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Layaway

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Alex Tabarrok’s piece at Marginal Revolution about the bad economics of layaway makes sense on one level. It got all the appropriate and expected twitter hits this morning (Yglesias, Klein, etc). I’m not going to argue against the the post on its merits. Layaway exists as a way to transfer money from people to corporations, it is a bad economic investment for the consumer, etc. Tabarrok can’t figure out why people would agree to do this–stores rarely run out of goods and if they do they are replaced with something else, it’s a big pain to make the payments, etc. And I agree that Consumer Reports probably shouldn’t be calling layaway a good idea.

But like so many ultimately well-meaning articles about the poor I read on the internet, it’s seems to me that Tabarrok doesn’t understand layaway because he’s never been poor (although I don’t actually know). Let’s imagine a situation for layaway. You are 11 years old. It’s July. Your family doesn’t have much money. Getting new school clothes is a big deal because you don’t get very many new clothes in a year and you want to wear them on the first day of school. Your parents are really worried about this. They want to buy you the new clothes. They also know that they will have a really hard time actually saving the money to purchase them all at once. So they put them on layaway at the Target or Walmart and make the payments, hoping to have them all paid off before school starts.

How would I come up with this scenario? Because I was that 10 or 11 year old and my parents used layaway to get me those new clothes I wanted. In fact, in the scenario I am recalling, they actually couldn’t make all the payments and I really wanted those clothes and somehow we talked the store into giving us some of the clothes up front and breaking up the layaway, which probably only worked because I was there and nearly hysterical that I would have to wear old clothes on the first day of school.

In a so-called rational economic world, layaway might not make sense. In the real world that actually people live and operate in it makes a ton of sense, even if it is bad economics. People can’t save money easily. It’s actually a more secure investment to pay some of it up front, which commits the individual to buying the product and makes acquiring it probable, but also gives the buyer some leeway if disaster strikes.

Economists try to understand why people make the decisions they do. The growing field of behavioral economics is mercifully bringing that back into the real world. What has driven the decisions of working-class people in the 20th century more than anything is a desire for security, broadly defined. Whether we are talking about Social Security, Medicare, the union contract that rolled over with few substantial changes except better benefits for 20 years, the ability to own a home after World War II, many of our major policy and labor decisions since the 1930s was driven by the desire for security now mobilized through the American labor movement. The CIO especially centered security as a broad goal and crafted policy to increase working-class security. And it worked, at least for members of the white male working-class, for several decades. Today it has mostly collapsed in an era of contingent labor, union busting, capital mobility, massive debt, and income stagnation.

But I don’t think the desire for security is just a broad policy goal in union offices in Washington, Congress, or the Department of Labor. It also drives people’s daily lives. The struggle to survive and to make ends meet is ultimately a struggle to find some level of security in your life. Sometimes, the desire for security might even drive behavior economists see as irrational. But layaway is a form of security for you to buy your 11 year old his school clothes. So on the fundamental level of seeing your child happy and your home at peace, layaway might be a perfectly rational decision.

What bothers me about articles like this is the lack of understanding of working-class behavior. Tabarrok can’t understand why people would use layaway. But it’s easy to gain that understanding. Ask some poor people why they use it.

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