The Irrationality of Payday Lending Regulation
Friday, March 7th, 2008 By Marc KilmerAn article written by two state Representatives who are opposed to payday lending appeared in the Newark Advocate today. It didn’t offer much new in the way of arguments I’ve dissected on this blog before, but I did want to comment on two of their contentions:
Any efficient business can make a profit under the proposed 36 percent usury cap.
Mind you, this is in an article trying to justify payday lending regulation on free market grounds. Essentially this comment is saying that legislators know what is best for businesses. The idea animating this type of government paternalism and economic planning has nothing to do with the free market. It is simply government leaders looking to direct your economic choices because they think you are too stupid to do it yourself.
The statement is also factually untrue. If businesses could be profitable at this rate you would see a variety of lenders offering loans at that rate. After all, if there are few barriers to entry into this market (as the large growth of lenders illustrates) and consumers really are being ripped off (as anti-lending advocates claim), then what is stopping a smart businessman from offering loans at this 36% interest rate? If customers had this option, don’t you think they would rush to use it? The absence of the option indicates something these legislators fail to understand: lenders cannot profitably offer loans at this low interest rate and consumers aren’t very concerned about meaningless annual percentage rates.
We must remember that usury caps have been a long-standing institution of our capitalist system, and responsible lenders welcome such a generous ceiling.
Ah, yes, the “responsible” lenders that compete with payday loans will surely welcome these caps. Nothing like using the government to put your competitors out of business.
This article reminds me of something I read on Will Wilkinson’s blog. He discusses irrationality in economics and has this gem:
I say, again and again, that it is an embarrassing non-sequitur to argue that people are �irrational� and then leap to the conclusion that they need benevolent paternal guidance from the state. After all, if people are irrational then voters are irrational, politicians are irrational, bureaucrats are irrational, etc….People acting inside government institutions are much less likely to themselves bear the cost of their mistakes, and will therefore likely make more of them. There is no way to wriggle out of the fact that people who win elections are just like the rest of us.
Politicians who are opposing payday lending think that those who take these loans are irrational. Perhaps they need to examine their own irrationality.
Tags: Regulation
