Are Capitalists Bamboozling the Poor?
For lack of a better term I am dubbing it Woods's Law: whenever the private sector introduces an innovation that makes the poor better off than they would have been without it, or that offers benefits or terms that no one else is prepared to offer them, someone — in the name of helping the poor — will call for curbing or abolishing it.
Last time I noted the crusade against rent-to-own stores. This time it's something you may not have heard of: the tax refund anticipation loan (RAL). It works very simply: consumers borrow against their anticipated refund from the IRS, and then pay the loan back when their refund checks arrive. These short-term loans ranged from $200 to $7,000 in 2004.
So what's the problem? Well, plenty, according to the poor-people-are-idiots-who-can't-read-a-simple-form school of thought. The poor, it is alleged, are not given sufficient information about the features of the loan, and/or are being charged fees to borrow money for as little as a week to ten days that amount to unusually high annual interest charges.
A typical RAL, according to a recent study, involves a loan fee of $89 for a $3,000 loan, which comes out to an annualized interest rate of 108 percent. Now 108 percent annual interest is very high, to be sure, but of course no one is borrowing the money for a full year. It would make more sense for these borrowers to avoid the RAL, charge their expenses on a credit card, and hold a balance (if necessary) until the tax refund arrives, but people applying for RALs come disproportionately from groups with limited if any access to credit or additional credit. In 2004, fully a quarter of them had credit records containing at least one serious delinquency within the previous year alone. These are the people who would be directly harmed if RALs were no longer available to them, whether or not the activists seeking to deprive them of this option do so with their best interests in mind.
But there is always that radical possibility that the poor are capable of judging their best interests for themselves. Krystal Akons, an office manager in her mid-30s, told a reporter at an H&R Block office that she had consistently applied for RALs, since she could thereby pay her tax preparation fee more easily, simply deducting it from the loan money. A mother of four, she likes the ability to receive her money as soon as possible. "Sometimes I have bills that I need to pay right away," she said. She added that people should have the right to choose the RAL if it's right for them. "It's their money."
There are plenty of good reasons for someone who lacks other credit outlets to consider one of these loans. If someone needed to purchase an important item that for a limited time was marked down from $4,000 to $3,000, and the opportunity would be gone by the time he received his tax refund, he would be crazy not to pay the $89 for the RAL and get his money right away. The $89 would be a pittance compared to the $1,000 he would save on the purchase.
Gregory Elliehausen, of Georgetown University's McDonough School of Business, conducted a study in 2005 that found RAL borrowers to be fairly well informed about the process, contrary to accusations by critics of the practice. "Most refund anticipation loan customers provide evidence of some deliberation in choosing to obtain a refund anticipation loan. Nearly all customers were aware of electronic filing, and more than half of customers discussed with the tax preparer other options for getting funds from refunds faster. About half of customers recalled the refund anticipation loan fee, and most customers recalled some other information about the loan."
Even the fact that surveys have found some RAL borrowers less informed about the details of their recent loans is less alarming than it first seems, thanks to several important mitigating factors — among them the fact that as repeat users of the service they are in a position to understand it well enough without having to do much additional research each year. "Consumers with ample previous experience are often in a position to make purposeful and intelligent decisions without much deliberation," Elliehausen explains.
Moreover, it is not difficult to acquire the necessary information to make a sensible decision. "Information about refund anticipation loan fees and alternatives for filing and obtaining funds faster is readily available," according to Ellihausen. "Hardly any refund anticipation loan customers perceived unclear or insufficient information or hidden fees as problems."
"By far," Elliehausen noted, "most customers were satisfied with their most recent refund anticipation loan."
Whether consumers are satisfied or not, plenty of voices can be heard describing the practice as predatory and wicked. "Unfortunately when you've got low-income families getting a big chunk of money, the sharks come circling," said Chi Chi Wu, a staff attorney for the National Consumer Law Center (NCLC), in a 2005 interview.
Chi Chi Wu, by the way, has also advocated state regulation of RALs, or even — in quaint fidelity to Woods's Law — banning them altogether.
So the RAL is another example of an option from which the poor obviously benefit, but from which the activist community wants to rescue them. But there is a much more important point to all this.
Not a single critic of RALs I have come across has bothered to point out that the poor wouldn't be in this unfortunate situation at all if the government hadn't taken their money from them in the first place. Here we have private firms whose programs alleviate at least a portion of the suffering and deprivation caused by government policy, and it is these private firms, rather than government itself, that attracts all the condemnation!
In a recent report, the NCLC and the Consumer Federation of America complained that people who used RALs were "essentially borrowing their own money at extremely high interest rates." And what exactly happened to "their own money" that they don't currently possess it? The entire report contains not a single word criticizing the government for looting the poor and putting them in this vulnerable situation in the first place. Not one word. So closed are these alleged researchers to predatory public-sector behavior that it does not occur to them even to mention it, much less criticize it.
This bizarre oversight is only a tiny example of a much broader sociological phenomenon — let's call it Westley's Law, after Jacksonville State University economics professor Christopher Westley with whom I discussed it earlier this month. Even simpler than Woods's Law, Westley's Law holds that the public sector is always held to lower standards than the private sector. Thus the private sector is condemned for alleged misdeeds of which the government is far more consistently guilty and on a much grander scale. Or government failures are treated far more kindly — when they are noticed at all — than are failures by private actors.
Crime control is a good example. On a particular New York expressway there are people who make an illicit living cruising by and waiting for someone's car to break down. At that point, they stop, threaten the hapless motorist, and strip his car of anything that might fetch them money. They know very well that the police are completely incapable of doing anything about this, and that law enforcement will get involved only if physical harm is done to the poor driver. So these crooks are careful not to hurt their victims.
Once when I lived in Manhattan a friend who had come to visit me from Connecticut had his car stereo stolen while we were eating. A police car happened to drive by as we surveyed the car and realized what had occurred. We flagged him down and explained the situation. He told us it was a real shame, and drove away.
When the government tells people that they have absolutely no recourse in a matter of property theft, they typically accept it in a spirit of grim resignation. Now imagine a private firm saying the same thing: we agreed to protect you, but we're not going to lift a finger to track down the perpetrator, recover your lost item, or reimburse you for your loss.
Let's not even discuss the question of the percentage of crimes, even serious ones, that the New York police actually manage to solve, because it's frighteningly low. And let's leave aside the fact that according to a former New York police captain of my acquaintance, exactly nothing happens to a first-time car thief. In some places you need to steal a car five times before anything happens to you at all.
As I have wondered aloud in the past, what would be people's reaction if a private firm were this negligent, and so obviously incapable of carrying out its task? We would never hear the end of the lectures about the incompetence of the market and the need for strict regulation and oversight. State failure, on the other hand, to the extent that it is noticed at all, is a matter of head shaking and chuckling. Yes, occasionally a flagrantly corrupt official resigns, but no one is losing his job because the postal system is expensive and inefficient or the police department can't do anything about auto theft. The state has somehow managed to exempt itself from ordinary standards of behavior and performance, and many people have, without thinking, simply gone along.
We have heard a great deal about accounting irregularities in the private sector. It was in the news for months on end, particularly in 2002. Early this month, USA Today reported that the true United States budget deficit for 2005 was not the officially reported but certainly misleading $318 billion, but $760 billion — and, if Social Security and Medicare were included, $2.9 trillion. Is anyone being punished? Has anyone been fired? Has anything happened at all? These questions answer themselves. The item is already yesterday's news.
To review: the government loots a lower-class household to the tune of, say, $10,000 in a given year, deigns to return perhaps $2,000 of that money to its owner, and then, aided by the hopeless activist community, tries to paint private firms as wicked and dastardly for charging a $100 fee to accelerate the return of the slice of money the government has chosen to give back. That government has managed to corrupt our sense of justice to the point that it can perpetrate such a transparent fraud upon any fully conscious human being is yet another argument in favor of the free society and against the state.