How To Deregulate Our Way To Better Payday Lending… Seriously

Hmm, now that I read the paper closely, neither of our explanations seems to fit the facts. While they observe that indeed payday loan prices are higher in areas with “captive” clientele, they also observe that competition does not appear to make a difference in the APR. Areas that actually do have real competition seem to be just as expensive as those with few payday lenders.

At first, I thought, “fixed costs”, the reason why markets with more hospital beds per capita have higher healthcare costs than markets with fewer hospital beds per capita, but that would tend to lead to a few mega-storefronts — think Wal-Mart vs. the small expensive shops they drove out of business. A huge payday loan business would have lower per-customer costs and thus be able to sell loans for less than a small storefront with higher per-customer costs. So why hasn’t that happened? I don’t have an answer to that question, and it’s irritating me. Even my prior mobility notion doesn’t seem to fully fit — we’re talking about the same people who shop at Wal-Mart, and Wal-Mart doesn’t seem to have a problem with getting folks to drive there for lower prices…

We have institutions that provide the kind of installment payment loans that you propose, Jon. They’re called BANKS, and the product that you’re grasping for a name for is called a “personal loan” or “credit card”. And you are correct that there is no natural limit to the interest rates that payday lenders charge, it is set by the high fixed costs of operating the storefronts and making the loans divided across the number of customers that any particular storefront has. But your notion that the fact that there is no natural limit means we should not cap that APR is just astounding. It’s as if you’re saying, “okay, there’s no natural upper limit, so we’ll let the industry go into a death spiral of higher and higher interest rates just because regulating it would make the free market fairy cry!” How, exactly, does that serve the interests of either the customers of payday lenders or indeed of payday lenders themselves?

You may be right that it’s the high fixed per-loan costs of issuing these loans that is preventing the Walmartization of the industry. On the other hand, perhaps APR regulation can lead the industry to explore how to improve its efficiency. The market hasn’t done that for some reason — sorry, the Free Market Fairy didn’t wave her (his?) magic wand and make sparkle ponies that poop sparkle berries appear. I see no reason why we should not explore other means, even if they make the Free Market Fairy cry.

Black and white thinking like “you can have it only one of two ways” is utter nonsense and drivel. There are a wide variety of goods and services which government regulates for quality and other attributes, and a wide variety of other commercial transactions which government outlaws entirely. You cannot, for example, set up a crack cocaine kiosk outside the gates of an elementary school — government interferes in that commercial transaction. And if you are a public utility you cannot simply set the price of your electricity at whatever the market will bear — you must set the price of your electricity at what your state’s regulatory body will allow, given your information on how much it costs to provide electricity and how much over that will obtain the legal maximum profit for you. All of this, apparently, according to you means that government outlaws *all* transactions. Which is ludicrous and exhibits the same kind of black and white, left and right, immoderate absolutist nonsense which has turned our political discourse into a collection of howling morons on the right and screeching lunatics on the left making those of us who want sensible, realistic, pragmatic policies just want to shout “Shut UP you lunatics, we don’t care about your ideological extremism, all we want is what WORKS regardless of whether it complies with your ideological Bolshevik or Bushevik ideology!”

In short: We regulate things on a daily basis for quality and price. To state that this means we don’t have a market is utter and complete nonsense. It may indeed be that 36% is too low an interest rate for payday lendors to stay in business (and personally I do think it is, because of the horrific default rate for payday loans). If so, they’ll start going out of business — and the free market in democratic representation (which uses VOTES rather than MONEY to select for policies that maximize the public good) will repeal that law as not in the public interest. That is how it works in a democracy. To state that we cannot regulate *anything* for quality and price because then we’re some sort of tyranny or something, on the other hand, is just absolutionist nonsense.

By your argument, though, setting up a kiosk to sell crack cocaine across from a schoolyard is fine and dandy. This is America, after all. Outlawing selling crack cocaine to school children is interfering with freedom of commerce.

If a state by popular vote decides to end payday lending either directly or by setting an unrealistically low interest rate, how does that differ from outlawing setting up a kiosk to sell crack cocaine to school children? In both cases, the people of the state have decided that this product is harmful to their society and outlawed it. So what makes the two cases of “interfering with commerce” — crack to schoolchildren, and payday loans to poor people — fundamentally different?

Or are you truly saying that selling crack to schoolchildren really *shouldn’t* be illegal because it is interfering with commerce? That would be intellectually honest of you if you really believe in your argument, but at that point I, and most Americans, basically have a fundamental moral and philosophical difference with you since we (the majority) believe that allowing the sale of harmful products to vulnerable populations is wrong and that government has a fundamental responsibility to step in and deal with that situation. If your belief in freedom of commerce applies to things that the majority clearly believes should be outlawed as harmful to vulnerable populations and to society as a whole, it’s pointless to continue at that point because it becomes clearer that your problem is with democracy as a whole, which we (the majority) like and which you apparently have a problem with. At which point I could mention Winston Churchill’s observation that “democracy is the worst of all possible systems of government, excepting all others that have been tried”. But really, what’s the point? Trying to discuss the virtues of democracy with an anarcho-capitalist is like trying to discuss the virtues of democracy with Stalin, extremists simply don’t like democracy and will never agree that despite its warts it’s the best system we have at the moment. Pointless.

The question is, who decides what is a harmful good? You, or the majority in a democracy (via their representatives)? Your argument is fundamentally anti-democratic, saying that your notion of what constitutes a “harmful good”, or Jonathan Zinman’s notion of what constitutes a “harmful good”, should override what the will of the majority in Oregon decided was a harmful good (i.e., payday loans). You are making a fundamentally authoritarian argument that your judgment should override the judgment of the majority of voters in Oregon.

Could the majority be wrong? Sure. And in a democracy, it’s quite respectable and responsible to attempt to educate and inform the majority that they are in fact wrong. But to go from that and call the will of the majority “authoritarian” is utter nonsense. This is not a Stalinist dictatorship. “The Government” here is We The People, for better or for worse. I may have a sour opinion of the wisdom of the majority of my fellow Americans, but really, what is the alternative? Other than imposing a tyranny of you and Jonathan Zinman upon the majority that decided that payday lending in Oregon should be abolished?

I was discussing the Bill of Rights with someone in Australia a few years back and discovered that Australia has no bill of rights in their Constitution. I asked him why, and he said “any right which is not supported by the majority will be ignored anyhow, so why bother having a Bill of Rights actually written in your Constitution?” Look at the 15th Amendment, for example. It guaranteed blacks the right to vote, and was passed in 1870 as part of a package of amendments intended to punish the South. But blacks didn’t actually get the right to vote until LBJ signed the Voting Rights Act in 1965, a hundred years later. Why? Because the majority of Americans did not agree that blacks should have the right to vote until then, so the only way to impose the right to vote upon Americans would have been via tyranny.

Which is my point: If the majority wish to strictly regulate payday lending as toxic and harmful, but you and Jonathan Zinman have a different opinion that payday lending is actually good and should not be regulated, what way other than tyranny is there to impose you and Jonathan Zinman’s opinion upon America and Americans? Should a minority have the right to impose their opinion upon the minority just because they feel themselves to be morally and intellectually superior? How does that differ from apartheid-era South Africa, or the segregation-era American South?

I mean, I disagree with my fellow Americans often. But when they make some decision that I disagree with, I don’t try to impose my own opinion by force. That would be the work of a tyrant. Instead I try to educate them. And as Churchill once said, Americans eventually do seem to come around to the right thing to do, even though they seem to go through all the various wrong ways of doing things in the process. It seems to me that you harbor a deep-seated mistrust of Americans. I’d take a cheap shot and say that Osama bin Laden probably agrees with you about the stupidity and venality of the average American, but that would be a cheap shot since you didn’t actually say anything about stupidity and venality .

I guess my take-away from this discussion is that you can either have democracy, or you can have unregulated free markets, but you can’t have both because the majority in a democracy will often (not always, but often) vote to regulate activities that they feel are not in the public’s best interests. Interesting how economics and civics collide here, eh?

“Well, should a majority have the right to impose their opinion upon the minority”

The reality is that, short of imposing tyranny, you cannot stop the majority from imposing their opinion upon the minority. The 15th Amendment attempted to give blacks the right to vote in 1870. Yet they did not actually gain the right to vote until 1965, because it was not until 1965 that a majority of Americans agreed that blacks should have the right to vote. I.e., I’m not saying that the majority is always *right* (to say that I disagree with the pre-1965 majority is an understatement), what I’m saying is that the only way to overrule the opinion of the majority is via tyranny of the minority over the majority, and that imposing the will of the minority upon the majority is thus inherently incompatible with democracy.

It is interesting that economists who have confidence in the wisdom of the masses when it comes to “rational markets” and such, suddenly lose said confidence when the majority in a democracy makes political decisions (such as regulating payday lenders) that they disagree with. You can’t have it both way. Either the majority is perfectly rational and thus make “rational markets” work without regulation, or they’re irrational in which case regulation is needed to make markets work. So which is it, are the majority irrational — in which case regulation of payday lenders is needed to protect irrational people from making bad decisions? Or are they rational — in which case they’re making rational decisions in the marketplace of politics (which IS a marketplace, albeit one that uses votes rather than money to reach its decisions) to vote for laws to regulate payday lenders? Checkmate .

So let me get this straight. The majority generally make rational choices about their private decisions (though it turns out that isn’t actually true — http://snarkypenguin.blogspot.com/2010/03/chicago-school-rational-markets-and.html ) yet somehow get irrational when it comes to voting? Next thing you’ll be telling me is that water is both wet and dry at the same time .

My point about the Constitution was not that I don’t like it. My point about the Constitution is that it is useless when the majority decide to ignore it. Whether we are talking about denying blacks the vote for 100 years after the Constitution granted them the right, or banning a political party (the Communist Party in the 1950′s) despite the 1st Amendment’s guaranteed right of freedom of association (which, apparently, only applies if you associate with the “right” people), or disappearing brown people to Gitmo without trial despite the 6th Amendment guarantee of right to a speedy trial, or denial of habeas corpus to those people despite Article I section 9′s guarantee of habeas corpus as a right for all cases not involving military members or invasion or insurrection, reality is that the majority rules in a democracy and the only way to prevent the majority from ruling is via tyranny. Educating people about rule of law and why it’s a good idea is the only realistic thing to do in that case. Yes, the Supreme Court can rule. But as President Andrew Jackson once supposedly replied, “Justice Marshall has ruled, now let him enforce it.” How many inmates have been released from Gitmo because the Supreme Court ruled it was unconstitutional? Hint…. it’s a whole non-negative number less than one .

If the majority in a state decide to ban payday lending in that state, all your nattering about “they have no right!” is nonsense, as Chairman Mao pointed out power grows from the barrel of a gun, and in a democracy the majority has the majority of the guns (or, rather, the votes that control those guns). Stating that technocrats should be able to overrule the will of the majority because they know better sounds profoundly un-American to me — even though in many cases the technocrats *do* know better. As H.L. Mencken pointed out, democracy is the notion that the common folk know what they want, and deserve to get it, good and hard. So it goes .

Shorter Caplan: “Voters are irrational because they disagree with me!”

Not a compelling argument, and does not address my central point, which is that you cannot say that someone who is irrational in one area of economics (political economy) suddenly becomes magically rational in another area of economics (monetary economy). There is no Free Market Fairy spewing magic sparkle pony dust to suddenly turn irrational people into rational people or vice versa.

And yes, I call shenanigans on the notion that political economy is somehow fundamentally different from monetary economy. Both are token-based economies where consumers in a marketplace view the available choices and choose whichever one they like for whatever reasons, rational or irrational, that consumers use when choosing things. They are markets, pure and simple.

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