The Agenda

Today’s Policy Update: Can Startups Help Kill Pay-Day Loans?

The Fed is going to continue stimulus for the time being. Conservatives should be happy.

In the New York Times, Binyamin Appelbaum reports on Federal Reserve Chairman Janet Yellen’s testimony before Congress.

The decline in the unemployment rate, meanwhile, has exceeded expectations, reaching 6.1 percent in June, but Ms. Yellen maintained her view that the decline was overstating the progress of the labor market. Some people who stopped looking for work are likely to return as the economy improves, she said. Wage growth also remains weak, suggesting employers still find it easy to replace workers.

Ms. Yellen also spoke about the “serious psychological toll” of unemployment and its long-term costs, underscoring her commitment to the Fed’s efforts.

Inflation also remains sluggish, suggesting that the economy continues to operate below capacity, and allowing the Fed to extend its stimulus campaign.

Many inflation hawks are ready for monetary stimulus to end, and to their point, there may be finally be some signs that inflation could start to creep upwards soon. However, it seems that Yellen is correct that, first, the labor market is in much worse shape than the unemployment rate would suggest (this is, ironically, an issue conservatives often point out), that the monetary stimulus is helping heal the economy, and that inflation is well below our target of 2 percent over the longer run.

In fact, even if Yellen were to continue stimulus for too long, inflation a little over our target would probably be a good thing by reducing debt burdens and increasing business investment. Fighting joblessness should be the top priority for conservatives, and monetary stimulus is still one of our most important tools in the fight.

Exclusion from the mainstream financial system can prevent upward mobility — can startups change that?

In The Atlantic, Derek Thompson examines the poor’s interaction with the financial system:

Middle-class families falling on hard times and grappling outside the traditional banking system are alarmingly common. Approximately 70 million Americans don’t have a bank account or access to traditional financial services. That’s more people than live in California, New York, and Maryland combined. It’s more than the number who voted for Barack Obama (or Mitt Romney) in the 2012 election. 

Instead of direct deposit, many rely on physical pay stubs. Instead of checking accounts, they have to drive to check-cashing services, like Pay-O-Matic. Instead of automatic payments, they drive again across the suburbs to pay utility bills in person. In lieu of a credit history that qualifies them for bank loans, they have a history of cash that is disqualifying. Instead of low-interest loans, they rely on payday lenders whose services can ultimately cost three- or four-times the original loan. And so, replacing the services of a bank on your own becomes a second part-time job, an odyssey of stripmalls, check-cashing storefronts, money orders, prepaid cards, and miles and miles on the road.

Ron Brownstein has called it the “archipelago of alternative finance.”

As Megan McArdle discusses in her recent AEI “Vision Talk,” accumulating capital is essential and often near impossible for those near the bottom of the income distribution. Derek Thompson’s piece touches on one of the barriers to accumulating that capital – lack of access to traditional financial institutions that leads to a reliance on payday loans. This is particularly troublesome to conservatives, who care a great deal about inclusion and helping the disadvantaged to lift themselves up.

There are policy possibilities here, but the private sector can help too. One tech startup, LendUp,

uses technology to approve borrowers with damaged or thin credit files.  As customers establish a responsible borrowing history with LendUp, they move up the LendUp Ladder, giving them access to more money, at lower rates, for longer periods of time.  The top two levels of the Ladder report to credit bureaus, giving customers the chance to improve their credit and gain access to mainstream financial services products.

The breakthrough is the technological innovation enabling approval of questionable credit, but the firm also has aligned their incentives so they don’t benefit if a client becomes trapped in debt and has committed “to building credit through education, gamification and a transparent fee structure.” As someone who’s always more optimistic about bottom-up innovations from the private sector than massive government interventions, it’s exciting to see a young startup working to solve one of society’s most vexing problems.

Land-use regulations aren’t only unjust; they hurt economic growth.

Often discussed in this space is the way that excessive zoning regulations that restrict housing reduce economic mobility, and Chang-Tai Hsieh and Enrico Moretti have released a new NBER working paper that examines the broader effects of such regulations.

Incumbent homeowners in high wage cities have a private incentive to restrict housing supply. By doing so, these voters de facto limit the number of US workers who have access to the most productive of American cities. Our findings indicate that in general equilibrium, this lowers income and welfare of all US workers. In essence, this amounts to a large negative externality imposed by a minority of voters on the entire country.

By segregating workers and preventing some from being able to access jobs for which they’d be well-suited, the regulations imposed by NIMBYs to increase their own property values reduce growth throughout the entire economy. A fundamental principle of policymaking must be working to eliminate artificial weights government places on the economy.

These authors suggest the federal government should limit how much local governments can regulate and improve mass transit to mitigate the costs of the regulations. There are other ways to fight these regulations, too, like paying off incumbent residents through TILTs. But the most important thing is that both liberals, who don’t always trust free markets, and conservatives, who reflexively defend the rights of property owners, realize that zoning restrictions are some of the biggest barriers government has placed in the way of society’s growth and mobility. 

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