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.

Debt, and Occupy Wall Street

I've not yet been down to see the Occupy Philadelphia protest, though I hope to do so before the weekend is out. But reporter Kia Gregory has been down there this morning, Tweeting her observations. This one particularly struck me:

The Tea Party movement, you'll recall, began with Rick Santelli's famous rant against "losers" who'd fallen behind in their mortgage payments, defying the Obama-led government to do anything that might lessen the burden of those mortgages—because, after all, taxpayers shouldn't be on the hook for the unwise choices made by millions of individuals.

Admittedly, I think one of the wisest choices I made during the middle of the last decade was to not buy a house—despite a fair amount of peer pressure to do so. On the surface, there was plenty of reason to do so: I (at the time) had a solid career, loved the community was in, and expected to stay there a long time. Still: Buying a house looked likely to put me $150,000 or more in debt. An older colleague mocked me for my fear of such a substantial debt, suggesting I was avoiding the rites and even responsibilities of adulthood. But when circumstances changed—and then became more challenging—the lack of that $150,000 albatross around my neck gave me and my family a lot more freedom to make choices. The Philadelphia cardboard sign makes a really good point, it turns out.

But it's not been so long since we, as a society, had a very different attitude. Granted, it's an attitude my generation's grandparents—Depression-raised as they were—didn't seem to share. Debt wasn't a burden—it was "leverage," a way to get ahead, to "invest" in education or housing or (less crucially) a better SUV. If you could pay for those things with your own resources, super, but as my older colleague seemed to suggest, you were behaving counterproductively if you didn't take on the debt to get ahead.

Now, in a time of depressed housing prices and a high unemployment rate, that debt seems less like leverage and more like an anchor. I'm not sure what responsibility society—and taxpayers—have to the people who are now crushed by that burden. But society is not blameless in creating the problem in the first place. And I do suspect that the economy as a whole won't start to really move forward again until people feel like they can afford to buy stuff again (stimulating demand) instead of paying off their credit cards. There are probably two ways of doing that: Helping out the "losers" now, or settling in for a lost decade or more.

There is no freedom in debt. So what should we do about it?