One solution to solving the scourge of payday lending is to pass Initiated Measure 21, the real 36% rate cap, to prevent loan sharks from trapping poor and desperate customers in debt with insurmountable triple-digit interest rates. Another is to enact Senator Bernie Sanders’s plan to authorize the Post Office to offer short-term loans and other banking services.
A third option (and let’s think of these three policies as legs on a stool, not either-or) is to do a better job of fighting the financial distress that impairs decision-making. Economics professor Nathan Fiala says we can combat poverty better by empowering the poor with cash-grant programs like Mexico’s Prospera that don’t impose unnecessary restrictions on their choices:
Researchers have published countless articles on how to address these issues, but we don’t have a clear solution — if it was that easy to solve poverty, it would be over by now. That said, recent solutions do show promise: guaranteed minimum income programs and cash grant programs such as Prospera (formerly Oportunidades) from Mexico, which gives families direct cash payments in exchange for school attendance and health clinic visits.
Currently, much of the United States’ low-income support bureaucratically restricts individual choice. We need a system that gives options back to individuals and gives them the individual power to make good long-term choices for themselves and their families. Research shows that the poor don’t actually waste their money on drugs or alcohol when they receive cash programs. Instead, when given control over their own lives through policies that provide simple cash, such as Prospera, they make good choices. Sometimes it still means a high-interest short-term loan. But it’s far less often [Nathan Fiala, “The Problem Is Bigger than Payday Loans,” Washington Post, 2016.07.01].
Give the poor reasonable options, relieve the financial distress of having to choose between rent and groceries, and the loan sharks lose the desperation that underpins their business model.