The Nanny State Says No to Payday Loans

George Leef is the book review editor of The Freeman.

by George Leef

Last year North Carolina became the first state to ban “payday lending.” Payday loans are small short-term loans to provide workers with cash until their next paycheck. The cost is high, reflecting both a substantial risk of nonpayment and the high overhead costs of handling many little transactions. I wouldn’t borrow money that way, but there is enough demand to support thousands of payday-lending stores across the nation, making several million loans per year.

But not in North Carolina.

Pointing to the high cost of borrowing money that way, a coalition of groups claiming to represent the poor stampeded the North Carolina General Assembly into putting all the payday-lending firms out of business. The only reason I’m writing about this now is that the North Carolina Office of the Commissioner of Banks recently felt the need to justify that action with the release of a study purporting to demonstrate that the politicians did the right thing because payday lending “is not missed.” The preposterous lack of logic in this whole exercise cannot pass without comment.

Before we look at the defense that has been given for this nanny-state dictate, we should consider what I call Sowell’s Axiom: You can’t make people better off by taking away options. (It’s named for the economist Thomas Sowell, who first drove this point home to me many years ago.)

Individuals act in ways most likely to further their self-interest. Sometimes a person faces difficult circumstances and has to choose the option that’s least bad, but that doesn’t change the analysis. If he’s out of money and needs cash until his next paycheck, he will consider various alternatives. For a poor individual without easy access to credit, none of them is very good.

With a payday loan, the borrower, after proving he is employed and has a sufficient income stream, writes a check to the lender postdated to his next payday for, say, $300. The lender then gives him, say, $260. The lender cashes the borrower's check on its due date. That is obviously a very high annual rate of interest if you consider the $40 fee for, say, a week's or a month's use of the money, as an interest charge. A payday loan is not an attractive option — unless all your others are worse. No one would do it unless every other course of action looked even costlier.

No Harm Done?

Nevertheless, the North Carolinians who worked to abolish payday lending are eager to say that they didn’t do any harm. A group called the UNC Center for Community Capital undertook a survey about people’s attitudes toward the ban, asking 400 low- and middle-income families in the state how they deal with financial shortfalls. Only 159 reported having had financial troubles that they couldn’t meet out of their regular income. From this small number of responses, those doing the survey concluded that “Payday lending is not missed [because] almost nine out of ten said payday lending was a lsquo;bad thing’ [and] twice as many respondents said the absence of payday lending has had a positive effect on their household than said it has had a negative effect.”

There you have it. Most people say payday lending is “bad,” and few miss it now that it has been banned. That surely proves that the state did the right thing in getting rid of it.

Or does it?

Completely forgotten in the rush to justify the ban are the people who said that they think they are worse off for not having this option anymore. Yes, they were a small minority of the respondents, but that is no reason to state that “payday lending is not missed.” An accurate conclusion would instead be, “Payday lending is missed by some people.”

Maybe the silliness of this approach will be apparent if we consider a hypothetical case that parallels it.

Imagine that there’s a group of people in New York who hate opera. They regard it as too costly and time consuming and a bad moral influence. Using their political connections, they succeed in getting the city government to ban live opera productions. Out goes the Met, the Civic Opera, and any other companies.

A year later this group commissions a survey asking 400 New Yorkers if they miss having opera in the city. Since most people don’t care about or even dislike opera, the results come in showing that the overwhelming majority of New Yorkers agree that “Opera is not missed.” Would that justify taking opera away from the, oh, 5 percent who said that they would like to have had the option of going to one?

My point is that the views of the people who don’t patronize a business or art form shouldn’t count for anything. The people who don’t like opera are free not to go, and the people who think payday lending is bad are free to avoid it. As long as anyone wants to attend an opera or needs a payday loan, the government has no business forcibly depriving him of those choices. And if nobody wants to do those things, they will close down on for lack of customers.

One More Option

Returning to the North Carolina study, people were also asked how they respond when they are short of money. The results showed that people did any of a number of things, including paying bills late, dipping into savings, borrowing from family or friends, using a credit card to get cash, or merely doing without things. Jumping on that information, North Carolina’s Deputy Commissioner of Banks, Mark Pearce, told the Raleigh News amp; Observer, “Working people don’t miss payday lending. They have a lot of financial options and they use them.”

We can only wonder why it doesn’t occur to Pearce that having one more option might be a good thing. What if someone has already exhausted all possible money sources and faces very serious consequences from either paying late (suppose the next missed payment means the power gets turned off?) or doing without (you’ve got to have some car repairs so you can get to work)? A payday loan might be the best option left.

But if you live in North Carolina, it isn’t there any more.

I maintain that Sowell’s Axiom holds. When government takes away options, it is bound to make some people worse off.