Why Doesn't Someone Undercut Payday Lending?

A payday loan works like this: The borrower received an amount that is typically between $100 and $500. The borrower writes a post-dated check to the lender, and the lender agrees not to cash the check for, say, two weeks. No collateral is required: the borrower often needs to show an ID, a recent pay stub, and maybe a statement showing that they have a bank account. The lender charges a fee of about $15 for every $100 borrowed. Paying $15 for a two-week loan of $100 works out to an astronomical annual rate of about 390% per year. But because the payment is a "fee," not an "interest rate," it does not fall afoul of state usury laws. A number of state have passed legislation to limit payday loans, either by capping the maximum amount, capping the interest rate, or banning them outright.

But for those who think like economists, complaints about price-gouging or unfairness in the payday lending market raise an obvious question: If payday lenders are making huge profits, then shouldn't we see entry into that  market from credit unions and banks, which would drive down the prices of such loans for everyone? Victor Stango offers some argument and evidence on this point in "Are Payday Lending Markets Competitive," which appears in the Fall 2012 issue of Regulation magazine.
Stango writes:

"The most direct evidence is the most telling in this case: very few credit unions currently offer payday loans. Fewer than 6 percent of credit unions offered payday loans as of 2009, and credit unions probably comprise less than 2 percent of the national payday loan market. This “market test” shows that credit unions find entering the payday loan market unattractive. With few regulatory obstacles to offering payday loans, it seems that credit unions cannot compete with a substantively similar product at lower prices.

"Those few credit unions that do offer a payday advance product often have total fee and interest charges that are quite close to (or even higher than) standard payday loan fees. Credit union payday loans also have tighter credit requirements, which generate much  lower default rates by rationing riskier borrowers out of the market. The upshot is that risk-adjusted prices on credit union payday loans might be no lower than those on standard payday loans."

The question of whether payday lending should be restricted can make a useful topic for discussions or even short papers in an economics class. The industry is far more prevalent than many people recognize. As Stango describes:

"The scale of a payday outlet can be quite small and startup costs are minimal compared to those of a bank. ... They can locate nearly anywhere and have longer business hours than banks. ... There are currently more than 24,000 physical payday outlets; by comparison there are roughly 16,000 banks and credit unions in total (with roughly 90,000 branches). Many more lenders offer payday loans online. Estimates of market penetration vary, but industry reports suggest that 5–10 percent of the adult population in the United States has used a payday loan at least once."

Payday lending fees do look uncomfortably high, but those with low incomes are often facing hard choices. Overdrawing a bank account often has high fees, as does exceeding a credit card limit. Having your electricity or water turned off for non-payment often leads to high fees, and not getting your car repaired for a couple of weeks can cost you your job.

Moreover, such loans are risky to make. Stango cites data that credit unions steer away from making payday loans because of their riskiness, and instead offer only only much safer loans that have lower costs to the borrower, but also have many more restrictions, like credit checks, or a longer application period, or a requirement that some of the "loan" be immediately placed into a savings account. Credit unions may also charge an "annual" fee for such a loan--but for someone taking out a short-term loan only once or twice in a year, whether the fee is labelled as "annual" or not doesn't affect what they pay. Indeed, Stango cites a July 2009 report from the National Consumer Law Center that criticized credit unions for offering "false payday loan `alternatives'" that actually cost about as much as a typical payday loan.

Stango also cites evidence form his own small survey of payday loan borrowers in Sacramento, California, that many of them prefer the higher fees and looser restrictions on payday loans to the lower fees and tighter restrictions common on similar loans from credit unions. Those interested in a bit more background might begin with my post from July 2011, "Could Restrictions on Payday Lending Hurt Consumers?" and the links included there.

Long Term Payday Loans: Grab satisfactory money to win over the fiscal issues

Long Term Payday Loans

Do you have deficiency of finance to cope with the current situations? Looking for exterior monetary shore up to fulfill some chief fiscal necessities? At such point of time, the stipulation of long term payday loans proves to be outstanding for you. As the name implies, these loans come up with a facility of long repayment term with easy process. With the aid of these loans you can get satisfactory amount of funds in hard times, which enables you to resolve your short term fiscal requirements on time with immense ease and comfort.

Another advantage while applying with long term payday loans is that you can borrow immediate funds for urgency without any credit checks from the lenders. This means that you can borrow the cash regardless of your past blemishes of late payments, payment defaults and CCJs mentioned in your credit report. In this way, we can say that these loans are also helpful when you hold a bad credit history and low credit rating.

The processing of these loans are very straightforward and quick, as there is no association of any document faxing, credit checking and lengthy paperwork official procedure incorporated here. This implies that you have not to waste time for waiting approval of you loan money and also the funds will be unswervingly supplied in your checking account in a swift time span.

For complete assurance about the terms and procedure please visit @ http://www.longtermpaydayloans.org.uk

Was Curbside Recycling the Invention of Beverage Companies?

We often think of programs like curbside recycling as driven by a pure environmentalist agenda. But Bartow J. Elmore makes an intriguing argument these programs were passed in substantial part because of pressure from U.S. beverage makers, who were trying to address a public relations nightmare and to increase their profits. His essay, "The American Beverage Industry and the Development of Curbside Recycling Programs, 1950-2000" appears in the Autumn 2012 issue of the Business History Review (vol. 86, number 3, pp. 477-501). This journal isn't freely available on-line, but many in academia will have access through library subscriptions. From the abstract:

"Many people today consider curbside recycling the quintessential model of eco-stewardship, yet this waste-management system in the United States was in many ways a polluter-sponsored initiative that allowed corporations to expand their productive capacity without fixing fundamental flaws in their packaging technology. For the soft-drink, brewing, and canning industries, the promise of recycling became a powerful weapon for combating mandatory deposit bills and other source-reduction measures in the 1970s and 1980s." 

As Elmore tells it, the story unfolds like this: For much of the 20th century, soft drink and beer companies shipped bottles. Then local bottling companies filled the bottles with beverages. The bottles included a deposit that was often 1 or 2 cents for returning them. Thus, the local bottling companies collected the empties, and washed and reused them. Elmore cites evidence that in the late 1940s, 96% of all soft drink bottles were returned, and a given bottle was often used 20-30 times before becoming chipped or broken.

But after Prohibition, as beer companies rebuilt their national sales networks, they started turning away from local bottlers, and instead using a larger centralized brewery and shipping beer in steel cans. Pepsi-Cola started shipping soft drinks in steel cans in 1953, and Coca-Cola followed in 1955. For the soft drink companies, there was a long-standing belief that they could raise profits if they could find a way to reduce the number of local bottlers: sure enough, the number of local bottlers fell from 4500 in 1960 to about 3,000 by 1972.

But there was a problem. The steel cans, and then aluminum cans, were "one-way"--that is, they weren't washed and recycled. To put it another way, they were a high volume of long-lasting garbage. People protested and state legislatures began to make ominous noises about taxing or banning nonreturnable drink containers. Industry banded together in the 1950s to create the first national anti-litter association: Keep America Beautiful. But promotional ads to encourage picking up litter weren't enough, and by the late 1960s and early 1970s, the U.S. Congress along with various states was again contemplating a ban on nonreturnable containers.

And so the beverage and canning companies, along with garbage giants like Waste Management and Browning-Ferris and scrap metal companies like Hugo Neu, formed a coalition with environmental groups like the Sierra Club and the National Wildlife Federation to push for federal grants that would help set up recycling programs. As Elmore writes: "The beverage industry positioned itself as the keystone of the recyling system." When anyone argued for reuseable drink containers, a common response was that doing so would cripple the recycling system, and that it would cost jobs in the can-making industry. 

States stopped passing laws requiring mandatory deposits on cans and bottles: since 1986, only Hawaii has passed such a law. Instead, taxpayers and ratepayers at the federal and state level paid for curbside recycling. Elmore writes: "Taxpayers were taking on the majority of the cost of collecting, processing, and returning corporate byproducts to producers, and industry remained exempt from disposal fees that might have been used to pay for expensive recycling systems. More critically, government-mandated source-reduction and polluter-pays programs had been discredited as viable methods for reducing the nation's pollution problem."

Compared to the 1940s when 96 percent of bottles were washed and reused, often a couple of dozen times, where do we stand today? Elmore cites evidence that in the mid-2000s, maybe 30-40 percent of cans and plastic bottles are recycled.

I wouldn't want to try to turn the clock back to the days of rewashing and reusing bottles. But it's not at all obvious to me that curbside recycling is doing the job. Ten states have laws requiring deposits on cans and bottles, according to the lobbyists at BottleBill.org. If we want people to be serious about recycling, having a policy of 5-10 cents for returning cans and bottles is likely to be a more effective tools than curbside recycling.

An Economist Chews Over Thanksgiving

(Originally appeared Thanksgiving 2011.)

As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there's anything wrong with that.

The last time the U.S. Department of Agriculture did a detailed "Overview of the U.S. Turkey Industry" appears to be back in 2007. Some themes about the turkey market waddle out from that report on both the demand and supply sides.

On the demand side, the quantity of turkey consumed rose dramatically from the mid-1970s to the mid-1990s, but since then has declined somewhat. The figure below is from the USDA study, but more recent data from the Eatturkey.com website run by the National Turkey Federation report that U.S. producers raised 244 million turkeys in 2010, so the decline has continued in the last few years. Apparently, the Classic Thanksgiving Dinner is becoming slightly less widespread.



On the production side, the National Turkey Federation explains: "Turkey companies are vertically integrated, meaning they control or contract for all phases of production and processing - from breeding through delivery to retail." However, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which all the steps of turkey production have become separated and specialized--with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys.  Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:

"In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg  capacity per hatchery in 2007.

Turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.

Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.

Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent."

U.S. agriculture is full of these kinds of examples of remarkable increases in yields over a few decades, but they always drop my jaw. I tend to think of a "turkey" as a product that doesn't have a lot of opportunity for technological development, but clearly I'm wrong. Here's a graph showing the rise in size of turkeys over time.

The production of turkey remains an industry that is not very concentrated, with three relatively large producers and then more than a dozen mid-sized producers. Here's a list of top turkey producers in 2010 from the National Turkey Federation: 

For some reason, this entire post is reminding me of the old line that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. Did I mention that I make an excellent chestnut stuffing? 

Anyway, the starting point for measuring inflation is to define a relevant "basket" or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical U.S. household buys. But one can also define a more specific basket of goods if desired, and for 26 years, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:

The top line of this graph shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. One could use the underlying data here to calculate an inflation rate: that is, the increase in nominal prices for the same basket of goods was 13% from 2010 to 2011. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate in the last 26 years. But in 2011, the rise in the price of the Classic Thanksgiving Dinner, like the rise in food prices generally, has outstripped the overall rise in inflation.

Thanksgiving is my favorite holiday. Good food, good company, no presents--and all these good topics for conversation. What's not to like?

The Paperless Office: Headed that Way at Last?

As computers became widespread in the 1980s and into the early 1990s, a common prediction was that we were headed for the "paperless office." But that prediction went badly astray, as Abigail Sellen and Richard Harper pointed out in their 2002 book, The Myth of the Paperless Office.
For example, they cited evidence that consumption of common office paper rose by 14.7% from  1995 and 2000  and they argued that that when organizations started using e-mail, their consumption of paper rose by 40%. In short, it appeared that information technology was not a substitute for the use of paper, but instead was a complement for it--in other words, computerization was going to be the best thing that ever happened to the paper industry.

But although the transition took some time, it now appears that at least U.S. offices are becoming, if not quite paperless, much less paper-intensive. Here's a figure from the Environmental Paper Network's State of the Paper Industry 2011, which came out last year. Notice in particular the decline in paper use since about 2007 in North America and Western Europe.

The report describes U.S. paper consumption trends in this way (notes omitted):

"Consumption of paper and paperboard products has experienced significant decline in North America since 2007. This is attributable primarily to the aftermath of the financial crisis in the United States at the end of the decade. The poor economy motivated many companies to perform a close analysis of their paper use and inspired the adoption of innovative and more efficient systems. These new systems will remain in place into the economic recovery and likely have a lasting impact on printing and writing paper consumption. In addition, the shift in the patterns of consumption of news and other media from print to digital formats is also apparently having an irreversible effect in
some paper sectors such as newsprint.

"Total global consumption of paper is still rising, reaching 371 million tonnes in 2009. However, total paper consumption in North America has declined 24% between 2006 and 2009. Per capita consumption of paper in North America dropped from more than 652 lbs/year in 2005 to 504 lbs/year in 2009.

"North Americans still, however, consume almost 30 times more paper per capita than the average person in Africa and 6 times more than the average person in Asia. In 2009, total paper consumption in China eclipsed total North American consumption for the first time."

I remember stories from the old days of computerized offices, maybe 15-20 years ago, about executives who wanted all their e-mails and reports printed out. Those days are gone. But it's interesting to me that even for a change that seems as obvious as electronic communication leading to less paper, it took some years and the pressures of a recession for substantial change to take effect. Similarly, it wasn't until about 2006 that the volume of mail carried by the U.S. Postal Service took a nosedive. All the consequences of major technological changes can take decades to ripple through an economy.

 

China's Economic Growth: A Different Storyline

When I chat with people about China's economic growth, I often hear a story that goes like this: The main driver's behind China's growth is that it uses a combination of cheap labor and an undervalued exchange rate to create huge trade surpluses. The most recent issue of my own Journal of Economic Perspectives includes a five-paper symposium on China's growth, and they make a compelling case that this received wisdom about China's growth is more wrong than right.

For example, start with the claim that China's economic growth has been driven by huge trade surpluses. China's major economic reforms started around 1978, and rapid growth took off not long after that. But China's balance of trade was essentially in balance until the early 2000s, and only then did it take off. Here's a figure generated using the ever-useful FRED website from the St. Louis Fed.

How does China's pattern of trade balances line up with argument about China's undervalued exchange rate? Here's a graph showing China's exchange rate over time in yuan/dollar. Thus, an upward movement on the graph means that yuan is weaker relative to the dollar, and a downward movement means that it is stronger relative to the dollar. The yuan does indeed get weaker relative to the U.S. dollar for much of the 1980s and first half of the 1990s--but this is the time period when China's trade balance is near-zero. China's exchange rate is pretty much unchanging for the five years or so before China's trade surplus takes off. Since 2006, the yuan has indeed been strengthening. Last week the yuan hit a record high against the dollar since 1994.

What about China's purportedly cheap wages? Here's a figure from the article by Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong, called "The End of Cheap Chinese Labor." As the figure points out, China's wages were fairly during much of the 1980 and 1990s, which is the time when China's trade was nearly in-balance. But whether the conversion is done using yuan/dollar exchange rates or by inflation in China (measured by the producer price index), wages in China have been rising at double-digit annual rates since the late 1990s. In other words, China's big trade surpluses of the last decade have co-existed with sharply rising wages.

Clearly, China's pattern of economic growth since the start of its reforms needs a different storyline than the basic tale of low wages, a cheap currency, and big trade surpluses. After working with these authors, my own view is that it's useful to think of China's economy since about 1978 in two main stages--although there isn't a clean-and-clear break between them.

The first stage of China's growth that went through the 1980s and a bit into the early 1990s was really about rural areas.  Yasheng Huang makes this argument strongly in his JEP article "How Did China Take Off?" Huang writes: "China’s take-off in economic growth starting in the late 1970s and its poverty reduction for the next couple of decades was completely a function of its rural developments and its internal reforms in general. During the golden era of rural industry in the 1980s, China had none of what are often thought of as the requisite features of the China growth model, like massive state-controlled infrastructural investments and mercantilism." This was the time period when the agricultural sector was allowed to operate under a market framework, and as agricultural output exploded, rural workers moved to employment in the "township and village enterprises." Huang makes a strong argument that these enterprises should be thought of a privately owned firms, operating with what was in many ways a private-sector financial market.


But in the 1990s, the emphasis of China's economy began to change. New leaders favored urban development over rural development, and they cut the township and village enterprises down to size by re-nationalizing their sources of finance They began to reform the money-losing state-owned enterprises that still dominated China's urban economy as of the early 1990s. They moved China toward joining the World Trade Organization, which happened in 2001. For a sense of the transition in China's urban areas to private sector employment, here's another useful figure from Li, Li, Wu and Xiong:

But this process of change brought an unexpected macroeconomic imbalance. As Dennis Tao Yang point out in his JEP paper, "Aggregate Savings and External Imbalances in China," China's 11th Five-Year Plan for the years from 2006-2010 called for trade to be in balance overall--clearly an expectation that was not close to being met. Yang looks at a variety of reasons why savings rates took off in China: for example, after China joined the WTO in 2001, exports took off, but firms lacked useful ways in China's underdeveloped financial system to pass these savings to the household sector; as exports took off, China's government received an unexpectedly huge surplus, with budget surpluses upward of 8% of GDP; and households, concerned about retirement and health costs for themselves and their families, and with little access to loans for mortgages or consumer durables, continued to save at very high rates. Yang notes that in China, this combination of outcomes is sometimes criticized as the "Nation Rich, People Poor" policy.

Thus, although China's economy continues to grow rapidly, it is faced with many challenges. Along with the macroeconomic imbalances emphasized by Yang, Xin Meng raises another cluster of issues in her paper, "Labor Market Outcomes and Reforms in China": the extraordinary back-and-forth migration from rural to urban areas, now at well over 100 million people per year, and perhaps headed much higher; the growing inequalities in wages as labor markets move away from the administratively determined wages that were so common even just 20 years ago; the inequalities being created by the spread of education; and China's coming demographic bulge with many elderly and few young workers--a hangover of the one-child rules to limit population growth.

With little effort, one can compile quite a list of economic difficulties facing China: macroeconomic imbalances, an underdeveloped financial sector, inequalities in wages and across rural and urban areas, the demographic bulge, corruption, environmental problems, and more. Still, with all that said, it's worth remembering that China's economy still has enormous potential upside. China started from such a low per capita GDP back in 1978 that even now, productivity levels are only about 20% of the U.S. level. In yet another JEP paper, "Understanding China’s Growth: Past, Present, and Future," Xiaodong Zhu points out that when Japan and Korea and Taiwan had their rapid spurts of economic growth int he 1950s and 1960s and 1970s, they were essentially raising their productivity levels from 40-50% of the U.S. level up to 70-80% of the U.S. level. In other words, China is still far below the level that was the take-off point of rapid growth for countries like Japan, Korea and Taiwan. As Zhu points out, China is making enormous investments in education, physical capital investment, and research and development. In many ways, it is laying a framework for continued growth.

Surely, many things could go wrong for China's economy. For continued growth, it will need to transform its economy again and again. But it also seems to me that hundreds of millions of people in China have developed a sense of possibility, and of what their economic lives could hold for them. China's future growth is sure to have fits and starts, like every country, but its economy continues ot have enormous momentum toward a much higher standard of living.

Marginal Tax Rates on the Poor and Lower Middle Class

There's always a lot of talk about how marginal tax rates affect the incentives of those with high incomes. But how high are marginal tax rates on those with low incomes? The question might seem peculiar. After all, don't we know for a fact that those in the bottom of the income distribution, at least on average, don't pay federal taxes? Instead, on average, they get "refundable" tax credits from the federal government for programs like the Earned Income Tax Credit and the child credit. As a result, the Congressional Budget Office has calculated that the bottom two quintiles of the income distribution pay a negative income rate. Even with payroll taxes for Social Security and Medicare and federal excise taxes on gasoline, cigarettes and alcohol added in the bottom quintile of the income distribution pays only 1% of its income in federal taxes.

But the marginal tax rate that someone owes is not the same as the average tax rate that they owe. Those with low incomes can often face a situation where, as their income rises, the amount that the receive from the Earned Income Tax Credit declines. There are other non-tax programs like Food Stamps, Medicaid, Temporary Assistance to Needy Families (welfare), and Children's Health Insurance Program (CHIP) that phase out as income increases. Thus, for each marginal $1 that someone with a low income earns, the gradual withdrawal of these benefits means that their after-tax income rises by less than $1. In addition, even those with low incomes pay Social Security and Medicare payroll taxes.

The Congressional Budget Office has taken on the tax of calculating "Effective Marginal Tax Rates for Low- and Moderate-Income Workers."  Here's an illustrative figure showing before-tax and after-tax income for a hypothetical single parent with one child. Before-tax income is just a straight line for illustrative purposes. The line for after-tax income shows what after-tax income would be for this family, given the before-tax level of income. For example, with a before-tax income of zero, after tax income would be approximately $20,000, due to various transfer payments. At a before-tax income of about $27,000, after-tax income is also about $27,000: that is, $27,000 is the break-even point where the subsidies available from the government at that income level are equal to the taxes being paid at that income level. In general, the after-tax income line has a flatter slope that the before-tax line, which is telling you that when you earn $1 of before-tax income, the gain to after-tax income is less than $1--even for those with low and moderate income levels.

The first graph is more-or-less real data, but for a hypothetical family. A second graph looks at the actual marginal tax rates by household income level. At any given income level, of course, there is actually a range of marginal tax rates, depending on how many people are in the family, what programs they are eligible for, even state they live in (because benefit levels for many programs will vary by state). Thus, there will be a range of different marginal tax rates for households at any given income level. The graph shows the range of marginal tax rates for any given income level, ranging from the 10th percentile of marginal tax rates up to the 90th percentile. Earnings on the horizontal axis are shown as a percentage of the federal poverty line (FPL).

Two main patterns jump out at me from this graph. One pattern is that there is an enormous range of marginal tax rates at very low income levels, at and below the poverty line. This range of marginal tax rates reflects the enormous diversity in types of households in poverty, and what sort of government assistance each family is eligible for. The other pattern is that for those from about 200% of the poverty line up to about 600% of the poverty line, a sizeable proportion of households are facing marginal tax rates--considering federal income and payroll taxes, along with food stamps--in the range of 30-40%.

These high marginal tax rates on those with low and moderate levels of income raise some questions for those on all sides of the tax debates. For those who don't believe that high marginal tax rates have much affect on incentives to work at higher income levels, like households earning $250,000 or more per year, consistency would seem to suggest that they shouldn't worry too much about incentives to work at lower income levels, either. For those who express a lot of concern about how high marginal tax rates would injure incentives to work for those at the top income levels, consistency would seem to suggest that they express similar concern over lower marginal tax rates for those at the lower and moderate income levels, too--which means making programs like the Earned Income Tax Credit, food stamps, welfare, and others more generous, so that they can be phased down more slowly as people earn income.