BuckeyeBlog

It looks like the fallout from the passage of Issue 5 has begun. At least one payday lender is closing some of its operations, putting 150 people out of work. Of course, those who were supporting Issue 5 claimed payday lenders would stay in business and that jobs wouldn’t be lost. Maybe those who are losing their jobs can go ask Bill Faith if he has a place for them in his organization.

In his column on Sunday in the Cleveland Plain Dealer, Thomas Suddes takes yet another swipe at payday lenders. In doing so he once again illustrates he is unacquainted with the basic facts about how businesses operate. For instance, he trots out the old myth that payday lenders are “obscenely profitable.” To support that claim, he discusses the gross profits of one payday lending company. Sorry, Mr. Suddes, but gross profits don’t mean too much. They are the profits that accrue to a company before deducting a variety of operating expenses. So these gross profits may look large, but once you subtract things like salaries and overhead, payday lenders usually make a profit margin of around 3% to 8%.

This kind of shoddy reporting about payday lending is, unfortunately, par for the course. You have those opposed to payday lending say things that sound bad, such as payday lenders charge 391% APR or they have huge gross profits. While technically true, these things are not really accurate in the sense that they leave a misleading impression. A 391% annual percentage rate is meaningless when you are discussing a two-week loan. Gross profits are a meaningless indicator of how big a company’s profit margin really is. But those who say this either don’t know what they are talking about or are happy to leave such a misleading impression in the average reader’s mind. It’s too bad we can’t have a little more honesty in the debate over Issue 5.

These issues and others are discussed in an issue brief I co-authored with Dr. Tom Lehman.

Perhaps the people over at Progress Ohio didn’t live through the Taft Administration. Or perhaps they are fond of his tax-and-spend brand of Republicanism. Whatever the reason, they are trumpeting the fact that Bob Taft has joined his fellow former governors to endorse restrictions on payday lending.

In his statement, former governor Taft claims that Issue 5 is about financial freedom. I’m sure in his mind a government ban on what types of lending you have access to is indeed financial freedom. Just like his tax increases were probably, in his mind, a way to promote financial freedom. In my view, though, financial freedom comes from less government involvement in my life, not more.

If those opposed to payday lending agree with this kind of backwards thinking and agree that Bob Taft’s endorsement is valuable, then more power to them. It shows their understanding of politics is about as perceptive as their understanding of economics.

Perhaps I shouldn’t be giving too much attention to the folks over at the Progress Ohio blog. But since they decided to misrepresent my work on payday lending, I figure I should answer them. They make the silly claim that I (and others who question the need for a ban on payday lending) am motivated by the “prosperity gospel” (or “prosperity doctrine,” as they also call it) in defending “predatory lenders.” I find it funny that an organization that has consistently misread the Bible in terms of “usury” is lecturing me on religious doctrine.

I also find it funny that this is the basis for their attack on me (and others). Nowhere in anything I have written have I ever used a religious justification for payday lending. Unlike those who want to ban it, I don’t like to twist Scripture to suit my political ends. I think a payday lending ban is a bad idea based on my belief in liberty and my study of the scholarly work which indicate that it is bad public policy. Since those opposed to payday lending do not have the facts on their side when they talk about a “cycle of debt” or “outrageous profits,” I guess the only mode of attack they have left is to ascribe to me a view I do not hold. If anything I support the “liberty doctrine” which says that people should be free to make their own choices. Perhaps Progress Ohio can answer why they think that some people are too stupid to make their own financial decisions and that the government should do it for them.

I also find it funny that Progress Ohio claims that the Coalition Opposed to Additional Spending and Taxes (COAST) “clearly has ties” to the Buckeye Institute. If it does, I don’t know about them. The only “ties” I have to COAST is that I’m on their e-mail list. And even if there were “ties,” so what? I fail to see why that would be an issue.

In the end, this Progress Ohio blog is typical of the thinking of those who are opposed to payday lending. They don’t have a clear grasp of the facts about the industry and so they make up charges about their opponents, questioning motives instead of trying to discuss the issues. But since the only “facts” they have offered in this debate come from completely worthless “studies” put out by the Center for Responsible Lending and Policy Matters Ohio, I doubt they can do so. It’s too bad when name calling becomes a substitute for an honest discussion of the facts.

It is reported below that an entity (COHHIO) receiving all of its funding through government grants has spent some $260,000 campaigning for the ‘yes’ side on Issue 5.

If an entity is entirely dependent on government funding then it is hard to call it anything other than a proxy for government. Can anyone really image a group so funded doing anything other than what its government patrons would want it to do?

Since government holds the strings on the COHHIO puppet, then government itself is working to influence the outcome of the vote on Issue 5.

The people of Ohio deserve a chance to debate the merits of Issue 5 without the interference of government.

Check that. The freedom of Ohioans is at stake when government interferes with election outcomes. Arguably the greatest gift the Founders gave to America and the world is the notion that ‘we the people’ are the sovereign of this country. Government by the people promotes our freedom. Government over the people threatens it.

When government puts its thumb on an election scale, it is subverting popular sovereignty and eroding our liberty.

COHHIO’s spending in the Issue 5 campaign is a wasteful abuse of tax dollars, a potential violation of state law and is lamentable in itself.

But is also a very serious threat to freedom in Ohio.

The Coalition Opposed to Additional Spending and Taxes (COAST) sent out an interesting release which, if true, means that one of the main groups pushing for a “yes” vote on Issue 5, the Coalition on Homelessness and Housing in Ohio (COHHIO), may be misusing state funding (i.e., your tax money that is re-distributed by the state of Ohio):

While it is a non-profit corporation, COHHIO receives virtually 100% of its funding from State and Federal grants.  COHHIO has received more than $4.3 million in State funding from the State of Ohio since 2000.
 
“It is wrong to spend our tax dollars advancing anything on the ballot, whether a candidate or a ballot issue,” said COAST Chairman Jason Gloyd.  “That COHHIO can’t understand that shows they are not responsible with the monies the State of Ohio and the Federal government have given to them.”    
 
The campaign finance report for “Is 391% Too High? Vote Yes on 5 Committee” shows that the remaining donors, combined, gave an aggregate of less than $6,000 to the pro-Issue 5 campaign.
 
The $260,000 in campaign spending by COHHIO compares to only $614,000 in direct program services to help their supposed homeless clients, as revealed by their 2006 990 income tax return.
 
“It is a recurring theme,” said COAST Chairman Jason Gloyd.  “Folks who are funded by government always think we need more government and spend our tax dollars to advance that destructive cause.”
 
There are specific prohibitions in Ohio State law preventing the use of tax monies for political purposes.  COHHIO is either openly violating the law, or thinks it can evade the prohibition because the tax funds flowed first through their non-profit coffers.

The Cato Institute recently released its Fiscal Policy Report Card on America’s Governors: 2008. Ohio Governor Ted Strickland received a letter grade “B” for his taxing and spending records. According to the report:

Governor Strickland succeeded in his goal of passing an expanded homestead exemption under the property tax. He is also following through on a phased-in replacement of Ohio’s corporate franchise and business property taxes with a gross receipts tax. The plan is supposed to result in a large net tax cut for businesses. On spending, the governor supports large increases in the education budget and is pushing an expensive debt-financed energy plan. But with the state facing a budget deficit this year, the governor is taking steps to trim spending.”

During the debate over payday lending “reform” in the state, I’m amazed at how misinformed the editors at Ohio’s newspapers are on this subject. The editorials they write blasting payday lending make a variety of statements that have little or no basis in fact. Today’s editorial from the Toledo Blade is no exception.

Take this claim: “Loans still will be available to people who need them but at an interest rate that, while still high, will be comparable to that charged by credit card companies. Unscrupulous lenders will simply be prevented from profiting excessively from the misfortunes of people with few resources.” For one, the idea that these loans will still be available after this “reform” goes into effect is contradicted by other jurisdictions that enacted similar laws. These types of short-term loans dried up in those places and they will in Ohio, too. Two, payday lenders make a profit between 3% and 8%. How is that “excessive”?

The editors also claim that lenders “take advantage of personal misfortune by charging usurious interest rates that often trap their customers in a cycle of debt.” They take advantage of personal misfortune the same way that grocery stores take advantage of hunger. Yes, people who have personal misfortune turn to payday lenders. Giving people a way to address this personal misfortune is the same as giving people a way to address their hunger. Furthermore, there is no basis to call payday lending “usurious” nor is there any proof that they trap people in a “cycle of debt.”

It’s unfortunate that these completely false statements permeate the media’s view on payday lending. I thought editors would have more regard for being factually correct. I guess I was wrong.

It’s that time of the year when newspaper editors tell you how you should vote. There are a number of them saying you should vote against Issue 5, the payday lending referendum. Most of these editorials are filled with factual errors.

For instance, the Chillicothe Gazette claims that “data shows more than 99 percent of payday loans go to repeat borrowers.” The Zanesville Times Recorder says, “study after study has shown that payday loans lead too many people into financial ruin.” Really? I’d like to see these data and these studies. I’ve looked over the scholarly data on payday lending and the only studies I have seen that say these things are ones put out by blatantly biased entities like Policy Matters Ohio or the Center for Responsible Lending. There are a number of unbiased scholars who have looked at this subject and concluded exactly the opposite of what these newspapers claim (see the footnotes of my report on payday lending for a list of these studies).

The fact is that the editors of these newspapers, the legislators who supported the payday lending ban, and the governor who signed it into law knows the real facts about payday lending. It is evident given their comments on the issue. It’s a pretty sad day for public policy when flawed reports from biased interest groups persuade the state to ban a product that is popular with the public.

The Center for Consumer freedom points out something that is little-noticed in the current debate over payday lending:

If the Center for Responsible Lending, a North Carolina-based banking organization connected to the discredited community organizing group ACORN, is successful in passing Issue 5, the measure will effectively ban 1,600 consumer lending businesses in Ohio and give banks incorporated outside Ohio a monopoly on short-term loans.

Supporters of Issue 5 sell the amendment as pro-consumer regulation, when it is actually a sweetheart deal for one special interest group.

As the rise of payday lending illustrates, consumers have a desire for short-term loans. It makes no sense to be pro-consumer and yet severly restrict the competition in that market. That enriches the few remaining providers of service at the expense of consumers. It’s unfortunate that those opposed to payday lending seem to ignore basic economics.