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Common Sense, Moral Values, and Pew's Failure to Lead on Payday Loans

David Callahan

The Pew Charitable Trusts blew a major opportunity to condemn the exploitative practice of payday lending when it issued a major report on this issue a few days ago -- the culmination of over two years of careful research. 

Instead of saying that it's plain wrong for lenders to charge triple-digit annual interest rates, and push for all states to ban this practice (as 15 states have already) Pew proposed incrementalist reforms to make it easier for borrowers to repay these loans. Pew's suggestions are helpful, but it's failure to come out more decisively against payday loans represents a lack of leadership on this issue.

Why did Pew take a neutral stance? Because, as their report argues, there is not decisive empirical evidence that payday loans are harmful to borrowers. 

Now, there are many groups out there who take a different view, such as the Center for Responsible Lending. And there has been enough concern about the harm of these loans for 15 states to take action to ban them. 

But for the purposes of this post, let's assume that Pew's researchers are right: That we don't have hard answers about the effects of payday loans. What should be the right stance in this situation for organizations or elected leaders concerned about the public good?

Well, as it happens, we have some good historic case studies to draw on in other areas. You see, sometimes research hasn't, or can't, decisively answer crucial questions about public policy -- either because an issue eludes hard empirical answers or simply because the resources don't exist to adequately explore that issue. 

It took many years before medical science could decisively prove that smoking was bad. It took years to decisively prove that human activity was warming the climate. It took years to prove that lead was dangerous and shouldn't be used in household paint. Ditto for asbestos and other chemicals. In the economic sphere, there has been fierce debate about the effects of raising the minimum wage. Looking back to earlier times, there was a long gap between the belief that germs spread infections and hard proof that this was so. 

The list could go on. Again and again, policy leaders and elected officials have had to confront issues where the evidence is murky. It is exactly these situations where leadership is so important. When empirical questions may never be answered decisively, it's time for choices based on factors other than the evidence. 

Moral values are an important guide in these cases. But common sense is another guide -- one that juries often rely on when the facts in a case can never be fully proven. 

In the examples listed above, common sense called for action even before the evidence was definitive. Smoking seemed like an inherently harmful practice even before it was conclusively shown to cause lung cancer. Lead struck many scientists as a very dangerous substance to put in household paint even before all the studies were done about kids brain damaged by eating paint chips. Burning vast quantities of fossil fuel seemed likely to heat the planet even before all the big climate studies were done. (I read my first book on climate change in 1990. Seemed like pretty obvious stuff back then.)

In the case of payday lending, both moral values and common sense should have tilted Pew toward a tough condemnation of payday lending -- as opposed to a technocratic fix that leaves exploitative practices place and lets politicians boast of "reforms." 

The moral points here hardly need explicating. Usurious lending was long condemned by Christianity, Judaism, and Islam, which is why it was banned in many countries -- and remains banned in various places. As Pew's research notes, many payday borrowers are extremely desperate people down on their luck. No matter how bad their credit, charging triple-digit interest rates feels inherently wrong within the long established moral traditions of most civilizations. You don't financially exploit those down on their luck.

But common sense should also weigh on the side of a crackdown on this practice. Payday loans offer no lasting solution to people's financial problems and often exacerbate those problems by diverting wealth into costly interest payments, landing people on a debt treadmill they can never get off. 

Pew's researchers told me that people want these loans and hate the idea of losing access to even costly credit. But that seems mainly indicative of how screwed up things are in America, economically -- that so many people would be willing to pay, say, $120 in interest for a $375 loan. 

Common sense suggests that this a system that should be dismantled and replaced with alternative options for cheap credit, not perpetuated.

Given the weight of these arguments, it's a shame Pew couldn't take a stronger stance here.