Payday Loans

Usury is a sin. Dante counted it as a sin of violence and put usurers in the 7th Circle of Hell, noting especially his revulsion with the craven moneylenders, which contrasts interestingly with some admiration he retains for sodomites a few rings over and compassion for some souls in the Wood of Suicides. Even set against murderers, harvesters of interest are portrayed in The Inferno as worthier of scorn. Usury is an act of violence against dignity and industry, according to Dante's interpretation and I have a hunch that his beliefs are still pretty widespread.


I know that it's hardly science, but I searched news items using "Payday Loans" and "Payday Lending", coming back with ~6000 hits. Scrolling through the results, perhaps one in twenty articles and op-eds appeared to defend the industry, and I didn't find a single one outright singing hosannas in its favor. Generally speaking, folks see payday lenders as exploiting the working poor, charging exorbitant interest rates that fuel perhaps questionable consumption decisions.

Recently, William Dickens and Bryan Caplan have been arguing over poverty, including desert and appropriate remedy. See here, here, here and here for the debate so far. If you'll forgive me for excising much of the nuance of the arguments, Caplan claims that the poor can do more on their own to remedy their situation: save more, refrain from drugs and alcohol, and brush the chip off their shoulder when they find work. Dickens counters with evidence from behavioral economics: the poor tend to be low IQ and score poorly on conscientiousness measures. Since these are exogenous, it's batty to blame people for their circumstances. I think it's fair to say that each side would acknowledge some costs and some benefits to payday lenders (and if either one elects to comment further, I'd be thrilled to share their thoughts here). I'd expect that they'd agree that taking out a short-term loan to buy a case of Bud Light and a carton of smokes before the end of the month is probably unwise on the part of the borrower. I think they'd also agree that a furloughed worker who needs to buy formula and diapers and who might lack other reasonable options is made better off by having the option of seeking loanable funds from an above-board enterprise.

Is payday lending euvoluntary? Probably not. The chief customers tend to be poor, may be bad with impulse control and not very good at saving. The BATNA to borrowing short-term could be eviction, hungry babies, no electricity or having to resort to Vinny Two-Fingers and his pals Knuckles and Jimmy the Moose.

Are payday loans subject to abuse? You bet. As cash transfers, the lenders have no call over what the loans are spent on. Payday loans thwart deeply-held paternalistic instincts. You could easily make the argument that payday lenders take double advantage of the irresponsible poor: they take a pound of flesh for abetting behavior that only further immiserates the borrower. At least government transfer programs (particularly after the 1996 reforms) have case workers to establish desert. If that's not your cup of tea, then civil alternatives like mutual insurance societies, churches and fraternal organizations have historically been quite good about keeping recipients on the straight and narrow.

Does this imply that payday lending should be subject to further regulation or outright abolished? I don't think so. The high annualized interest rates (which put the cash advance rates on my credit card to shame) mirror the proportionally high default risks. Caps on loan amounts that don't account for either inflation or differences in real relative prices are distortionary and not always in ways that might please concerned parties. The questions seem to be:

1. Assuming poverty-perpetuating behavior is genuinely regrettable and not mere cheap talk, does the marginal contribution to this behavior outweigh the marginal benefit provided to people who need paternalistically acceptable help?
2. If payday lending is abolished, will the institutions that replace it be better or worse than the status quo?
3. Do additional regulations reflect far-mode paternalism or will they reflect the underlying preferences and constraints of customers? Using Arnold Kling's guidelines, is there any reasonable set of preferences that can justify an exchange?

I am more than willing to claim that there exist superior alternatives to payday lending. I have become a fan of negative income tax schemes, for example. I certainly believe that if civil society poverty relief organizations were still a thing in American society that there would be a separating equilibrium where we'd see mostly the irresponsible poor taking payday loans and the single mothers who need to feed their kids can get not just a few bucks but some decent life coaching from people who have real incentives to care about members of their community. Unfortunately, I can't tap my heels together three times and wish for the society I want, so I have to conclude that for all their flaws, a world with payday lending is, c.p. probably better than one without. IMO, with 75% confidence, I claim that payday lending, though not euvoluntary, is a constrained K-H improvement.