Read an Excerpt

Citizen Wealth

Berrett-Koehler Publishers, Inc.

Chapter One

The Bible may have assured some people that the poor would always be with us, but there is no support in Scripture for the view that their numbers must necessarily be as huge as they are today. We should instead believe that poverty is a relative concept, meaning that some families are relatively poor compared to those who are rich, rather than an absolute concept, meaning that some families are sentenced by circumstance, fate, or fortune to the most abject levels of deprivation and poverty.

The task of making sense of all of this can be daunting. Every morning's headlines seem to carry the subtext these days that economics is about as much a science as astrology. The basic strategy seems to be to throw as much money against the wall as can be printed and hope that it sticks long enough to prevent the deluge. Managing the economy in these times seems to be driven by hopes and prayers more than anything else. Suffice it to say, all of these issues become very complex when it comes to money, who has too little of it, and how to make sure they have more.

These are problems that arise when we fail to recognize the fact that income alone does not guarantee economic security, nor does income by itself define wealth. In working to advance citizen wealth we need to look closely at how these factors differ and how we can devise strategies or campaigns to create programs that increase not only income, but wealth as well.

This is a big-stakes proposition, and there need to be a lot of players at this table putting actual investments into the pot, not just wild bets. The government is part of the solution here, but so are businesses that depend on lower- and moderate-income families for their success. I also believe there are roles for all of us to play, particularly as recession forces us to confront the fragility of family economic security. We may not be economists, but more and more of us are going to know families who are losing their security, losing their homes, seeing their children come home from colleges they are no longer able to afford, dealing with mature workers finding careers and good jobs suddenly gone. In fact, more and more of us are these families, and some of us have been these families for a long time. We have to sort this out.

Low- and Moderate-Income Families

The demographic population that ACORN sees as its primary constituency is low- and moderate-income (LMI) families. Roughly speaking, this "majority constituency" (which includes the 47 percent of American families making less than $50,000 annually; the 21 percent earning between $51,000 and $75,000; and the 14 percent earning between $76,000 and $100,000) adds up to 57 million families in America. This same block of people around the world is obviously an even larger percentage of the population, because the developing world is overflowing with families who are barely surviving. Estimates indicate that a quarter of the world's population makes less than US$2 per day—over 1 billion people! At home or abroad, the reality continues to be that there are more people for whom money is a constant, daily concern than there are people who have found a livelihood and income stream that puts them beyond the ravages of want.

Business Models

Firms see such numbers as markets, and they make their own assessments of whether these are customers they want to seek or avoid. Current developments in India around modifications of foreign direct investment in retail, banking, and insurance are interesting because they reveal some of the choices and aspirations of global corporations. In a country of 1.1 billion people, some 300 million in India's emerging middle class are reshaping the market so that global concerns like big-box retail or global financial institutions like Citibank or HSBC can export their brands to such "solid" citizens.

Even so, in the United States some of the same companies see low-and moderate-income families as primary markets for their core businesses. Two good examples in different markets are Wal-Mart and H&R Block. Wal-Mart has succeeded over the last fifty years in building the largest corporation in the United States, with gross sales of some $270 billion and more than two million employees, making it the largest employer by far in the U.S., by using a business model that focuses on full-service retail sales to families making less than $50,000 per year. Kmart and Target like to see themselves as slightly more upscale, but their target customers are still in the solid range of LMI consumers. H&R Block, which specializes in tax services as its core business, focuses its business model on a "preparer dependent" customer who keeps coming back tax season after tax season. Block prepares 20 million tax returns every year, specializing in low- and moderate-income communities, as ACORN discovered in our campaign against some of Block's practices. In fact, H&R Block recently shared with us an internal report indicating that approximately 7 million of its tax-return customers seem to be eligible for any number of federal income support programs, which illustrates the full reach of Block's market penetration among lower-income families.

Certainly these are not the only large companies to specialize in lower-income consumers. The list is in fact a long one, and parts of it are anything but pretty. Cigarette, beer, and liquor companies have long been mainstays in this area. Pawnshops and quick-loan storefronts can be found in virtually any lower-income area, but many have been replaced by the check-cashing and payday loan outfits that have become ubiquitous in lower-income communities. Look within a short radius of Wal-Marts virtually anywhere in the country, including some moderate-income neighborhoods, and you will see not only the check-cashing and payday loan storefronts in nearby strip malls, but also H&R Block, Jackson Hewitt, Liberty, or some local "mom-and-pop" tax place. There will, of course, be fast-food outlets of all shapes and varieties. Increasingly there may not be supermarkets. You may find specialized outlets catering to particular ethnic groups. There will be coin-operated laundromats, liquor stores, bars, churches, daycare centers, rent-a-center or cheap furniture stores, a lot more tire and mechanics' shops to keep beat-up cars hauling their owners to work with bailing wire and chewing gum, used car dealers, and on and on. Many of them are not large national firms, though a surprising number of establishments, like the predatory check-cashing and payday loan boutiques, are supported by the largest and best-known finance houses in the country.

The simple truth is that despite the poverty of many of these communities there are already significant assets embedded there. Recognition of this fact helped drive passage of the Community Reinvestment Act in 1977. Banks were collecting substantial deposits from thousands of individual accounts in poor communities, and the numbers added up to significant proportions of bank assets. But not much of this money returned in the form of loans by the banks back to the local communities where they so readily accepted deposits and held resources.

In fact, the heart of the economics of redlining could be found in the expropriation of these deposited dollars from poorer areas and their transfer to "safer" areas, which were also richer and whiter, to finance home mortgages and similar loans. There were assets, lots of assets, but they were not being allowed to multiply on behalf of their owners, particularly in creating home ownership opportunities or in allowing investments in existing homes that would increase in value. Banks were essentially controlling assets providing their owners minimal to nonexistent returns in order to maximize bank income from higher interest rates and to make supposedly more secure investments outside the community.

Over the last thirty years there has been great progress in reducing redlining, though even now only about 30 percent of the mortgage lenders fall under CRA regulatory requirements for community lending or the Home Mortgage Disclosure Act (HMDA) for reporting on such lending. In the last three decades this area has, despite the CRA, become an unregulated "no man's land."

Part of the business model of many financial institutions over the same period has been to move away from serving individual depositors. It would seem obvious for me now to list banks as another one of the institutions that are firmly rooted in lower-income communities. In fact, it would seem obvious to report that there is great progress in narrowing the gap of the "unbanked" among American lower-in-come families. Unfortunately, this still does not seem to be the case. Currently, 9 percent of families do not have a bank account. Twenty years ago, 15 percent of families did not have bank accounts. That is not as much progress as we need, and therefore creates a problem experienced routinely in the development of citizen wealth.

Western Union, for example, and new competitors such as MoneyGram and those that offer debit card–based products, are entrenched in lower-income communities, particularly in those with high percentages of immigrant workers and residents, because these companies specialize in handling the transfer of remittances from the U.S. back to the families' home countries. These remittances are now a fundamental component of the national economies of countries throughout the developing world in Africa, Latin America, and Asia.

The Nexus of Wealth

Before we go too far down this path, it is important to understand that most of these business models are focused on capturing income from LMI families, rather than wealth, and therein lies both the problem and the potential lie. At the threshold of our journey, we have to confront a huge problem for people, politicians, and policy. There is a world of difference between income and wealth, and inequities have been increasing in America even more dramatically around wealth than around income.

In "The Hidden Cost of Being African American" Thomas Shapiro makes this point forcefully: "The average American family uses income for food, shelter, clothing, and other necessities. Wealth is different, and ... it is used differently than income. Wealth is what families own, a storehouse of resources. Wealth signifies command over financial resources that when combined with income can produce the opportunity to secure the 'good life' in whatever form is needed—education, business, training, justice, health, comfort, and so on. In this sense wealth is a special form of money not usually used to purchase milk and shoes or other life necessities. More often it is used to create opportunities, secure a desired status and standard of living, or pass class status along to one's children."

Put another way, there are big reasons why the rich are different from the rest of us, and those differences lie right at the nexus of wealth: they can live with a level of security and a variety of opportunities that can only be imagined by the vast majority of working families.

Many make the argument that some progress has been made in reducing income inequality. The income-based U.S. poverty rate was 15.2 percent in 1983 and dropped dramatically to 12.8 percent during the six-year period to 1989, and fell less significantly down to 11.7 percent by 2001. Unfortunately, as important as reducing income equality is, there seems to be a weak correlation between income and wealth. Sociologist Lisa Keister makes this point in her study Wealth in America: by focusing "solely on income [we] miss a large part of the story of advantage and disadvantage in America."

The same point is made about the relationships among income, earnings, and wealth by Javier Díaz-Giménez, Vincenzo Quadrini, and José-Victor Ríos-Rull: "Labor earnings, income, and wealth are all unequally distributed among U.S. households, but the distributions are significantly different. Wealth is much more concentrated than the other two. Wealth is positively correlated with earnings and income, but not strongly. The movement of households up and down the economic scale is greater when measured by income than by earnings or wealth. Differences among the three variables remain when the data is disaggregated by age, employment status, educational level, and marital status of heads of U.S. households." All of this seems to be the equivalent for the body politic of getting pneumonia under control and then having to explain to the family that the patient still died because there was no remedy for the cancer.

Since we are now wallowing somewhere between bad news and hard facts, let's consider sociologist Mark Rank's point that to recognize the "true nature of poverty" we "should be looking at American families that experience at least one year of poverty." Rank emphasizes that almost 60 percent of Americans will spend one year below the official poverty line—I can tell you now that organizers will spend more than one, along with many of our members—and that 90 percent of African American families will have this experience during their most productive working years.

Thomas Shapiro also cites the asset poverty line (APL) as helpful in looking at this problem. It's a calculation of the resources needed by a family to survive a crisis period during which they have no income. Suppose, Shapiro argues, that the APL were tied to the official poverty level and we arbitrarily defined a family's crisis period as three months with zero income: "In 1999 the official U.S. government poverty line for a family of four stood at $1,392 a month. In order to live at that poverty line for three months, a family of four needs a safety net of at least $4,175. Families with less than $4,175 in net financial assets in 1999, then, are 'asset-poor.'"

It is this kind of calculation that underlies the fear of losing a job or missing a paycheck for a month or two, and marks the difference between family security and homelessness. It is wealth rather than income that provides the safety net for working families, and there simply is not enough wealth and not enough being done to increase it.

It goes without saying that wealth is not color-blind, either. In a 1999 study a little more than a quarter of all white children were raised in such asset-poor families, while 52 percent of African American children were raised that way and 54 percent of Hispanic kids. For whites since 1984 that level has been largely unchanged, while the percentage of blacks has fallen from 67 percent in 1984 and Hispanics have seen increases in asset deprivation.

Most of the business models we looked at earlier focused on how to divert pieces of the income stream of lower-income families to business enterprises. Such income diversions virtually by definition go toward necessities or "survival" items like food, shelter, clothing, fuel, transportation, and health. The Wal-Marts of the world can maintain their hold on the incomes of working families because they specialize in many of these areas. Many other companies contend for this income stream, including other grocery and drugstore operations, car manufacturers, insurance companies, trade schools and community colleges, gas stations, home and rental companies, and so forth through all the categories of consumer and durable products. In many cases, such firms' best-case argument for creating value is similar to Wal-Mart's claims that it saves the working family money and perhaps thereby helps to create wealth.

If we define wealth as based on the resources a family controls and that can be increased by new opportunities, then arguably wealth can be built by deeper training in marketable skills, through education that not only broadens opportunity but also extends social and job networks; by ownership of housing and other property; and by holding savings and other investments. With this being said, where are the companies that see their business model as increasing citizen wealth? The citizen wealth crisis is most dramatically revealed in the current loss of wealth caused by the bait-and-switch methods that were endemic to subprime lending. The financial institutions that supported the subprime system are to blame for the loss of millions of family homes to foreclosure and for the fate of millions of families who are "under water" on the value of their homes compared to the size of their mortgages. All of these families are losing wealth.

(Continues...)

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Excerpted from Citizen Wealth by WADE RATHKE Copyright © 2009 by Wade Rathke. Excerpted by permission of Berrett-Koehler Publishers, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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