We have a decent amount of consumer debt acquired in no small part while I became a full time student sort of in the middle of adulthood. Our rates range from just under to just over 10% APR. I'm sure there are better rates for the more credit worthy, and I know that before I had the minimums automatically withdrawn, being late a couple days on a payment can result in rates being raised to nearly 30%. (Then you call and say, "Hey, WTF" and they go back down.) Pay day loans charge $15 for every $100 borrowed for two weeks, up to a maximum of $500. That is an APR of about 391%.
However, people getting payday loans could not qualify for a credit card, generally. So what options do they have? Here's some data from the pay day loans:
$100 payday advance with a $15 fee = 391% APRThe real problem is that the clients of the pay day loans are largely powerless. They are not able to give push back on price sufficiently to use the market to set the rate. Like not letting the market set the price for fresh water immediately after a natural disaster. The dehydrated consumer standing in the middle of a hurricane can't exactly negotiate.
$100 bounced check with $54 NSF/merchant fees = 1,409% APR
$100 credit card balance with a $37 late fee = 965% APR
$100 utility bill with $46 late/reconnect fees = 1,203% APR
Does anyone think the market can be trusted to set the maximum rate on payday loans? If not the market how does one assess a "fair" APR? (and this is the use of fair that Matt thinks is ridiculous I believe)
10 comments:
I don't know that I think the use of "fair" is ridiculous, I think it's irrelevant. I think it's an illusion. There's nothing fair about any of these things, there *is* such a thing as equal access and level playing fields. But a level playing field isn't going to make me have the same results in the 100 meter dash as Usain Bolt. It would be detrimental to all participants in track and field (competitors, coaches, fans, beer vendors, TV broadcasters, newspaper columnists, etc) if you just kept adding weight to Bolt's shoes until he and I were the same speed. The race would produce no imbalance, and without an imbalance there's no striving for more, and without the striving for more, there's no movement of wealth.
It's not a perfect analogy, but it kind of is. Here's where it's the same: taxing "windfall" (i.e. "arbitrary") kinds of profits (or profits that offend Liam for a reason he can't properly articulate), is putting weight on the better runner. It takes away anyone's incentive to use, patronize, reward or invest in the better company. The entire economy suffers (just like the entire track and field community suffers in the metaphor).
Here's where it's not the same: no one dies of starvation or lack of good health care if track and field succeeds as an "economy". In other words, the worst runner is not punished to the point of putting his kids in poverty.
So by allowing equal access and not interfering very much, you raise the water levels and all boats float. The *very* worst boats sink and people die. But the best boats do much better, the median boats to better, the mode boats do better, the mean boats do better, the top quartile of boats do better, the middle 50% do better, the bottom quartile does better. But that tiny fraction lives in cardboard boxes and drinks itself to death.
So what happens if you put just a *few* weights on Bolt (or a few regulations not allowing usurious loans)? Turns out you can reduce the number of boats which sink, and while you lower the water level, you can satisfy yourself that the lowering of everyone is worth it because *everyone* losing one dessert a year is worth even one person coming out of his cardboard box and living in an apartment. Everyone sane (or aware of it) thinks this is a good idea.
But you have to know when the price is too high. The problem is that everyone giving up something to bring the next guy out of the cardboard box gets more expensive over time. At some stage, there are still some guys in the boxes and everyone's going to have to give up having a healthy breakfast three times a week. Then it's harder to say it's worth it.
And the cost approaches the free capital in the economy, which means the last guy in the box is essentially of infinite cost to bring out of the box.
Unless you're a crazy person, or you haven't thought it through before, everyone sees this as true, and you just have to decide where your line is to be drawn.
I tend to take a long view, I want to maximize the average quality of life over the maximum number of generations of humans. This requires some larger tolerance of uncertainty about any one person's quality of life at any given time. I think Liam tends to take a shorter view and can't as easily tolerate the misery of one person today.
But this subtle argument is why I get angry when you guys say things like "Ronald Regan hated poor people." No, a more appropriate (and a more correct, and a nicer) way to understand it is that he cared about future poor people more than you do.
So we're all drawing our lines somewhere. I never knew about the 391% APR of payday loans (and I honestly hadn't even known much about payday loans, and I still don't really understand how they work) until you brought them to my attention. So I think I can tolerate making usurious APRs on payday loans illegal. I think this thing falls on the same side of the line for you and for me.
Matt, this is an articulate, intelligent, excellent comment. Among many fine points, your point that a more conservative person is not defacto less caring or moral is one that more liberal people need to internalize. I know many conservative people that do more volunteer work, give more to charity, and are generally more beneficial to the community than lots of more liberal folks I know, including myself. Many conservatives genuinely think the conservative route is a better way to help people.
I have a couple critiques, however. The most important is that in reality, no, there *is not* a level playing field. Even if there is for one second, as soon as you do better, your children are almost guaranteed a head start over the kids of the guy you outperformed. This is one of the reasons I think taxing inheritance of huge amounts of money is not a bad thing, for example. Family dynasties are one of the major mechanisms for distorting the playing field.
The second thing is I think you painted Liam's objection to "windfall" profits too broadly. If we are talking about oil companies recently for example, we are talking about one industry benefiting hugely, while the price of their product is negatively affecting the rest of the economy. I'm not saying those profits should or shouldn't be more heavily taxed, but its not as arbitrary as you made it out.
I second Josh's point regarding windfall profits. In fact, it's kind of starting to piss me off, and I would like you to stop it. You asked me about it once, I gave you an off-the-cuff response, you went nuts over that response, and now you keep referencing it as if it's the centerpiece of my economic philosophy.
Writ more clear: I believe in progressive taxation, and while I can see a justification for windfall profits, I am not sure they are good policy and I do not advocate for them. I've been consistent in that statement, and I would appreciate it if you would stop distorting my position here.
Liam, you defended windfall profits once while I've never bought that they even exist. You tried to draw the distinction between a company out-competing vs. getting lucky but I don't think there's a difference.
I don't recall that you softened that stance, and I think the idea of windfall profits is as dangerous a concept as any facing our economy. As such I don't think there is such a thing as a lukewarm stance on them, if you're for them on any level you are advocating a new type of intervention by the government that didn't exist before. They are not a type of graduated tax, they are a new kind of tax, and one that asks the government to make a qualitative distinction between various market vagaries. This matters and it's very, very important. If you want to not make this a bone of contention, at least argue why it's not a very, very different kind of government act on commerce than has existed before.
Josh, I don't know how to level the playing field given the effect you note of kids getting an advantage generation to generation. What if your parents want to leave you their land and house? You deserve to get that house you grew up in. It would be a tragedy to your family to lose that land (in my supposition). What if my parents want to do that, too? Are you saying that it's okay to make that not possible for me just because my parents got unlucky enough to have bought a house in the D.C. area?
I think you and Liam are not understanding the implications of windfall taxation. It is not a case of just that the oil companies happen to have made a big profit, the windfall concept supposes that they just got lucky on some level. As if they didn't invest in a gamble exactly like every other company ever. You're letting the government decide which profits are earned versus which profits are unearned. It supposes all sorts of things that are demonstrably untrue, not the least of which is that the government has some kind of magic knowledge about what is earned versus what is not. It also supposes that there *is* such a thing as earned or unearned money. It's a *fundamentally* new kind of authority you're giving the government, and I think it's plainly a scary one.
I don't know that I think the use of "fair" is ridiculous, I think it's irrelevant. I think it's an illusion. . . . I think I can tolerate making usurious APRs on payday loans illegal. I think this thing falls on the same side of the line for you and for me.
We can not call it "fair" if you like, but we have to set a maximum interest rate don't we? In the post I provided other fees that similarly situated individuals face. From that standpoint it sounds like the 391% is reasonable. We could convene a panel of economists and have them vote. We could ratchet down the usury rate every year until payday loan places start to close.
As for rest of Matt's post, I don't think the race analogy works because the goal of a race is to find out who's best, that's not the goal of an economy. Conceptually, we could certainly over burden everyone with caring for the poor, but oh my goodness, we are far from that. You could literally double the top tax bracket and there would still be plenty of incentive to make lots of money.
Finally, I think Ronald Reagan hated poor people because vilifying poor people was a major plank in his campaign.
Matt,
I don't recall that you softened that stance
That is because you simply weren't paying attention to the original email. I never had anything approaching an unqualified endorsement. From my original email:
"I generally agree that putting an upper cap on profits is problematic both philosophically and pragmatically. [...] There might be a better solution to the perceived problem." My conclusion was, "it's fundamentally misguided public policy."
My support of the proposal was limited to a very vague "I imagine it could be done," or "in theory it could work," with about a million caveats. You ignored all the caveats and qualification and leapt straight to "Liam, you're a crazy socialist!"
But I never ever ever advocated it and stop saying I did.
you are advocating a new type of intervention by the government that didn't exist before.
This is actually wrong. Windfall/excess profit taxes in the US date back to at least WWI. Not that it justifies them, but it's not in the least new.
I think you and Liam are not understanding the implications of windfall taxation. [...] It's a *fundamentally* new kind of authority you're giving the government, and I think it's plainly a scary one.
Okay, I think we agree that with windfall taxes, the government is basically playing Willie Sutton and just stealing money from some attractive target, because they can and because they need money, and because the source is flush and not very sympathetic in the public eye. But what's new there? The government already has had that authority for years. Let's say, hypothetically, that the government decided to treat all funds held in escrow by real estate brokers as taxable revenue. And let's say that they decided to make that policy retroactive for ten years. Gosh, that would be awful for that industry, wouldn't it? It would probably drive a lot of people out of business, and would make that industry a lot harder to be profitable. What would the consequences be? Well, those that survived the original hit would suck it up and figure out how to get by with a lower profit margin, or they would pass along the costs to their customers, or they would find a technical work-around, or they would get politically active and change the law. (I recall that this is not actually hypothetical; how did it work out in reality?)
My point is that tax policies can indeed be onerous to certain industries or classes of taxpayers. Some taxes are confiscatory. There are bad policies out there now and in history. But the consequences have not been apocalyptic. They may slow growth in some cases, they may even prevent growth in extreme cases. But the market is highly resilient, and policies which would hurt one industry or class need to be judged against whatever benefit they provide. For example, in WWII, war profiteering taxes were used to limit the cost of the war. Windfall profit taxes on oil to fund some national priority, like the war effort might be worth the damage it would cause the market. Note that these taxes were temporary and limited to the duration of the crisis.
I don't know enough about the historical facts to judge whether these were good or bad policies in 1944; I only use them as examples to illustrate the point that taxes have two sides on the balance sheet and the cost-benefit analysis must be applied.
That is because you simply weren't paying attention to the original email.
Okay, my apologies, I mischaracterized your position.
But what's new there? The government already has had that authority for years. Let's say, hypothetically, that the government decided to treat all funds held in escrow by real estate brokers..
Yes, this was a proposal and was struck down in Virginia. I'd have to look up why, I don't recall the particulars, but perhaps it was because it seemed strange to tax people who didn't make money. And that was not this. This is the government re-defining "transaction", windfall is the government defining "too much money" or "lucky". They're both wrong, but they are different.
That the government tries to do this from time to time doesn't make it untrue that it's truly different than a graduated income tax.
but we have to set a maximum interest rate don't we?
I guess that's what I was saying when I was agreeing that payday loans at 391% APR was usurious.
I don't think the race analogy works because the goal of a race is to find out who's best, that's not the goal of an economy.
Yes it is, though. You are determining who's best by the accumulation and distribution of wealth. It's the right analogy, the best runner and the best segment of the economy is rewarded for winning.
The purpose of an economy is to efficiently produce goods and services, which benefits the participants in the economy.
We have all of these rules governing possessions and trading goods and services. Everything from the basics of property rights to insider trading laws. The point of all of those rules is to make sure that the economy is most efficiently producing goods.
It is not a contest to see who can most effectively navigate the rules. The rules are there for a purpose.
In other words, a usury rate or a tax policy is good or bad, not based on whether in inhibits the capitalists in the top income brackets from achieving; it is good or bad based on whether it inhibits the society's ability to efficiently provide goods and services.
[T]axing "windfall" (i.e. "arbitrary") kinds of profits . . . is putting weight on the better runner. It takes away anyone's incentive to use, patronize, reward or invest in the better company. The entire economy suffers (just like the entire track and field community suffers in the metaphor).
Taxing windfall profits undeniably punishes the top performer and is analogous to putting weights on Bolt's feet. However, I would evaluate whether taxing windfall profits should be done as follows: IF taxing windfall profits takes away anyone's incentive to invest in better companies THEN taxing windfall profits is a problem. If, on the other hand, taxing corporate profits that meet some threshold, or profits that raise the public ire does nothing to the incentive for people to invest in better companies, then it is not a bad practice.
Would investors say, "Well, you know the oil industry is sometimes so profitable that the federal government confiscates some their end of the year profits, so, that's an industry you should stay out of. Stick to something like newspapers that are not nearly so profitable."? I find that hard to believe.
I also find it hard to believe that people will be disinclined to earn over $250,000 a year because they have to pay higher taxes on the income above $250,000. "Well, I could bill another 25 hours this year, but then I'll be bumped up a tax bracket and only take home 65% of my gross instead of 72% of my gross on the portion between 180K and 250K, so . . ." Strikes me as silly. People moving from one tax bracket to another don't like paying higher taxes, sure. But the fact that they pay higher taxes is not keeping them from earning more money. (I can't be as confident about windfall profit taxes, but it seems similar.)
Matt,
This is the government re-defining "transaction", windfall is the government defining "too much money" or "lucky".
I dunno. I just can't bring myself to get worked up or care about this. I am amazed that I may perhaps have a more cynical view than you do regarding taxes. Ultimately, I view taxes as the old saw about three wolves and a sheep voting on what to have for lunch. By which, I mean that most taxes are arbitrary and targeted towards whoever is weakest and least available to avoid them. It's basically a kleptocracy.
I'd like to see a tax system that is fair, but as we said earlier, "fair" is a mostly meaningless concept. So I'll settle for one which works, and hopefully is guided by some general principles (i.e. progressive). That's not really what we have. Corporations pay no income tax, usually. Marriage penalty, mortgage exemptions, capital gains -- it's all a hodgepodge. When I see someone hit by a particularly arbitrary tax, like realtors or oil companies or the AMT, I kind of sympathize with their plight, but given how fucked-up the whole system is, my righteous indignation gland just won't activate. And I can't gin up the principled objection given how bizarre the system is.
I'll put it this way: if we had a system where corporations paid a consistent, meaningful and progressive income tax, then I might be more concerned about redefining "too much money."
Post a Comment