Hidden taxes hurt just as much
This in-depth story provides a detailed look at the cost of regulations on business – something that often gets short-shrift in news accounts about new legislation. But even the federal government acknowledges the massive costs of regulation; a Small Business Administration report notes that total regulatory costs are at about $1.75 trillion annually, which is almost twice the amount of all individual income taxes collected last year.
Obviously, a society cannot proceed without regulations of some sort, but the story notes that even when the facts show that the costs of regulation exceed the benefit, regulators will still plow ahead… that’s what they do, after all.
Programs to fix programs
When government intervenes in the markets to achieve a “socially desirable” outcome, there are always unintended consequences, and there are always ways around the intervention. Such is the case with Medicaid, as explained in this insightful article about how its price-fixing mechanism was established to reduce costs. It hasn’t worked, of course, but you can see the contortions interventionists will undergo to fix a fatally flawed program rather than to admit that it’s simply unsustainable.
On election day last November, Montanans voted to use their government to cap interest rates on payday loans at 36 percent annually. Good for the poor? No.
At first blush, it might seem reasonable, since most people complain when credit cards charge just half that rate. But payday loans are not used as annual loans, so an APR is the wrong way to judge them. The fact is, these loans are used by people who need cash immediately, and so they provide a post-dated check for a week or two in the future, and get cash to meet their immediate needs. They end up paying $10 to $20 per $100 of immediate cash.
This may seem exorbitant, and for many of us, it would be. But for obvious reasons, these lenders face high default rates, which means their costs are high. The folks who need cash right away are part of a pool of people at high risk for default, and so the rates they pay reflect how much the lenders lose to the folks in that risk-pool.
Given that the high-cost loans are a response to the high cost of providing the loans, it makes no sense to cap the prices charged by lenders. The result is obvious and predictable: the businesses that provided the loans pack up and leave the state. If you were required to sell your products at less than it costs you to buy them, wouldn’t you do the same?
According to a story in Reason magazine, Montana can expect an exodus: “When Arizona’s payday loan rates were capped at 36 percent in June, payday lenders immediately started checking out. Joe Coleman, president of the Financial Service Centers of America, told USA Today that Montana will be no different: ‘As has been the case in other states, because of the numerous costs involved, virtually no operator can offer the product at that rate, and all of them will almost certainly go out of business,’ he says.”
The need for quick cash remains after payday lenders leave, and studies show the poor therefore turn to check-bouncing, utility shutoffs, bankruptcy and other unfortunate measures.
Economic reality, it seems, constantly thwarts liberal legislative dreams.