Wednesday, November 2, 2011

Thomas Sowell defends usury

At NRO today, Thomas Sowell gets cranky about a California newspaper's investigation into "payday loan" companies and their practices. He particularly objects to a line suggesting that customers of such institutions are charged what amounts to an annual interest rate of more than 400 percent:
The 460 percent figure comes from imagining that the borrower is not just going to borrow the money for a couple of weeks, but is going to keep on borrowing every couple of weeks all year long.

Using this kind of reasoning — or lack of reasoning — you could quote the price of salmon as $15,000 a ton or say a hotel room rents for $36,000 a year, when no consumer buys a ton of salmon and few people stay in a hotel room all year. It is clever propaganda, but do people buy newspapers to be propagandized?
Sowell, having raised such questions, might've attempted to answer them.

That might've detracted from his screed, though, because the evidence is that quite a few customers actually do get caught in a debt spiral with these companies. In 2007, Michael Stegman did an overview of the industry for the Journal of Economic Perspectives:

Sowell, in the end, decries the story as part of a lefty plot to keep payday lenders from defending themselves:
Instead, we get the story of how the payday-loan industry, like most other industries, has lobbyists contributing money to politicians to try to be spared more regulations. This the investigative reporter calls “protecting” the payday-loan industry.

Protecting it from what? From the politicians. Some would call their campaign donations “protection money,” in the same sense in which the mafia collects protection money.
Not exactly. In California, the payday loan industry has put its muscle behind a bill that would boost their profits by letting them lend greater amounts of money at higher rates of interest. That's not defensive, it's aggressive. If Sowell's mafia analogy is correct ... well, let's just say the payday industry would be the guy in the leather chair, stroking a cat.

I suspect the broader argument is that payday companies provide a valuable service, which workers are free to use or not use. But it certainly appears that the systemic incentive is to put the working poor on the hook and encourage them to stay there for as long as is profitable. Sowell's fellow conservatives like to talk a lot about liberty from government, but payday loan lenders offer plenty of evidence there are other institutions that offer oppression, which is no less pernicious.

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