Payday Loans in Oregon: An Update

I received an e-mail from a group called the Consumer Credit Research Foundation. This is a non-profit group, funded by payday lenders, that sponsors research on credit markets. They were touting a new study by Jonathan Zinman of Dartmouth College that looks that the effect of the restriction on payday loans in Oregon.

I have posted before with a typical economist's take on the issue: I believe that restricting access to credit (expensive or not) is misguided. If there is a problem with access to credit then do things to enhance access not cut it off. The idea that you are 'helping' people avoid their own bad decisions is government regulation at it worse. What you are really doing, in my view, is punishing the already economically stressed by giving them less flexibility to weather economic turmoil.

So I was really excited that we may have good evidence that these assumptions are correct. Zinman is a young economist with an already stellar research record - he is no hack. Unfortunately Zinman's paper does not provide what I had hoped for. It is not a bad paper, there is no academically dishonest statements, but there are a number of vague and misleading statements that appear to be clearly designed to give the impression to a lay audience that positive evidence is found when it is not.

The study compares pre- and post-restriction surveys in Oregon and Washington of payday loan users. Oregon imposed restrictions while Washington did not. The similarities among the states suggest that these two populations are reasonable for use as treatment and control groups. He finds that payday lending went down significantly in Oregon compared to Washington, which is not a big surprise. Then he finds that former payday loan users shifted:

partially into plausibly inferior substitutes. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

First notice the academic-speak: "plausibly inferior," "evidence suggests," "results suggest." Why does he use these terms? Because none of his statistical tests of these effects turn out to be significant. I am quite ready personally to believe that these suggestive results are actually revealing an underlying fact because I believe theoretically that this is likely the case, but it does nobody any good to read ones prior assumptions into a set of results that are not statistically significant - and not just statistically insignificant but with tiny point estimates that are not plausibly different from zero.

Overall there are four serious problems with this study:

1. The data are a set of surveys conducted by the payday loan funded non-profit. This naturally leads to questions about explicit or implicit bias. The questionnaire is not reproduced in the paper and it should be.

2. Respondents to such a survey (especially the ones now excluded from the payday loan market) are likely to be predisposed to suggest that it has adverse effects on their financial situation. Thus the results would be biased toward findings that suggest restrictions lead to financial hardship.

3. The author finds, it turns out, that Oregon and Washington payday borrowers are not good treatment and control groups - the people that utilize payday loans in the two states turn out to be quite different. Efforts to control for these differences are unconvincing, which leads to biased results. [Note, however, that it is not clear in which way the bias would work and may in fact be a cause of the insignificant point estimates]

4. All statements about the adverse consequences of the decline in payday loans in Oregon are not supported by the evidence - they are suppositional.

I believe that restricting access to payday loans is bad policy, but I am still looking for good objective evidence to bolster my theoretical argument. This is a provocative start, but in my view, falls well short.