay the price they’re asking.  However some profit is far better than no profit.  This conflict is at the heart of selective pricing.  Once upon a time when every shop counter was run by the owner, and prices weren’t as easliy compared nor were they even tagged on the products, every transaction involved bargaining.  The seller would gauge the amount of money he guessed you had available, and how bad you wanted that particular product, and name a price.  It was up to the buyer to vote with his feet if he wasn’t willing to pay the asking price.

When I hear a phrase like “variable pricing” my gut goes “that’s not fair!”  But that’s the way every transaction was made in every market square for a thousand years.  If you leave America you’ll find that our fixed pricing scheme is actually the odball in the world.  So how did we end up with our system?  Department stores.  When stores began to get so large they had to hire sales staff who didn’t have the business’ interest at heart they had to stop bargaining on every sale and set the prices firmly for the clerks to follow.

Thier tendency is to set the prices a little on the high side, because after all someone will be willing to pay it.  But they know that there are more profits to be made by selling the product for less to people that aren’t willing to pay the higher price.  The way this is done is by putting obstacles between the consumer and the lower prices.

The most common of these is time.  Keep the price high when a DVD is first released.  Then after a couple of months all the impatient money is spent and the price is lowered.  More people are willing to buy at the lower price.  I hear you trying to argue that this isn’t a nefarious plan, this is just supply and demand… Demand drops so the price drops.  But I don’t think the number of people interested in buying the movie really changes, just the number of people willing to pay $24.95.

Many items have a seasonal price cycle that tracks the opposite of demand.  Swim suits are most expensive in the spring and get cheaper throughout the summer.  At the end of the summer the prices are knocked down to cost because they don’t want to store them all winter.

Another discount hurdle is “the sale.”  They will create a narrow window of a few days in which the price sensative consumers can get the products they want at prices they’re willing to pay, and the stores can get the money they can from them without giving up the money they normally get from the more affluent (or lazy, or impatient) consumers.  The store’s  are simultaneously using this as a bait and switch advertising ploy, hoping you’ll buy some full price items while you’re there.

A third method is the coupon.  You have to find and save this scrap of paper to earn your cheaper price.  Coupons also overlap neatly with advertising.

What Determines Price?

Supply and Demand right?  Easy enough.  The more that people want to buy a thing the more the sellers can hold out and find people willing to pay the higher prices.  Inversely the more of something there is to be had, the better chance the buyers have of shopping around for the more desperate sellers, forcing all sellers to lower their price to compete.  Simple high school level economics.

Before I get too far into this lecture I should put up a disclaimer.  I have never “studied” economics.  I have an intelligent and curious mind, and I follow freakonomics and planet money, and I try and make sense of the world in my own terms.

But wait a second.  Demand is flexible.  That means that If you lower the price, more people will be willing to buy it at the lower price point.  Every new product is hunting for the right price point.  If you lower the price and make less profit per unit, but sell more units do you make more money?  Sometimes you do, and sometimes you don’t, but my point here is that a second ago we said that price depends on demand, and now we see that demand also depends on price.

Supply can be distorted through monopoly control or through an agreement to limit production or coordinated purchasing policies.

  • diamond mines
  • OPEC
  • International manipulation of grain markets
  • Patent control / copywrite law

So we have supply, demand, price-demand feedback, supply manipulation.  But all this only applies to commodities.  Products and services differ from one another, where as commodities are interchangeable regardless of the source.  No one can tell whether a gallon of gas came from Texas, or Canada, or Iran.  And in a free market no one cares.  However you can tell whether your mp3 player is an ipod or sony.  You can tell the difference between Kraft cheese and macaroni and the store brand.  So there’s another set of things effecting demand:

  • The differences between similar products.
  • The reputations of the companies.
  • The effectiveness of their advertising.
  • The ease of change once you’ve started using a product.

Earlier we looked as Price-Demand feedback.  There’s a similar thing that happens on the seller side.  A sort of Profit-Supply feedback.  That is to say that if a product’s supply/demand situation has positioned itself so that a product has higher profit margins, this will draw more manufacturers into the market to compete.  This will increase supply and therefore lower price.  This is where price is really determined over the long term;  Average Profit Margins.