BuckeyeBlog

The debate about payday lending has been notable for the anti-lending forces as well as those in the press (am I being redundant?) fail to grasp basic facts about the payday loan industry. I have documented that repeatedly on this blog. It seems that I have more work to do, however, based on today’s editorial in the Dayton Daily News. Let me just comment on a few of the more egregious departures from reality the editors make:

There are alternatives to payday lenders. Credit unions, for instance, and even some banks will make short-term loans for much more reasonable rates.

Really? Then why do people choose payday lenders who, in the view of these editors, rip them off? Are these consumers idiots? Well, no, since the notion that credit unions or banks are going to be making high-risk, unsecured loans at low rates to a large number of people is ridiculous. It isn’t happening now and it won’t happen when the ban goes into effect. The fact is that these high rates are necessary to provide the product that borrowers want and need.

After Sept. 1, short-term loans simply would be capped at 28 percent on an annualized basis, versus the 391 percent that can be charged now. Borrowers would pay $18 for a two-week $300 loan, not $45.

No. A 28% APR on a two-week, $300 loan is $3.23. Would you loan money to someone for that low of a rate? Would you make a profit if you did?

But when lawmakers looked into the payday businesses’ practices, they found that many customers were being encouraged to take out loan after loan because high fees were trapping them in debt.

That sounds like lawmakers actually did a study of the issue and discovered the borrowing patterns of those who take these loans. That didn’t happen. They heard from a handful of people who needed a payday loan at the time but, in retrospect, didn’t like the price they paid. But these borrowers agreed to pay the price at that time, indicating that the viewed it then as a fair price. Furthermore, there was no evidence that people were being encouraged to take out more than one loan. The plural of anecdote isn’t data. (more…)

Ohio state representative Chris Widener was featured on CBS’s “Eye to Eye” segment discussing Ohio’s ban on payday lending. As we saw during the debate on this issue, state legislators like Widener just don’t understand the economics behind payday lending. For instance, he repeatedly refers to some sort of “cycle of debt” seemingy caused by payday lending. I have no doubt that Rep. Widener believes that payday lending causes such a cycle of debt. However, outside of the flawed research by the advocacy group the Center for Responsible Lending, you’ll have a hard time finding any academic who studies this issue agree that payday lending causes this.

As testimony from Dr. Tom Lehman pointed out, those “studies” which show that payday lending causes a debt trap are so full of methodological errors that they are worthless. Unbiased research clearly shows that payday loans do not cause economic problems; instead, people who are already having economic problems turn to them. Eliminating these loans will do nothing to stop the “cycle of debt” that Rep. Widener discusses. In fact, as Dr. Lehman’s testimony illustrates, it is likely to cause even more problem for these folks as they turn to even less attractive alternatives.

Unfortunately, Ohio legislators like Rep. Widener ignored the hard data and instead relied on anecdotes and ideologically-driven “research” upon which to base their votes. And it really seems they believe these falsehoods about payday lending and payday borrowers. The banning of payday lending was a shameful expample of legislators failing to do their job. It’s sad that Rep. Widener feels so proud of this abdication of duty that he goes on TV to brag about it.

The Warren Tribune Chronicle had a great editorial today that should be read by all policyamakers. Its title? Ohio Needs to Cut Burdensome Regulations:

Columbus native and Northwestern University economic prof Lynne Keisling in her excellent Knowledge Problem blog dishes up the meow mix to WSJ’s Rebecca Smith for a badly misinformed analysis of the impact freer electric energy markets are having in Texas.

Perhaps Ohio’s recent decision to extend government regulation of electric utility energy will protect corporation bottom lines and manufacturing jobs in the short run. Eventually, however, the distorted or completely missing signals of true prices for consumption and true returns for production investments will cause Ohioans to lose out on jobs and prosperity to places with freer markets such as Texas.

BTW, Texas added 139,000 jobs so far in 2008. Ohio has added a paltry 6,000 jobs.

Ohio native Drew Carey has a great new video discussing the advance of the nanny state and the loss of our liberties, courtesy of the Reason Foundation:

Since we will be celebrating American independence tomorrow, where the theme of “no taxation without representation” played prominently, this video illustrating the opressive nature of high tax rates seems appropriate:

I’m not sure how I missed this, but there was an amazing editorial at the Cleveland Plain Dealer on June 23 regarding payday lending that is so rich in irony that I have to comment, even it it’s over a week late.

The opening sentence reads: “Here’s a stunner: Payday lenders resorted to falsehoods in their desperate attempt to continue gouging Ohioans with 391 percent interest rates.” As I’ve documented a few times on this blog, the anti-lending forces (among whom the Plain Dealer’s editors took a leading role) were the ones who were giving completely inaccurate information about payday lending throughout the legislative quest to ban it. The idea that these lenders charged 391% interest rates, for instance, is completely false. They charged $15 per $100 borrowed — that’s an interest rate of 15%. Yes, their annual percentage rate (APR) may have approached 391%, but an APR is different from an interest rate. A note to the Plain Dealer editors — if you are going to slam a group for “resorting to falsehoods” then you might want to refrain from, you know, resorting to a falsehood in the same sentence.

Of course, that kind of sloppy editorializing is par for the course in this debate. The Plain Dealer has also said in the past that lenders make “grotesque profits,” which is a blatant falsehood. I say “blatant” because reading any academic literature about payday lending shows that this claim (and many others made about payday lenders by the anti-lending forces) has no basis in fact. I find it highly ironic that the Plain Dealer editors blast payday lenders for “falsehoods” when they themselves are among the leading purveyors of falsehoods during this debate.

In anticipation of the Fourth of July, Steven Chapman at Reason magazine has an interesting article about how freedom (specifically economic freedom) is essential to the pursuit of happiness:

Two things, it appears, are needed to increase the supply of happiness: freedom and money. As it happens, a substantial amount of freedom is crucial to the creation of wealth. There is no such thing as a rich totalitarian country, as even the onetime totalitarians in Beijing finally realized. So in a very real sense, freedom is the key to happiness.

The survey, by the Institute for Social Research at the University of Michigan, involved asking people in 97 countries two simple questions: “Taking all things together, would you say you are very happy, rather happy, not very happy or not at all happy?” and “All things considered, how satisfied are you with your life as a whole these days?”

What the researchers found is that in the 52 countries where the poll has been done over the last couple of decades, the percentage of people giving upbeat answers rose in 40. Among the places where smiles have been spreading are such developing countries as China and India, which have grown freer as well as more prosperous.

The Rhode Island Supreme Court dismissed a public nuisance lawsuit against Sherwin Williams. Unfortunately, the suit filed by disgraced former Attorney General Marc Dann against this Ohio company remains, as does the suit filed by the city of Columbus. Perhaps this common sense ruling from Rhode Island will cause both the state of Ohio and the city of Columbus to stop wasting taxpayer dollars to harass this company with their baseless lawsuits.

David Owsiany wrote an excellent Viewpoint for the Buckeye Institute last year explaining the flaws of the “public nuisance” theory:

Public nuisance is a relatively obscure and narrow legal theory that permits a government entity to take action to stop or abate the impact of specific unreasonable behavior that causes injury to a public right. For example, under the public nuisance theory, a city may take action to stop someone from blasting their radio when people are picnicking in a public park or to force responsible parties to abate the damage caused by their dumping of sewage into a public river. Public nuisance law, however, has little applicability in the lead paint context.

Lead paint is only dangerous when it peels or flakes, releasing a fine dust that when ingested can cause lead poisoning. Accordingly, proper maintenance of older buildings over the last three decades, including a fresh coat of non-lead paint, would have dramatically reduced the threat of lead poisoning. Most paint companies, including the Ohio-based Sherwin-Williams Company, which is one of the companies named in Columbus’ lawsuit, stopped selling lead-based paints long before the federal government banned its use in 1978.

Misusing public nuisance law as a means to shake down paint companies for selling, what was at the time, a legal product more than forty years ago, ignores the traditional legal standards for liability, including proving that a product defect caused a specific harm. Such litigation also disregards the negligence of owners who failed to maintain their properties in a reasonable fashion, especially in light of the well-known threat caused by allowing buildings with lead paint to deteriorate.

A lot of Congressmen, Senators, and pundits are blaming oil speculators for the rise in energy prices. I’ve already noted on this blog Bob Murphy’s excellent piece explaining the role of speculators and why attacking them illustrates a fundamental ignorance of economic markets. Now Fortune has an interesting piece showing what happens in the real world when you ban speculation. Back in the 1950s onion farmers were able to convince Congress to ban speculation for their commodity. The results?

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

If politicians have their way and oil speculation is curtailed or banned, you will likely see something similar in the oil market.

Hat tip to the Cato Institute’s excellent blog.