Oregon Senator Jeff Merkley made his bones by removing Oregon payday lenders from the state by limiting their potential revenue to the point where they couldnâ€™t do business. The result was a loss of several hundred jobs, millions in labor income, and many more millions in GSP.
And it didnâ€™t change a single thing about payday loan usage in Oregon. Just like Prohibition, demand for the product didnâ€™t just vanish, but supply did. And just like Prohibition, people were forced to go to other sources for the product they wanted, and pay more for it. You cannot limit demand by limiting supply, and if youâ€™ve watched five minutes of â€œBoardwalk Empireâ€, youâ€™d know what I mean.
Unlike Prohibition, during which people didnâ€™t really need to drink, you can only go so far in modern society without access to credit. Very few products lend themselves as well to a consumer making an informed choice as acquisition of credit. Like other staples (food, gas), people must have credit for some reason or another. Folks are going to be smart about where they get their food and gas, choosing options that make the most sense to them. They do the same thing for credit, because itâ€™s also something they routinely need.
A free market helps solve this like nothing else â€“ itâ€™s the cornerstone of what makes our country great. Access to the free market is great for the consumer, because a free market lowers prices.
Also unlike Prohibition, however, alternative lending sources are legal.
Yet Sen. Merkley wants to kill legal sources of credit and kill the free market, in a misguided effort that strips Native Americans of the right to generate income for their people.
Havenâ€™t the Tribes been through enough without a meddling politician trying to rob them of the right to earn a living?
Payday Loan Options
Iâ€™ve been writing about payday loans for years and been involved in all aspects of the business. No matter what opponents say about this product, the truth cuts through: consumers like the product, consumers need the product, consumers understand the product, and every time their free choice to use it is taken away, it makes things worse for them. Payday loans are neither the most nor the least expensive choice for short term credit, yet it is a choice, and America is about choice.
12 million American use the product every year. 94% of all loans are repaid on time. Consumers donâ€™t care about APR, they care about flat pricing. The number of complaints registered with state agencies is less than 0.1% of all loans made.
When states ban payday lending like in Oregon, customers go elsewhere for their product. Some companies have set up payday loan operations offshore. Others have set up operations in states like Utah, where the transaction nexus allows the Utah lender to apply Utah law. And in recent years, some sovereign nations aka Native American Tribes, have formed lending companies.
In the case of sovereign nation lending, the legal method is for a Tribe to create and own a lending company that operates on Tribal land. As with casinos, they can take out loans from U.S. entities to finance those operations, and partner with non-Tribal entities in ownership deals. The laws of the U.S., which include treaties going back well over a hundred years, grant tribes immunity from state laws with very few exceptions. Courts in several high-profile cases have repeatedly sided with this argument throughout history.
Tribal payday lending is legal. Period.
Sen. Merkley, however, wants to prohibit all forms of legal payday lending. He claims payday loans â€œdestroys familiesâ€, despite there being absolutely no evidence whatsoever to support such a silly claim. This is the kind of hyperbolic language Merkley has used since he destroyed the industry in Oregon in 2006.
I ask Sen. Merkley to support that claim with definitive evidence.
What destroys families, particularly Native American ones, is when they arenâ€™t permitted to build a legal business after suffering decades of poverty.
Merkley also claims that operating a Tribal lending business â€œisnâ€™t moralâ€.
This is an unsupportable claim from both a pragmatic and philosophical standpoint. To act morally, one must show intentions, decisions, and actions that are good, rather than bad. The intention to assist someone with short term credit, with terms and conditions clearly disclosed is good. The intention to profit from that endeavor is unquestionably moral within the capitalist system, as America could not function without the free exchange of currency for goods and services provided. The free decision to offer the loan transparently and within the law, and the free decision to borrow with intent to repay, are also good, as they are based in the concept of freedom, itself a moral concept. Finally, the action to risk oneâ€™s own capital to loan to another and receive interest in return within the law, and the action to take that loan and repay it based solely on a promise with no actual collateral, is as moral an act as youâ€™ll find.
The Free Market Is Moral, Politicians Are Not
I need not remind readers of Americaâ€™ regrettable history regarding Native Americans. But how great is it that generations later, Americans and Native Americans can engage in the free flow of commerce, in the form of casinos (entertainment for a fee) and lending (credit for a fee). Sen. Merkley wants to spoil that.
Sen. Merkley has staked out a position that serves no purpose other than to harm Native American lenders, and to harm the consumers who freely choose to borrow from them.
How is that, in any way, moral?