Tuesday, April 22, 2008

Check Cashing Nonsense

We're always happy to have articles forwarded our way. TPS regular Rob Holub sent along the following piece on the regulation of check cashing businesses in the Cleveland area.

In short, the town of Parma is limiting the number of check cashing businesses within its city limits to 1 for every 10,000 residents; this means there will be no more than 9 at the current population level.

The mayor sums it up pretty well: "Some of these businesses charge high interest rates and fees for a short-term loan," said Parma Mayor Dean DePiero. "We want to make sure our residents are not taken advantage of."

This is bad economics rooted in political popularity. There are no residents being taken advantage of in this scenario; no one is being coerced into engaging in business with these check cashing groups. To the contrary, these businesses allow for a degree of time preference that is unattainable to workers sans check cashing places. Some people want to be able to spend their income sooner; these businesses allow for this to happen. They can't charge too high of an interest rate, or they would price many of their customers out of the market. I would be very willing to bet that their rates reflect very closely the time preferences of their customers. It would be interesting to see how these rates change over time and in response to certain economic ebbs and flows.

A good response question to the mayor would be, "What would an acceptable rate of interest be?" Better yet, ask a group against check cashing places the same question in private, then have them defend their position to each other.

It's popular for the mayor to take a stance like this because, sadly, legislating morality is almost an American political pastime. Many people don't use check cashing locations, feel that they charge too much, also feel that this is fundamentally wrong given their moral code, and therefore desire to change the world to fit their personal preferences. Here is West Virginia, we see the legislation of morality in the arguments over table games and slot machines. Drug prohibition is much the same argument as well.

Also-- check cashing places tend to be in lower income areas, and eliminating check cashing businesses gives the perception of "fighting poverty." It's not unlike swatting all of the flies from the air and claiming you've gotten rid of the refuse heap.


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