Price ceilings restrict the supply of credit like anything else
Price floors and ceilings — Minimum wages and rent controls
Public policymakers often intervene in economies using “price floors,” such as government-mandated minimum wages, or “price ceilings,” like rent controls. Price floors set a minimum legal price for a good or service and price ceilings set a legal maximum price.
The intention behind price floors is to stop the seller of a good or a service — labor, in the case of minimum wage laws — receiving below a certain price. Conversely, the intention behind price ceilings is to stop the seller of a good or a service — landlords, in the case of rent controls — receiving above a certain price.
These policies often fail to achieve their aims. Minimum wage laws, for example, usually set the price of labor above the market price — there wouldn’t be much point in a minimum wage that didn’t do that — but this simply means that employers buy less labor at that price. Research shows that employers respond by cutting hours (buying less labor), making employees work harder (getting more labor for their money), cutting other elements of remuneration like health insurance (reducing the price they pay), or simply hiring fewer people (buying less labor). The intention might be to make the workers better off, but this is not the result.
Rent controls, likewise, usually set rents below the market rate. And, in this case, this simply means that landlords supply less accommodation at that price. Again, the intention might be to make the renters better off, but this is not the result.
Price ceilings — Payday loans
The Twin Cities of Minneapolis and St. Paul have recently offered examples of both of these processes in action. Minnesota now also offers another example of price ceilings in action: caps on the interest rates chargeable on payday loans.
Payday loans are generally for small amounts of cash — often a few hundred dollars — meant for borrowers to pay off in a couple weeks. They typically have high rates of interest; Minnesota Department of Commerce data shows that around 25,000 Minnesotans took out payday loans in 2022, racking up six loans on average with annual percentage rates (APR) of around 210%. But, as noted, these are typically short terms loans so the APR can be a little misleading. Furthermore, they are unsecured, meaning that a borrower doesn’t need collateral to get one, and credit reports and credit scores are not generally part of the loan process. These are very risky loans from the perspective of the lender.
If the loan isn’t paid off on time, however, the costs can spiral. The Star Tribune reports:
Dianna Johnson’s mother was 76 years old when she took out her first payday loan. She couldn’t pay off the roughly $200 debt, so she borrowed another. And another.
“It’s a vicious cycle,” said Johnson, who helped her mom repay the loan after watching her spend a year returning to the Payday America in Coon Rapids.
To prevent such occurrences:
Minnesota has joined 19 other states that have restricted payday loans…The state capped annual percentage rates in most cases at 36% starting Jan. 1, 2024, though lenders could go up to 50% if they follow strict rules to ensure the borrower can repay the sum.
This cap is just a price ceiling, like a rent control law. And, like a rent control law, all it means is that payday lenders will supply fewer loans at that price:
Minnesota’s biggest lender, Payday America, stopped offering the loans shortly after the law was passed this spring.
Payday lenders have largely disappeared in other states that added such interest rate restrictions, said Yasmin Farahi, deputy director of state policy and senior policy counsel at the Center for Responsible Lending.
“How payday lenders succeed is making sure their customers fail,” Farahi said.
Of course, if the customer fails to repay the loan the lender is out of pocket. This does not seem to have occurred to Ms. Farahi.
These lenders:
…typically operate in communities of color and low-income neighborhoods, Farahi said. She said states will “no longer have that huge fee drain that is being stripped from these communities that are already really hard-hit and struggling.”
But who steps in to fill the need remains unclear.
Indeed it does. People previously had the option of accessing a payday loan at an average APR of 210%. They now have no payday loan option at all, although it could be said that this has brought the average APR down to 0%. The intention might be to make the borrowers better off, but this is not the result.
This illustrates once again the sort of wishful thinking that goes into these policies. It is assumed that the alternative to a job paying below minimum wage is a job paying the minimum wage or that the alternative to accommodation at a rent above a rent cap is accommodation at rent at the rent cap; it seldom occurs to people like Ms. Farahi that the alternative is actually no job, accommodation, or loan at all.