A must-read: Payday Post-Mortem

This article from the Buckeye Institute says much of what I was thinking in terms of the payday lending legislation recently passed by Ohio:

A Payday Post-Mortem
By Marc Kilmer, posted June 2, 2008

In Biblical times, the people of Israel symbolically placed their sins on a goat and sent it into the wilderness. The modern idea of a scapegoat - an innocent person who takes the blame for the sins of others - comes from this historic practice. This notion is appropriate in light of the recent banishment of payday lenders from Ohio. The politicians who are presiding over a tax and regulatory structure which is killing the state's economy found a scapegoat in payday lenders. They placed the blame for Ohioans' financial woes on the backs of these businessmen and sent them away. Just as in ancient Israel, however, the sins of these politicians will not go away with the departure of these modern scapegoats.

The practice of providing high-interest, short-term loans to people should not be controversial. If people want or need these loans, and businesses think they can make a profit providing them, then there is no reason for a third party (or the government) to stop them. After all, people take a variety of different loans, from mortgages to car payments, and generally the government presumes that the borrower and lender are the best people to judge the merits of such financial arrangements.

But in this spring of economic discontent, with Presidential candidates crisscrossing the state highlighting the state's financial difficulties, the picture of Ohioans struggling to pay their bills played across both local and national media. Slow job creation, manufacturing plants moving across the border, and people being kicked out of their homes illustrated the poor economy Ohio has been saddled with this entire decade.

Of course, other states are having a much better time than Ohio. When manufacturing plants leave the state, the border they may cross is just as likely to be a state border rather than the national border. There are many businessmen who choose to locate in, say, Texas or Florida, states that offer a better tax rate and less government regulation.

Ohio, in fact, has one of the worst tax climates for business in the nation. Only two states come in ahead of it in this race to the bottom. Its regulatory burden is also far from ideal, with many other states doing better attracting investment and business. And, of course, the idea that workers do not have the freedom to choose whether or not they belong to a union is a huge incentive to look elsewhere when a business is looking to expand or move.

Are Ohio's elected officials looking at changing any of these things? No, they spent days debating whether or not a financial transaction between two willing people should be criminalized. Instead of trying to improve the conditions that have led businesses to go out-of-state and leave workers in Ohio with fewer job opportunities, they decided to shut down businesses that employ thousands across the state.

And, in perhaps the ultimate irony, they looked into the TV cameras and wailed about the "cycle of debt" as they continued to spend your money at a rate which is unsustainable given the revenue coming into the state�s coffers.

The idea that payday lending is the cause of the financial troubles of even a small fraction of Ohioans is contradicted by a variety of scholarly studies. The real source of many Ohio workers� economic problems is the state's onerous tax and regulatory structure. But payday lending has a bad reputation, so it was easier for them to legislate based on appearance, not on substance.

Now with payday lending banished from the state�s borders, what can we expect? Ohio will still continue to lag behind other states in terms of job creation and economic growth. Those who used payday loans will not magically have their financial picture improve. The only real effect is that those who were employed by payday lenders will now join the ranks of Ohio�s unemployed and those who used payday loans will, if scholarly data is correct, bounce more checks and pay more late fees.

The payday loan ban will not solve Ohio�s problems. To do that, legislators need to look at fundamental tax, regulatory, and labor reforms. Without taking steps like cutting taxes, streamlining regulations, and opening up the labor market, the state�s workers will have fewer and fewer options. Ohio's politicians used payday lenders as the scapegoat this time. What industry will they target when they fail to do their duty in the future?


Marc Kilmer is a policy analyst with the Buckeye Institute for Public Policy Solutions, a research and educational institute located in Columbus, Ohio.