It might seem a little odd to advise a closer attention to Maoist philosophy to an organization already as left-wing as the Center for Responsible Lending — who would ban payday loans just because they think people shouldn’t get what the people want. Following their response to a column of mine seems necessary.
P.J. O’Rouke’s telling of the tale is slightly rude, so I’ll paraphrase: The way to get people to do something is to make it the best of their available options. The way to stop them from doing something is to offer them a better such option.
The cat bites the hot pepper we’ve made when not biting it is a much more unappealing option.
The specific issue here is the cost of payday loans. When translated into an annual percentage rate, these can apparently cost 400% and higher. This is obviously ghastly usury and financial trickery. But annual percentage rate isn’t a good way of measuring short term credit. That offering such a small sum and short term credit, as I originally noted, costs over 200% APR to provide without any profit or even profit motive is also true. But, OK, this is a moral outrage, we wish it to disappear from our fair land.
Great. How do we do that? Ban people from charging what such loans cost to provide? That is the Center for Responsible Lending’s answer, yes. Being the cynic — perhaps just experienced in the ways of men — that I am I would note this only stops the people who obey the law. Those who collect money with baseball bats might not take much notice and even welcome the increase in business.
Biting that hot pepper, the way to excise 400% payday loans from civilization, is to create a system which lends the money at a lower price. That might include credit unions, or government loans perhaps — plenty of European welfare states will provide a bit of cash in extremis. We can all think of other possible paths. My point, though, is that the urge to do away with it isn’t enough.
It is necessary to build that alternative first. We must show that the system can indeed be made better by creating that better alternative, not banning the current arrangements. Once we’ve created it, we outcompete the old system and it disappears without the need for legislation or coercion.
If the Center for Responsible Lending wants there to be no payday lending, then it’s incumbent upon the Center for Responsible Lending to build that better system, not ban the best answer we’ve currently got. As Mao said, we’ve got to make the cat want to bite the hot pepper. Providing people with a lower cost alternative to payday loans would do just that.
Of course, it’s possible that there is no other viable and lower cost method. But if that’s true, then how come it’s righteous to ban the best we can do?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.