Archives: May, 2010

Uncle Sam: Payday Lender

One of the puzzles of Congressional efforts to “reform” our financial system to avoid future crises is the amount of attention to lenders who had nothing to do with the crisis (almost as puzzling as the inattention to many who did).

Today’s Washington Post, for instance, details the efforts of payday lenders to fight back against both Senator Dodd’s new consumer agency and Senator Hagan’s amendment, that would essentially eliminate the consumer option of payday loans.

In general, any efforts to restrict consumer choice is rarely likely to improve consumer welfare.  This has been repeatedly demonstrated in research on payday lending.  Senator Hagan played a key role in banning such products in North Carolina.  What was the result of that ban?  Don Morgan, at the Federal Reserve Bank of New York, decided to test whether such a ban helped or hurt consumers.  He compares how households in North Carolina fared after payday loan bans.  The results: since the loans were banned in 2005 in North Carolina, compared to states where payday lending is permitted, households in NC have bounced more checks and complained more to FTC about lenders and debt collectors. “The increased credit problems contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced check protection sold by credit unions and banks or loans from pawnshops” states Morgan.

Where Hagan proposes to ban payday, Dodd proposes to have banks and non-profits directly compete with payday lenders, but with one big, important difference: taxpayers would cover a substantial portion of the credit losses.  Buried at the end of Dodd’s massive bill in Title XII is a grant program that would cover credit losses on “payday” loans made by non-profit community lenders as an “alternative to more costly payday loans.”  Of course the private sector loans will be more costly, as the lender will have to charge a rate that covers its losses.  The difference between Dodd’s proposal and the private sector is that while private sector payday loans may be expense, they are entered into voluntarily, whereas Dodd make the taxpayer an unwilling participant in subsidizing high risk borrowing.  Perhaps Dodd should examine previous efforts to subsidize high cost mortgage lending, before we repeat the same mistakes in payday.

Monday Links

Friedman and Moynihan Agree with Sanders and Paul

Reportage in today’s New York Times (“Consensus For Limits to Secrecy At the Fed” by Sewell Chan) indicates that more auditing of the Fed is probably in the cards.

Prof. Milton Friedman and Senator Daniel Patrick Moynihan would have most certainly agreed with the thrust of the Senate (S. 604) and House (H.R. 1207) bills sponsored by Senator Bernard Sanders and Representative Ron Paul, respectively.  These bills would partially lift the shroud of secrecy draped over the Fed.

Prof. Milton Friedman weighed in on central bank independence in a 1962 essay, “Should There Be an Independent Monetary Authority?”  Prof. Friedman’s conclusion: “The case against a fully independent central bank is strong indeed.”  As for letting in some sunshine, Senator Moynihan had this to say: “Secrecy is for losers.”

Bennett’s Ouster: a Sign That Conservatives Have Started Paying Attention to Health Care?

Utah Republicans will not be re-nominating U.S. Senator Bob Bennett (R-UT) for another term.  A principal reason appears to be their displeasure over a health care bill that Bennett teamed with Sen. Ron Wyden (D-OR) to sponsor.

Some commentators decry how Bennett’s ouster demonstrates that the Republican party has lurched to the right.  That’s a reasonable interpretation if you believe, as conservative Washington Post columnist Kathleen Parker does, that Wyden-Bennett was a moderate, “market-driven” bill.

Rather than a moderate, market-driven bill, Wyden-Bennett would have created “Medicare Advantage for All.” It would have made health insurance compulsory for all Americans, and imposed stringent government controls on what type of coverage Americans must purchase.  It would have imposed federal price controls on health insurance.  As I explain elsewhere, once you have those elements in place, you’ve got socialized medicine.

Wyden-Bennett went further.  It would have created a new government entitlement to insurance subsidies.   Yes, the legislation would have given workers more insurance choices – at first.  But it would have set in motion economic and political dynamics that would reduce choice and innovation, forcing all Americans into a narrow range of health plans.  It effectively would have prohibited employer-sponsored health insurance, forcing even more Americans to give up their current coverage than ObamaCare would.

Wyden-Bennett was more honest than ObamaCare, in that it would have forced workers to pay their premiums to the IRS.  That would have made it explicit that the mandatory premium payments are indeed a tax.  Those tax payments would have appeared in the federal budget, and the American people would have been able to evaluate the law based on its actual cost. In contrast, ObamaCare’s authors assiduously worked to keep those mandatory (read: tax) payments out of the federal budget.

But on policy grounds, as National Review notes, Wyden-Bennett is more radical than ObamaCare – which itself was so radical that a majority of voters oppose it, and Democrats could just barely corral enough members to pass it.

“Okay, Cannon,” you might object, “but if Wyden-Bennett is even further to the left than ObamaCare, then why do its cosponsors include not just Bennett, but other conservative Republican senators like Lamar Alexander (TN), Mike Crapo (ID), and Judd Gregg (NH)?” Good question.

The answer: conservatives and Republicans just don’t pay as much attention to health care as they should.  (Ask any leftist or free-market health policy wonk; they’ll agree.)  As a result, the health care industry and the Left can easily seduce them into supporting legislation that violates their limited-government principles.  Sen. Wyden pulled it off by dangling the words “choice” and “health savings accounts” in front of his Republican colleagues.  Even when Republicans do pay attention to health care, it’s often after someone convinces them that a left-wing goal like universal coverage can be done in a free-market way. (Exhibit A: Mitt Romney.)

Viewed from this perspective, Bennett’s ouster is not evidence that the GOP has lurched rightward.  It is a sign that conservative voters may be starting to pay attention to health care.  And it gives hope that conservative politicians will do the same.

Kagan: Revenge of the Grinds

I’ve been saying for a while that to understand the Obama administration specifically and much of today’s liberal Left more broadly, you need to conceive of it as a sort of extension of the intellectual and policy culture of high-end legal academia. The nomination of Elena Kagan, best known as a successful Harvard law dean, extends this familiar pattern. Assuming Kagan coasts to an easy confirmation, she’ll join a liberal caucus on the Court that more than ever resembles a faculty meeting.

To the dismay of some on the left, Kagan, like Ruth Bader Ginsburg, Stephen Breyer, and Sonia Sotomayor before her, counts as a “cautious and confirmable” pick – a reliable liberal vote, almost certainly, but not particularly known for disturbingly big ideas or impassioned rhetorical gestures. (The Obama administration does contain plenty of law professors of the latter type – from big thinker Cass Sunstein to liberal firebrand Harold Koh – but has not yet chosen to nominate them to the Court.)

Consider the likeliest speed bump on Kagan’s road to confirmation, her decision to bar military recruiters from Harvard, which resulted in a prolonged and losing showdown with Congress. That episode will be the hardest thing on her record for many Democratic senators to accept (though accept it they will). But it was an overwhelmingly, even near-unanimously popular position to take at top law schools. By way of comparison, recall the mini-furor over Sonia Sotomayor’s “wise Latina” comments, which she’d repeatedly delivered in various versions on the academic conference circuit. There, the notion that a judge’s ethnic background could and should make for different and better decisions was met with predictable applause and little challenge; when aired in wider public debate, it proved hotly controversial and the nominee prudently backed away.

Obama spokespeople spent much of last week rumbling about the need for judges with a common touch who’d stand up for the people. This fed speculation that they might mix up the Court by picking an elected official, trial lawyer or crusading prosecutor. Just kidding! For better or worse, we’re in for more law made by Harvard, Yale and Chicago intellectuals.

The National Debt Is Huge, but Unfunded Liabilities Are America’s Real Red-Ink Challenge

I frequently argue that government spending is the problem, not budget deficits. Regardless of whether it is financed by taxing or borrowing, every penny of spending diverts resources from the productive sector of the economy. I narrated a video explaining why excessive spending is bad from a theoretical perspective. I did another looking at the empirical evidence for smaller government. And I had another video discussing why deficits are a symptom and the real problem is bloated budgets.

Nonetheless, some people seem convinced that deficits and debt are the real problem. While I think that focus is a bit misguided, I certainly agree that there is something utterly immoral about spending today and imposing a fiscal burden on future taxpayers (especially since so much government spending is for current consumption and transfers).

But here’s some really depressing news for the anti-debt crowd. Today’s deficits and debt actually are just the tip of the iceberg. Here’s a new video exposing the enormous unfunded liabilities resulting from entitlement programs. As the video explains, unfunded liabilities are promises by politicians that impose enormous long-term obligations for more spending and debt.

The narrator of the video is Kelly McDonough, a student at American University and a former Cato Institute intern. If this video is anywhere near as successful as the other video narrated by a former Cato intern, perhaps this will become a new tradition. That won’t be good for my video career, but it shows that the Cato Institute is doing a good job cultivating a new generation of freedom fighters.

RIP Max Palevsky, a Man Whose Vast Wealth Helped Stop a War

“Max Palevsky, a pioneer in the computer industry and a founder of the computer-chip giant Intel who used his fortune to back Democratic presidential candidates and to amass an important collection of American Arts and Crafts furniture, died on Wednesday at his home in Beverly Hills, Calif. He was 85,” reports the New York Times.

Palevsky used his vast wealth to influence politics, especially to oppose the Vietnam War. He was one of the liberal mega-givers who made the Eugene McCarthy campaign possible in 1968, along with such people as Stanley Sheinbaum, Stewart Mott, and Martin Peretz. Describing the McCarthy campaign as “shoestring,” Christopher Hitchens added:

When one says “shoestring,” by the way, one is forced to recall that the whole operation was essentially underwritten by a few ill-sorted but well-off individuals including, notably, Max Palevsky, Blair Clark, and Martin Peretz. Today’s campaign-finance laws—or “reforms” as they are always described—make a similar undertaking extremely difficult, if not impossible.

Hitchens may be a bit misty-eyed in his memory of a “shoestring” campaign. Time reported that “In 1968 Clean Gene led the list of preconvention spenders with an $11 million outlay.” But he’s right about the campaign finance laws. An outsider candidate with a mission, like McCarthy in 1968 or George McGovern in 1972 (to whom Palevsky is said to have given $320,000), is not allowed to jump-start his campaign with a few big contributions from donors who share his vision.

Ironically, Palevsky later donated $1 million to a California initiative that would have limited campaign contributions. It is not recorded whether Palevsky specifically wished that he and his friends had been forbidden to make the McCarthy and McGovern campaigns possible. But he did make them happen, and the restrictions on such outsider campaigns are one of the big costs of our current campaign finance laws.

Cross-posted at Politico Arena.