I recently wrote that the ban on payday lending makes no sense for the simple reason that you can’t make people better off by taking options away from them.
Cheerleaders for the ban were crowing about a methodologically silly paper finding that “people don’t miss payday lending” while the data, such as it was, showed that some people certainly did miss having this option.
As luck would have it, I was tipped off by someone who read my FEE article to the existence of a new paper put out by the Federal Reserve Bank of New York on this issue. The authors looked at NC and Georgia, the two states thus far to ban payday loans. They conclude that “Georgians and North Carolinians do not seem better off since their states outlawed payday credit: they have bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 bankruptcy at a higher rate.
Furthermore, “This negative correlation — reduced payday credit supply, increased credit problems — contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as bounced-check ‘protection’ sold by credit unions and banks or loans from pawnshops.”
The paper also notes that banks and credit unions have apparently benefited from the reduction in competition.
