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Payday Loans vs. Gambling: Which is Worse?

The Cleveland Plain Dealer, notorious for its biased and intellectually unsound bashing of payday loans, actually managed to find a reason not to hate those loans so much today. Columnist Phillip Morris raises an interesting question in his column. Which institution do you think is capable of creating the greater lasting social damage: A payday lender or a state-run casino?
Of course, regular readers of my column know the answer – it’s a state-run casino, hands-down. In fact, regular readers know that payday loans do not create any more social damage than any other product that is used irresponsibly – and when used irresponsibly create far less social damage. In fact, the subject of Mr. Morris’ article proves this very point.

Under rules passed by the Ohio Lottery Commission, people 18 years and older may gamble in casino or slot parlours. Mr. Morris interviewed Rev. Gregory Hogan, Sr., whose son tragically became a gambling addict, robbed a bank to pay off his gambling debts, and ended up in prison for two years. Thankfully, this young man is now in college and putting his life back together.
Last year, Ohio put on its political pageant and attempted to gut the payday lending industry, ignoring the will of the people in a display of colossal governmental arrogance. What few people know is, at the time that the bill was being considered on the Assembly floor, Republicans rightly introduced an amendment designed to kill Gov. Strickland’s proposal to legalize Keno gambling. Now, everyone knew this amendment wouldn’t ultimately get any traction. What the Republicans were doing was sending two messages: 1) Strickland is a hypocrite when he proclaimed the payday loan bill would “protect the financially vulnerable”, and 2) that the whole payday lending bill was political payback (when a Democrat stole an incumbent GOP’s seat, and it was discovered the Democrat’s wife was a payday loan lobbyist).

It is exactly this hypocrisy that Mr. Morris rightly attacks. You cannot attempt to run payday lenders out of town while simultaneously endorsing a regressive tax on people of lower incomes. That’s what state lotteries are, that’s what legalized gambling is, that’s what Keno is, that’s what slot machines are – regressive taxes.

There is one problem with Mr. Morris’ article, however. It neglects to address the benefits of payday loans, as well as the problems that the new law has caused for Ohio – which Rep. Lundy is attempting to exacerbate.

Rev. Hogan claims, “”From a social policy point of view, the casino is really no different than a payday lender. The business model is the same. The social outcome is the same,”

False. Payday loans are paid off 94% of the time and in exchange for a fee, the customers receive short-term credit. With this credit, they are able to accomplish a defined goal: fix a car so they can get to work, pay a utility bill, pay for a doctor’s visit, take the family to Disneyland. Payday loans provide a short-term credit option for people who may find the other options unpalatable. Finally, if a payday loan does not get paid back on time, the customer may simply ask for a payment plan [the media will have you believe that everyone ends up in a “cycle of debt”, which isn’t true given the 94% payback rate]. And in the worst case scenario, a customer who doesn’t repay is simply sent to collections. There is no damage to a credit report. And the reason the customer couldn’t repay isn’t the lender’s fault, it’s the borrowers.

So where exactly is the “social damage” here? Perhaps Rev. Hogan works in an area where he sees a higher proportion of irresponsible borrowers who took out loans they never should’ve taken out. Or perhaps he sees more victims of that small minority of irresponsible lenders, who do exist and do break the law. Perhaps he attributes more “social damage” because of his proximity to it, and improperly extrapolates this damage to all of society. What he fails to do, then, is to look beyond his own community for the truth. He also fails to read independent studies like “Payday Holiday” which shows how much worse things for consumers when payday loans are banned.

Now let’s look at legalized gambling, in which the consumer is designed to have a disadvantage when using the product. Gambling is called that for a reason – the consumer is taking a risk that they can turn money into more money – against the odds. Slot machines, for example, are designed to pay out less money over time than they take in. That’s why Las Vegas exists, folks. If they paid out more than they took in, the city would never have survived. Unlike the stock market, which has a positive expectation over long periods of time, gambling has a negative expectation over time.

Gambling is specifically designed to be wealth-reductive. It is specifically designed to take money away from people and, in this case, funnel it to the state treasury. If you lose at gambling, that’s it, you’ve lost your money. Worst-case scenario: you end up addicted, owe money for your addiction, rob a bank, and end up in prison.

The social outcomes of payday loans vs. gambling couldn’t be farther apart.

But I think I know why Strickland has been so hot to trot on adding gambling to Ohio. He had to do something to make up for all the lost tax revenue and additional unemployment checks the state had to deal with when it restricted payday loans last year.

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