In my previous post, I suggested that America’s so-called housing crisis is really an affordability crisis. Naturally, this led me to ask what other current social and economic phenomena are indicative of that larger crisis. One example would be the rise of “Buy Now, Pay Later” services. The general principle behind Buy Now, Pay Later (BNPL henceforth) is quite similar to that employed by PadSplit: users purchase a commodity or a service and then pay for it in weekly or monthly installments. This is supposed to make budgeting easier and render essential but costly expenses more affordable. BNPL’s appeal is due in large part to “easier access to credit, predictable payment plans, and no interest rate” according to a Bankrate survey. The same survey found that almost one in three Americans have used a BNPL service (PayPal Pay and Affirm being the most popular), with a majority of users citing the need to spread their cash flow as their reason for doing so.
The apparent lack of interest rates on BNPL apps has contributed to their popularity. However, the notion that these kinds of payments are interest-free is a misleading one, to put it mildly. Larger payments spread over longer periods do in fact carry interest rates, which are frequently around 15 to 20 percent, or even higher. It is also true that BNPL services often include late fees. “Keep in mind that while some BNPL services don’t charge late fees” continue the authors of the Bankrate survey, “they may report late payments to the credit reporting agencies, causing your score to drop and making it more difficult to get personal loans and other financing for larger purchases in the future.” Initially this was not always the case, and arguably a major selling point for BNPL services. However, in April of this year the BNPL service Affirm announced that it would begin reporting all late payments to the credit bureaus Experian and TransUnion. The penalties levied by these bureaus are especially concerning when coupled with the fact that the most commonly reported complaint with BNPL is users spending more than they should. This may be an indication that large numbers of consumers erroneously believe that all BNPL services allow for interest-free payments, devoid of late fees.
A study in the Journal of Cultural Economy characterizes the moneymaking strategies of BNPL services somewhat differently. The authors emphasize how, when these BNPL services rose to prominence, they were “designed to challenge the hegemony of traditional banks and other financial institutions” and differ from credit cards in that “they do not charge interest, and are thus currently unregulated as consumer credit in Australia, the UK and elsewhere.” These services are able to turn a profit due to “merchants’ fees (typically between 2-6 per cent) and customer ‘late’ fees. Up to one in five BNPL users incur such penalties, and it has been shown that these end up being the equivalent (or more) of interest rates charged for credit cards” with the authors citing Afterpay as an example, which imposes penalties equivalent to a 28.25 per cent interest rate.
The risk posed by BNPL in encouraging unsafe consumption patterns can be explained in part through the work of John Maynard Keynes. Keynes, a towering 20th century figure often described as the father of macroeconomics, was highly concerned with consumption in particular, as he saw it as driving a controlling percentage of spending in the economy. The Absolute Income Model, which Keynes developed to explain consumption habits, assumes that people consume directly in proportion to their disposable income. Because, BNPL services allow consumers to make larger purchases than they might normally be able to (by splitting them into instalments), they are likely to assume that their disposable income is greater than it actually is. As a result, people may begin to tailor their consumption patterns around a skewed understanding of their ability to spend, leading to reckless purchases and untenable levels of debt.
These BNPL services, while creating the illusion of greater social mobility and more effective, streamlined modes of economic decision making, are really just means of sticking the same old difficulties with a slightly more appealing label. The aforementioned Journal of Cultural Economy study describes BNPL as “a service that is specifically marketed at young people, often functioning as an initial entry point of socialization to a life of adult indebtedness.” Engaging in risky spending patterns just to make ends meet or making questionable long-term investments in order to stretch one’s purchasing power slightly are no longer dangers that young people prudently avoid: instead, young people often willingly delude themselves into believing that these risks are opening pathways to their future that were previously barred.
The process of psychologically preparing young people for a life of indebtedness and deferred ownership has been underway for over a decade. While the living standards enjoyed by boomers are still coveted by young people, recent polling shows that the top 1% of Americans own more wealth than the entire middle class, eroding the total share of income held by the latter group. More Perfect Union has recently reported the unemployment rate for 16-24 year-olds to be at 10.5%, a figure that in all probability is an undercount. The wealthiest 20% of Americans are the overwhelming drivers of spending, while everyone else tends to limit their consumption according to the demands of inflation and their limited salaries. 49% of Gen Zers polled have decided that saving for the future is pointless, according to Credit Karma. This year, 42% of young workers are reportedly living paycheck-to-paycheck, up from 31% in 1997. All the while, financialization has increasingly consumed the economic lives of young people: since Reagan’s re-election in ’85, the share of US GDP composed of financial assets has swollen by over 500%. All of this might be good news if you own stock in a Fortune 500 company, or if you work in finance or IT. For everyone else, though, these statistics paint a forbidding picture of economic precarity and declining living standards.
When considering all of these trends, it’s increasingly baffling to me that moderate voters remain mystified by Zohran Mamdani’s rise to prominence, or simply attribute it to smart optics and messaging. The working and middle classes, students, and young people in New York are experiencing life in ‘the capitol of capitalism’. They see these developments in the context of their immediate surroundings and anticipate a future of growing social alienation, living paycheck to paycheck, and permanent indebtedness. When a Mamdani comes along to raise the obvious issue of affordability, acknowledging that oligarchs are turning our future into a luxury commodity, it shouldn’t be a surprise that his message immediately resonates with millions. Public figures who continue to ignore this glaring affordability crisis do so at their own peril.