The Consumption Smoothing Edition

Summary

Slate Money – The Consumption Smoothing Edition

Date: December 2, 2017
Host: Felix Salmon with Anna Shymanski, Jordan Weissman, and guest Rachel Schneider

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Episode Overview

In this “Consumption Smoothing Edition,” the Slate Money crew is joined by Rachel Schneider, co-author of The Financial Diaries: How American Families Cope in a World of Uncertainty, to discuss the shifting realities of American middle-class finance. The episode explores why even working families experience wild swings in income and expenses, the challenge of budgeting under such volatility, and the rise of fintech solutions designed to help (or exploit) consumers. The team also dives into the implications of cities’ aggressive courtship of Amazon’s next headquarters, and the problematic race-to-the-bottom these deals represent for local democracy.

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Main Discussion: The Financial Diaries & Income Volatility

Setting the Stage: Who Gets Studied, and Why?

• Rachel Schneider shares her research, where she followed 235 working families for one year, tracking every penny spent:

  "It's really the stories that arise out of research... we talked to 235 families and gathered information about their financial lives over the course of a full year." (00:45 - Rachel)

• The focus is not the very poor, but families at or just above the poverty line (“the band we were working with was from the poverty line up till about two times the poverty line, which is around the area median”). (02:39 - Rachel)

Key Findings: Income Swings Are the Norm, Not the Exception

• The prevailing assumption—that a steady, predictable paycheck comes with a full-time job—is outdated:

  “Even if you're solidly in the middle class and even if you have a full time job, you can still wind up with unintuitively enormous fluctuations in monthly income and cash flow.” (02:09 - Felix)

• Families experienced massive spikes or dips (≥25%) in monthly income at least five months per year:

  “In five out of 12 months... families had huge spikes and dips in their earnings over at least 25% more, 25% less than the average.” (03:58 - Rachel)

• Traditional budgeting advice is “nonsensical” for these families because of such volatility.

The Human Reality of Budgeting

• People adapt by hoarding goods (stockpiling food and toiletries after a good month) rather than saving cash:

  "When her husband has spikes in his earnings... she stocks the freezer... pantry full of toothpaste... She says, 'It's just really hard to save in cash, and I can't go to the movies and pay with a pork chop.'" (05:06 - Rachel)

The Great Job Shift & Corporate Risk

• The 20th-century norm of steady wages was an exception, not the rule:

  “We hold out the Post World War II decades as the benchmark, but they may have been an aberration in terms of economic security.” (10:50 - Rachel)

• Just-in-time labor practice means risk is shifted from corporations to individuals:

  "What's happened really is a shift in the risk in demand for services from the institution... to individuals." (07:23 - Rachel)

The Role of Technology and Corporate Power

• Companies’ use of technology and scheduling software increases workers' income instability.
• A 30% increase in annual income volatility has occurred over the past 40 years, per national data. (08:12 - Rachel)

Implications: Social Mobility & Regressive Effects

• Volatility is more damaging for the poor, who have smaller financial cushions and less access to low-cost credit:

  “If you're rich, ... you can totally afford to take a volatile income... If you're poor, you can't afford to do that.” (13:15 - Felix) "The poorer you are, the smaller change it takes in your income for it to be really volatile." (13:42 - Anna)

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Solutions & Fintech: Affirm and the Evolution of Credit

Affirm: Credit Innovation or Consumption Trap?

• Affirm (founded by Max Levchin, PayPal co-founder) offers point-of-sale installment loans, providing an alternative to credit cards, especially for purchasing big-ticket items:

  “Everything is done on a purchase by purchase basis. So you really know how much you're spending each month or each paycheck to pay off... the item that you used the affirm credit for." (16:43 - Felix)

The Good:

• Transparent installment terms; clearer for budgeting than revolving credit cards.
• Offers credit access to those who might not qualify for credit cards.
• Installment structure is a "dramatic improvement over payday loans and over credit cards in lots of ways." (23:22 - Rachel)

The Bad:

• Risk of hidden costs: Merchants pay Affirm, and prices are often higher in poorer neighborhoods—an "additional poverty tax." (21:52 and 23:44 - Felix and Rachel)
• Interest rates (around 19%) are between typical credit cards and predatory payday loans.
• May encourage “needless and possibly ill considered consumption,” as purchases spike after Affirm is introduced. (18:16 - Anna)

  "You could still get into some financial trouble, certainly." (18:41 - Jordan)

Notable Quote:

“With credit, the constant problem is, is better good enough?” (24:23 - Rachel)

Algorithmic Underwriting:

• Affirm’s algorithms constantly change and sometimes deny credit unpredictably, which adds another layer of instability for users who might rely on such loans. (24:51 - Anna)
• Concerns raised about the transparency (“black boxiness”) and discriminatory potential of such algorithms:

  “Underwriting is designed to tell the lender whether... you're going to pay it back. It's not designed to tell whether or not this loan is a good choice in your life at all.” (27:41 - Rachel)

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Cities Competing for Amazon: The New Company Towns

Municipal Giveaways & Democracy at Stake

• Cities (notably Chicago and Fresno) are bending over backwards to lure Amazon’s HQ2, with offers ranging from redirecting tax revenue back to Amazon (Chicago) to outright letting Amazon decide how its tax dollars are spent (Fresno).

  "We will let you build your own city and we will throw money at you... but you will be in charge of your city and you get to make the rules." (31:34 - Felix)

Concerns

• Undermining democratic control in favor of corporate interests—echoes of old company towns:

  “...A bunch of cities have effectively gone up to Amazon and... we will actually give you the keys to city hall to a large degree as well.” (35:21 - Felix)

• The possibility of long-term, contractually binding deals that make it difficult for local citizens to reclaim control:

  “You can vote out the mayor, but you can't vote out Amazon once it's there and it has its deal.” (36:34 - Anna)

Is It Overstated?

• Some argue the economic benefits (jobs, secondary growth) may offset concerns, and municipal democracy can persist. Others are skeptical, fearing a template for future corporate demands:

  “I don't think this is going to be the last time a major company tries to pull this. I think Jeff Bezos might be setting a template here.” (38:55 - Anna)

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Numbers Round (Key Stats & Notable Moments)

• $400 — Half of Americans cannot easily come up with $400 in an emergency without borrowing or selling something. (46:17 - Rachel)

  “The idea that you wouldn't have $400 to your name if something came up is striking.” (47:10 - Rachel)

• 252,000 — Transactions per second on Alibaba during Singles’ Day. (44:07 - Anna)
• $100 million — Amount Chase invested in “Chase Pay,” a payment tech with low user adoption. (44:48 - Felix)
• $59,000 — Median household income in the US for a family of four. (03:09 - Rachel)
• 30% — The rise in income volatility over the past 40 years. (08:12 - Rachel)

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Notable Quotes

• On budgeting and volatility:

  "Everything you think about how somebody would budget goes out the window... in five months of the year, that would have been nonsensical." (03:58 - Rachel)

• On consumption:

  "To splurge on something is a human need and desire... the idea that you would be perfectly disciplined about your spending all the time... it's not fun." (19:42 - Rachel)

• On technology and workers:

  "Companies have gotten too good at programming their workforces for like down to the second savings?" (06:34 - Jordan)

• On Amazon HQ2:

  "It's not even the employees... which get to determine their own fate. It's their employer. And I feel like we haven't had one of those company towns in what, like almost 100 years now..." (31:34 - Felix)

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Memorable Moments

• Becky’s Toothpaste Pantry: A vivid story of coping—when cash is tight, stockpiling household goods after a good month. (05:06 - Rachel)
• Anna’s criteria for financial products: Is "better" always good enough, especially for those with limited options? (24:23 - Rachel)
• Comparing Affirm’s interest & fees in poorer neighborhoods: A discussion on the “hidden” notes of poverty tax and the dangers/benefits of credit innovation. (21:52 - Felix)
• Amazon as ‘Emperor’ of towns, and the Hunger Games for HQ2: The comedic yet disquieting depiction of municipal desperation. (29:33–35:21)
• Host exasperation at fintech proliferation: Felix’s quip about "a gazillion competing payments protocols out there." (45:16 - Felix)

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Timestamps for Key Segments

• 00:45 — Rachel describes The Financial Diaries project
• 02:09–05:56 — Overview of key findings: income volatility, coping mechanisms
• 06:04–10:50 — The Great Job Shift: historical vs. current economic stability
• 11:21–14:21 — Solutions: fintech innovations, regulatory concerns
• 16:06–29:19 — Deep dive: Affirm’s business model, pros and cons, the role of 'black box' algorithms
• 29:33–36:47 — Amazon HQ2: city offers, implications for democracy
• 44:07–47:28 — Numbers round: Alibaba stats, Chase Pay, $400 emergency stat

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Final Thoughts

The episode highlights the growing disconnect between traditional economic advice and the lived reality of working Americans contending with volatile incomes, as well as the ambiguous promises and perils of fintech “solutions” like Affirm. It also points to the shifting power dynamic between major corporations and the cities eager (or desperate) to host them—raising tough questions about governance, democracy, and who really benefits as economic tides change.

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[End of summary – perfect for a listener looking to grasp the episode’s depth, arguments, and wit without tuning in.]

Transcript

[A]

The following podcast contains explicit language.

[B]

Hello and welcome to the Consumption Smoothing edition of Slate Money, your guide to the businessman finance news of the week. I'm Felix Salmon of Fusion. I'm joined as usual by Anna Shymanski and Jordan Weissman.

[A]

Hello.

[C]

Hello.

[B]

And Rachel Schneider.

[C]

Hello.

[B]

Hello. Rachel is a published author. I have your book sitting in front of me. What is it called and what is it about?

[D]

It is called the Financial How Americans Families Cope in a World of Uncertainty. And it's really the stories that arise out of research that I did with a professor at NYU named Jonathan Wardock. And we talked to 235 families and gathered information about their financial lives over the course of a full year.

[B]

This is every single penny that people spend. It's an amazingly detailed and granular data set and we will dive into it very shortly. We are also going to be talking about Affirm, which is Max Levchin's not so new anymore company, where he's doing some interesting things with financing purchases. We are going to be talking about some of the information which is trickling out at least about 30 different cities and how much they're bribing Amazon basically to. To. To get Amazon to place its second HQ in them. We are also, if you're a Sleek plus listener, going to answer all of Jordan Weissman's questions about cross currency basis swaps.

[A]

It's going to be a guide for the perplexed, namely I am the perplexed and Anna's going to guide me.

[B]

This is going to be like a semi regular segment on Slate plus where Jordan says, I read something in the Wall Street Journal and I don't understand it. Please, Anna, explain it.

[A]

It's my own little Mishnah Torah. It's gonna be great.

[B]

But yeah, let's start with the financial diaries because Rachel's here. You didn't concentrate on the poorest Americans. You kind of took a pretty broad swathe. And it turns out that even if you're solidly in the middle class and even if you have a full time job, you can still wind up with unintuitively enormous fluctuations in monthly income and cash flow.

[D]

Yeah, it's really true. I mean, we were working with people. One of the criterion was everybody had to. Every family had somebody who had a job. So this wasn't a study about what is happening with people who. It was a study about working people and trying to understand what's happening in their lives now. They weren't upper income people. Right. The band we were working with was from the poverty line. Up till about two times the poverty line, which is around the area median. So it's people.

[B]

So what's that in dollars for a household of four, say?

[D]

Now I'm jumping ahead to the numbers section, but the median household income in the US is 59,000 for a family of four.

[B]

And what's twice the poverty line?

[D]

It's roughly around there. Like it depends where you're talking about.

[B]

The poverty line is generally about half median. Yeah, yeah. Okay. So not by any means rich, but certainly not, I mean, given the millions of Americans who are below the poverty line. We're not talking about them.

[D]

Exactly.

[B]

And obviously a lot of these Americans have to pay the rent and other major expenses and medical expenses and stuff. But it's not just that unexpected large expenses can land in your lap at any time. It's also that your income, even with a full time job or especially if you don't have a full time job, can just have huge variance. And that's not easy to cope with.

[D]

No. And that was really the most salient, the most sort of critical finding here. Right. So we tracked people's monthly incomes and in five out of 12 months in the year on average, families had huge spikes and dips in their earnings over at least 25% more, 25% less than the average. So everything you think about how somebody would budget goes out the window. When you think about budgeting, you tell somebody to figure out their monthly earnings, subtract their monthly expenses, only spend what's left. But in five months of the year, that would have been nonsensical for the families we were talking about.

[B]

And is that something which it's even possible to budget for?

[D]

I don't think. I mean, I think the math, like when you start then thinking about what we know from behavioral economics and the extent to which people are good at making decisions and good at estimating the future and assessing variability, then I think no. Right.

[C]

Because I think if someone hasn't read your book, their response might be, well, if you know that you're going to have this variance in your income, why don't you spend less in the months when you make less? And why, why is that not the case?

[D]

And people do that.

[A]

Right.

[D]

So we definitely saw spending go up and down with income and, and we saw really creative strategies for how to manage it. So in the book we tell the story of a woman named Becky and what she does is when her husband has spikes in his earnings because his job is commission based, so he works full time, but the amount he makes still has wide swings. And so in the months that he earns more, she stocks the freezer, right? She is like a pantry full of toothpaste. She's like, she says, like, I'll never need to buy toothpaste again.

[A]

We're good.

[D]

And she says, what she says is it's just really hard to save in cash and I can't go to the movies and pay with a pork chop. So to me it's really this human understanding of what it means to be human. Like, yes, absolutely, save, budget, borrow. But really we don't really do that.

[A]

You have this kind of great concept you talked about at the beginning of the book called the Great Job Shift. And it was sort of something that when I read it, it was like, oh, this should have been obvious to.

[D]

Me.

[A]

And I'll explain why in a second. But basically it's the idea that used to be when you had a full time job, you also had a regular income. Like you had a factory job, your income was, you know, you had your hours and it was consistent. And as we've moved away from that part of the economy and we have more people just working for tips in the service industry on sales commissions, that we've had this spike in volatility now our financial lives are less ordered, less predictable, like you say. And we've been seeing, I mean, you see stories about this constantly. You see stories about Starbucks employees with these weird schedules where they, at McDonald's workers who, you know, they get called in for these shifts and then suddenly told to go, leave. And there are so many, or, you know, Walmart pioneered this. There's so many signs of this all around us that we should have kind of realized, yeah, this is what middle class life is. But we still hold onto this idea that once you have a job that middle class, you should have a sort of consistent middle class life. And you're saying, no, it doesn't appear to be the case at all. So I guess what I'm kind of wondering is just how much of this has just been. How much can we kind of just blame on like technology? How much is it just about the fact that companies have gotten too good at programming their workforces for like down to the second savings?

[D]

I think that is a huge source of it. So I went to business school, right? We can debate whether or not that was a good use of money offline. But, but when I went, the big thing that was, was being touted as amazing, good, wonderful, was just in time manufacturing. This was huge trend in how companies thought about their productivity and their competitiveness. What you don't think about when you hear just in time manufacturing is that means just in time labor costs. That's what that means. That means I'm going to send people home when I need to make fewer cars. And so what's happened really is a shift in the risk in demand for services from the institution that was designed to be able to weather that risk. That's what a corporation is designed to do and shifting that risk down to individuals.

[B]

So this is the big question which I have and this is like the implication of what Jordan was saying. But, you know, I want to really nail it. You did a survey of families now, did anyone do that survey 20 or 30 years ago so we know whether anything has changed?

[D]

No. I mean, this was really like difficult kind of research to do. And we were building off of similar research that was done in the developing world and before that had been done, people weren't really trying to gather this deep of cash flow information. But what we do have is really good annual studies and there are really solid analyses of how income volatility from year to year has risen dramatically. So in the last 40 years, income volatility year over year has risen by 30%.

[B]

So that actually goes against the simultaneous trend, which is a decline in social mobility. Right. There's this lots of talk about how it's harder to move from one social class to another. How is that consistent with a spike in income annualized or annual income volatility?

[D]

Well, that assumes that somebody has multiple spikes multiple years in a row. Right. But really what's happening is one family has a spike this year, another family has a dip this year. And the volatility is what's changing, not the likelihood that you'll repeatedly move up and up and up. Right.

[A]

Yeah. There was another kind of small line you had that I thought was really interesting where you pointed out also that corporations profits are starting to show more of this sort of spiking. And it just made me think about how with seasons. Right. And it's not their profits aren't as smooth as they used to be. And it just made me think that we're kind of becoming this weird seasonal economy. Almost the entire like corporations profits are moving up and down more than the people's individual incomes. And that creates a feedback loop. And it's kind of a scary thing. It just makes you think of the entire economy as this very erratic. I don't know, it's not an entity just system.

[C]

Well, this was something I actually found kind of interesting to think of how things are changing because we have a tendency, I think to think of the kind of post war boom to maybe 78s is like the normal because that's what we always reference. But what I'm actually wondering because when you hear about this seasonality, it sounds very similar to if you think of like economic history, like pre a lot of labor laws where everything was entirely seasonal. So I'm kind of wondering if maybe the period we think is normal was actually the aberration.

[D]

Yeah, I think that's, that's really right. I mean that, that's my personal instinct. I'm not an economic historian, but yeah, we hold out the Post World War II decades as the benchmark, but they may have been an aberration in terms of economic security. That said, don't we want that to be the norm and so what do we do to get closer to that being the norm?

[C]

Yeah. And then I think that raises then the next question which I think you do also address in your book about what are some of the products or some of the laws that could be passed to help this situation?

[D]

Yeah, so much so. I mean you asked about like shouldn't people just save and borrow? Couldn't they do a better job at that? And I do think that the innovation that you see in Fintech is promising here. I think we're going to get to a place where you can use data to give people personalized device, help them make better choices. I think we're at the start of an innovation wave around that. But for that to be successful, you have to maintain the CFPB and you have to think about consumer protections as well because some of that data is not going to be used for the good of the consumer. Some of those predictive analytics are not going to be designed to help you make the best possible choices.

[B]

I have a question about incomes we are seeing in the labor force data. Finally incomes rising, which is good. But let's assume, I think a reasonable assumption after reading your book, which is that a lot if not all of that rise in income is a rise in what you might call precarious or volatile income rather than a rise in steady income. And I guess my question is having studied these individuals and talked to them, what's like the exchange rate, like how much money would I need to make on a volatile basis to make up for like $50,000 a year of guaranteed steady income?

[D]

I love that way of thinking about it. I'm sure that varies based on risk aversion, right? I mean, so we had this family, I was talking about Becky and Jeremy or Becky stockpiles in the freezer. Ultimately, Jeremy took a lower paying job in order to have stability.

[B]

And how much of a pay cut was that?

[D]

Oh, God, I don't know. It's a good question. But I think, and when I've told this story, because I've been talking about them a lot, some people in the audience always think, well, that's just stupid. Why did he do that?

[B]

Right. Always. Because you can guarantee that you're going to be able to make rent. I mean, but this is the other thing. Right. It also is regressive in that if you're rich, if you have a nice little savings account with three months worth of spending in it, then you can totally afford to take a volatile income and it costs you nothing and you get to get that boost in income if there is like a premium to volatility. If you're poor, you can't afford to do that.

[A]

And worst comes worse. I mean, and worse than that, the poorer you are, the smaller change it takes in your income for it to be really volatile. A small change can be a big percentage of your paycheck and so you're more at risk for it. Especially if you're a car dealer who relies on tips, like one of the people you mention in your book.

[D]

Right. And also your stuff is likely to be more likely to cause you trouble too. Right. Like your car is likely to have more need for repair and it's likely that you're in a community where other people are in the same position. So not only is this easier, easier to weather if you have a cushion, it's easier to weather if you know somebody who has a cushion.

[C]

And I, and I think this also speaks to how when you have more money, again, you can also you have easier access to low cost credit. You probably have, as you said, family members. It's. Whereas the reality is the poorer you are, the higher your credit is going to cost, the less cushion you have, not just on your own money, but access to.

[D]

Agreed. And we also should think about this in the context of what kinds of jobs people have access to and what kind of power they have in the workforce. So great, Jeremy was able to get a different job. That's not always the case. Right. If you rely on tips as a waitress, it's pretty hard to get yourself a secure wage.

[B]

Yeah. There aren't very many full time non tipped waitressing jobs out there.

[D]

No. Exactly. So how do you trade your skill set for something that is going to be steady. And what negotiating power do you have to tell your boss? I need a minimum, a number of hours every week, which is something workers are arguing for across the country, but so far it's not an easy argument for them to win right now.

[B]

Brilliant. Okay, so that is the perfect segue to. You were mentioning fintech, and probably the single biggest thing that financial innovation that people use for consumption smoothing is the credit card. And if you do wind up with an unexpected expense, then what you do is you put that expense on your credit card, and then you can pay off the credit card over however many months or years, and you have managed to sort of amortize that expense in a way that you could afford to pay it. And not everyone has credit cards. And so along has come Max Levchin.

[C]

Who had to save us all.

[B]

To save us all. I mean, I'm gonna come out and say that I like Max. I think he.

[A]

We should probably say who Max is. Background.

[B]

He is the. Max is, let's say the. The least weird of the PayPal mafia.

[A]

How big is the PayPal mafia? Obviously, you know, you got, you got teal and musk, but then beyond that.

[B]

And then like Reid Hoffman and like, you know, there's a bunch of kind of like sort of spectrumy people and. But the, but in any case, like. Yeah, so. So Max was a co founder of PayPal.

[A]

Yeah.

[B]

PayPal was obviously designed to solve payments questions primarily and just moving money around questions in a little way. His new shop, Affirm, is similar in that it's. It's trying to replace credit cards, I think is a fair thing to say, but with two big differences between what a firm does and how credit cards work. The first big difference is that he is using a bunch of underwriting techniques which allows him to extend credit to people who don't have credit cards or couldn't qualify for credit cards. And the second is that everything is done on a purchase by purchase basis. So you really know how much you're spending each month or each paycheck to pay off, you know, the mattress that you bought or the pair of jeans that you bought or whatever it was, the item that you used the affirm credit for. And so it becomes, it becomes much more obvious, like what your cash flow is. And then the other thing, of course, is that you don't wind up in that credit card trap of running this huge random balance at which. Which accumulated on God knows what. And, and you're just like, you just have this debt.

[A]

On the other hand, as an article in Rackd, I believe, pointed out this.

[B]

Week, Susie Cagle, which we will link.

[A]

To, great article, noted that it seems that retailers who use a firm suddenly see big spikes in their purchases.

[B]

So it's, that's why, that's, that's, that's what a firm is designed to do.

[A]

So there's a concern that while you really do know exactly what you're paying, it may also just be, you know, not subsidizing, but financing needless and possibly ill considered consumption.

[C]

Yeah. Because again, even if you are paying off a very expensive pair of jeans, they seem obsessed with this pair of jeans.

[A]

Yeah, that's.

[B]

Well, it is, right?

[A]

Yeah, they had to frame it.

[C]

Yeah, that makes sense. So, so even if you are paying this off in an installment plan, you are still paying a pretty high rate of interest on this purchase. And you could potentially still, if you're paying it by installments, it's probably because you couldn't just afford to make this purchase. So these still could, you could get you into some financial trouble, certainly.

[B]

And so this is the question which I have for Rachel, which is why I'm very happy that Rachel is here, which is you studied a lot of, you know, families on constrained incomes. I have this like gut feeling. I hate sort of spend shaming people. I feel that people spend generally in, in pretty rational ways and that like when middle class people turn around and said, you spent how much on the pair of sneakers? I'm like, just like fingernails down a blackboard for me. But is Jordan's worry in any way based in reality that people just spend in stupid ways and if they only didn't spend in stupid ways, then they'd have more money?

[D]

I'm with you on this. I can't go there because I think for the most part people are really rational about what they spend. And to splurge on something is a human need and desire. Right. And the idea that you would be perfectly disciplined about your spending all the time is like you're going to be perfectly disciplined about what you eat all the time. Like, it's not fun.

[A]

So I am typically not into spend shaming people either. I think the issue that people brought up with the firm, and I should say it's like, I think their average APR is like 19% or it's a little. It's not outrageous. You know, they're charging rates that are above a credit card but well below a payday loan. But it seems to be that they are right now at least generally working with merchants who, you know, are selling, you Know, optional stuff. Their, Their, their goal is not to help you fix your busted car tire. It's actually, I think, right now.

[C]

Well, no, I actually think this is kind of important because even in the article, they, they pointed out that they are really not targeting the people you were talking about. They are targeting what they called, which I actually think is, I don't like this term, the temporarily poor, by which they mean, it's kind of like sofi that they're targeting people who have probably graduated from good colleges, are starting out, start in their careers. They may not have the greatest financial, like, you know, if you snapshot right now, but they have a lot of potential and they're probably less of a risk than they might appear to be. So really, they are not targeting the financially precarious. I would argue they are targeting, like, college grads of like, from good school.

[B]

So that's. That is where they started because they started in a very kind of, you know, millennial friendly, techie way, but they moved away from that pretty quickly. And their biggest area of growth is actually bricks and mortar stores rather than online spending. Their big place where they started was mattresses. Mattresses are expensive. People often don't have enough money to buy a mattress, and yet you kind of need a mattress. And so, and you don't want a secondhand mattress. So, like, you know, there's a lot of demand and there's.

[C]

You could just get a Casper mattress.

[B]

So you, so you. They, they started with mattresses, and that worked out quite well. But then what they wound up doing pretty quickly, which was fascinating to me, is they moved onto the high street in relatively poor neighborhoods. And they said, and they went into a whole bunch of stores where any store basically selling stuff for over $100. In a poor neighborhood, if you're trying to sell something for over $100, people aren't going to have that kind of cash. And so they were like, yeah, just at the checkout counter, instead of not being able to buy it or having to put it on layaway, you can just do it on this affirm system. And that worked out pretty well for them with like, genuinely, like, poor neighborhoods, not the sort of upwardly mobile college grad types. And the, the problem with that is that the interest rate is hidden. The interest rate that you pay a firm is exactly what Jordan was saying. It's 19% or something relatively reasonable. But the merchant is also paying a firm a whole bunch of extra money out of the sticker price. And the sticker price, if you go into a Brick and mortar store on a high street in a poor neighborhood is going to be higher than the sticker price on Amazon or Walmart or something like that. And so there's like a hidden extra interest rate that you wind up paying additional poverty tax, which is built into the price.

[D]

That to me, changes everything about this. I mean, I was prepared to be really excited about the structure of it. I mean, installment loans, where you have a set payment over time and a clear understanding of exactly what you're going to pay, are a dramatic improvement over payday loans and over credit cards in lots of ways. Um, but if, then there's this hidden fee, then that seems, seems like a total bait and switch on that idea.

[C]

And again, it doesn't totally surprise me though, because unfortunately, if you, if you are lending to consumers that have potentially more volatile incomes, you are almost certainly going to have to charge a significantly higher interest rate.

[B]

And this is what the affirmed people told me was that their default rates on these, like, brick and mortar stores in poor neighborhoods significantly higher than that 19% interest rate would imply. But because of the extra deal that they do with the merchants, they get to finance it and these people get their goods. And maybe it's worth it and maybe it's not. And I'm conflicted on this one.

[D]

Well, I feel like with credit, the constant problem is, is better good enough, right? Because. And there's also conflation of two issues. So on the one hand, this, even with what you just described, is a better product than a payday loan, right? That's not negotiable. So that's an improvement in the marketplace. And do we cheer for that and say great, or do we spend our time saying, well, but it's still not good enough? And that's continually the problem when you talk about credit innovation.

[A]

The other thing that seems a little problematic, at least the firm right now, is that its algorithm is constantly changing. And some consumers are talking about how, okay, I was able to get a loan from you guys once, but now I'm getting denied. And, you know, it's a point of sale. It's not something you can really predict. So it seems like as a solution to income volatility, this is kind of volatile, or it could potentially be volatile. And so that kind of worries me a little bit too. If that becomes like a, you know, a credit card seems like at least, I guess the question again is, you know, is the perfect, the enemy, the good? A credit card, you kind of know if you can use it for the.

[B]

Most part, whereas and often you wind up maxing it out. Yeah. And. And you wind up in this debt spiral. And one of the interesting things about Affirm is that it's overwhelmingly used for goods rather than services.

[A]

Okay.

[B]

And so it's actually a thing which you own, which you are now paying off. You are still sleeping on that mattress. And when you pay your monthly thing to pay off your mattress, you're like, yeah, this is my mattress. I'm paying it off. As opposed to, you know, I went out for some drinks and it went onto my credit card, and I haven't paid off my credit card. And those drinks are somehow still on my credit card three years later. And what the hell, you know.

[C]

Yeah. Although the good you bought essentially, like, I mean, I guess you're using it. So it is value in that sense. It doesn't have any real, like, resale value. But I will say, going back a little bit to what you were saying with their. Their underwriting model, that's actually the part that I found interesting that I. Because I do think we all know that the FICO model is so broken and we need a better model. And part of what they were even saying in terms of when they were kind of describing the way that this is structured, it is a very dynamic model and it does change constantly. It's using tons and tons of data points. And I actually think that could be a good thing moving forward.

[A]

But that also kind of adds to the black boxiness of it. Right? Yeah.

[C]

And that's true.

[B]

Why is. Why is black boxing this a bad thing?

[A]

I mean, have we not, like, spent, like, episode after episode on this show talking about why algorithms that we can't see through and don't really know what their standards are for judging whether we're credit worthy or worrisome?

[C]

I do agree, but I do think that the more kind of specific and tailored it is, like, based on someone potentially someone's own, like, activity, then arguably you could have less room for kind of more overt discrimination.

[B]

Well, it's definitely. And even not overt discrimination, I talked to them about this for impact, and they, you know, they definitely talk very strongly about caring about it. And they were on the CFPB advisory board and like, they consider that to be a comparative advantage for them, that they are actually more ahead of the game on. They reckon they're much better in terms of disparate impact than, say, FICO is.

[D]

I think it would be good if we knew some metrics about how this actually impacts people's financial health. That's really the barrier that credit underwriting hasn't gotten to yet. Credit underwriting is designed to tell the lender whether or not you're going to pay it back. It's not designed to tell whether or not this loan is a good choice in your life at all. That's what starts to get to the consumption issue. It might be that they have the best possible underwriting to figure out whether or not you're going to pay back your pants loan. But that doesn't actually give you, as the consumer, the information you need to decide, should I take out this loan in the first place? Presumably, if you're designing a wonderful, brilliant algorithm based on the best possible data ever, you could do that instead of stopping at this objective of just, am I going to get paid back?

[B]

And it is actually possible that the people who got the first loan and didn't get the second loan ran into exactly that. The affirm omniscient algo machine was like, yeah, one was good, two is too many.

[A]

It's possible.

[B]

And that's an important move. You know, I think it makes sense. This is the problem that everyone always used to have with payday loans, is that, you know, one is fine, two or three or more is just disastrous. And it's good to kind of cut people off at some point.

[A]

But I think what Rachel is saying is that the people who get cut off should be told why they're being cut off or at least told ahead of time if they're likely to get into trouble. Like, if. Rather than just saying, you've been declined, it's a, you've been declined because you've had some trouble paying off XX and X. Yeah.

[D]

And you know, in the article, like, a firm makes some noises in the direction of, we would use this data to give people the advice and products they need outside of loans that, like, that's fantastic. If you get there. I don't know how close they are to that.

[B]

Okay, who wants to talk about the way that municipalities around the world, or at least around the country, are just.

[A]

Like, prostrating themselves before Jeff Bezos?

[B]

Throwing away all remote attempts at democratic legitimacy and saying, no, you just get to be emperor of our town? Mr. Amazon.

[A]

Rahm Emanuel pretty much just got a really nice hotel suite in the Drake and covered the bed in rose petals for. It's just like. It's really depressing.

[B]

But you see, that's actually the less objectionable part. So a little bit of rewinding. There has to be. Ben, I don't know how many thousand applications to Amazon saying, from various towns and cities around the country saying, you should build your HQ here. And thanks to Freedom of Information requests, we've seen about 30 of them now. And so Rahm Emanuel in Chicago, his bright idea was, well, okay, all of your employees are going to pay income tax. You know, Chicago income tax. And that's great for Chicago, except for what we will do is we will take all of those revenues and just give them to Amazon.

[A]

Yeah, it's called an edge bond or something. This is a thing in Illinois. I had never read about it before. The Chicago Reader has long written about these kinds of giveaways. The state really specializes in this kind of just foolishness. But you're right, that's not even the most embarrassing of the pitches that cities have made was. It's Fresno, I think that just said you can take. You can tell us how to spend your tax money. Like whatever money that Amazon pays or tax revenue generates. You can direct us to like, whatever. You can have us build a park and we'll put a sign that says park. Brought to you by Jeff Bezos. His shiny bald face. Like, it's just, I.

[B]

It's actually even worse than that that a lot of these offers are basically not an offer of we have a city and we would like you to build your headquarters in our city and much more. We will let you build your own city and we will throw money at you and various other incentives to build your city. But you will be in charge of your city and you get to make the rules. Yes, and it's deeply undemocratic in that. It's not even the employee slash residents of the city which get to determine their own fate. It's their employer. And I feel like we haven't had one of those sort of company towns in what, like almost 100 years now. Like, that used to be a thing, that kind of journalist company town where the company would build all the housing and be in charge of everything and house its employees.

[A]

Railroad barons really were fond of it. Like, that was a big deal.

[D]

You got paid in company square.

[B]

There was a great one just outside Liverpool in England called Port Sunlight, which was built by Lever Brothers before it became Unilever. And they were ahead of their time. They were actually like good places to live and people had relatively good lives. But I feel like we've moved on from that or should have.

[A]

And yet.

[C]

And yet, although the plate devil sound get a little bit just. Again, I'm not saying that this isn't disturbing. I think it is. Although I Think it's more part of a, a larger question about kind of the state of companies right now and just the discrepancy between when you work for certain companies, what people's lives are like, versus when you work for almost any other company. And why this is why people want Amazon to come so much. Because it's not just that Amazon will come with their employees and their investment, it's that that will almost certainly, if we've seen what's happened in Seattle, bring many other companies that will come into the town as well and really, you know, expand the tax base, increase the talent pool. There are a lot of very real benefits that people are looking for. And I would also argue that, again, I don't, I don't think a lot of these, what, what these cities are trying to do is a good thing. I don't think it is. But I think to say that this is like this enormous threat to democracy may be a little overstated.

[B]

Wait, no, I want you, I want to ask you to put those two thoughts together a little bit more clearly. On the one hand, yes, we understand that there are sort of residual benefits to having Amazon in your town. Great. On the other hand, we also understand that having corporations have an outsider say in how a town is run as opposed to individuals is inherently anti democratic. What is the connection between the two? Why do you think that the residual benefits of having a corporation in your town in any way kind of mitigate the anti democratic effects of what's on the table here?

[C]

Because even if you are right now saying, okay, Amazon, we're going to allow you to direct a certain portion of the tax dollars that you're generating, again, at the same time, the city is still being run with the same democratic processes that it was before that.

[B]

Speaker 2 actually not true. And that's, that's the bit which, well.

[C]

I know what you're saying, but again, what I, what I'm arguing is that.

[A]

I guess what you're saying is that the city that existed before Amazon showed up is at least being run. Whereas like Amazon, if you think of Amazon as an adjunct to the city, it's like I'm trying to, I think this is what you're saying at least. If you think of Amazon as like a new city just kind of like tacked on to Fresno, then the rest of Fresno is still being run just like before. There's no real change, except for there's this, you know, additional company town that's sort of on the edge of things. I, my question is how, how Separate. Are those two things really going to be.

[B]

Yeah, I feel like Amazon, basically what is done here is that a bunch of cities have effectively gone up to Amazon and say. And saying, we will not only give you money and space and tax incentives, but we will actually give you the keys to city hall to a large degree as well.

[A]

Yes.

[C]

But I also don't know some of the, like, very like, explicit details of how these deals are structured in terms of, frankly, the length and the idea of, you know, if Amazon were to come, how much control they would actually potentially have long term. I honestly, I don't think those deals have all been fully flipped, fleshed out. But again, I, I do think the idea is that we. Sorry, I'm trying to think of.

[A]

I, I guess. Oh, you want to.

[C]

Yeah, like, I, I still think if you have citizens of Fresno who disagree with what is happening and they push back against the current government, I have a hard time to imagine that that isn't going to have implications for Amazon and that they are literally creating just this new city that will have no restrictions on them based on other state and city regulations. I find that hard to believe.

[A]

I don't find it that hard to believe because a lot of these deals, once they get made, are. They're enforceable by contract. Like, you can't really go back on them. Like, you can't. You can vote out the mayor, but you can't vote out Amazon once it's there and it has its deal.

[D]

I also think the way you're describing it is this, you know, a separate city aside from Fresno, allows us to then connect this to our thinking about what's happened in cities that increasingly change their lines of incorporation for other reasons. Right. So in Detroit, for example, where like, gradually all the money has moved to the suburbs and so has the political power, and then what is the inner city left with? Right. So in that model of like, well, won't the citizens just push back on this Amazon? Like, I think that's hard for me to see, like, in the context of what happens elsewhere.

[C]

And I don't just. I agree with that. I mean, I think there's. I do agree with that. I mean, I agree with a lot of what you're saying. I though I do think again, if you have Amazon come in and Amazon then attracts a lot of other companies that are also coming in, I don't think you're necessarily just going to have Amazon Ville and then everything else.

[B]

No, we're not talking about. It is a possibility. It is a scary possibility. It is also like invidious in the way that Amazon has set it up in this kind of Hunger Gamesy kind of way of like we are just going like, there's gonna be a winner's curse. Right. If you have 3,000 municipalities all trying to outdo each other, then whoever wins that race is going to lose.

[A]

See, I actually, I don't entirely agree with that, but. And it's because I think the towns that are making these offers, like the really like shocking ones like Fresno, are probably going to lose this race. The reason they are making these offers is because they don't have enough to offer. You know, it's a little surprising for me to see Chicago because that's a city that a lot of people thought just on its kind of merits might be able to attract Amazon.

[C]

But you know, again, they're in the finances in Illinois.

[A]

That's true, but. And again, they're not, they're not handing over city hall so much as they are just handing over their, the, you know, people's money. But what does worry me about this is it's sort of a huge demonstration to the rest of corporate America of just how much you can ask for.

[B]

Like, it's, you don't even need to ask. They will just give it to you.

[A]

And you might not be Amazon, but if you can, you know, show up and, you know, do your own RFP for like, you know, this, it seems like I don't think this is going to be the last time a major company tries to pull this. I think Jeff Bezos might be setting a template here. And so that's why this really kind of frightens me. It's, it's, you know, okay, maybe Fresno is not going to hand over City hall this time, but it might to another company.

[B]

Can I just come in with like one little bit of good news? Like what is the biggest, most powerful company in America probably right now? It's Apple, certainly in terms of market cap.

[A]

Yeah.

[B]

And they are not only in a big fight with Cupertino right now, they are losing a fight with Cupertino. Right.

[A]

Is it over parking? What is it over? What are they fighting over at the moment?

[B]

Well, yeah, they want. Well, the problem with they have this shiny, gleaming new campus in Cupertino. And the problem is that there's nowhere for their employees to live because it's a very low density neighborhood. And yeah, they just need to house their employees. And so they are proposing to build housing basically so their employees can live somewhere in the neighborhood. And Cupertino, in classic Silicon Valley, Nimbyish family, Nimbyish fashion is saying, no, no, you can't do any building. We can't have any. And Cupertino is winning that fight.

[A]

But that's like, okay, rich white people can, like, slay other rich white people. That's like what we're learning from that. That's not a desperate city trying to attract a new company. It's a little bit different there. Cupertino is already rich. They don't need to worry about Apple Plus Apple just set down roots. It cannot pull up. Like, there is not. They are there. They have settled.

[C]

Although I do, and I do think that goes a little bit to support what I was saying in the idea that I don't think that if you have a company come in and generate a lot of revenue, again, a lot of potentially, like, ancillary jobs, that the people there will just inherently lose all political power. Because I think part of the problem of what you happened in Detroit was also that just in everything, all that, like, the corporations, everything moved outside of the city. And I don't see that as exactly what we're potentially to see happen here.

[B]

Let's have a numbers round.

[A]

Okay. My numbers are silly, so I should just get it out of the way. It's an obvious one, but it's 10,000. Bitcoin broke 10,000, not that one. Okay, so wait, here's my question. This is just Jordan asking. Dumb question. As bitcoin gets like this ludicrously expensive, does it become worse as a medium of exchange? Like, shouldn't it? Yeah, it does. It is becoming a. Or solve.

[B]

I don't think so.

[A]

Okay.

[B]

I think that pretty much entirely orthogonal.

[A]

Okay.

[B]

Like, I transacted for bitcoin when it was $5, and I transacted for Bitcoin when it was $3,000. I haven't transacted for Bitcoin since it's been $10,000. But I could quite easily, and it would be just as easy. Like, the amount of bitcoin you're spending obviously goes down for any given dollar amount, but other than that, it's basically the same.

[A]

So this is kind of a blow to the econ nerds who are doubting bitcoin back in the day, because we all assumed, okay, it's got this big deflationary bias and that if it ever spikes in price, people are going to sit on it and they're not going to want to trade any or sell any.

[B]

Oh, that's definitely true. Well, it's not so much the Price, it's the price rise that if, if the price is rising, then people don't want to spend their bitcoin because they would rather see the capital gains from just sitting on it.

[A]

But, but you're saying, well, okay, but you're saying it's not that hard to transact in it. And it seems like there's enough liquidity right now. It seems like volume's actually getting higher as it gets.

[B]

So now volume in bitcoin terms is falling a little bit. In dollar terms, it's rising.

[A]

Okay, so maybe. Okay, I need to research this further to figure out if we've all been proven wrong or not. Stay tuned.

[B]

It's very random what happened to bitcoin. But just to explain for listeners who haven't been following the crazy. And by the way, congratulations if you haven't, because there's no reason why you should. It kind of spiked from sort of 7,8000ish all the way up to about 11,000 and then dropped back down to 9,000. It was, you know, this is. It lost 20% in one day, that kind of thing. It's highly volatile right now. Bitcoin every 18 months or so goes through one of these periods of extreme volatility and then generally it kind of settles somewhere. And my base case is that the future will resemble the past and it will find some new higher level where it will settle and be relatively less volatile for a while. But right now it's super volatile.

[C]

Anna mine is 252,000 per second. That would be the number of transactions that went through the Alibaba servers.

[B]

Woo. That's probably about, I'm going to guess, two orders of magnitude higher than transactions per second in bitcoin.

[C]

Yes. So this was, this was on singles day, which is 11:11. And this is just so much bigger than anything we would see on like a Black Friday or Cyber Monday. Because in total it was 25 billion in one day on singles day on one website. I actually think that 20, I think that 25 billion may be from Alibaba and JD.com I don't know if that's just. But the, the 252,000 per second is just through Alibaba's servers still.

[A]

That's giant.

[C]

It's crazy.

[A]

Yeah.

[B]

My number is 100 million, which is the number of dollars that Chase has invested in Chase Pay, which is a technology which, as far as I can make out, about eight people have ever used.

[C]

I've used it.

[A]

Someone paid me in it once. I was really angry because I had to register my email for them to send me the money. Anyway, my family will not use Venmo.

[C]

I hate checks. I have Chase.

[B]

There are a gazillion competing payments protocols out there. Venmo is a kind of. It's basically PayPal with emojis, but there's many others. There's Square Cash, there's Apple Cash is coming out any minute now. There's Chase Pay, there's Square, and Stripe, and, you know, a gazillion others. And I'm not quite sure why everyone is trying to build all of these clever digital payment app layers on top of, like, the old antiquated creaky ach and credit card pipes, but apparently this is the kind of thing that chase will spend $100 million on. And I. Yeah, it baffles me why.

[A]

I'd rather them invest it than give that money to it as a dividend to their shareholders.

[D]

So whatever that was, some employees getting that exactly as wages. So. Good enough.

[A]

Yeah, exactly.

[B]

Rachel, you got to finish up.

[D]

I got the last one. So, true to the topic I'm expert in, I'll say my number is $400. Half of Americans cannot easily come up with $400 without borrowing or selling something, which is a pretty scary number when you think about it.

[B]

And so I've seen this number bandied around a lot in various different contexts. Does that mean that they don't have. As I understand it, that means they don't have $400 of credit on a credit card. That wouldn't count as borrowing. They just don't have it in an emergency. Any easy way they have it means.

[D]

They don't have it, like cash on hand or saved about another big chunk. Another 30% say they can get that money if they borrow it. Right. So it's a much smaller percentage of Americans who just cannot get it at all. 14% or something like that.

[B]

Okay.

[D]

So that's the way to think about it. But the idea that you wouldn't have $400 to your name if something came up is striking.

[B]

Yeah, I just got a speeding ticket for almost that much.

[D]

Right? Exactly, Exactly. Which is why all sorts of expenses would immediately cause you to need that amount of money.

[B]

Okay, I think that is it. Thank you, Rachel. Thank you so much for coming in to Slate Money. It's been absolutely amazing to have you here. Your book is the Financial How American Families Cope in a World of Uncertainty. It is out now from Princeton University Press, those lovely people. And thank you as well to Dan Schrader for all of his work on this. And most importantly to everyone here listening, we still have space left on our voicemail machine. The number is.

[A]

Oh, my God.

[B]

347-960-6314. That's in the show Notes. Call us up, leave us a question, and we will answer it in a special holiday Q and A call in edition of Slate Money later this month. So, yeah, so listen to El gabfest, an espanol from Leon Krause. He's one of my Univision colleagues, and he has his own gabfest in Spanish. And that will not only get you up to speed on the news of the day, but will also help you with your Spanish. So listen to that. It comes out every Thursday. And we will talk to you next week on Sleep Money.