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Payday Lending Caps Reduce Liquor Purchases?

Hat tip to Mark Thoma, Economist’s View!

Here’s another reason to sign the real 36%-rate-cap petition and help rein in predatory payday lenders… and a reason we might see another powerful South Dakota lobbying group join the payday lenders in promoting the fake 18%-rate-cap petition to protect business as usual for local loan sharks. Cap payday lenders ability to exploit your neighbors, and your neighbors may well buy less booze.

So conclude two researchers who studied the impact of Washington State’s limitations on payday lenders on liquor sales:

To identify the causal effect of lending restrictions on liquor sales, we exploit a change in payday lending laws in the State of Washington. Leveraging lender- and liquor store-level data, we estimate a difference-in-differences model comparing Washington to the neighboring State of Oregon, which did not experience a change in payday lending laws during this time. Importantly, by focusing on states with state-run liquor monopolies, we can address supply-side competitive effects, such as price changes, or store openings and closings, that normally would confound this identification strategy for a generic consumption good. We find that the law change leads to a significant reduction in liquor sales, with the largest decreases occurring at liquor stores located very near to payday lenders at the time the law took effect. Our results provide compelling evidence on how credit constraints affect consumer spending, suggest a behavioral mechanism that may underly some payday loan usage, and provide evidence that the Washington law likely reduced one form of loan overuse [Harold E. Cuffe and Christopher G. Gibbs, “The Effect of Payday Lending Restrictions on Liquor Sales,” working paper, University of Wellington School of Economics and Finance, August 2015].

Wow—cap payday lending and scratch my Temperance itch? Could the real 36%-rate-cap get any better?

Now watch for Lisa Furlong’s fake petition goons around your local liquor store….


  1. Deb Geelsdottir 2015-09-03

    Well that’s fascinating. Less financial stress equals less drinking. I hadn’t considered that, but when one lacks effective coping skills, one drinks more to cope with those exploitative and usurious interest rates.

    I don’t have a problem with anyone having a drink or two, or even getting drunk (rarely), as long as precautions are in place to keep everyone safe. But booze is a lousy coping device, and in this instance, makes everything worse.

  2. caheidelberger Post author | 2015-09-04

    Deb, it may be that reducing loan sharking reduces financial stress, which in turn reduces liquor consumption. However, note that the report finds the drop in liquor sales to be largest at liquor stores closest to payday lending storefronts. It could be that payday loans are facilitating problem drinking and that capping payday loans also caps binge buying and drinking.

    To put it another way, Deb posits this sequence in borrowers’ heads: Pre-cap, they say, “I’ve taken out payday loans. I’m swamped with debt. Woe is me! I need a drink.” Post-cap, they say, “Whew! I’ve got less debt! I’m happier. I don’t need a drink.”

    I suggest this sequence: Pre-cap, they say, “I need a drink, but I’m out of cash. Hey, look, there’s a payday lender right next door to the liquor shop. I’ll get a payday loan so I can buy booze!” Post-cap, they say, “I need a drink. I’m out of cash. Dang—I can’t get another loan from the payday lender. I don’t want to ask my buddy or my mom for the money. I guess I’ll pass on getting buying booze tonight.”

  3. caheidelberger Post author | 2015-09-04

    Melzer (2011) finds that payday lending does not alleviate financial hardship: “To the contrary, loan access leads to increased difficulty paying mortgage, rent and utilities bills.”

  4. mike from iowa 2015-09-04

    Wouldn’t want to deny Payday lenders their sincerely held, religious beliefs that 500% interest is good for poor people. Their religion is greed. They worship at the altar of the almighty greenback dollar.

  5. W R Old Guy 2015-09-04

    I found this on Craig’s List for Rapid City last night. I’m guessing the intent is to not only get the signatures but to start pushing the 18% cap on pay day lenders as being better than the other initiated law. I’ll bet the fact that it is a constitutional amendment won’t be mentioned by the paid circulators either.

    Drivers/Petitioners to Help Cap Payday Loans Needed (10 positions) (Rapid City)
    compensation: $15/hr + production bonus incentives
    employment type: employee’s choice

    Encore Political Services, LLC is looking for 10 motivated workers to help get signatures for two ballot initiatives from South Dakota voters.

    One initiative is to cap Payday Lending loans at 18% maximum.
    The other is Marsy’s law, which requires victims to be notified when offenders of those same victims are released from prison.

    Pay starts at $15/hr, and bonus incentives are provided.

    Interviews start Weds, 9/2/15, at 10:00am. This is a time sensitive job, as our deadline for signatures is November 9th. Work same day as interview is available.
    Experience preferred, but not necessary.

    Please call or text Hiram at (605) 545-2304
    •Principals only. Recruiters, please don’t contact this job poster.
    •do NOT contact us with unsolicited services or offers

  6. mike from iowa 2015-09-04

    employment type: employee’s choice

    I choose to be the over paid head of a multi-trillion dollar korporation.

  7. Deb Geelsdottir 2015-09-04

    Your scenario could be right Cory. Chances are we’re both right.

  8. leslie 2015-09-04

    Jfc-climb outta the lake afta long swim and this:(why this study? Job creators loan@1500%but dont wanna lose booze sales.ofcs.lisa owns the blue lounge too?

  9. jeniw 2015-09-05

    When I was growing up I would hear adults say “I can’t afford…..” But they seem to always have enough to but alcoholic beverages and/or tobacco products.

    Could it be that alcoholic beverages are relatively inexpensive that buyers feel that it is acceptable to buy beer than pay toward their debts?

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