Last week, the Standard Examiner published its own report on the payday loan business in Utah (here). The article attempts to present a balanced view, but it left me somewhat incredulous.
The SE article cites high customer satisfaction rates, saying, “According to a customer-satisfaction survey conducted by researchers from Syracuse University, 63 percent of payday borrowers are satisfied, compared to 28 percent with credit cards.”
One satisfied regular payday loan customer makes relatively good money in computer engineering. He travels frequently for business and his employer doesn’t reimburse him until a couple of weeks after each trip. He gets payday loans to fill the gap, paying around $80 for a two-week $500 loan.
This guy explains that he doesn’t have a credit card because he got in lots of trouble with credit cards when he was younger. So he actually “appreciates … the stiff fees” that help “keep him in line.” Although this guy makes good money, he is obviously bad at math. He says that he prefers a payday loan to a credit card because he doesn’t “want to pay that 18 percent interest.” This is a totally bizarre statement, because he avoids that high 18% rate only by paying a 416% rate on his payday loans.
Tellingly, the reporter writes that this man is now considering getting a credit card with a $500 limit because he realized, he says, “If I pay it back within a month, I won't pay any interest at all.” Ah, the light has turned on. Maybe this guy can work on your computer system, but don’t hire him to handle your finances.
This is the kind of fiscal ignorance upon which payday lenders prey. They rely on a steady stream of dupes that are mystified by simple finances. They need people that don’t understand the availability of more viable financing options or that have made enough bad decisions in the past that some of these options are now closed to them.
Other articles have cited the fact that part of the reason payday lending flourishes is that more respectable financial institutions do a poor job of servicing the people mentioned above. Actually, the real problem is that people don’t learn how to manage their finances early in life and they develop patterns early in life for expecting to get things they can’t afford. We have a huge credit industry that encourages this type of behavior and many people fall into their traps.
The article notes that payday lenders service people with “a high discount rate.” A university professor defines this, saying, “People with a high discount rate value present consumption more than future consumption. The pleasure they are getting today outweighs the costs they are going to have in the future.” In other words, payday lenders need a stream of customers that live for the moment and demand immediate gratification regardless of the consequences.
Reporter Marshall Thompson also notes that payday lending has exploded in Utah because it is one of the eight states in the nation that hardly regulate the business. Most states have usury laws that prohibit “lending money at exorbitant interest rates,” but Utah does not.
But don’t worry. An industry rep says that “the term usury doesn't apply to the payday industry since it only charges what the market will support.” Whew, that’s a relief. He also says that with “a high customer satisfaction rating and booming demand for services, the payday loan industry must be doing something right.”
When I read this, I turned to my wife and said, “I’m sure that the prostitution industry also charges only market rates, has plenty of demand, and has a high rate of customer satisfaction. But most people don’t think it should be legal.” I also noted that we have plenty of demand for gambling in Utah and plenty of satisfied gamblers that cross the border, but that most Utahns don’t think gambling should be legal in the state either.
Libertarian critics of regulating payday lending will correctly note that doing so will limit supply; thereby, driving costs even higher and creating a black market. But there are other matters to consider. Right now the state is complicit in the payday lending industry’s scheme to dupe people. The basic business plan is to get people to default on their loans, and then take them to court where the state rules against them so that the lender can get a revenue stream from garnishing wages, getting a much higher return on the lender’s investment. The state even helps collect revenue at this point. Since the people of this state are de facto partners to this business plan, state government has a right to have a say in how it is played out.
Critics of regulating payday lenders will also say that government has no right trying to keep people safe from their own bad choices and that the state has no business legislating morality. I both agree and disagree. This is like saying that we should never put up guard rails and concrete barriers along mountainous roads with steep drop offs because it would keep people that want to drive over the edge from doing so, or because it would keep people that veer off to the side from suffering the natural consequences of their actions. Of course we should take care of public safety, including public financial safety. This is a large part of what government does. It constantly attempts to achieve an optimal balance between public safety and individual liberty. The problem happens when we put up guard rails where none are needed.
This issue also involves considerations of natural law. Some hold that our laws should pretty much follow only natural law. There are two types of law: malum in se, which means that something is naturally wrong of itself, and malum prohibitum, which means something is wrong only because it is prohibited by authority. Murder, stealing, and lying, are wrong in and of themselves, for example. It doesn’t matter whether we have laws to prohibit them or not; they are still wrong. But driving 35 mph in a zone marked 30 mph is only wrong because it is prohibited by authority.
To be sure, there are disagreements as to what fits into the definition of malum in se. The classic modern example is abortion. One side sees abortion as malum in se, while the other side does not. Some would argue that usury falls into malum in se under the pretext that it is wrong to take advantage of someone even if that person agrees to the action. Usury is prohibited in both the Bible and the Koran. People in the payday lending industry would either argue that their 500%+ rates are not usury or that usury does not fall into malum in se.
Prostitution is prohibited in most places under the pretext that it falls into malum in se. It does not matter that consenting adults enter into an agreement to sell/purchase sexual favors for money. Society mostly believes that there are still victims in this type of transaction. Whenever anyone is harmed in a democratic society, all of society is harmed; thus, prostitution is illegal in most of the U.S.
Strict libertarians will argue that questions of this nature should not be regulated by government, and that the natural operation of the free market will sort out all such moral dilemmas. They will argue that the majority has no business imposing its moral will upon the minority, as this is simply tyranny of the majority, which our Founders sought to prevent by forming a republic.
When this point is made, someone frequently throws in an argument along these lines: “You want to enforce your view of morality at the point of a gun.” This takes the valid point that government has coercive powers and demagogues it by taking it to an extreme. Certainly there are times when a law might need to be enforced with violence, but for the most part, we’re talking about putting up guard rails rather than posting a guy on the side of the road with a bazooka ready to blast you if you veer too close to the edge.
Our democratic republic was created in a way that government should only play a role in certain enumerated areas. And for the most part, it should only play a role when there is fairly broad consensus on points. When this pattern is followed, government necessarily has a narrow focus, because such consensus can only be achieved on a few points. Other than that, government should stay out of the way.
Does payday lending fall into the categories specified above? The Standard Examiner published an editorial on Saturday arguing that does. I tend to agree. We ought to put limits on businesses whose main practice is to create victims, even if they’re willing victims. We especially ought to implement limits when a significant portion of the business’ operating plan involves the unwilling complicity of state government.