One obvious truth that politicians have trouble grasping is that the best option in life for most people is sometimes not the best option for everyone.
Consider payday loans. Most people with stable finances and conventional banking accounts tend to avoid them. The rates and fees seem exorbitantly high when extrapolated out over long time frames, as critics tend to do.
These critics, most of whom would prefer to regulate the payday loan industry out of existence, argue that its rates are structured to intentionally confuse customers and that the business model is inherently predatory, trapping the poor in cycles of debt they might otherwise avoid.
These arguments suggest that people who choose to use payday loans don’t, and perhaps can’t, understand the choices they are making. For their own good, those choices should be prohibited by our enlightened, elected betters. It is a form of benevolent condescension built on the belief that poor people can’t count.
Accounts of the lived experiences of actual payday loan customers indicate otherwise. In 2017, University of Pennsylvania Professor Lisa Servon published The Unbanking of America, a close look at people who lack traditional bank accounts, many of whom regularly use payday loans and check cashing services. During the course of her research, Servon worked as a teller at one such business for four months. What she found was that customers knew exactly what they were doing when they took out loans, and they usually had good reasons for doing so.
Many of them had previously had negative experiences with banks, in particular with overdraft fees, which tend to be higher than the rates charged by payday lenders when compared on an equal basis. Extended out over the course of a year (which is longer than the typical repayment period), a typical payday loan has an annual percentage rate (APR) of about 390 percent; over the same period, overdraft fees can range from 600 to nearly 800 percent. Bounced checks can result in effective annual APRs of more than 1,400 percent. Payday loans aren’t cheap, but people with inconsistent cash flow often find that the alternatives are more expensive.
Servon learned that some payday loan customers needed cash more quickly than a bank would provide. Others valued the transparency of the pricing for various services. They weren’t confused by the various fees and transactions; on the contrary, they found them clearer and easier to manage than what they encountered at banks. In many cases, they saw payday loans as less expensive than the available alternatives. Nearly all of them understood in fine detail exactly what their financial resources were, as well as their obligations, and worked to meet them as best they could, often in trying circumstances. The payday lending operation was widely liked and acted as a kind of community center.
Much of this was not obvious to Servon when she started the job. But in time, she came to understand that the lives of her customers were different from hers, and thus benefited from different options. As she told NPR in an interview about her experience, “All of these things that may appear irrational to those of us who haven’t walked in the shoes of the people who are using these services, most of them turned out to be pretty rational decisions.” The people she encountered were making tough choices in trying circumstances, but they knew quite well what they were doing.
Keep that in mind when someone like Sen. Bernie Sanders (I-Vt.) brags about having eliminated payday loans in his home state of Vermont, as he is today.
In Texas, the average annual interest rate on a payday loan is 661%.
In Vermont, the payday loan industry doesn’t exist, because interest rates on small dollar loans are capped at 18%.
We must cap interest rates on consumer loans and credit cards at 15% nationwide.
— Bernie Sanders (@BernieSanders) May 9, 2019
What Sanders is actually bragging about is eliminating choices—choices that may seem unfortunate or unpleasant to the sort of people who, say, own three homes and write bestsellers that make them millionaires—but which often benefit the people who make those choices: lower-income people with less stable finances. In essence, Sanders is proud of having eliminated useful financial tools for the poor.
And he and his fellow democratic socialist, Rep. Alexandria Ocasio-Cortez (D–N.Y.), are now proposing to do the same thing again, by capping interest rates on credit cards at 15 percent. Currently, the median interest rate for credit cards is a little more than 21 percent. Borrowers with good credit typically pay about 17.7 percent, while those with lower credit scores pay about 24.9 percent, according to The Washington Post. Capping rates on payday loans in Vermont effectively eliminated the industry; capping rates on credit cards will have a similar, if more limited, effect, making it much harder for those with low credit scores—which is to say, people who struggle financially—to access credit.
And if history is any guide, that means they will turn to other, potentially worse, options. Reports on payday loans return again and again to overdraft fees on checking accounts, and the costs they can impose on people with tight budgets. Research also shows that when payday lending goes away, pawn shops proliferate. Eliminating these services by regulating them out of existence doesn’t eliminate the demand for these sorts of financial products; it just pushes the people who need them to instead sell their most valuable possessions at a steep discount.
Sanders and Ocasio-Cortez have at least anticipated this argument, and proposed a solution, which is that the U.S. Postal Service should effectively be converted into a bank, offering savings and checkings accounts.
This is not a new idea, but it is a bad one. The Postal Service lost nearly $4 billion in the 2018 fiscal year, an increase of nearly 44 percent from the prior year. Even before then, the Government Accountability Office, which sometimes seems to exist mainly to document how other parts of the government are failing, warned that a “comprehensive package of actions is needed to improve USPS financial viability.” This is a polite way of saying that it can’t meet its obligations, and needs a bailout to survive. Sanders and Ocasio-Cortez, in other words, would push people into a financial relationship with a failing institution that has deep fiscal problems. Somehow, this is supposed to be an improvement.
The legislation isn’t likely to pass. But Sanders is keen to defend it anyway, and he has already dismissed opponents of his legislation as tools of big banks. “I am sure it will be criticized,” he said. “I have a radical idea: Maybe Congress should stand up for ordinary people.”
Here’s an even better idea: Sanders should stop thinking he knows what’s best for everyone else, and let ordinary people make decisions for themselves.
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