Podcast: Payday Loans and Health Care Litigation
In this Kosmos podcast, I'm joined by Humane Studies Fellowship winner and PhD/JD Candidate at the University of Alabama, AK Shauku. AK is currently doing research on payday loans and the ongoing litigation surrounding the health care reforms.
JH: Welcome to this Kosmos Online Podcast. I’m Jeanne Hoffman. Today I’m speaking with A.K. Shauku who has joined us to talk about some of his current research in health care litigation and payday loans. A.K. is a PhD JD candidate at the University of Alabama and a Humane Studies Fellow. Welcome A.K. and thanks for taking the time to talk with us.
A.K.: Thanks for having me.
JH: So you’re currently pursuing your JD and PhD in political science. Why both?
A.K.: Why both? Well basically I initially intended to go to graduate school to study either political science or economics. But I actually had a hard time narrowing it down between political science and economics. I can sort of talk a little bit about how I split the difference there. But, basically what I ended up doing was realizing that in order to study institutions and regulation in the way that I wanted to, I needed to have a nuts and bolts mastery of the law. The type they don’t give you in graduate programs. So I figured I need also to study the law.
JH: And then you mentioned splitting the difference between economics and political science. What concerns are you taking into consideration there?
A.K.: I’m interested in political economy and there are not too many programs that do exactly what I wanted it to do, which is basically study the intersection of law, politics and economics particularly in the field of constitutional political economy. So what I basically did was I got admitted into the program as a PhD/JD student and there’s a newly established program to do that. But then I went to my graduate studies committee and I said, well I’m doing a PhD in political science, but that’s not exactly what I want to do. I actually want to study political science and economics, particularly as they interact with one another and be able to use economic methodology to study political processes in institutions. And they said, well write us up a proposal so I wrote up a proposal about what I really wanted to study. The committee approved it and so I am actually working on a JD/PhD in law, political science and economics.
JH: Could you tell us a little bit about your work in defense of payday loans?
A.K.: Well it’s not often you hear people defending payday loans. But I’ve always been a contrarian I guess. Basically I would hear the sorts of rhetoric that were thrown out about payday loans and some of it sounded fishy. At one point I was at my law school, University of Alabama and a group, a non-profit group that advocates for issues on behalf of the poor, they came in and they gave a presentation and they basically wanted to recruit law students to work with them as a public interest.
And I was excited about the opportunity to work with this organization and they do a lot of good work. But when it got to the segment in their presentation about payday loans I realized that you basically had lawyers doing very bad economics and basically lawyers making economic policy, or at least wanting to, and it was not pretty. So I got into a big argument with the lawyer in charge of this particular organization and basically she gave ground on the economic argument but retreated to her moral argument and it never quite seemed to click that her moral argument was really premised on certain economic facts being a certain way and that is the part of the argument that she had lost and had conceded as much. So that’s how I got started in dealing with payday loans and I decided to sort of write out where she was getting it wrong and I ended up working with a law professor of mine who teaches contract law at the law school but she works in contract studies generally and regulations with respects to contracts and finance and things of that nature.
But at any rate, we basically sort of mapped out what my research program was going to look like. Basically when you’re looking at public policy there are two main justifications for a particular regulation. There’s the externalities argument and there’s the paternalism argument. And what I basically do in my research program and in a paper that I am just finishing up on this particular subject is I say look, here’s the externalities argument, here’s the paternalism argument and I express some skepticism about the validity of the paternalism argument, but I say, look if you look at payday loan regulations at either through the lens of the externalities argument – which basically says you know we can regulate certain types of activities if they create significant negative spillover effects for others -- or the paternalism argument which says we can regulate certain activities for your own good. And I basically said if you look through payday loans through either of these lenses, the empirical evidence does not actually add up to a justification to restricting these types of transactions. Truth-in-lending, that’s fine, but the idea that a third party can come in and determine what the correct price is or determine these transactions should not be allowed at all is just not justified by the evidence.
JH: Do payday loans hurt the people who are taking them out?
A.K.: There is some risk of financial distress when someone takes out a payday loan. The problem with that argument is that it proves too much. There is some risk of financial distress when you do just about anything. Any productive activity, any consumption, whether you go out and buy a new pair of shoes and that produces a possibility or at least some risk of financial distress. Your consuming over here precludes consumption over there. And so there’s always some degree of risk. The question is always what degree of risk and does it rise to a level of unreasonable or substantial risk? And for that you really have to compare it to other things and so for a lot of my research what I’m doing is I’m comparing payday loans with other types of financial products, particularly products that have been on the market for a long time and there’s no indication that they’re going away anytime soon.
One of the things that I compare payday loans to are credit cards and payday loans actually have, even though in large part you are dealing with… it’s a mixed demographic you’re dealing with in terms of the typical payday loan customer. They are somewhat more likely because of selection effects to be people who are more likely to misuse credit. But even that being the case, even dealing with a demographic that tends to skew towards those that misuse credit, they actually have a 65% lower rate of default on payday loans then credit cards. And I thought wow. But the reason why is the structure of the loan itself.
The loan is structured in such a way a lot of critics take issue with the short time period you have to repay the loan or the strict limit on how much you can borrow. But if you can only borrow as much as your next paycheck, as is the case with the payday loan, and you know the amount that you borrow today must be paid back on your next paycheck, then not only are you constrained with the amount that you can borrow, but you don’t have the same same risk that you’re going to overestimate how much you can pay back over time or underestimate how much the rate of repayment is going to actually be.
With a credit card it compounds over time and it’s easy to underestimate how much that compounding is going to end up translating to in terms of a dollar amount. With the payday loan, when you sign the form, it has an actual dollar amount that you will be paying back, in many cases, two weeks from today. So I borrow a certain amount today and I pay back that amount plus a finance fee. It’s actually not an interest rate at all so much as it’s a borrowing fee, a finance fee. But I know exactly the dollar amount that that’s going to be two weeks from today. So the cognitive biopsies that we worry about when people get in over their head with credit, it’s not as likely with the structure of a payday loan.
JH: So that was kind of an example of the use of your economics, political science side of your studies. You’ve always put your JD to good use in following the health care litigation. Could you tell us about your work there?
A.K.: Well I’m actually tackling the health care legislation of Patient Protection and Affordable Care Act from several different angles, from how such an ambitious piece of legislation of the health care industry even got passed in the first place, but also tracking the litigation that immediately arose following its passage. So what I’ve basically been doing is researching and writing about the challenges across the country that arose and have been rising through the federal courts around the PPACA legislation.
What I’ve basically done is tracked each-- I say major case. I basically have examined each case that has made it at least as far as the circuit courts and I’m looking at the main arguments of each side, the main arguments of the challengers and the main arguments of the government and trying to determine, as Randy Barnett says there’s three ways you can determine whether something is constitutional: whether something comports with the text of the constitution, whether it comports with what the Supreme Court has said the constitution means or whether you can get five votes on a Supreme Court panel for a given proposition.
And basically I’ve been looking at the arguments of each side and tracking the litigation up to the point where it is now where the Supreme Court has just agreed to hear the cases that arose in the 11th Circuit to answer the question of the individual mandate, whether the anti-injunction act would actually bar a challenge to the legislation.
JH: How do you use public choice in your research?
A.K.: Basically the way a lot of people in our government and a lot of people generally, even a lot of economists approach regulation and that’s primarily what I’m concerned with, is they say, there is some failure in the market. That is to say we have these idealized economic models, and I say idealized because we are assuming a way in an economic model, in a neoclassic economic model, many of the most basic elements of every day life.
So two of the main things we assume away are, we assume away imperfect information. We assume, in a model, that we have perfect access to and ability to process information. We also assume away transaction cost. Every time you do anything, even find out what movies are playing tonight, that’s a transaction cost. That’s something you have to do, a cost you have to incur in order to get the relevant information, in order to make a decision. In standard economic models we assume away two very important aspects of human life. But then that becomes a measure by which we judge an economic outcome. So we say if the market fails to reach a perfect equilibrium as judged by our idealized model then that’s a market failure. Therefore, what we need is a benevolent third party – the government – to come in and fix it. And usually you can look at a supply and demand curve and you can say, well the supply curve runs here and the demand curve runs here and they intersect there. And what we really want is we want them to intersect at another place, at this idealized equilibrium that they should, that the market should be reaching.
So what we’ll do is, if we’re the government, we’ll come in and we will move the supply curve by say subsidizing supply of something. Or we’ll move the demand curve. Maybe we’ll subsidize demand for a product or we’ll tax something if we want less of it to be demand, but in either case what we’re trying to do is achieve what our idealized model says should be achieved. We’re trying to overcome the failure of the market.
There’s two problems associated with this type of thinking. One is the model, this idealized model is just that. It’s an idealized model. We have to be very careful about making that the standard by which we judge real life events.
Second, we forget that the government itself is a mechanism, is an imperfect mechanism, just like the market, you might say the market is an imperfect mechanism. The government also is imperfect. And before we call it into fix the “failures” of the market, we have to assess whether the government outcome will actually be superior to the market outcome. It may be that the market failure is less than ideal. In many cases it is far less than ideal. The problem is what we have to ask ourselves is, is the government likely to make things better or worse and at what cost? And that’s where public choice comes in. It gives us an analytical framework to evaluate the constraints and incentives that public sector agents, you know in economics we deal with private sector agents, in public choice we can say let’s apply the same type of methodology and look at public sector agents; voters, politicians, administrative bureaucrats, these types of agents, let’s look at how they operate and let’s see if they are likely to achieve a superior outcome then what obtains under the market circumstance.
JH: See, you have served in the Armed Forces. I was wondering if that influenced your subsequent career path at all?
A.K.: I’m not sure actually. I do get this question fairly often and I’m sure it has. I mean basically my first education was through the Department of Defense. I joined the Army. I did the Defense Language Program. Basically the Department of Defense sends you to school and I trained as a linguist and a cryptologist. And I didn’t fully understand at the time what that meant I was supposed to do. All I knew was I was going to get to work as a translator and I thought that was cool.
What I ended up doing was studying Korean language and culture and going over to South Korea and working. This was during the time when North Korea was kind of thumbing its nose at the international community and sort of pushing ahead with its nuclear program. And I basically collected intelligence on North Korea during that time. And so basically I intercepted North Korean communications and translated them and reported back and basically just kept an eye on them during that whole tense period.
JH: So for the Million Dollar Question, what do you think you can do to contribute to liberty?
A.K.: Well I think I’m doing what a lot of great scholars are doing. I’m trying to sort of carve out a niche for myself which is basically to ask people and to present people with the appropriate evidence to undermine our belief, our sort of irrational belief in what the government can accomplish. I think throughout human history, people have given way too much power to their government based on an erroneous belief in what can actually be accomplished through government. The government is great, unlike some libertarian thinkers I don’t think there is a fundamental antagonism between free people and a government. But I think we tend to give too much power to government when we think the government is capable of doing things that it is in fact not capable of doing, or things we ought to be doing for ourselves.
When we a minute ago talked about comparing the market outcome to the government led outcome, I think that’s important. Too often the reflexive, knee-jerk reaction is I don’t like this given state of the world, therefore I demand that my government fix it. And I think that’s often what it comes down to. Some people even in our circles speak of those in the government as they’re sort of nefarious megalomaniacs bent on world domination. I think often the case is they’re well intentioned people who are being pressed upon daily to do more and more stuff, stuff that even they begin to realize is beyond their competence, yet you don’t get elected unless you promise the moon and the stars. And so we create this selection effect where we only elect people who either believe or at least are willing to say that they can in fact deliver the moon and the stars. And more and more freedoms are lost and more and more inefficiencies are introduced into our lives when we transfer over to an institution more than it can actually effectively accomplish.
And so that’s – I see my role as basically saying, these are the roles that the government does well, and these are the things it can’t do so well and these are the circumstances under which it is legitimate even from a normative point of view to invoke the coercive power of the state and these are areas where that sort of invocation is definitely off limits. So that’s where I see myself.
JH: Okay, well thanks so much for joining us, A.K.
A.K.: No problem, I enjoyed it.
JH: Great, and for more interviews on liberty advancing research, visit KosmosOnline.org. Providing career advice and intellectual resources for academics. And this is Jeanne Hoffman, signing off.
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