Payday Lending Empowered by Executive Corruption

Predatory economic practices continue to expand in the American economy. Payday lending is perhaps the most egregious example.

Why do we permit such practices? The arguments for practices such as payday lending are twofold. First, defenders of the industry suggest payday lending firms fill a market niche. Those who cannot qualify for conventional loans from banks need access to credit; payday lending provides this service. Second, freedom of choice and individual responsibility. Individual consumers, that is, should have choices, and should be permitted scope for responsibility for their financial decisions.

So where’s the problem?

Let’s start with the second justification: choice. Those who avail themselves of such loans typically face desperate situations that skew their choices. The car has just broken down. Borrow money on a short-term basis to cover the cost of the repair, knowing the terms are painful, or fail to show up for work and lose one’s source of future income? With an unexpected reduction in shifts at work and a consequently smaller paycheck, there is not quite enough money to pay the rent. Borrow on a short-term basis to fill the shortfall, or let the rent go and face the risk of eviction and homelessness?  Among others, David Shipler documented precisely such cases in his 2005 book, The Working Poor and Barabara Ehrenreich revealed such dynamics in her 2001 work Nickel and Dimed: On (Not) Getting By in America.

In his recently released and acclaimed work, Evicted: Poverty and Profit in the American City, Matthew Desmond writes that “Most of the 12 million Americans who take out high-interest payday loans do not do so to buy luxury items or cover unexpected expenses but to pay the rent or gas bill, buy food, or meet other regular expenses. Payday loans are but one of many financial techniques . . . specifically designed to pull money from the pockets of the poor.”

The point is that living at the margins of subsistence alters the decision-making environment; for the poor, such choices are rational. As economists describe this, liquidity constraints affect intertemporal choices — that is, when money is very scarce, decision-making is more heavily weighted toward navigating the present.

The problem with arguments based blandly on individual responsibility is that they implicitly assume we all face the same temporal tradeoffs. (In other words, if I delay gratification and invest now, I’ll have more in the future. Sure, if you have the security of circumstances to comfortably move through the present. If not, the premise is fundamentally misguided.)

Turning to the first case for the existence of short-term lending secured by the borrower’s next paycheck, the implication is that the practice should be regulated because of the gross imbalance between the desperation of the borrower and the profit motive of the lender.

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Source: The Pew Charitable Trusts, “CFPB Proposal for Payday and Other Small Loans: A survey of Americans,” http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2015/07/cfpb-proposal-for-payday-and-other-small-loans

The balanced solution, then, is to subject payday lending to reasonable regulation. Lenders can fill the market niche and earn a profit, without ruining the lives of people who live on the financial margins and who are readily tipped into despair. Organizations like the Center for Responsible Lending, which points out that the average payday loan carries an effective interest rate of 391% have been advocating for regulation for well over a decade.

Along the way, they have faced opposition from those who elevate “individual choice” to sacred status in complete abstraction of the conditions under which choices are made – such as this vapid assessment from the libertarian Mises Institute: “On the margin, it is the borrower and lender who are most fit to decide the appropriateness of any transaction—not the Center for Responsible Lending, or a congressman.”

But here’s where the story becomes truly disturbing. In the wake of the 2008-9 financial crisis and the numerous abuses by financial services firms revealed in the aftermath of the crisis, the U.S. Congress created the Consumer Financial Protection Bureau.

The CFPB was designed with an intense focus on consumer protection, and following the political battle to confirm its first director during the Obama Administration, it did just that. The Bureau brought cases and imposed fines on financial firms for racial discrimination in lending and for deceptive practices. The Bureau pursued abuses that ultimately returned $12 billion to 28 million consumers.

With the arrival of a new administration, the focus shifted dramatically. As with virtually all executive agencies from the State Department to the Department of Labor to the Department of the Interior to the Department of Education to Housing and Urban Development to the Environmental Protection Agency, directors were put in place with the mission of deconstructing the agency and giving free rein to private actors to take every advantage of the nation’s resources and profit making opportunities created by public sector withdrawal.

Demonstrating utter disdain for the Consumer Financial Protection Bureau, the administration appointed a director who already has a full-time job as Director of the Office of Management and Budget. In his spare time, Mick Mulvaney is systematically dismantling the CFPB, dropping open investigations of financial services firms –including at least one case in which a federal judge has already found the firm guilty of engaging in deceptive practices, and which was awaiting the penalty phase of its case — and actively urging Congress to “cripple” the agency he nominally leads.

Mr. Mulvaney suspended new regulation regulating payday lending scheduled to go into effect in January of this year. And here’s where the disturbing becomes truly grotesque.

As a member of Congress from South Carolina, Mulvaney accepted campaign contributions from the payday lending industry. Bad, but entirely consistent with the level of influence-purchasing that is by now deeply institutionalized in the U.S. Congress. About two weeks ago, at its annual convention, the payday lending industry celebrated Mulvaney’s decision to suspend new regulations.

Where did the convention take place? In the Miama area, at the Trump National Doral Golf Club. A few protestors gathered outside the event, but in the daily chaos and ethical sinkhole of the current administration, relatively few took notice. They took little notice, that is, that the occupant of the White House appointed someone to dismantle regulation of an industry that then acted to put money directly in the pocket of the White House occupant. How can this be?

Those on the political right may wish to defend an anti-regulatory leaning on ideological grounds. Fine. We can respectfully disagree. But why is there not universal outrage in the face of such naked corruption?

The absence of popular outrage demonstrates a couple of sad realities. The institutions responsible for oversight of the ethics of the executive branch are weak, depending for their effectiveness on the executive having a sense of duty and a sense of shame.

Additionally, corruption and profiteering have become normalized in the current administration; the more regularly it occurs, the less we notice.

The Troubling Question of Democracy in the West

The cover of the latest issue of the German news weekly Der Spiegel shows a background of a US president setting the world ablaze. In the foreground, a hesitant German Chancellor Merkel stands back-to-back with a confident French President Macron holding a fire extinguisher labeled “I love Europe.”

“Who will save the West?” asks the headline — the issue is about freedom and democracy. Macron needs Germany’s help, yet the Chancellor, laments Der Spiegel, is ceding the field to Macron.

SP_2018_17_Digitaltitel_600.jpgThe English-language international issue notes that “The U.S. is no longer leading the West, neither morally, economically, on foreign policy or militarily.”

The need to ask who will save democracy in the West is itself a sad statement. But the question is indeed relevant. A Turkey once close to docking at the harbor of democracy and rule of law has drifted into authoritarian seas. A Hungary and a Poland firmly anchored in the democratic harbor and embedded in the rule of law represented by the European Union have each come unmoored, and have drifted from the harbor.

As these alarming developments proceed, where are the global beacons of democracy?

The notion of the U.S. as such a beacon is of course flawed; no doubt, there has always been a great deal of hypocrisy underlying the notion of the U.S. as the world’s beacon of democracy. But the symbolic dimension matters nonetheless, if only as a cautionary note to those seeking to spread illiberalism and as a rallying point for those working for government accountability, responsiveness and rule of law.

While the light may have been mottled in the past, the U.S. beacon now grows ever dimmer.  This is a result both of failures to denounce authoritarianism abroad and a willingness to encroach on democracy and rule of law at home when politically useful.

The US Congress has been silent on the spread of authoritarian, because it is understood that any critique of tactics in Poland or Hungary is an implicit critique of the current occupant of the Oval Office. The authoritarian tendencies of our own presidency have muted U.S. advocacy for press freedom and rule of law around the world. Without that voice, authoritarians are empowered, given license.

Furthermore, members of the U.S. Congress have willingly taken part in the administration’s effort to eliminate checks on executive authority – through leaks, for example, and other warnings of the administration’s efforts to undermine science- or evidence-based policy.

Some members of Congress have championed an assault on the “deep state” (an Erdoganesque construct) comprised of FBI and Justice Department officials — who in reality are intent on imposing rule of law on an executive resentful of legal limits.

In contrast to these shameful betrayals of democracy and rule of law, the European Parliament has at least taken the symbolic steps of passing resolutions condemning violations of rule of law in Hungary and in Poland.

In the case of Hungary, the European Parliament’s resolution cites commitments of EU member state governments made in the Treaty on European Union, the Charter of Fundamental Rights of the EU, and the Universal Declaration of Human Rights.

Referencing violations of rights of asylum seekers, attacks on civil society organizations and on media pluralism, assaults on freedom of organization and of expression and overt engagement in propaganda campaigns regarding immigration, the European Parliament “Regrets that the developments in Hungary have led to a serious deterioration of the rule of law, democracy and fundamental rights over the past few years.”

Similarly, in a November 2017 resolution the European Parliament condemns numerous actions of the Polish government “risking the systematic undermining of fundamental human rights, democratic checks and balances and the rule of law.”

Furthermore, in December 2017, the European Commission invoked Article 7 of the Treaty on European Union, which calls for the national governments to act where there is a “clear risk of a serious breach of the rule of law”

Justifying its action, the European Commission explained that it “is taking action to protect the rule of law in Europe. Judicial reforms in Poland mean that the country’s judiciary is now under the political control of the ruling majority.”

The Commission continues: “A breach of the rule of law in one Member State has an effect on all Member States and the Union as a whole. First, because the independence of the judiciary – free from undue political interference – is a value that reflects the concept of European democracy we have built up together, heeding the lessons of the past.”

Meanwhile, as Poland grew more isolated within the EU, a July 2017 visit from the U.S. executive sent a contrary message.

Rather than taking the opportunity to diplomatically caution the Polish government regarding violations of rule of law, the current occupant of the White House instead, while on the soil of a government that has displayed growing authoritarian tendencies and engaged in violations of press freedoms, gleefully reiterated attacks on the U.S. media to which we have grown so accustomed at home.

It is indeed sad that the question of who will save the West must be asked at all. It is sadder still that the United States is no longer part of the answer.

The Road Back to Democracy

In his newest book, the Road to Unfreedom, the distinguished historian and leading public intellectual, Timothy Snyder, traces the erosion of democracy from Russia, across Europe to the United States.

While there are of course consequential differences across these cases, there also are common dynamics at work, and strategic borrowing of tactics by those who wish to weaken democratic institutions. These tactics include sowing distrust in the media through creation of false stories and denial of facts, as well as the use of narratives of national victimization to mobilize domestic constituencies and to redefine parameters of global engagement and disengagement.

In his lucent lecture at the University of Oklahoma, Snyder began from the concept of freedom itself. How do we conceptualize freedom?  What is it that we are in danger of losing as we traverse the path from freedom to unfreedom?

At the core of Snyder’s conceptualization of freedom is the notion that we are not free if we cannot imagine alternatives. The notion that the present order is as it must be and will remain has historically been a mechanism through which oppressors have extended domination over the oppressed at little cost.

Resistance does not occur when the oppressed accept the existing order as inevitable – whether because the existing order should be, or because it is as it must be given the overwhelming apparatus undergirding the existing hierarchy.

Professor Snyder’s conceptualization emerges from scholarship deeply immersed in the history of Eastern and East Central Europe.

Unknown.jpegIn his famous 1978 essay, The Power of the Powerless, the Czech playwright Vaclav Havel addressed the way in which the communist dictatorship “lived within a lie” and how, by conforming to the regime’s lies, individuals “fulfill the system,” creating what he called an “auto-totality,” a self-dominating system of oppression.

This notion of domination through an inability to imagine alternatives has broad applicability. In his ingenious essay about colonial rule, Marrakech, George Orwell perceives the role of ideological domination in the maintenance of colonialism; the Senegalese infantry column he observes operates on behalf of France because the soldiers have been taught to internalize their inferiority. (Though Orwell insightfully recognizes this mechanism of domination is bound to crumble, and that the soldiers will eventually turn their guns on their colonial “masters.”)

In his wonderful 1982 book about the dominance of mining companies in Appalachia’s Clear Fork Valley from the late 19th century to the 1970s, Power and Powerlessness, political sociologist John Gaventa documents how the local mining companies control economic resources, the flow and presentation of information in the local press, and the institutions of power, from the courthouse to the police to the city council. The first line of defense of the company’s domination, though, is the miners’ internalized sense of the inevitability of the existing hierarchy. They cannot imagine alternatives.

Lest we shrug off the relevance of this concept for the contemporary United States, Vaclav Havel saw forty years ago that consumer society made us vulnerable to an auto-totality as well, even if one perpetuated through more stealthy methods than communist regimes: “It would appear that the traditional parliamentary democracies can offer no fundamental opposition to the automatism of technological civilization and the industrial-consumer society, for they, too, are being dragged helplessly along by it. People are manipulated in ways that are infinitely more subtle and refined than the brutal methods used in the post-totalitarian societies.”

Havel’s proposal for breaking down the auto-totality was the act of “living within the truth.” Acknowledging truth was the precondition for political action to overcome oppression, beginning by casting off the internalized inevitability of the existing system. Living within the truth, wrote Havel, “is . . . an attempt to regain control over one’s own sense of responsibility.”

The idea of taking responsibility leads us back to Timothy Snyder’s core premise.

The value of Snyder’s work is so enormous because it simultaneously richly reveals historical developments, identifies and illuminates larger historical and transnational patterns at work, AND points toward a means of reclaiming the present. That pathway involves a “politics of responsibility” and a reimagining of the possibility of alternatives.

Havel wrote that “In a democracy, human beings may enjoy many personal freedoms and securities that are unknown to us, but in the end they do them no good, for they too are ultimately victims of the same automatism, and are incapable of defending their concerns about their own identity or preventing their superficialization or transcending concerns about their own personal survival to become proud and responsible members of the polis, making a genuine contribution to the creation of its destiny.”

Vaclav Havel called in “The Power of the Powerless” for citizens of the Czech Republic to “break through the crust of lies” and begin “living in the truth.” Fifteen years later, Havel was president of the Czech Republic. Agency matters.

Like Havel, Snyder calls upon us to contribute to the creation of our political destiny. No doubt, American democracy is under threat – perhaps not as overtly as democracy in Poland or Hungary today, and perhaps resting on stronger institutional foundations than democracies in those countries. But under threat nonetheless.

In our contemporary globalized environment, some Americans have been lulled by what Snyder calls a “politics of inevitability” – the notion that globalization represents a unidirectional march of the market economy, with attendant consequences for the distribution of wealth and power. We are simply along for the ride.

An alternative that has emerged in response identifies enemies within and without as the source of the perceived ills of globalization, and dangerously seeks to remove democratic constraints on the exercise of power in the service of defeating those enemies – the program, in other words, of “American First,” with its direct lineage to the America First Committee founded in 1940 to avoid letting “the Jewish race” drag the United States into World War II.

We seem to be confronted with unpalatable alternatives. We can be passive receptors of the forces of globalization, accepting as inevitable a deepening of economic inequalities and a loss of national policy autonomy. Alternatively, we face a looming authoritarianism that wages war on countervailing sources of power and criticism of the chief executive and empowers an oligarchy in the name of national “greatness.”

But we do not have to live either future.

We have to imagine alternatives.

Doing so involves reclaiming political responsibility by living the truth, supporting credible journalism, limiting our own vulnerability to manipulation via the internet and working to build civic networks.

Such efforts, undertaken by enough of us, can lead us back toward more robust democratic institutions and norms, enabling the country to once again have real debates over policy alternatives to address problems of economic, social, gender and racial inequality.

Students, Teachers and Democratic Accountability

This past week the Governor of Oklahoma and several state legislators pronounced that “you can’t spend what you don’t have” in response to the state’s teacher walkout, about to enter its second week.

As it turns out, the state budget is not chiseled in stone and handed down from on high; it is the product of the actions of the legislators themselves.

The real problem is that legislators are unwilling to raise the resources required to fund education adequately in Oklahoma and several other Republican-governed states, including Kansas, West Virginia, Kentucky and Arizona.

Adequate funding would require that legislators abandon their persistent and pernicious “small government” mantra, and that they place the needs of the people of the state above those of their wealthy corporate donors.

Across the United States, spending per pupil on primary and secondary education is not low by international standards. The U.S. comes out above average in spending per student, and slightly below the OECD average in terms of effort – that is, spending relative to GDP.

The U.S. spends about $11,400 per pupil on public education. Ultimately, the problem for public education in the U.S. is the unevenness of spending across states (as well as across localities within states).

While New York spends $21,200 per student, Utah spends less than $6600. Arizona comes in at $7489 and Oklahoma at $8082. Oklahoma’s spending per pupil is about $1000 less than Slovenia, a European country with GDP per capita not quite half that of Oklahoma.

After a decade of reduced funding for education, lopping off nearly a quarter of funding to education in real terms according to the Oklahoma Policy Institute, Oklahoma legislators in late March passed a $447 million revenue package to fund significant raises for teachers, support staff and state employees.

The Governor and legislators celebrated, considering their work done. Even though they’d fallen far short of the requests of the teachers to also reverse the massive cuts to school funding – so evident in large class sizes, crumbling textbooks and shortages of teachers and supplies alike — they called for teachers to express gratitude.

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Literature textbooks in use at Heavener High School in Heavener, OK, eastern Oklahoma close to the Arkansas border. Photo provided by Sarah Jane Scarberry to pbs.org.

Three elements of the revenue package are especially noteworthy.

First, this was the first tax increase passed by the Oklahoma state legislature in 28 years, the result of a 1992 referendum requiring three-fourths of the legislature to support a tax increase.

Second, the measure disregarded some major potential sources of revenue, such as the personal income tax, which has a top rate that has been cut repeatedly in recent years, and the capital gains tax deduction, which legislators so far contend is “off the table.”

Third, the revenue package materialized after the preparation of a mass teacher walkout. Only the pressure of the walkout produced results that the legislature had staunchly resisted for years.

Oklahoma legislators now express frustration that the teachers have not responded with expressions of gratitude and a return to the classroom. In addition to the Governor, who condescendingly referred to teachers as teenagers wanting a better car, other legislators have voiced visible displeasure with teachers for their persistence in showing up at the state capital in large numbers on behalf of their cause.

Legislators and the Governor also have resorted to the insulting and now reflexive tactic of claiming (with zero evidence) that protestors are paid agitators.

Why this reaction? Frequently reelected without little or no opposition, these legislators are uncomfortable with the concept of democratic accountability.

Though it may make legislators in Oklahoma, West Virginia, Kentucky and Arizona uncomfortable, democratic accountability is on the rise. The courageous Marjorie Stoneman Douglas High School students who started the March for Our Lives movement have given new life to accountability.

Teachers have been empowered by students, and state legislators best take heed.

 

The War on Regulation: Endangering Society, but also Undermining Markets

The New York Times reports this Sunday, April 1 on the administration’s plans to roll back regulations on auto emissions of greenhouse gases and on fuel economy standards.

Ironically and disturbingly, the proposed rollback surpasses the request of auto industry executives. Just days before the announcement, Ford’s Chairman and the company’s CEO called in a blog post for “CO2 reductions consistent with the Paris Climate Accord.”

But Ford’s CEO also earlier asked the new administration to reopen a review of Obama-era rules targeted at greenhouse gas emissions and ambitious fuel economy standards because of the supposed danger to jobs. The new administration was all too happy to seize on another opportunity to undo progressive action of the Obama Administration.

The motives of the current administration go well beyond an anti-regulation philosophy; there seems to be a strong inclination, for example, to cater to every desire of the fossil fuel industry. The same is true for financial services. And there is also the appeal to political supporters of rejecting scientific expertise and of getting government (and the professional civil servants that supposedly comprise the “deep state”) “out of the way.”

Is government really “in the way”? Is regulation no more than a “cost” to industry? Is there a zero-sum relationship between regulation to promote health, safety and environmental quality, on the one hand, and business profitability, on the other?

The financial crisis of a decade ago, now wiped from memory by anti-regulation activists, tell us unequivocally, NO.

If there is a single lesson of the financial crisis, it is that poor regulation can create economic vulnerability that far exceeds in cost the potential burden of industry compliance with well-crafted regulation. Policy makers seemed to learn that lesson in the immediate aftermath of the crisis, but rapidly unlearned it in the partisan conflagration and assault on regulation that followed.

The result was the — unfortunately successful — “government is in the way” narrative.

In the 1990s, scholars Michael Porter and Claus van der Linde established that environmental regulation could in fact create incentives for innovation that would ultimately offset the costs of regulation.

Others have developed and gathered evidence for the “innovation offsets” argument ever since. In a 2014 Centre for European Policy Studies examination of much-criticized European Union regulation, Jacques Pelkmans and Andrea Renda found that EU regulation could accelerate the rate of innovation in industry, particularly when regulation was designed with flexibility and deployed with minimal bureaucratic burdens.

Regulations governing recycling of vehicles reaching the end of their useful lives, for example, stimulate advances in vehicle design that make dismantling of autos easier at the end of their useful lives. Such regulation also fosters advances in materials recovery and reuse technology.

Similarly, European Union ecodesign regulations create incentives for manufacturers to develop more energy efficiency appliances.

In the U.S., meanwhile, in addition to weakening numerous environmental regulations, the administration has during the past year weakened the Financial Consumer Protection Bureau established in the aftermath of the financial crisis. Congress also has moved toward easing other financial regulations put in place to forestall a repeat of the 2008-9 financial disaster.

Along with hostility toward immigrants, anti-regulation sentiment has been at the forefront of the Brexit movement. Ironically, in a recent major speech on the British approach to Brexit, Prime Minister Theresa May inadvertently revealed that industry values regulation for the market certainty it creates. While extolling the virtues of Britain being able to “make our own rules,” May let slip the stunning contradiction that exporters recognize that having uniform European regulatory standards lowers the transactions costs of doing business: “businesses who export to the EU tell us that it is strongly in their interest to have a single set of regulatory standards that mean they can sell into the UK and EU markets.”

In the initial post in this blog I referenced the magisterial work of Karl Polanyi, The Great Transformation. Polanyi taught us that there is no such thing as a “self-regulating” market. Humans can only prosper when there are reasonable rules bounding markets.

This is why factory owners began to push for regulations on child labor and other behaviors that would render competition limitlessly brutal in the early decades of the Industrial Revolution in the UK.

Claims that markets are best left in their “natural” state emanate from fundamental misunderstandings about the impact and value of regulation. Well-crafted regulation reduces externalities such as water, air and other forms of environmental pollution, and can reduce systemic financial risk.

Efforts to pare back regulation in the name of profitability rarely account for the (often large, but difficult to measure) benefits accruing from carefully crafted rules — in the case of greenhouse gases, the ultimate benefit of planetary survival.

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Even beyond this obvious gain, markets cannot function effectively without good rules.

Simply put, society and economy alike will suffer from the bonfire of regulations.