Friday, April 17, 2009

Sowell on Numbers

Magic Numbers in Politics
by Thomas Sowell

Words are not the only things that enable political rhetoric to magically transform reality. Numbers can be used just as creatively-- and many voters are even more gullible about statistics than they are about words, apparently because statistics seem more objective.
The latest Congressional crusade is to clamp down on small finance companies that provide "payday loans" and check-cashing services in many low-income neighborhoods where there are few banks.

A common practice in making small loans of a few hundred dollars for a few weeks is to charge about $15 per hundred dollars lent. Politicians, the media, community activists and miscellaneous other busybodies are able to transform these numbers into annual percentage charges of several hundred percent, thereby creating moral melodramas and demands that the government "do something" about such "abuses."

Of course, these loans are seldom borrowed for a year. They are often loans for a couple of weeks or less, to meet some difficulty of the moment by people who live from payday to payday, whether they are being paid by a job or are receiving checks from Social Security, unemployment compensation or welfare.

The alternative to getting a payday loan may be having the electricity cut off or not having money to buy some medication. It is worse to borrow from illegal loan sharks, who have their own methods of collecting.

While $15 per hundred dollars may sound like a high rate of interest, it is not all interest. The finance company incurs costs just to process a loan, and these costs are a higher proportion of the total cost for a small loan than for a large loan.

When Oregon imposed a limit of 36 percent annual interest on what a finance company could charge, that meant charging less than $1.50 for a hundred dollar loan for a couple of weeks. A dollar and a half would probably not even cover the cost of processing the loan, much less the risks of default.

Not surprisingly, most of the small finance companies making payday loans in Oregon went out of business. But there are no statistics on how many low-income people turned to loan sharks or had their electricity cut off or had to do without their medicine.

This is just one of the many ways in which self-righteous busybodies leave havoc in their wake, while going away feeling noble.

Statistics played a key role in creating the housing boom and bust that led to the current economic crisis......
Read it all here:
"There are three kinds of lies: lies, damned lies, and statistics.” Attributed to Benjamin Disraeli and popularised in the United States by Mark Twain.


  1. Granted, the smart use of payday loans would be as a once-in-a-while, stopgap measure to prevent the electricity from getting shut off, or to keep from bouncing the mortgage check.

    However. My husband manages a payday lending place. They charge $17 per $100 lent, with a $500 maximum. And most of his customers come in, pay off the $585, and immediately take $500 back out.

    Politicians will say that the payday lending places are predatory lending, acting to keep the poor in debt. First of all, it's not the industry working to keep the poor in debt: my husband is required by law to lend to anyone who comes in the door and qualifies.

    Really, though, it's not the poor that are the worst users of the service--it's those who make $60-80,000. They'll take out the loan (which isn't even half of one week's takehome pay), and then default. And then threaten him with assault when he calls to remind them that they owe money that they haven't paid back.

    Those of the poor who take out a loan every payday usually don't have the work ethic and money habits that they should in the first place; rather, they've been infected with the entitlement mentality that fueled the spiraling debt problems in America. I have no pity for those people.

    Granted, this is anecdotal evidence, and with only one payday lender that's trying to branch out into other areas, like check cashing, money transfers, prepaid credit cards, and the like. It likely isn't an accurate representative of the industry as a whole.

    However. I don't have a political agenda, either for or against the industry. Politicians and bankers (whose banks usually make a good chunk of their profits from bounced check fees) both do.

  2. u⋅su⋅ry
    1. the lending or practice of lending money at an exorbitant interest.
    2. an exorbitant amount or rate of interest, esp. in excess of the legal rate.

    As HH points out:
    "most... come in, pay off the $585, and immediately take $500 back out."

    This is because they aren't smart, at least with their money. They're caught in a bad loop to say the least.

    I've seen people do this do. People do it with credit cards when they carry a high balance at a near 20% interest rate. This is their right, the right to be dumb with their finances.

    But at some point it is worth considering how badly and how repeatedly the poor should be allowed to be raped.

    $500 borrowed and returned weekly, works out the same as borrowing $500 for a year. That's the principle. $85 interest/charges, per week totals: $4,420

    So some poor struggling person who is admittedly very bad with money is getting kicked in the teeth with a $4,420 charge for borrowing $500.

    Setting aside the charges, what is that, 884% interest? I think so.

    That's not a magical statistical word game, it's usury, if the word usury has any meaning at all. I think it does.

    Cross posted and linked in a forum that allows free speech:

  3. I understand the instinct to ban usury. As a member of the Government Regulations committee while a senator, which oversees banks and lending, I certainly supported maintaining usury laws. Protecting the “stupid poor” from themselves, as the post above might put it. So we should ban payday & title loans, and let the poor borrow from the Chicago Outfit loan sharks, who kickback to the local machine, and have very efficient collection procedures. I’m not sure that helps the poor a lot. But then, I don’t think helping the poor is always the object of the left. Keeping them poor and voting Democrat, while putting their money as well as their votes at the service of the machine, might be a better understanding.

    But it’s a hard question, because I wouldn’t feel comfortable running a payday loan business.

  4. One solution may be to require full disclosure. We have many "rental" places around here that will rent any kind of furniture, appliances etc, for what seems like not much per week. But it adds up so that the person ends up paying extraordinary prices for these items. Sometimes 3 and 4 times what a prudent person (or a person with credit) could buy it for. This shouldn't be banned but a law was passed so that the total of the payments were required to be shown. This is so when some poor republican comes along and pays $350 for a microwave (at only $8 per week)that he could have bought outright for $89, he is without excuse.

    Likewise, payday loan businesses shouldn't be banned. Perhaps requiring full disclosure, in writing (with signature) of the actual interest rate would suffice. Or, going further, having a ceiling on the interest rate that is reasonable. I don't know of anyone that wants to ban them, they serve a purpose. It would be good if some of them could rise above being something other than legal loan sharks taking advantage of desperate people.

    Helping the poor is "not always the object of the left" but more so than "the right." Perhaps they got this reputation partly because, with the exception of president Nixon, poverty went up under every Republican president since 1961. Under every Democratic president since 1961, it fell.

    Census poverty data: