Several friends of mine are involved in a ballot initiative to place an interest rate cap on loans made in the state of Missouri. The legislation would bar interest rates of over 36%, and is expected to lead to the elimination of the Missouri payday lending industry as providers. While I am sympathetic to claims that payday lenders are often abusive, I am not sure that the proposed solution will be effective. Indeed, a prohibition on loans bearing high interest rates is sure to force consumers into markets for other short-term financial products, including those products that exist in black markets.
It is worth seriously considering the implications of a black market. Surely, consumers who need short-term emergency finance in the status quo are often desperate, and will seek out desperate solutions. Where legal means of satisfying their desires fail, they will turn to a black market. We know this from our prior experiments with Prohibitionist policies, particularly alcohol prohibition.
What will the effect of this black market be? We don’t know, but it might be a fair guess that mafia loan sharks might emerge, tempted by the lure of black market profit margins. Worse, desperate consumers will decide that the law does not meet their needs and make the conscious decision to disregard the law, seeking out providers of black market financing. Certainly, all the problems that consumers face in the status quo payday lenders can only be worse in a black market, and injured parties may be more unwilling to seek redress through legal processes.
I am suggesting that as a society we evaluate carefully the kinds of prohibitions we are willing to tolerate. Alcohol prohibition is a classic example of when black markets created a society at war with itself, unable to tolerate the shackles of its own laws. This was not just because people chose to continue producing and consuming alcohol; it was also because the enforcement of alcohol prohibition further fractured society by creating black markets, places where no government can hope to long retain the consent or the good will of its own citizens.
Will a de facto ban on payday lending companies create a Missouri where citizens, desperate to exercise their own rights to economic liberty, begin looking at the law as a hindrance to a civil life? I am afraid it will.
There are other solutions to the problems faced by the poor and politically weak that I think we can pursue. I am a strong advocate of increasing the access of ordinary people to the legal system, where they may pursue claims of civil and criminal tort. I think that this sort of empowerment will have a transformative effect on society by allowing more people to have access to the fair and level playing field that we call the law.
Society benefits when we bring more people to participate in the legal structures that make society possible. Criminalizing conduct that we know people will do anyway drives people away from the law and undermines society’s ability to govern itself. I hope Missouri engages this ballot question with a willingness to critically examine all possible avenues, and particularly ones that shirk prohibitionist mechanisms in favor of democratic engagement and participation.
Eapen Thampy is the executive director of Americans for Forfeiture Reform.