But Zinman’s research went beyond that basic fact. The state of Washington, Oregon’s neighbor to the north, had considered passing a similar law that would cap interest rates, but it didn’t.
ZINMAN: And so we have a setup for a nice natural experiment there. You have two neighboring states, similar in a lot of ways. One passed a law, another considered passing a law, but didn’t quite pass it.
And this let Zinman compare data from the two states to see what happens, if anything, when payday-loan shops go away. He looked at data on bank overdrafts, and late bill payments and employment; he looked at survey data on whether people considered themselves better or worse off without access to payday loans.
ZINMAN: And in that study, in that data, I find evidence that payday borrowers in Oregon actually seemed to be harmed. They seemed to be worse off by having that access to payday loans taken away. And so that’s a study that supports the pro-payday loan camp.
That’s pretty compelling evidence in favor of payday loans. But in a different study, Zinman found evidence in the opposite direction.
In that paper, which he co-authored with Scott Carrell, Zinman looked at the use of payday loans by U.S. military personnel. This had been the topic of an ongoing debate in Washington, D.C.
ZINMAN: The Pentagon in recent years has made it a big policy issue. They have posited that having very ready access to payday loans outside of bases has caused financial distress and distractions that have contributed to declines in military readiness and job performance.
DOLE: This practice not only creates financial problems for individual soldiers and their families, but it also weakens our military’s operational readiness.
ZINMAN: And so Scott and I got the idea of actually testing that hypothesis using data from military personnel files.
Then-Senator Elizabeth Dole, in a 2006 Senate Banking Committee hearing on payday loans, showed a map with hundreds of payday-loan shops clustered around military bases
Zinman and Carrell got hold of personnel data from U.S. Air Force bases across many states that looked at job performance and military readiness.
Like the Oregon-Washington study, this one also took advantage of changes in different states’ payday laws, which allowed the researchers to isolate that variable and then compare outcomes
ZINMAN: And what we found matching that data on job performance and job readiness supports the Pentagon’s hypothesis. We found that as payday loan access increases, servicemen job performance evaluations decline. And we see that sanctions for severely poor readiness increase as payday-loan access increases, as the spigot gets turned on. So that’s a study that very much supports the anti-payday lending camp.
Congress had been so concerned about the effects of payday loans that in 2006 it passed the Military Lending Act, which, among other things, capped the interest rate that payday lenders can charge active personnel and their dependents at 36 percent nationwide. So what happened next? You guessed it. A lot of the payday loan shops near military bases closed down.
We’ve been asking a pretty simple question today: are payday loans as evil as their critics say or overall, are they pretty useful? But even such a simple question can be hard to answer, especially when so many of the parties involved have incentive to twist the argument, and even the data, in their favor. At least the academic research we’ve been hearing about is totally unbiased, right?
I specifically asked Bob DeYoung about that when I was talking to him about his New York Minnesota auto title loans locations Fed blog post that for the most part defended payday lending: