BuckeyeBlog

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:

The Blade is unhappy that there are “those who just don’t care about the long-held concept of fiduciary responsibility in the business sector .”

Yikes. It’s a bit hard to tell what the Blade is after there, but it’s a good guess that what they’re really referring to is, you know, decency, which is a bit different than fiduciary duty.

Somebody made a ton of money, had friends, etc. Was it outrageous? No doubt. But the issue is, if there really was a breach of fiduciary duty, then the failure is as much or more in the courts as anywhere else, so take the complaint to the courts if that’s the problem.

If there wasn’t a breach of fiduciary duty, then the complaint should land with the relevant shareholders, as in, what the dickens is the matter with you people, paying this bozo that much?

But neither of those paths will be followed. Instead, someday there will simply be more regulation. Until it stops moving, then there will be subsidy.

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.

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.

Over at Reason Online there is a great article debunking the latest fad in advancing the nanny state — mandatory nutritional labeling in restaurants:

Americans may say they would also like to see dietary information on menus. But providing it costs money, in a fiercely competitive industry. If patrons really wanted such disclosures, no law would be needed. Restaurants, eager to attract customers, would already be providing the numbers—just as they strive to offer other things that bring in business. …

The belief that more facts will generate wiser decisions is appealing but, at least in the realm of food, yet to be proved. No one seems to have noticed that as nutritional labeling has expanded, so have American waistlines. The federal government first required packaged foods to carry such information in the mid-1970s, and today, we are collectively fatter than we were then.

What does that suggest? Either people don’t notice what’s in the food they buy, or they don’t let the knowledge affect what goes in their mouths. …

There is little research to suggest that calorie alerts will make any difference in obesity rates. In 2004, the American Journal of Preventive Medicine reported that when women of normal weight were given this kind of information, it had no effect on what they ate, and that facts furnished in restaurants were also irrelevant in dining decisions.

A study in the Journal of the American Dietetic Association found that people who dine out frequently are less likely to pay attention to nutritional data than people who eat mostly at home. It suggested that “those who have a less nutritious diet are less likely to use food labels and have less interest in doing so.”

It must be nice to be liberal advocacy group Families USA. Whenever they put out a report light on facts and heavy on rhetoric blasting the free market they get friendly media play from coast to coast. Their latest report, attacking the fact that some insurance policies aren’t as heavily regulated as Families USA would like, got the usual uncritical coverage from Ohio newspapers.

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In an editorial today, the Cleveland Plain Dealer once again decided that getting its facts straight is optional when it comes to smearing payday lenders. It makes the completely unsupported claim that these lenders make “grotesque profits … leeched from consumers.” As was the case with the legislators who supported the payday lending ban, it is clear that the Plain Dealer editors have never actually looked at the scholarly evidence on payday lending. Instead, they rely on the false impressions levied by self-appointed “consumer” advocates.

To pick one study from many, this article published in the Fordham Journal of Corporate and Financial Law states:

this study finds that payday lender profit margins are less than half that of their mainstream lending counterparts…. For pure payday lenders, the average profit margin was 3.57%. When including pawn operators, this figure more than doubles to 7.63%.

These figures indicate that payday lenders are not overly profitable organizations. Contrary to conventional wisdom, these firms fall far short of profits for mainstream commercial lenders. In addition, profit margins of payday lenders are far below those of Starbucks. The profit margins of Starbucks for the measured time period were just over 9%. This is almost 2% more than all payday lenders, and more than double the pure-payday lenders. These figures indicate that arguments against payday lending, couched in terms of preventing excessive profits, are unfounded. If companies should be limited to a certain profitability measure, citizens would be better off fighting Starbucks than their local payday lender.

Anyone who looks at the scholarly data on payday lending can easily see that the common attacks on this industry bear no relation to reality. Unfortunately, the General Assembly and Governor Strickland (as well as the editorial boards that were prominent in pushing for a payday lending ban) decided that anecdotes, name-calling, and agenda-driven “studies” would carry the day.