Payday Loan Industry in the News

Some legislators held a hearing the other day on the harms caused by the payday loan industry. Combest has linked toseveral news stories about the hearing. Although payday loan companies may not be popular, and defending them might not be the easiest road to take, but here at the Show-Me Institute, we have written a few pieces in defense of them.

I think one of the commenters in the Columbia Daily Tribune story accidentally made our point when he or she said that payday loan companies are “legalized loan sharks.” Yes, they are, and if you ban them or regulate them out of existence, they will be replaced by illegal loan sharks. Former Show-Me Institute policy analyst Justin Hauke said it very well in his article when he summarized:

At least with a payday lender, default is settled in court. In the black market, it usually involves a crowbar.

I found it somewhat unbelievable that an economics professor advocated that people who loan money at high rates, because of the heavy risk that this market entails, should go to prison:

In a rebuttal, Bill Black an associate professor of economics and law at the University of Missouri-Kansas City and expert on fraud, said the profit earned by payday lenders is equal to a “giant sucking sound” of dollars headed out of the state. The interest paid to the lenders is money not going to buy groceries, pay utilities or cover rent. It’s a financial black hole, he said.

“In any period of human history other than about the last 15 years, it would have been a crime,” Black said of the lending practice. “And people who charged those interest rates would have been in prison, which is where they belong.”

So, let me get this straight. If two adults engage in a voluntary loan transaction, in a free country like ours, one of them should go to prison? I can’t imagine what other areas of our life Professor Black supports regulating. Based on the above statement, I can’t imagine any aspect of our lives the government wouldn’t belong in. Just terrifying.

Snow White and the Seven Gift Cards

The Federal Reserve, like a knight in shining armor, is riding forth to protect consumers from a fearsome dragon: gift cards that expire within five years from date of purchase.

If retailers are not informing customers about the terms and expiration dates of the cards, I can understand a regulation like, “Gift cards must state expiration date and applicable fees.” I have no idea where the five-year rule comes from, though, or why retailers should have to conform to it. It sounds like somebody’s fairy tale fantasy of what gift cards should be: No gift card shall turn into a pumpkin before the stroke of midnight.

While the Federal Reserve is granting people’s wishes, I hope they will let Prince Charming know that I can be reached at [email protected].

Charter Schools Still a Good Choice for Missouri

 

For more than 20 years, charter schools have been providing parents across the nation with an alternative to the traditional public schools that might otherwise have been their only educational option. As of 2009, 40 states and the District of Columbia had authorized charter schools, and more than 4,700 such schools served more than 1.4 million students throughout the country. Many of these schools specialize in meeting the needs of a specific type of student — such as those who live in impoverished communities, show poor academic performance in a traditional setting, or have particular academic gifts or interests — and charter schools usually require significantly less taxpayer funding per student than their traditional counterparts. Charter schools are so popular that, nationwide, more than 365,000 students are on waiting lists because of the lack of available seats.

Given the popularity of this type of reform, and the continuing discussion of charter schools in Missouri, the Show-Me Institute commissioned a study to determine what recent research (published between 2004 and 2008) has shown regarding the impact of charter schools on students’ academic performance.

The highest-quality studies show that charter schools in New York City, Chicago, and Boston appear to improve their students’ academic performances dramatically. Most of the other studies suggest that, although students tend to struggle during their first year after transitioning into a charter school, and although it takes most such students a couple of years to match the academic performance of nearby traditional public schools, charter schools on the whole are performing as well as, or slightly better than, nearby traditional public schools. The research also suggests that competition from charter schools can, in some cases, produce a slight improvement in the academic performance of traditional public schools — although the performance of traditional schools more frequently remains unchanged. Finally, the research shows that the impact of charter schools is not uniformly positive. One study of North Carolina’s charter schools suggested that they were lagging behind traditional public schools, and that student performance in the traditional public schools had dipped slightly as well.

The scholars who produced the Show-Me Institute’s study did not have access to research that looked specifically at how Missouri’s charter schools were performing — but, fortunately, Stanford University’s Center for Research on Educational Outcomes recently published a paper offering just this sort of analysis. The Stanford study revealed that, taken as a whole, Missouri’s charter schools are attracting students who were underperforming in their traditional public schools, and that Missouri’s charter students are realizing larger academic gains than their counterparts who remain in traditional public schools.

It is comforting to have evidence that Missouri’s charter schools are helping to improve the academic performance of students who were struggling in traditional public schools. Even more essential, however, is the fact that charter schools give many parents educational choices that their income level might not otherwise afford them. While wealthy families can afford tuition costs for private schools that cater to the specific environment or curriculum they want for their children — such as an emphasis on safety, discipline, language immersion, or college preparation — charter schools can offer parents these same features without many of the additional costs associated with private schools. Thus, the encouragement of charter schools continues to be a desirable policy for Missouri, creating avenues to success for our state’s parents and students.

Dave Roland is an expert on school choice programs and a policy analyst with the Show-Me Institute.

 

SMI Releases New Study of Charter School Effectiveness

Today, the Show-Me Institute released a study, written by Texas A&M University economics professors Timothy Gronberg and Dennis Jansen, reviewing research published between 2004 and 2008 about the effectiveness of charter schools. Don’t have time to read the full study? Here’s a link to the four-page briefing paper! Too lazy to read four pages? We’ve also published a short op-ed that hits the high notes!

A Tree Grows in Kansas City

I agree with this quote about urban farming from an article in the Pitch:

“I’m hoping for more availability and enthusiasm for local food in Kansas City — seeing a code that allows growers to sell and connect with potential buyers. Then local food will grow all on its own,” said Rachel Hogan, who recently completed a year-long internship on a series of organic farms in Missouri and is looking to help develop community gardens in Kansas City.

Farmers should be able to sell what they grow, regardless of whether they live on a rural farm or in a residential area or city. Get rid of the barriers to urban farming, and more people will pursue it.

Some people would be content if government just got out of the way, but other activists are asking the city of Kansas City to promote local gardening actively:

Residents suggested that new neighborhood trees planted by the city could be fruit or nut trees; land could be designated for agricultural purposes similar to park land; organic practices could be mandated for urban farms; and changes to the zoning code could provide guidance for would-be farmers.

Let’s look at those suggestions one at a time: I don’t see anything wrong with planting fruit trees, if the city is going to be planting trees anyway. It could be a problem if the fruit trees require more care than the trees Kansas City would normally plant, or if it’s cumbersome to remove the fruit that falls. Community gardening enthusiasts could probably come up with solutions to those issues.

I’m still opposed to designating public land for agriculture. That gives local agriculture an unfair advantage over other activities — cities don’t give out free land for bakeries or pharmacies. As for the argument that agriculture is special because everyone will depend on local food in the case of economic collapse, everyone would depend on local everything in that highly unlikely scenario. We couldn’t bring in bread from other places if disaster struck, so we might as well start subsidizing the bakeries. If you buy that argument for public farmland, you’re agreeing to local subsidies for every business.

Mandating organic practices is another policy that Kansas City would be wise not to pursue. When you want people to feel free to farm in the city, the last thing you should do is put a lot of extra requirements in their way.

And, finally, I don’t know what specific “guidance” activists want to impart through zoning code changes. Whatever it is, there is probably a less coercive way to guide farmers. People who want guidance usually ask for help or advice — not for an order from the city.

Large Counties Should Reduce Their Commercial Property Tax Surcharges

In 1985, Missouri changed the way that local governments tax commercial and industrial property. Voters approved eliminating the personal property tax on business merchandise and inventory, and replaced it with a surcharge on the value of commercial real estate. That year, every Missouri county and the city of Saint Louis calculated their new respective surcharges at a revenue-neutral level of replacement for the discontinued business property taxes. Among the reasons for the change was a desire to base the tax on the value of real estate, which is more consistent than ever-fluctuating inventories. The change, passed through an amendment to the state’s Constitution, was explicit that the replacement levy calculated by the counties could not be raised. However, the change also oddly mandated that only voters — not local elected officials — could reduce the tax. So, the commercial surcharge is at odds with the mechanics of other property taxes in Missouri, with rates that fall as assessed valuations rise.

The timing of this change is important. In 1985, the collar counties around Kansas City and Saint Louis were far smaller than today. At that time, the city of Saint Louis, Saint Louis County, and Jackson County drove the state’s economy more than they do now — although their role is still substantial. Collar counties such as Platte, Cass, and Clay in metro Kansas City, and Saint Charles, Jefferson, and Franklin in metro Saint Louis, had less business and industry than they do now. Consequently, when they set their commercial surcharge rates at the revenue replacement level, those rates were, and still are, substantially lower than in Jackson County and Saint Louis. Over time, various factors — including the population growth in the suburbs, and the prohibition on local councils lowering the surcharge rate — have combined to turn the high commercial surcharges into a competitive disadvantage for our largest counties.

Jackson County set its rate in 1985 at $1.44 per $100 of assessed commercial valuation. By comparison, Cass County’s rate is much lower, at $0.54, and Platte County’s is a mere $0.36. Only Clay County bucks the trend, with a surcharge of $1.59, likely attributable to the significant inventory taxes it received prior to 1985 from the Ford plant within the county. On the eastern side of the state, Saint Louis County set a rate of $1.70 per $100 of assessed commercial valuation. The city of Saint Louis set its at $1.64, while Saint Charles set a rate of just $0.53, and Franklin and Jefferson counties have rates even lower than that.

Assessed valuations have grown enormously since the tax was introduced. For example, the commercial assessments in Saint Louis County increased by 145 percent between 1985 and 2008, from $2.5 billion to $6.1 billion, although in Jackson County they increased 74 percent between 1997 and 2007.  The surcharge rates have never been reduced to offset that rise, as happens with other property taxes. Their lower commercial surcharges are one of the reasons that collar counties, such as Saint Charles, can take a harder line on issuing tax incentives than Jackson County or Saint Louis can — their tax rates are already low enough to serve as an incentive for businesses to locate there. The combination of a high tax rate, and the difficulty involved with reducing it, puts our largest urban counties at a competitive disadvantage with the rest of the state, and hurts business growth in our major metro areas.

This is a problem, but a problem without blame. These differences were probably not a big deal in 1985, when the tax alteration had a neutral effect for Missouri businesses, more of which were located in central business districts. But it is a major problem now. Reducing rates as commercial assessments rise is simply an issue of fairness. It would not lead to any tax revenue decreases, but would simply involve treating the commercial surcharge like other property taxes in Missouri.

Another issue with reducing the tax would be, perhaps, more complicated. Lowering the commercial surcharge rate could both spur economic activity in our largest counties and reduce the perceived need for tax incentives. Frankly, from a government revenue perspective, every dollar lost to the surcharge reduction could be replaced by a reduction in the tax incentives that have been given to select businesses. This would be revenue neutral for government, and still improve the overall economic environment. I believe that reducing the surcharge rate would lead to increased government revenue in a number of ways, but one does not have to assume a change in tax revenues in order to understand the benefits of this change.

The elected officials in the city of Saint Louis, Saint Louis County, and Jackson County should place surcharge tax reduction proposals on the ballot so that voters can have a say in making their region more economically competitive. The state legislature should then authorize a vote on changing the Constitution to allow the commercial surcharge to be reduced as assessments increase, like for other property taxes. These changes would help grow Missouri’s economy, and everyone benefits from that.

David Stokes is a policy analyst with the Show-Me Institute, a Missouri-based think tank.

 

Film Tax Credits Are Bad for States

The new George Clooney film, Up in the Air, premiered at the Tivoli in Saint Louis over the weekend. Many are using the event as an opportunity to promote film tax credits, to be used as a means to bring more film productions to Missouri. John Combest links to a video on KMOV about the subject.

I could support the film tax credits if they actually did attract money from outside of Missouri. But, as I have blogged previously, this just doesn’t happen; states tend to spend more attracting filmmakers with tax credits than the filmmakers generate in the state. I have not been able to find information about how much money Up in The Air generated for Missouri, but I would not be surprised if that number is less than the $4.5 million in tax credits that it was awarded. I will continue to look for this information.

Instead of film tax credit programs, Missouri should spend its money on programs that create jobs that are better-paying and longer-lasting. We see from the KMOV video that these film tax credits do not result in sustained job creation. Certainly, many St. Louis residents are cast as extras in these films, but these jobs are low-wage and temporary. According to the casting call for Up In the Air, extras were compensated only $7.05 per hour (before taxes) and they were asked to work for just one day. Aspiring actress Adrienne Lamping was quoted in the video saying that she got to work on set for a week, but discloses that she does not have an acting job lined up in the future.

I understand why states like Missouri want to attract filmmakers. Certainly, it’s exciting for the hoi polloi to recognize their local haunts on the big screen and to spot celebrities like George Clooney. Unfortunately, however, almost nobody discusses the sheer cost of these programs.

Contrary to Popular Opinion, Health Care Does Follow Free-Market Mechanisms

On Sunday, one of my favorite economists, Greg Mankiw, used basic economic concepts to describe how the government reimbursement system distorts the health care market:

If a government policy increases the demand for a service, the price of that service tends to rise. If the government prevents prices from rising, shortages develop. The quantity provided is then determined by supply and not demand. In the presence of such excess demand, the result could be a two-tier market structure.

Mankiw’s point is that, by failing to reimburse providers for the full cost of providing services, the government is creating an artificial shortage. Some health care providers will stop seeing Medicare and Medicaid patients because they lose money on the services that they provide to them. The Mayo Clinic is already doing this. Unless the government starts to reimburse fully for the services performed, more providers will follow Mayo’s example.

Mankiw continues. Here, he describes the aforementioned two tiers of the market:

Consumers who can somehow pay more than the government mandated price will be able to purchase the service, while those paying the controlled price may be unable to find a willing supplier.

In other words, patients who rely on government reimbursements (i.e., Medicare and Medicaid patients) will have difficulty accessing services, but those who pay out of pocket will not.

I have seen this happen in my professional experience. Before I started working at the Show-Me Institute, I worked as an analyst in the business strategy department at a major health care system. In our expansion, we deliberately avoided populations with high proportions of Medicare and Medicaid patients. Instead, we targeted populations that were concentrated with fee-for-service patients, because they would pay for their services in full.

Parenthetically, this government reimbursement system raises health care prices. Providers charge more to fee-for-service patients then they would in a non-distorted market. In order to stay in business, they have to make up for those patients who cannot afford to pay more than the government mandated price. It’s just like how retail stores increase their prices in order to compensate for losses due to shoplifting.

I like Mankiw’s post because it illustrates how, contrary to popular opinion, health care does follow free-market mechanisms. Health care is subject to the same laws of supply and of demand as any other market. When the government intervenes, it creates a price floor or a price ceiling, and a shortage or a surplus.

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