I’ve gotten into a bit of a Twitter war with the National Installment Lenders Association (“NILA”), which is the trade association for predatory online installment lenders. NILA is very unhappy that Illinois just capped the interest rate on all loans in the state at 36%–putting its members out of business and saving Illinoisans roughly $50 million per year in interest and fees. NILA is trying to get the bill overturned, and as part of that they have filmed a series of “testimonials” of people who claim to be average Joes and Janes bemoaning the rate cap; one video is captioned with the ominous phrase, “Illinois’ shocking new lending law condemns hundreds of thousands to hardship.”
I mention this because when I called them out on their bullshit on Twitter, NILA responded the way the predatory lenders always to: by asserting that, absent their products, there are no alternatives. Yet in response to my noting that Capital Good Fund has a phenomenal alternative at just 5% APR, they “went there” and attacked us for being a small nonprofit; left unsaid, too, was that we require a grant subsidy (for now at least) to function.
This got me thinking about the whole concept of subsidies, an issue with which I am familiar through my advocacy for ending subsidies for oil and gas developers and my work to make Capital Good Fund 100% self-sufficient through earned income. Not long after writing my latest riposte to NILA, I went on a bike ride to clear my head, and I suddenly had this thought: everything is subsidized. One can either charge 5% on a Crisis Relief Loan, and require a grant to make it feasible, as Capital Good Fund does; or you can charge 100%+ and scale infinitely. However, those triple-digit interest rates are only possible because the lenders used their powerful lobbies to create special exemptions in the state usury laws to allow them to charge such high rates; it is the rest of the economy that deals with the damaged credit, lost income, and bankruptcies that ensue.
This is not a new concept: in the environmental movement, we talk a lot about externalities. A good example is that when we buy gas for $3 a gallon, we are not paying the true cost of that oil, which includes air pollution, the impact on climate change, and water and soil contamination. Those costs are externalities–someone else pays for the pollution while Big Oil gets rich. Carbon taxes are one means of forcing oil and gas companies to “internalize” those externalities–effectively, including in the price of oil the full cost of its manufacture, distribution, and consumption.
But what I mean by subsidy goes beyond externalities. Elizabeth Warren captured the spirit of this in a now-famous speech, in which she said:
There is nobody in this country who got rich on his own — nobody. You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.
Every large corporation has a government relations team, and often lobbyists on contract, because they understand that, on their own, they can never generate the kind of profits the market expects. To do that, they need to ensure that unions are weakened; that the minimum wage isn’t increased; that corporate and individual taxes are not raised; and that regulations remain lax. Over the past four decades, while the rich have gotten much richer, inflation-adjusted wages for most of the rest of us have barely budged. All those profits and all that wealth, in other words, are subsidized by policy choices made at the state and federal level.
Wherever you look–education, entrepreneurship, athletics, income, wealth, life expectancy, quality of life–“successful” people almost always succeed because someone else is picking up the tab. It therefore stands to reason that when it comes to reversing the inequities this system has created, subsidies, in the form of good public policy, grant dollars, so-called credit enhancements, and low-cost capital, are essential.
In my world, not only are predatory lenders profitable because of a regulatory subsidy, but they exist in part because of the aforementioned stagnant wages and the fact that banks and even credit unions have created a void. We often forget that financial institutions benefit from a massive subsidy: federal insurance on deposits, through either the FDIC or NCUA, allows them to pay virtually nothing (and often literally nothing) on those deposits. Why does this matter? When you deposit money in a bank, you are effectively making an interest-free loan, since the bank then uses your money to make profitable loans to business, homeowners, and the like. The only reason we accept such low returns on our deposits is that the money is backed by the full faith and credit of the U.S. Government–it is zero risk.
Where there is subsidy, there is the potential for leverage. Policymakers could tell banks, hey, we are over here guaranteeing your deposits, and in exchange you need to do a hell of a lot more to serve communities. Yes, the Community Reinvestment Act does require them to do some community work, but nowhere near enough. Or look at energy utilities, which are regulated monopolies: regulators set the profit margin that the utility can achieve. And yet utilities often lobby hard and successfully, despite their guaranteed profit, to prevent policies that benefit ratepayers and the environment. If we were to transform that subsidy from one that benefits the utility’s investors to one that benefits the climate and families, just imagine the good that could be done!
I probably could have titled this In Praise of Good Subsidy, for the social entrepreneurship movement has instilled in many of us the idea that the best kind of social change organization is the one that doesn’t require subsidy in the form of grants or donations–that subsidies are a sign of a bad business model. But if oil companies and financial institutions and drugmakers and the uber wealthy benefit from all manner of subsidies that do nothing but make them richer and more powerful, why should those of us seeking to do good be expected to eschew subsidy? Shouldn’t the effort be to eliminate bad subsidies and dramatically ramp up good subsidies? I would argue that if the public policy debate were driven by that question–and if we stood up to the powerful and made choices that aligned with the interests of the rest of us–we would see far more equitable outcomes in every sector of our economy and society.