Economics 101
After attending an Institute for Humane Studies workshop this past summer, I established a firm economic foundation. My professor reduced the whole field into one single sentence: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
This lesson is further validated by economist Henry Hazlitt, who believed that many of the economic fallacies in the world today stem from one or two issues: Looking only at the immediate consequences of an act or proposal, or looking at the consequences only for a particular group — to the neglect of others.
Today’s economic lesson is about the St. Louis Board of Aldermen and its proposal to limit payday loan stores in the area, as reported by the Post-Dispatch. Payday loans are short-term loans that are intended to cover borrowers’ expenses until their next pay period. According to many consumer advocate groups, payday loan stores are predatory — they prey on uninformed consumers and dish out loans with a vague screening process, making it easy for any Joe Six Pack to take out a loan.
Personally, I can’t stand them. Payday loan stores can take people who are already in an economic hole and turn their situations into economic craters. In spite of this, the stores represent a last resort for people who operate with little or no economic safety net. Let’s not forget, there is a market out there that really can take advantage of payday loans. Eliminating stores removes market competition, so that stores still operating end up offering even less favorable terms, or more restrictive screening. This would put those consumers in an even bigger bind. In the Post-Dispatch article, Tom Linafelt, a spokesman for Quik Cash, even stated, “Laws to restrict the opening of new stores actually help companies like his because they lessen competition.” Unfortunately, this guy is right.
Justin Hauke, a former Show-Me Institute policy analyst, wrote a piece on this topic back in 2007. Rather than pass new regulation, legislatures should get to the root of the financial problems surrounding payday loans, by encouraging programs that increase financial literacy (preferably in high school) or that seek alternative sources of short-term financing — such as lines of credit, or credit unions. No matter what, Economics 101 teaches us that we should look past the immediate consequences of an act, or the consequences for a particular group, so that we don’t neglect others.
Way to go, class. You earned your sticker for today.
The economics of the situation that many borrowers find themselves is that payday loans are often cheaper than bouncing checks and paying overdraft fees. This has been shown to be true by the Federal Reserve Bank of NY and the Cyprus Research Group. Consumers are wise to what products are in their best interests. It seems that the desire to limit loan options by uneducated city councils will only increase cost for consumers.
Comment by Clint Says — November 20, 2008 @ 12:10 a.m.
Great post, I also really like the first commenter’s point.
Comment by Josh Smith — November 20, 2008 @ 3:24 p.m.
“by encouraging programs that increase financial literacy”
why? you said yourself that the consumers who have very low time preference are better off taking usurous payday loans, than risking overdraft fees. given their circumstances, they’re already making the right choice. the solution here is to reduce payroll taxes, so their paychecks go further. what good is a public school finance class going to do? assuming these ppl even graduated from high school, what makes you think govt education actually transfers any knowledge to those forced to consume it?
Comment by vroman — November 25, 2008 @ 11:03 a.m.
US Bank recently introduced payroll advance for a flat fee to customers who make regular deposits.
Comment by Sarah Anne — November 25, 2008 @ 1:33 p.m.