reformist cognitive dissonance; yes/no to payday loans and social security

09.09.2011 § Leave a comment

Payday Loans Are Dead! Long Live Payday Loans! Nice post over at naked capitalism about the “yes! no!” attitude towards payday loans, for which 36% is considered a LOW interest rate. Much like with subprime lending, payday loan establishments were placed disproportionately in the middle of African-American neighborhoods (see for instance here), and The Nothing suspects that, much with subprime lending, African American women are ending up holding the bulk of the predatory debt.

While in theory short-term loans can be a boon to cash-strapped individuals, in practice, the usurious interest of payday loans result in many borrowers falling into a debt treadmill. The Pentagon was so concerned about the way that payday lending could wreak havoc with the lives of combat personnel that it restricted the rates that could be charged to military personnel to 36%. The industry howled that rules would drive payday lenders out of the business of serving the armed forces (they had previously been targeting bases). I suspect that result was a feature, not a bug.

In 2008, the Wall Street Journal reported on how payday lenders targeted the elderly…

The latest sighting, via the Associated Press (hat tip April Charney) is that bigger, more reputable-looking banks are offering payday loans, but predictably calling them something else…

The article does point out that Mississippi has put restrictions on payday loans. The maximum loan is $400 and the charges are limited to an equivalent of an interest rate of 572% a year.

Similarly contradictory are the recent moves around Social Security (from  testosterone pit…):

Out of one side of its mouth, our political system talks about reforming Social Security to preserve it for a few more years, and out of the other side of its mouth, it proposes to expedite its demise. As rational observer, you’d just like to get a big roll of duct tape and close off all these orifices for a while.

There are rumblings everywhere about a one-year extension of the “temporary” payroll-tax cut. Effective for all of 2011, it reduces the employee portion of the Social Security tax from 6.2% to 4.2%, thus giving us a little extra spending money. And collectively, it’s more than a little: $100 billion for the year. The idea is that we’d spend this extra money, which would nudge up GDP and create jobs somehow somewhere. Yep, GDP and consumer spending are up a bit, despite dropping real wages and sagging consumer confidence. The inexplicable American consumer in action.

But here is one thing the payroll-tax cut did do very effectively: It raided Social Security by $100 billion. And now, they’re proposing to raid it again. But to be fair, let’s include an employer portion. Combined, it would amount to $200 billion for next year. And why not make it permanent? Because letting it expire would be decried, much like today, as a huge jobs-destroying “tax hike,” while the $2.6 trillion Social Security Trust Fund just sits there, fat and plump with all this “money.”

So, if we wanted to phase out our Social Security Trust Fund, that would be one way of doing it. After a decade or so, it would be gone. China would have a quarter or more of it, and the rest would be spread around. End of story. We’d finally be rid of it.

It’s like raiding your 401k. Just clean it out, buy some stuff, and go on. Don’t worry about later. To heck with retirement. Sure, that’s one way to proceed. And if that’s what we want, let’s say it outright. Let’s state clearly that we want to phase out our Social Security Trust Fund, that we want to bankrupt the Social Security system on an expedited time line, and that this payroll-tax cut is a way to accomplish that in an efficient manner. So, the political thinking goes, let’s just go do that instead.

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