Tag Archives: Abhi Sivasailam

Talking to Mary Still on payday loan reform

I spoke to Missouri state representative Mary Still (D-MO 25) on her attempts to regulate payday lending. Also present was Abhi Sivasailam, a scholar at the Show-Me Institute, who is writing a policy study on the issue of payday loan reforms. Previously I wrote about Still’s efforts to regulate the industry here; my basic conclusion is first that a lot of the relevant data that might help us quantify the harms of payday lending does not exist or is unclear and second that I think that the real regulatory challenge is to tranche the market in a way that minimizes the harms that payday loans are implicated in.

There are easy ways to break this down into a free-market vs. anti-market debate. I don’t like them because I think that the hard ideological line is, well, wrong. It would be easy to accuse Still of being anti-market, but after speaking with her, I think she makes a much more nuanced claim. Part of it is simply that regardless of who is right about the normative question of “should we regulate payday loan providers out of business or not?”, there are reasonable arguments to be made that companies in this industry in Missouri have behaved extremely poorly.

The best piece of evidence that exists for this claim is that the payday loan industries were able to move enough money around to Missouri House Republicans that the speaker, Ron Richards, kept the Still’s payday lending bill out of committee for several months, and when the bill was assigned to committee, the hearing was chaired by Don Wells from Cabool, a Republican who himself owns payday lending stores. The hearing on the bill was deceptively presented as an information presentation on lending practices, which Still herself, the author of the bill in question, was not invited to or allowed to speak at. Testimony was exclusively presented by people in the payday loan industry, without any rejoinder.

There also seem to be substantial harms in the status quo that payday loans are implicated in. There is a lack of data to quantify these harms, and researchers are often forced to use proxies, like the number of bounced checks or bankruptcy filings in a region. While these are useful, there are some meaningful questions about possible omitted variables and trends that may color the data partially. No one has done simple, ground level research to improve the quality of the data available; while the Better Business Bureau collects data on received complaints, the people who are most harmed by a payday lender are often the least likely to file a complaint. The internal arguments there are that the people who are most likely to get locked into repeat loans and extremely high fees/interest rates are also the people who tend to be poorly educated, financially ignorant, and politically weak.  Poor people face extremely high barriers in simply accessing the information needed to know that legal mechanisms to arbitrate claims of tort exist and face high barriers accessing them (poor people have limited access to transportation and face much greater tradeoffs in terms of taking the time away from work or family to engage in that process).

Abhi notes studies in the literature (sorry, I’m lacking in the citation of the specific arguments but I will correct that later) lead him to the conclusion that payday lenders are good for the average borrower but bad for the marginal borrower. The studies he points to note that there is a clear discontinuity in the bankruptcy data for people taking out payday loans that can be isolated when you look at the credit scores of applicants. That is, there is a clearly definable threshold where people who are below a specific credit score tend to have a much higher rate of bankruptcy after they start taking out payday loans. The other study notes that there is an increase in bankruptcies and bounced checks in two states (Georgia and North Carolina) after payday lending is banned or regulated out of the market. The conclusion that can be drawn from these studies is that perhaps we should look at regulations that restrict access to payday loans by credit score or through some other similar mechanism. This has the benefit of allowing the market to function for those people who are able to benefit from the liquidity options that payday loans present without harm while restricting the market to exclude the people who are most likely to go bankrupt after using payday loans. Still agreed with the thrust of that analysis, which I don’t know has been a part of the legislative or popular debate to date.

The other issues that I think are at play here is the access to basic banking and financial mechanisms that aren’t often offered to low-income or minority communities by the market. Payday lending and the associated harms are more symptoms of this problem than they are problems themselves; I think it is true that in a world where it easy for poor people to access mainstream financial products they have fewer liquidity needs that lead them to payday lenders. Still agrees with that fundamental argument and is working with Missouri state treasurer Clint Zweifel towards that end. Still also indicates that she is receptive to tax-increment financing (TIF) to induce mainstream banking institutions to penetrate low-income communities, though she also hinted that in the long term the market is trending in that direction.

Addendum: Abhi’s previous work on payday lending is here and here, published through the Show-Me Daily.

Addendum the second: Abhi discusses our conversation with Still, here.

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On Broken Windows

After making a rather incoherent comment on Hazlitt’s ‘broken window’ parable at a libertarian book club meeting, Abhi Sivasailam suggested I write a post to clarify. My thought was to extend the insights from Hazlitt with observations from institutional economics.

The ‘broken window’ parable is used to distinguish the economic interactions that occur when a person buys a suit from the economic interactions that occur when the person has forgo the suit to repair a window a thief broke. The key insight is that the forgone opportunity to purchase a suit is itself an implicit cost that people often fail to consider when comparatively evaluating both interactions.

My thought was to extend Hazlitt’s analysis further. When we look at the glazier and the tailor and the brick and the suit that wasn’t made, we can compute the immediate implicit costs of the vandalism. But it doesn’t stop there. Every transaction, real or forgone, implies an extensive chain of economic activity. After the brick is thrown people have more reason to think about the security of their persons and their possessions. A brick through a window means a whole host of interactions happen: people demand more security services, either public or private. The increased demand for laws and mechanisms to protect property from loss resolves itself in a manner that involves a whole system of costly interactions.

The world post-brick is not simply a world of a forgone sales opportunity for the tailor. It is a world of forgone opportunities for everyone in the community, because there is a cost to the cleanup, to the search and prosecution and punishment of the criminal; costs that everyone in a community might be expected to be reasonably invested in. These costs shape and determine the underlying institutional costs that the community faces both now and in the future.

A thought for a further post: in the real world, some market actors invariably engage in rent-seeking behavior. This is particularly evident in our justice system. There are insights from Sam Bowles’s ideas on ‘guard labor’ that are relevant here.

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