Usury Laws?
Politics
| August 20, 2008
| Tim
One large difference between social conservatives and libertarians is that social conservative tend to be more supportive of laws which ban activities which they feel cause more harm, on the whole, than good. (Liberals also support laws like these -- far more often, in my experience -- but tend to want to control different areas. Conservatives want to keep narcotics illegal and keep the F-word off broadcast TV; liberals want to ban "junk" foods and control your thermostat.)
Three areas where I personally tend to think a large number of people -- especially those who tend to be poor -- can easily get into serious trouble are drug use, gambling, and debt. As a social conservative, I favor laws restricting all three of these areas. (Interestingly, these are also activities where wealth is quickly concentrated without producing much economic value.)
Democrats, on the other hand, have historically been supporters of the first two: Look into which politicians have generally promoted or supported casinos, state lotteries, and drug legalization and you'll find most have been Democrats. (I'm not saying this to demonize: Democrats often feel that lotteries and casinos will help generate tax money for social services, and many people feel that drug legalization would be helpful, not harmful.)
So what about debt? According to a report recently released by two professors, there exists "a surprising relationship between populations of Christian conservatives and the proliferation of payday lenders." As expected, this study is being excitedly reported on "reality-based" blogs.
I'm personally a bit surprised by the reported result. In Missouri -- a state which is fairly conservative overall -- "payday loan" places tended to have the highest density in urban areas -- which also tended to be under solid Democratic political control. (Missouri also has casino gambling today, ushered in by former Democratic governor Mel Carnahan. Colorado, where I currently live, also has casinos, introduced in 1990 by Democratic Governor Roy Romer -- and an apparently similar distribution of "payday loan" stores.)
James Joyner takes a closer look, and finds some rather serious problems. He notes that two-thirds of the Representatives cited by the study as allegedly reflecting the "Christian Right" turn out to be, um, Democrats. (And I'd strongly suspect this would paint an even worse picture if they did a district-by-district analysis, weighted by payday loan locations.)
And then there's the usual opportunity to pick one's favorite stance on correlation versus causation:
Where are the control variables? I don’t know a lot about payday loans but I’m guessing they’re more popular with people living paycheck-to-paycheck than among the relatively affluent. But there are no controls for that — or anything else — to ensure that social conservatism isn’t spurious.
Using simple correlation as a means of analyzing complex social phenomena is, quite literally, a joke. Or, should I say, an endless series of them. Drowning deaths and ice cream sales. Ministers’ salaries and the price of vodka. The number of doctors, fire trucks, and cops and deaths by disease, property damage from fire, and crimes.
Indeed, the study authors found that there was an incredible correlation between the recent rise of payday loan facilities and that of Starbucks Coffee franchises. They dismiss this by saying, “There is, of course, no relationship between the Starbucks and payday lending.” Yet they offer no more evidence that the correlation between legislative representation and payday lending is meaningful. Maybe people are spending too much on coffee and need to borrow some money?
Joyner also points that the analysis is done exactly backwards: Instead of looking at "Christian Right" states and finding the effect on "payday loan" places, they ran the analysis the opposite way. So if a state ranked high for influence from the "Christian Right" but bans payday loan places altogether (Joyner mentions Georgia -- and North Carolina is another example), that state was (absurdly!) excluded from this purported "study" on the political effects of "religiosity" on payday loan availability!
(Heh: Perhaps they've really "proven" (taking all other assumptions at face value) that payday loan places cause Christian conservative political influence! Or maybe its the new Starbucks coffee shops which are doing that? ;-))
For a real-life peek into who is fighting excessive interest rates today, take a look at this Forbes article on the battle going on in Ohio. I'm choosing it because, unlike the several I read beforehand, it actually mentions party affiliations. The legislative leaders in the fight against high interest rates were all leading Republicans -- so presumably the ever-unnamed legislative "opponents" were Democrats. To his credit, the Democratic governor has (apparently recently) "signed on" with state Republicans to protect the bill.
Note the religious language he chooses:
The law, which takes effect Sept. 1, limits borrowers to four short-term loans a year and caps annual interest rates at 28 percent. Lenders currently are able to charge what works out to an annual interest rate of 391 percent....
House Speaker Jon Husted, a Kettering Republican, said at a news conference Thursday that he rejects the industry's arguments that the law will interfere with the free market, which he believes in protecting.
"We capped the interest rate at a level that created a reasonable expectation that the borrower could pay it back, that they wouldn't be trapped in a cycle of debt," Husted said. "We didn't ban small loans, we banned a defective product."
Husted, GOP Senate President Bill Harris and [Democratic Governor Ted] Strickland are serving as honorary co-chairs for the campaign against the repeal, which is being spearheaded by the Coalition on Homelessness and Housing in Ohio. The coalition, an advocacy group for the poor, helped lead efforts to pass the payday lending restrictions.
Strickland said he will use the bully pulpit to fight for the new law, in addition to helping raise funds for the campaign.
"I will speak out as directly and as forcefully as I can and indicate to the people of this state the importance of this issue," he said.
The governor called usury, the practice of lending money at exorbitant interest rates, "one of the oldest of sins." He noted that it was outlawed in the Northwest Territory before Ohio became a state and that the state Legislature regulated it for the first time in a bill passed in 1804.
Good for him! I see no reason this shouldn't generally be a bipartisan issue.
Smirk — It's funny how the correlation functions are selectively used to denote truth, when convenient.
As expected, this study is being excitedly reported on "reality-based" blogs.
So, what exactly is a "reality based" blog? Doing a simple google search seems to lead me to the idea that it's some kind of new Orwellian lingo I missed out on.
And, just for the sake of historical anecdote this (lifted from Wikipedia:Usury:
In The Divine Comedy Dante places the usurers in the inner ring of the seventh circle of hell, below even suicides. (Showing how cultural attitudes have changed since the 14th century, the usurers' ring was shared only by the blasphemers and sodomites.)
Reality based blog is based of a joke by Colbert.
"Three areas where I personally tend to think a large number of people -- especially those who tend to be poor -- can easily get into serious trouble are drug use, gambling, and debt. As a social conservative, I favor laws restricting all three of these areas. (Interestingly, these are also activities where wealth is quickly concentrated without producing much economic value.) "
Yes, poor people tend to be hurt more by destructive behavior. However, they get into worse trouble when they are banned- then they end up in prison. Which, amazingly enough tends to be very bad.
So "helping" people by banning things and creating a black market is a BAD idea.
By the way, this statement is priceless:
"(Interestingly, these are also activities where wealth is quickly concentrated without producing much economic value.) "
You do realize that desribes most of the economy? So basically if people don't need it, it is not of alot of economic value? As for concentrating wealth... no. That only happens because they are illegal- which leads to gang control and monopoly due to violence.
As for loans... the government shouldn't control usury. Sure, it is bad if some can't pay of their loans, but I think the word "personal responsiblity" comes into play. The eception would be ones that have their rates suddenly jack up, which is more being tricked or ignorance, depending on the person.
Tim: "(Interestingly, these are also activities where wealth is quickly concentrated without producing much economic value.) "
Sam: You do realize that desribes most of the economy?
Do you really think that most of the economy doesn't produce much of (net) value?
As for concentrating wealth... no. That only happens because they are illegal
You have the same thing happening with gambling on legal Native American casinos. Wealth is concentrated with little produced in either case. Though personally, I'm of the "a fool and his money are soon parted" school of thought.
There are good arguments to be made on both sides of things. Personally, I'm none too fond of the nanny-state-ism that tries to protect people from themselves unless the harms to society are quite substantial (such as with cocaine use, say) with a few exceptions where people shouldn't be considered capable of giving consent. But I don't see anything which contradicts the things Tim has asserted.
The eception would be ones that have their rates suddenly jack up, which is more being tricked or ignorance, depending on the person.
I wonder how many people really understand just what they're getting into with a 400% per year interest loan.
Another thing to watch out for; The mother of my girlfriend's sister took out a number of credit cards in her daughter's name and ruined her credit rating. That put the daughter in a rather awkward position, since she's not willing to turn in her own mother for a felony offense she has tons of debt and bad credit.
I'd want age limits of 21 years or so at a minimum for the higher-interest loans because of these and similar problems that some younger people run into.
Even student loans, taken out at 18 or so, can cause difficulties with interest rates of +10%/year
"Do you really think that most of the economy doesn't produce much of (net) value? "
It depends on what the heck you mean by "net value". If you mean that it doesn't add to GDP than you are wrong. If you mean it isn't socially productive or is unnecesary, than you are right. Unfortunately your criteria probably applies equally well to minigolf, McDonalds and a whole host of legitimate businesses. After all, they aren't social necesaries.
"You have the same thing happening with gambling on legal Native American casinos. Wealth is concentrated with little produced in either case. Though personally, I'm of the "a fool and his money are soon parted" school of thought. "
A little dense aren't you? The reason wealth is being concentrated there... is because it is illegal to take place anywhere else. The word monopoly comes to mind.
As for banning things because of danger to society... I don't believe cocaine or other drugs falls under this. PCP may be an exception, but as long as alcohol is legal, the argument doesn't hold water.
Alcoholis legal because it was too much effort to ban it... just like th current crop of illegal drugs. However, people seem not to have caught on.
People being ignorant of basic math is not a reasonable excuse.
I personally have no opinion on the religious vs nonreligious debt argument- I am aware that Americans borrow too much money. I am also aware that they should sink and swim on their own when it comes to decisions like that. Some day I hope that such an idea also applies to companies.
The main problem I have is that Tim seems to think banning Ursury is a good idea. Tim- when you make things illegal, a black market develops. It doesn't matter if it is organs, chocalate, slaves, CFCs or what not. If the substance is produced in a few locations that are easy to moniter (alot of environmental regs) thn you have a chance. If it can be made any where... than there is no way to control it. Unless you put cameras everywhere or make the penalties harsh enough...
Anyway, loans follow basic econmic rules. As such, lower the interest rates will make he banks less willing to lend money... at which point the banks will be decried for their greed. The baks will insist they need backing if they lend to people who are high risk, and the government will provide it... at which point the banks will go on a lending spree. When a large number of people default on their loans, the banks will simply make up for the losses from the tax payers.
Or they simply rename loans and interest- it is how "Islamic" banking works. The church did the same thing too- and let the Jews run banking.
Basically, controlling loan and interest rates is a bad idea. There may be was to sanely regulate it, but setting a cap to the rate is NOT one of them. It is equivalent to rent control.
It depends on what the heck you mean by "net value".
Lets take something measurable like GDP;
If alcohol consumption goes up 20% then that will presumably affect other areas of productivity. Or to use an overly dramatic example, if half the population spends $50 on a tattoo and 10% get hepatitis that would be indistinguishable, at first blush, from half the population buying $50 worth of massages per person. But in the long run, the extra deaths do a lot of damage to the economy and decrease GDP.
Also, any activity has certain drawbacks. A dollar spent on activity A is a dollar not spent on activity B.
On the other hand, if a CEO can't get any extra goods from their multimillion dollar a year salary, they may put their services to less productive uses since they don't get much value from an extra dollar. In which case seemingly non-productive activities (including mini-golf and even gambling) could theoretically contribute to GDP by providing some kind of reward to "the person who has everything" which would motivate the person to keep applying his or her rare skills.
It depends on what the heck you mean by "net value". If you mean that it doesn't add to GDP than you are wrong. If you mean it isn't socially productive or is unnecesary, than you are right.
I'm not sure what you mean by saying I'm wrong or right. You were the one making the assertion in that instance.
A little dense aren't you? The reason wealth is being concentrated there... is because it is illegal to take place anywhere else. The word monopoly comes to mind.
Who spends a higher percentage of their salary on the lottery? Rich people or poor people? Poor people. The poor spent a greater percentage of their income on gambling than the wealthy, giving gambling the same effect on incomes as regressive taxes--the poor are hit the hardest.
Perhaps different laws would allow poorer folks to run gambling operations. That's a fair argument. Such games have entertainment value. But I doubt it would change the fact that the poor are more likely to gamble and also to lose money gambling. Even with different laws, I suspect that gambling is still likely to redistribute wealth up the food chain.
Not that wealth disparity is a huge concern of mine. And again, I think people have the right to do what they want.
But the assertion that the existence of easy access to gambling will make the poor poorer seems like a sound logical argument to me, for whatever its worth.
When you make things illegal, a black market develops.
I agree in theory. And I'd agree that "redlining" is a bogus insult made by people who don't understand the economics behind loans. I believe the historical religious opposition to any lending with interest has caused unnecessary problems. But in modern practice the question becomes; if you ban loans at 400% yearly interest but allow them at, say, 40% yearly interest will you have enough people considered 'bad risks' at 40% interest but good risks at 400% that a black market could develop? The following article suggests that there may not be a black market even with 40% per year interest rates mandated by law;
At the Goodwill thrift store, Truckey got a payday loan at half the finance charge and, more importantly, got help converting her payday debts to a single one-year loan with monthly payments of just $129. Her one year loan carries an interest rate of only 18.9 percent, compared with the 572 percent she was paying to the payday companies.
link
If we get more folks like these the payday loans might vanish on their own. Black markets typically develop if there isn't a readily available substitute good at a comparable price. Though I suspect there will always be people willing to trick folks unwilling to read fine print into a bad deal.
But lets assume, for the sake of argument, that banning loans at any rate is bad for people. It's still interesting to me that there was a study which claims to show that conservative populations were correlated with high legal interest rates, which was used for political ends. And it's interesting that a closer look shows that conservatives were actually strong supporters of banning such rates via legal fiat.
It says a little about how people think and process information.
I should correct myself here. GoodMoney ( a non-profit biz from Goodwill ) charged 252 APR, but helps people consolidate to lower interest rates if they can't pay the short term loan off right away.
Considering that they're a non-profit this argues that limiting interest rates might actually create a larger body of unserviced people needing loans than I expected. Half the GoodMoney charges, apparently, went to paying off bad loans. I've found a few industry assertions that payday loans have a very low rate of profitability. I don't know if that's accurate, or the result of Hollywood-style accounting.
Ryan has already made an excellent series of points regarding the distinction between wealth redistribution and wealth creation. (Gambling, pyramid schemes, and socialism being forms of redistribution, and economic activities creating wealth.)
The first thing we have to ask is: "What is wealth?" Samuel remarks:
Unfortunately your criteria probably applies equally well to minigolf, McDonalds and a whole host of legitimate businesses. After all, they aren't social necesaries.
While I have no idea what "socially necessary" might mean (what is the criteria?) it's true that we could all eat the equivalent of K-rations and live in tents that were heated in winter. Beyond subsistence, "wealth" does contain a number of thing which, strictly speaking, we could live just as well without: Granite counters instead of Formica; a tattoo of a naked woman near a skull; a glass of microbrewed beer; all kinds of entertainment.
But whatever policies reduce that also reduce the sort of wealth which allows more people to live better -- as Ryan points out, lower GDP, and people die. Some of that "wealth" is also life extending medications, and marketing needed justify their creation. Some of it is safety features, and some of it goes into health club memberships which promote exercise, or a more reliable car which might save your life by crashing better, or breaking down less often. Or a web browser which leads you, one day, to lifesaving information.
If a person wants it, it can be a form of "wealth". I am wealthier, in a sense, if I can afford a massage every night. (I'll probably sleep better too.)
In a certain sense, there is a fraction of gambling which DOES generate this kind of "wealth" -- a person playing a slot machine or blackjack may experience as much subjective enjoyment as another person playing a Wii game. (And a person in a pyramid scheme may actually enjoying going to those Quixtar rah-rah meetings.) But the wealth redistribution aspects of a slot machine far outweigh those of, say, a Wii (which may also provide more exercise and mental stimulation).
A little dense aren't you?
Frankly, under the "glass houses/stones" adage, you're in no position to be offering that specific insult. You have that (fortunately) rare combination of (at times) rather surprising and persistent ignorance (which Ryan patiently bears and answers, and for which I blame your public school education) combined, touchingly, with arrogance -- which is grating (or even hilarious, when juxtaposed against your more obvious gaffes), but not explicitly proscribed here.
Sadly, utterly unprovoked, abusive comments like yours above, are explicitly forbidden by the comment rules you agreed to by posting in this space. Thus, I'm banning you for a week, during which time I hope you'll read the comment rules, and think about your choice of approaches. You'll be welcomed back after that should you choose to modify your approach. I bear you no personal ill will, but think you need some boundaries.
Oh, and your first posted sentence must be an earnest-sounding apology to Ryan. (I'll be the judge, so make it good.)
(BTW: After that you're more than welcomed to imply Ryan is dense (or that I am, for that matter) -- if you can find an argument which would make him (or I) appear so. But making such attacks directly is a sign you've got no such argument.)
The main problem I have is that Tim seems to think banning Ursury is a good idea.
I have no problem with relatively modest rates of interest. But the places we're talking about above have annual interest rates almost as high as 400%. At the outset, I stated I favored laws "restricting" debt, not "banning" it.
Tim- when you make things illegal, a black market develops. It doesn't matter if it is organs, chocalate, slaves, CFCs or what not.
What makes you think I'm unaware of that? Have I failed to address the question of black markets in other postings? (No.) Is there anything above which says: "No black market will develop!" (No.) I don't know why you repeatedly assume that your opponents have failed to consider the basics, rather than having considered them, arrived at a differing conclusion. (And it often seems you yourself haven't considered them, as you've seemed unable to make your own implied case when confronted. I'll be interested to see if you can do so in this case...)
Here, the elementary question is whether the black market does more harm, in aggregate, than the "white" market -- where the activity is legal, but usually far more prevalent. Where one stands on restricting some activity is dictated by the answer to this question.
I shouldn't have to spell this out, but by saying I favor laws restricting high-interest loan places, yes, I am indeed also implying that I believe that far more damage is being done by legal 300-400% loans than would be done, in aggregate, by the relatively smaller (though far more dangerous) high-interest loan practices which would exist in their absence. (And probably exist in parallel, anyway, regarding riskier users.)
The case seems rather straighforward, but if you need details, I'll be happy to supply to them after you show you can intelligently make the opposite one, which you've implied must be the obvious one. (So much so that if I don't agree, I must have not even have considered the tradeoff!)
You'll be able to do so (without quick deletion), should you deign, a week from now.
Sorry to shut down Samuel's part the conversation until then (or perhaps forever, if Samuel feels too hurt by my decision, or is unable to muster a straightforward apology), but I've been overly patient about repeated and rather egregious comment rule violations (a lapse for which I apologize), and need to somehow make the point that although I try to generally be charitable about such violations, the rules are not entirely optional.
Week's up, Samuel. You're welcomed back if you can apologize. If not, I wish you well anyway. Take care.
McArdle has an interesting comment thread on this topic.
Quick thought; Shouldn't any anti-usury laws also apply to any late fees charged by other types of businesses? If a company charges a $20 late fee per month on $100 owed, is that tremendously different from a 240% interest per year loan that is paid off after one month?
The comment rules will apply. Please post only once.
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Smirk — It's funny how the correlation functions are selectively used to denote truth, when convenient.
As expected, this study is being excitedly reported on "reality-based" blogs.
So, what exactly is a "reality based" blog? Doing a simple google search seems to lead me to the idea that it's some kind of new Orwellian lingo I missed out on.
And, just for the sake of historical anecdote this (lifted from Wikipedia:Usury:
Posted by: Michael Zappe on August 22, 2008 01:26 AM