From a neoliberal perspective, the system works fine: the fringe banking system is a market-based solution to the financial situation of being poor. Private banks might rationally choose not to provide high-cost, low-profit services, like free or low-fee checking. And people who use fringe banking services have made a rational choice based on the costs—or else they are reaping the consequences of earlier bad behavior.
But this view ignores the social costs of fringe banking. When workers lose money and time to the fringe banking sector, they have less to invest in their children, their jobs, and their future. And it ignores the government’s traditional duty to provide means of exchange available to all.
Banking today plays the role that currency played in earlier eras, because the cash economy is becoming obsolete. By the 1950s, checks—not cash—became the norm as a way to pay workers.22 Today, many workers don’t even get checks; it’s easier for employers to use direct deposit. Couple that with credit cards, debit cards, and electronic payment systems, and fewer and fewer people and places use cash. These new technologies are largely a positive development. There’s no skimming off the top or worries about envelopes of cash getting lost or stolen.
But as the cash economy gives way to the electronic economy, the unbanked don’t benefit from these transformations and instead fall further behind.
A Public Option for Basic Banking
We think a public option would be an effective way to connect every American to the financial system. Some of the reasons are ones we’ve already discussed. There’s a real problem: millions of Americans are without access to basic deposit and savings accounts. The market solution isn’t working well: the fringe banking sector charges exorbitant fees and results in numerous hours of lost time and productivity, disproportionately hitting those who need it most. But there’s another important reason that cuts to the heart of the banking system: banking isn’t a purely private activity.
Nothing in the “private” economy is truly private. The private sector works only because of government, which sets up the rules of the game—like contract and property laws—and enforces those rules. But the money side of banking goes further. In every society, across time and geography, money has been the creation of the sovereign state. It’s one reason that from ancient Rome to America today, most currencies feature a picture of a revered head of state. Whether the ruler depicted is Julius Caesar, Queen Victoria, or Abraham Lincoln, the message is the same: the sovereign stands behind the currency and will treat it as legitimate for paying debts.
The United States, for example, prohibits the creation of private money and currency without a license (a banking charter). At the same time, most of the money the government issues isn’t actually printed and physically distributed (though we highly recommend that you visit the Bureau of Engraving and Printing’s presses in Washington, where cash is printed—they have a terrific tour). Instead, the United States, like most governments, “creates money” by increasing and decreasing the credit they give to private banks. In America, it’s the Federal Reserve’s job to interact with private banks, expanding and contracting the credit available to them. The private banks then lend that money. As the Fed does this and private banks lend more or less, the amount of money in circulation in the economy goes up or down. This function is still a sovereign function—it’s just outsourced to private banks. To make sure the outsourced system works well, the United States government provides a variety of backstops to the banks in the form of the full faith and credit of the government, deposit insurance, and subsidies.23
The larger point is that the banking system doesn’t emerge solely through the efforts of private firms. Banking is based on a social contract: we the people, operating through our government, license bankers to create money, and we give them a variety of privileges in order to operate the financial system. In return, we expect a few things: a safe and sound banking system, consumer protections from fraud and deception, and public access to the banking sector.24
Put another way, the financial system is like national defense or public roads. Society can’t function without banking (or defense or roads), and it’s the job of the government to ensure that everyone has access. In the case of banking, we’ve just decided to outsource provision of one part of it to banks, instead of having government do it directly. But the presence of private banks in the system doesn’t mean that banking is a wholly private concern.
The social contract in banking is so universally understood that most countries—including major developed countries—have adopted some form of a public option in order to guarantee that all of their citizens have free or affordable access to the banking sector. In many countries, these public options operate through the postal system. That made a whole lot of sense when it was implemented. In the era before telephones and electronic devices, it was the postal system that helped stitch together entire countries. Post offices were in virtually every town and city, enabling communication among private citizens and between citizens and their government. In 1861, the United Kingdom created a postal savings system, enabling British citizens to gain access to basic savings accounts—and using the infrastructure of the post office to scale up the service. Canada’s postal savings system started in 1868.25 Japan’s postal banking system has 203 trillion yen in assets. China’s is the fifth-largest bank in that country. France, Italy, and New Zealand have postal banking.26 Even Switzerland—home to the most famous private banking system in the world—has postal banking.27
You might be surprised to learn that the United States also once had a public option for basic banking. From 1911 to 1966, the postal savings system offered Americans a basic savings account via their local post office. Efforts to create a postal banking system started in the wake of the Civil War, and in the early twentieth century, after the financial panic of 1907, the move for postal banking in America gained steam.28 One of the central motivations at the time was that the distribution of banks around the country was uneven. In the eastern states, excluding New England, there was one bank, on average, for every 57 square miles—compared to one post office for every 14 square miles. In the South, it was one bank per 418 square miles, compared to a post office every 35 square miles. Indeed, because most banks were in cities, the distribution of these banks was skewed even further in rural areas.29
Advocates of postal banking argued that the program would address the scarcity of banks and expand access to savings to Americans across the country. And so the early postal banking system was targeted to serve those who weren’t already being served by the banking system. There was a maximum allowable balance—$500 at first, ultimately reaching $2,500 in 1918—and depositors were limited to $100 per month.30 Postal savers also earned a small amount of interest, 2 percent, which was lower than the market rates at the time. By 1929, the postal savings system had $153 million in deposits from American savers; by 1947, the system had $3.4 billion.31
After World War II, the economy boomed. People became wealthier, and banks raised interest rates. Postal savings declined amid the growing economy, dropping to $416 million in 1964.32 In 1966, the postal savings system was shut down, a casualty of the success of the glorious years of middle-class growth.33 In the next decade, as we have seen, wages stagnated and economic inequality began to widen, and fringe banking emerged in place of the postal savings system.
So would a public option for basic banking be possible? Legal scholar Mehrsa Baradaran has championed the idea, gaining the attention of many, including Senators Elizabeth Warren and Kirsten Gillibrand. One answer for how to implement it would be to revive and modernize the old postal savings system. For instance, any American could walk into a post office and open a small-scale savings or checking account. The account would be capped at a modest level—say, $5,000. The basic account would pay no interest and have no fees. The account holder could accept direct deposit into the account and use a debit card or ATM card to spend from the account, but without any ATM fees or debit card
fees. No overdrafts would be permitted.
Operating this system through the Postal Service would have several benefits. First, as we’ve seen, around 10 percent of the unbanked report that the absence of a bank near them is an important factor in not having a bank account. Indeed, banks are closing branches all around the country, with lower-income neighborhoods hit hardest.34 Post offices, in contrast, are a presence everywhere in the country. According to the Postal Service’s inspector general, “59 percent of Post Offices are in ZIP Codes with one or no bank branches.”35 Given the tradition of postal savings and the ubiquity of post offices, commentators and politicians have argued in recent years that postal banking is the right path forward.36
But a public option in banking doesn’t need to be tethered to the postal system. With today’s technology, a public option for basic banking could also operate electronically. The basic parameters could be the same—$5,000 cap, no fees, no interest, no overdrafts, direct deposit, and a debit / ATM card—but instead of going to a physical post office, all transactions would take place electronically through a website or smartphone app.37 The big downside with this approach, however, is that smartphone usage is not universal. Only 77 percent of Americans owned smartphones as of November 2016, and many of the people who would most benefit from a public option for banking—those in rural areas and those with lower incomes—are least likely to own a smartphone.38 As a result, an electronic public option might not be a substitute for a brick-and-mortar banking option—at least not yet.
A second approach would be for the federal government simply to offer a public option for bank accounts through the Federal Reserve. Right now, banks hold accounts at the Fed that earn a relatively high interest rate, have no minimum balances or fees, are fully non-defaultable (because the Fed is the printer of money), and have immediate clearing. Professors Morgan Ricks, John Crawford, and Lev Menand have argued that citizens and businesses should also have access to what they call “FedAccounts,” a bank account directly from the Federal Reserve. This account would have the above-mentioned benefits, in addition to having no interchange fees for using the account at a retailer. FedAccounts would include an online interface, a mobile app, and a brick-and-mortar interface through the post office.39
A purely public option isn’t the only approach, of course. Some commentators have recognized that another option is to apply a public utility approach to basic banking. Morgan Ricks and Alan White, for example, have each argued persuasively that banks are public utilities and, at a minimum, should have to ensure universal access to basic banking services.40 Ricks proposes that as a condition of their charter, banks should be required to offer a basic bank account to anyone. Adam Levitin has offered a variation of the public utility approach. Levitin argues for creating a new type of charter for basic banking services. These new basic banks could then operate wherever they like, Levitin suggests, including renting space within post offices.41 Of course, one could also imagine hybrid versions of these proposals, such as merging Ricks’s plan for mandating banks to offer a basic account with the idea of renting space in post offices.
Beyond Basic Banking?
The harder question is whether a public option in banking should extend beyond a basic deposit account to making small loans to individuals. The best argument for offering loans is that the federal government could issue them far more cheaply than fringe bankers, who often charge exorbitant fees. For example, each year 12 million Americans use payday loans.42 Payday loans are short-term loans, often only for two weeks, that provide the borrower with immediate cash on the theory that they’ll pay back the cash on their next payday (these loans require the borrower to have a bank account, which the lender usually has access to in order to get its payment). But the fees and interest rates for these loans are extraordinary. Borrowers pay between $10 to $30 per $100 in fees for these loans, and on average, the interest rate is 339 percent (APR).43 According to Pew Research, “a person who borrows $400 for a $60 fee for two weeks would have paid approximately $480 in fees after renewing the loan for four months”—and that’s before paying off any of the original $400.44
A public option might alleviate some of these burdens because the government wouldn’t be trying to profit from the loans and because post offices (if the public option worked through the Postal Service) already have their real estate expenses covered. The Postal Service’s inspector general estimates that, compared to the average $375 payday loan, which costs the borrower an additional $520, a postal loan would only cost an additional $48.45 For comparison, most foreign postal banks offer loans, though some do so via private banks.46
Some critics oppose a public option because they fear that competition will harm fringe bankers or even mainstream banks. When Walmart, for example, tried to get a banking charter, the banking lobby fiercely opposed it.47 But it isn’t clear that protectionism toward fringe bankers and the credit card industry is a good reason not to move toward a public option for small-dollar lending. The inspector general notes that in 2012 the median income of Americans who filed for bankruptcy was only $26 less than their expenses. Saving money by reducing payday lending fees could prevent thousands of bankruptcies.48 That’s a significant benefit that has to be considered. It’s also worth keeping in mind that a public option in small loans might not put fringe bankers out of business. A public option for small-dollar lending would have simple and straightforward terms, and as a result, it wouldn’t satisfy the needs of everyone. Many people might still seek out fringe bankers to get riskier products.
The better argument against a public option for small-dollar lending is that it isn’t clear that the goal of public institutions should be to spend taxpayer funds to loan money to the poor. If our goal is helping the poorest gain economic security and eventually build wealth, it might be better to spend taxpayer funds on investing in job creation, offering free child care, providing a basic income, or something else entirely. If the problem is that people don’t have enough money to make ends meet, it might be better to figure out how to solve that problem rather than just assuming the right way is for them to take out short-term loans.
The case for a public option in basic banking, however, rests on different grounds. People today need to be connected to the financial system. The government creates a uniform system of money, with universal access to everyone. Today, with the changes in banking technology, we need once again to ensure that everyone has access to the financial system.
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Child Care
Child care is a cornerstone of any society. No matter what else is going on, children have to be cared for. Hunter-gatherers carried their children along as they roamed, and agrarian parents kept their children close by (and, eventually, had them work in the fields). The Industrial Revolution upended these traditional arrangements but eventually created a new one: mothers stayed at home with children while fathers left for the industrial workforce.
Since the 1970s, our society has abandoned that model: the stay-at-home mom went away with the Treaty of Detroit. The expectation that women should be housewives has disappeared along with other relics of the 1950s. Today the vast majority of mothers work, but we have not come up with new social institutions to replace the old ones. Instead, we rely on the neoliberal solution—private markets—to provide child care options. The result is that working parents across the country scramble to find, and to afford, child care.
The stunning fact is that the average cost of child care has nearly doubled since 1985—and that’s after taking inflation into account.1 In two-thirds of states, day care for one infant costs more than public college tuition.2 One-quarter of American families spend more than 10 percent of their income on child care, and poor families spend nearly 20 percent.3
And just finding a slot can be a challenge. In Washington, D.C., some parents put their names on day care waiting lists as soon as they know they are expecting a child, spending hundreds of dollars on nonrefundable deposits just to get a spot on th
e list.4 And these parents aren’t overreacting. Statistics show a massive shortage of child care slots in the District of Columbia and nearby suburbs, especially for kids under age three.5 Ditto for Sonoma County, California, and rural counties in Minnesota, just to pick two more examples.6
Along with high cost, low quality is a huge problem. Research confirms that children thrive in settings that are healthy, safe, and stimulating—and where adults are warm and encouraging. A low staff-to-child ratio is helpful, and so are small-group settings and educated caregivers. Softer (less measurable) factors matter, too: the best caregivers have a positive attitude and put a priority on sensitive and encouraging interactions with kids.7 But most American child care settings fall short of these standards. In 2007, a major national study found that most U.S. child care is “fair” or “poor” in quality; only 10 percent of providers ranked as high-quality.8
Adding insult to injury, child care—as expensive as it is—often isn’t all that reliable. Many day care centers won’t take children under three or children who are not yet potty-trained. Day care centers often provide limited hours, even though many parents work nontraditional hours or late shifts. Most day care centers cannot care for sick kids, meaning that parents miss work for every one of childhood’s many common colds.
The child care scramble doesn’t end when children start school. Public school hours are often inhospitable to working parents—a school day of 9:00 a.m. to 3:00 p.m. is typical. Schools take weeks of vacation during the school year and close all summer. Some schools offer extended care for mornings and late afternoons, but these services are not universally available.
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