DRI-275 for week of 9-28-14: Touchdown-Celebration Prayer: Time for Separation of Church and Red Zone?

An Access Advertising EconBrief:

Touchdown-Celebration Prayer: Time for Separation of Church and Red Zone?

Fans of the National Football League (NFL) have become inured to the spectacle of celebrations conducted by players who score a touchdown. These actions have assumed a variety of forms, ranging from ordinary excesses of joy and enthusiasm like jumping up and down to esoteric rituals like spiking or dunking the football over the goalpost. Perhaps the most common form is some sort of gyration or celebratory dance. The practice originated among certain players whose fame depended at least as much on their self-promotional zeal as upon their athletic prowess – Deion Sanders, formerly of the Dallas Cowboys, comes particularly to mind.

Older readers will appreciate the striking contrast between this modern attitude and that exhibited by legendary stars of yesteryear like Jim Brown of the Cleveland Browns and Johnny Unitas of the Baltimore Colts. Brown, who may have been the greatest running back of all time, was slow to assume his stance prior to the center snap of the football and even slower to rise after being tackled when running the ball. His demeanor was impassive. He conserved his energy and saved his exertions for the time between the snap and the referee’s whistle signaling the end of a play. Did this account for the fact that his average-yards-gained per carry was the highest of any Hall of Fame runner?

Unitas was similarly deadpan on the field. As quarterback for the Colts, he terrified opponents and awed teammates with the knack for leading his team from behind in the closing seconds of a game. But fans could never have guessed by looking at him whether he had just been sacked for a loss or thrown the winning touchdown pass as time expired. If any of his teammates had ever done anything as gauche as celebrating a long run or spectacular catch, they would have been frozen solid by the icy stare known throughout the NFL as the “Unitas look.”

In the so-called “greatest football game ever played” – the 1958 NFL championship game between the Baltimore Colts and the New York Giants – Unitas provided the prelude to victory by completing a daring sideline pass to tight end Jim Mutcheller in the Giants’ one-yard line in sudden-death overtime. At the post-game press conference, a reporter ventured to question Unitas’s play-calling decision: “That was a pretty dangerous pass, wasn’t it? What if it had been intercepted?” The reporter was the first televised victim of “the look.” “When you know what you’re doing,” Unitas replied without needing to raise his voice, “they’re not intercepted.”

Nowadays many players feel obligated to supplement the audio and visual record of play supplied by television by advertising what has just happened. The newest wrinkle on this style of irrepressible self-expression is praying in the end zone after scoring a touchdown.

The Abdullah Case and Ensuing Fallout

In the fourth quarter of a game between the Kansas City Chief and New England Patriots at Arrowhead Stadium on September 29, 2014, New England quarterback Tom Brady completed a pass to Kansas City safety Husein Abdullah. Abdullah traversed the 39 yards to the New England end zone, where he dropped to his knees in prayer.

End-zone touchdown celebrations are now so commonplace that rules have been drafted to cover them. One of those rules forbids celebrating while “on the ground.” The referees invoked this rule, penalizing the Chiefs 15 yards on the ensuing kickoff for “unsportsmanlike conduct.”

That did not end the matter, though. Two days later, the NFL’s league office announced that the official decision had been in error. Why? It seems that “there are exceptions made for religious expressions,” according to NFL vice-president for football communications Michael Signora. But the referees may have been confused by Abdullah’s body language; he slid on his knees rather than simply kneeling down. Probably sensing an opportune moment, the well-known organization CAIR (Council on American-Islamic Relations) lodged an objection to the original ruling. According to an article in the Kansas City Star (“NFL Admitting Error on Abdullah Flag,” October 1, 2014, by Tod Palmer), “Abdullah is a devout Muslim.” The CAIR spokesman urged the league office to “clarify the policy” so as to “avoid the appearance of a double standard” for Muslims and non-Muslims.

The sensitivities of Americans have been abraded by over a half-century of controversy over the separation of church and state. Now the debate over public religious observance has invaded the football field or, more specifically, the end zone. Will theologians have to be on call for replay decisions by officials? Should the NFL nail a thesis on the separation of church and red zone to the main gate of its stadiums? Is all this really necessary?

The Economics of Player Celebration 

Does associating end-zone prayer with celebration seem odd? Abdullah himself referred to his action as “prostrat[ing] myself to God.” Still, the religious faithful at their devotions are often called “celebrants.” In any case, the attributes of prayer and those of celebration are virtually identical in this particular context, which allows us to apply economic principles to both types of action. Both interrupt the normal flow of play and divert attention away from the game and to the celebrant. A case exists that each kind of action might either please or annoy a football fan.

One interesting thing about this example is the diametric tacks taken by the economist and the non-economist. The non-economist feels compelled to ascertain whether prayer itself is “good” or “bad.” A particularly discriminating non-economist might put that to one side and focus on whether or not prayer is a good thing in this particular context; e.g., on a football field with hundreds of millions of spectators. The economist may or may not feel qualified to supply answers to those questions, but does not care about the answers because they needn’t be answered by any particular individual. Markets exist to answer questions that individuals cannot or should not answer. 

Professional football is an intangible product supplied by the National Football League and its member franchises (teams) to consumers (fans). That product consists primarily, but not solely, of competitive athletic performance. A rhetorical question posed previously in this space asked: If O. J. Simpson were still in full flower of his athletic skills, would he be working as a running back in the NFL, all other things equal? The obvious answer is no, because football fans do not want to watch murderers play professional football, no matter how talented they may be.

The advent of touchdown celebration allows us to add another qualifying example to our definition of the pro-football product. To the degree that some fans enjoy and even encourage end-zone celebrations, it is clear that they derive satisfaction (or utility, in economic jargon) from this practice. That means that the pro-football product is defined as “competitive athletic performance plus entertainment.”

This is not merely an ad hoc formulation cobbled together by an economist for a column. In the same edition of the same Sports section of the Kansas City Star as the story of the NFL’s recantation of the penalty on Abdullah, the adjacent story is a profile of Chiefs’ cornerback Sean Smith. Study Smith’s comments about his flamboyant style of play and the attitude of Chiefs’ coaches to the on-field exhibition of his personality.

“‘I think (the Miami game) gave the coaches a chance to see that when I’m able to go out there and just be myself and let my personality hang out there, not only do I play well, but people feed off my energy,’ Smith said.” [Quoting reporter Terez A. Paylor] “‘Smith, like his other more animated teammates, appreciates Coach Andy Reid’s philosophy. He encourages his players to play with passion and let their personalities shine through on the field, and Smith has embraced that approach this season.'”[Back to Smith again] “‘Coach emphasizes to let your personality show, go out there and cut loose, and be yourself and have fun…That’s something I definitely took personal. I’ve been a very enthusiastic guy. I like going out there and having fun and putting a smile on people’s faces.'”

This constitutes an implicit endorsement by a player and head coach, as cited by a beat reporter, of the economic model developed above.

Does this mean that end-zone celebrations are a good thing? Does it mean that players have a right to indulge them? Does it justify the NFL’s policy? Or condemn it? The answers to these questions are various forms of “no.” End-zone celebrations are one more input into the productive process, no better or worse a priori than any other. They may or may not be appropriate. Players have no “right” to indulge in them because players do not control the production process – the team does. The NFL is the franchisor; it has the right to control end-zone celebrations only if they affect its ability to provide the right competitive environment for the teams and not when only team profitability is at stake.

A last key question may be the one most frequently asked when this issue arises in public controversy. What about the player’s “right” of free religious observance?

Why Freedom of Religion Does Not Guarantee the Right to Celebrate in the End Zone 

Freedom is defined as the absence of external constraint. It does not guarantee the power to achieve one’s aims over opposition; in particular, it does not confer rights. A right can be enjoyed only when it does not abrogate the exercise of somebody else’s right. A contract is a voluntary agreement that imposes legal duties on both (all) parties to it.

These definitions lay the groundwork for our understanding of prayer in the end zone.

Husein Abdullah is an employee of the Kansas City Chiefs football team. He helps produce professional football entertainment but he does not control the mix of inputs into that product. The team decides who the other players will be, what style of football the team will play, what offensive plays the team will run, what defensive sets the team will employ, who the coaches, assistant coaches and trainers will be. If the team chooses all these inputs into the production of professional football entertainment, why should it not also control the nature of end-zone celebrations? Of course, the team may opt for spontaneity by giving free rein to players’ imaginations, just as conventional entertainers in show business may opt for improvisation over a scripted performance. Still, the team will almost certainly forbid players from celebrating by making obscene gestures to opposing players, revealing intimate body parts to fans and performing other acts virtually guaranteed to offend fans rather than entertaining them.

So we should hardly be astonished if the team should choose to regulate an action as potentially sensitive or embarrassing as an act of religious observance – should we? And, speaking as students of economic logic, we can make no objection to that – can we?

How about Husein Abdullah? Or, for that matter, any religious celebrant of any religious denomination? Is he being treated unfairly? Are his rights being violated?

No. As an employee of the team, Abdullah works at the direction of the team and for its benefit. The fact that Abdullah is engaging in a religious observance in this particular case is irrelevant. Abdullah certainly has freedom of religion. He has freedom of speech, too, but that doesn’t give him the right to say anything and everything under the sun in his capacity as an employee with no fear of repercussion.

Suppose Abdullah were an employee working in an office building. Does he have the “right” to pray at the top of his lungs while wandering around and between the desks of his fellow employees? No, he has no right to disrupt the workplace in this fashion even with the excuse that freedom of religion allows him the right of religious observance. Similarly, his “right” to pray in the end zone is circumscribed by team policy.

Does this mean that the Abdullahs of the world are inevitably booked for disappointment in their longing to prostrate themselves before God in the end zone? There is no reason to think so. We know, for instance, that celebrations were once frowned upon and suppressed yet are now practically de rigeur. There seems no way to predict what twists and turns this penchant for celebration will take because there is no way to predict how the tastes of the public will change.

Are we afraid that “discrimination” against unpopular minority groups (Muslims, for example) will proliferate? No, we are not, because in this context the term discrimination loses its familiar colloquial meaning. There is no arbitrary exercise of power against a group because no business has a duty to employ all inputs to an equal degree. Instead, businesses have a duty to their owners and consumers to employ inputs based on productivity precisely by discriminating in favor of the more productive and against the less productive. Whether the inputs are engaging in religious observance, speech or any other activity does not matter. If a player can produce a productive form of celebration, this will make money for his team and provide the player with a celebratory meal ticket. If not, the player will lose the privilege of celebrating in the end zone. Business is not about what the boss wants or what employees want – it is about what consumers want. Economists characterize this principle as consumer sovereignty.

If a player demands a right to pray in the end zone, what he is really demanding is not freedom, nor is an exercise of a valid right. Rather, it is the power to abrogate his duty to his employer at whim. As often emphasized in this space, this confusion of freedom and power suffered by the general public has been repeatedly exploited to political advantage by the left wing.

The Absurd Position in Which the NFL Finds Itself

The framework for analysis outlined above is simple and logical. It is an outgrowth of the system by which we divide labor to produce and exchange goods and services. The pellucid clarity of this system stands out in brilliant contrast to the existing framework under which the NFL currently operates.

The NFL currently has rules governing player celebrations. These rules are part of the code that governs play on the field. Violations are punished with penalties such as the one Abdullah earned for the Chiefs. Consequently, the rules must be mastered, interpreted and applied by the referees. Inevitably, as with all sports decisions made by referees or umpires, subjective perceptions and interpretations cause mistakes and controversy. (The distinction between kneeling and sliding to his knees probably reminded Abdullah of the judging on Dancing With the Stars.) Meanwhile, the entities whose interests are most directly affected – team ownership and management – must sit back and await the chance to appeal any wrongful decision later.

And the fans – the people for whose benefit the system operates – don’t get any direct say in this administrative process. Whereas in a competitive market, input from fans directly determines the nature and extent of player celebrations, the regulated market gives immediate control to the administrative mechanism of the NFL. This allows the entertainment part of the product to contaminate the competitive part when penalties are levied for unsportsmanlike conduct, whereas under a competitive system the team handles problems of unsuitable celebration outside of the context of the competitive contest.

That’s not all to object to about top-down regulation of end zone celebration by the NFL. In fact, it may not even be the worst. The Abdullah case illustrates the political hazards of the top-down approach. The NFL began by wanting to suppress inappropriate celebration, which is surely not objectionable in and of itself. By doing the regulating itself instead of leaving it to the market, the NFL left itself open to the pressures of every special interest with an ax to grind. Because the NFL has no special interest in the profits of any one team, it has no incentive to favor popular celebration. Because the NFL is a bureaucratic organization, it is open to influence by every special interest with an ax to grind, CAIR being the most recent to step up to the grinder.

Suddenly, the NFL finds it can’t simply ban a form of celebration it doesn’t approve of (by “any player on the ground”) because that would run afoul of “religious observance.” Imagine – religious observance interfering with the conduct of a football game, when previously the only thing the two had in common was Sunday. And the minute the NFL starts making an exception for “religious observance,” it then has to confront the issue of different – and conflicting – religions. Wonderful – the two things attendees at a dinner party are never supposed to mention are politics and religion, and both are now elbowing their way into the end zone. What next? Will Stars of David start popping up on player helmets as an expression of their “right of free speech?” If only the fans had the power to throw a flag against the NFL for interference!

The General Principle at Work Here 

Americans have forgotten the value of allowing markets to decide basic questions. A recent Wall Street Journal op-ed commented offhandedly that we have lost confidence in free markets as a result of the Great Recession. If so, this is a monumental irony, since that event was caused by the interference with and subordination of the market process. It is not clear how much of the current attitude originates with a loss of faith and how much with simple ignorance. Regardless of the source, we must reverse this attitude to have any hope of survival, let alone prosperity. We know markets work because the world in general and the U.S. in particular would never have reached their present state of prosperity unless markets were as effective as free-market economists claim they are. The pretense that regulated, administrative markets are a vehicle for perfect “social justice” is not merely a sham – it is a recipe for tyranny. Administrators possess neither the comprehensive information nor the omniscient sense of fairness necessary to decide whose celebrations to allow, which ones to ban and what standard to apply to all.

The best thing about the example of touchdown celebrations is that they provide a side-by-side illustration of free markets and regulated administrative markets. The free market is player celebrations as they evolved in recent years, encouraged by fan response and governed by individual teams. The Kansas City Star excerpts show in so many words that this market exists and the evidence of our senses shows that this market works just as economic logic predicts that it will. And our ever-more-dismal experience with top-down, bureaucratic NFL regulation shows that rule by fiat and by ventriloquists in the chattering classes is an escalating failure.

What about the older fans who are appalled by player celebrations and long for the good old days of strong, silent, heroic players like Brown and Unitas? Why, we’ll just have to find a team that suits our tastes – or found one.

DRI-380 for week of 7-29-12: The OYPI Challenge Returns: Religious Belief, Overpaid CEOs and Payday Loans

Religious Belief, Overpaid CEOs and Payday Loans

Regular readers of this column may recall the OYPI Challenge. The acronym OYPI stands for “Oh Yeah? Prove It!” It questions the validity of popular lore by challenging believers to back their beliefs with action – and cash. Accepting the challenge demands only the courage of one’s convictions, since the challenged beliefs imply the opportunity for easy profits to be made. How much courage does it take to pick up a $1000 bill lying on the sidewalk?

The underlying thesis of the OYPI Challenge is that talk is cheap, and the world is full of people saying things they don’t believe for purposes of political or personal gain. It would be shocking if this thesis were wholly original, and there is evidence to the contrary. In his recent book The Big Questions (2009), well-known economic popularizer Steven Landsburg develops an example that incorporates this fundamental insight implicitly.

Steven Landsburg on the Shakiness of Religious Belief

In the chapter entitled “What Do Believers Believe?” Landsburg casts doubt on the strength of wholesale religious belief. Noting that “the beliefs I go around repeating are the ones I don’t really believe…but when I pass the threshold to actual belief, I stop reviewing the matter,” Landsburg cites the widespread need for religious observance as one indicator of the shakiness of real faith.

He goes further by drawing inferences analogous to those implied in the OYPI Challenge. In principle, believers should commit fewer crimes, since they face punishment in the hereafter, not merely in the here and now. He finds no statistical case to support this proposition. Believers should fear death less, since the possibility (or certainty) of life after death should reduce the loss suffered as a result of death. Once again, Landsburg rejects little or no evidence to support this notion. (Willingness to die for the faith, whether as a Christian martyr or an Islamic suicide bomber, seems decidedly scant.)

The anxiety to publicly engage in “interfaith dialogue” seems similarly suspicious, since it implies indifference to what are purportedly life’s guiding principles. Since religions proffer theories about the origin of the universe, the earth, life and its progression, one might expect that believers would specialize in the study of these matters. But they don’t.

It is true, Landsburg concedes, that some 90% of Americans profess belief in God. But this is suspect because there is so seldom anything of consequence riding on our beliefs or their expression. This explains why people so often give wrong or contradictory answers to pollsters.

From our perspective, the most intriguing thing about Landsburg’s analysis is its generic resemblance to our OYPI Challenge. Landsburg recognizes that public discourse is overrun with insincere and superficial professions of belief. He recognizes the reason why this is true; namely, that expression is costless; e.g., “talk is cheap.” Moreover, people are seldom motivated to probe or challenge their own professions of belief.

Ironically, Landsburg seems not to notice that he has conflated the problems of the existence of God and the origin and purpose of life with the nature and tenets of various organized religions. He seems equally unconscious of the fact that most of the best writing on religion and faith, both secular and theological, has addressed the issues he raises. Landsburg may have overlooked his debt to writers such as C. S. Lewis and Graham Greene, but we should not overlook ours to Landsburg for reinforcing the bedrock logic underlying the OYPI Challenge.

Our OYPI Challenge is objective in character. The result of the challenge is measured in dollars and cents. The believer is challenged to demonstrate financially both the truth of his belief and his confidence in it. Failure – or failure to respond – refutes the belief.

Overpaid CEOs

The current brouhaha over CEO pay owes much to the Occupy movement, which created the artificial distinctions of “1%” and “99%” as a way of dehumanizing and demonizing the possession of great wealth and high income. The greater the separation between “the rich” and the rest, the smaller the number of demons in comparison with the number of those possessed, the greater becomes the volume of outrage generated by the movement. CEOs are a highly visible minority, severely limited in number, whose activities are remote from the experience and sympathies of most people.

The popular theory of CEO overpayment goes something like this: CEOs are employed by corporations, which are inherently evil. Corporate boards of directors are rubber stamps of management, which somehow influences the board to pay the CEO in excess of his or her true worth. The gains to the CEO (and perhaps to the board, through bribery) come at the expense of rank-and-file workers – hence the dichotomy between the 1% and the 99%. This disproportion can be proved by two kinds of comparison: cross-section (U.S. CEOs compared to, say, Japanese CEOs) and time-series (the ratio of CEO-to-worker pay now compared to that in the past).

To those who (claim to) believe this thesis, this is the OYPI Challenge: Start a corporation in competition with one or more whose CEO is “overpaid” according to your criterion. Form a board of directors whose mission is to hire the lowest-paid CEO that can be found. Raise the wages of hourly workers in correspondence with the relative decline in salary paid to the CEO. According to the overpaid CEO hypothesis, one or both of two things should happen: the firm’s productivity and profits will increase because it will recruit higher-quality workers, or the firm will simply enjoy normal profits with a lower-earning CEO and higher-earning workers.

The reasons why nobody bothers to rise to this OYPI Challenge go beyond their skepticism of CEO pay. Part of the problem is the hypothesis being challenged. For example, consider the ambiguity of the phrase “in correspondence with.” If this is interpreted to mean “pay the CEO 15% less than average and pay the workers 15% above the market wage,” its unworkability sticks out like a nose bitten by a bumblebee. The firm would save 15% of a CEO salary but lose 15% of a much-larger wage bill; it would go broke in short order. Furthermore, the implication that all CEO’s are interchangeable but some workers are better than others seems contraindicated by the facts.

On the other hand, the phrase might be interpreted to mean “distribute any savings from CEO pay among workers in the form of hourly wage increases.” But this would mean distributing a few million dollars among thousands of workers over the course of a year’s wage earnings. The gains would be real enough, but negligible in size. Certainly they wouldn’t make a discernible dent in the overall distribution of income even if generalized across an entire economy. So much for the “CEO gains are workers’ losses” component of the overpaid CEO hypothesis.

Why are so many of us dubious about CEO pay but more than willing to endorse multimillion-dollar earnings for professional athletes and entertainers? They experience the value created by movie and rock stars viscerally and personally, while their grasp of CEO impact on the bottom line is shaky. They know the difference between a first-string and second-string quarterback, but the distance separating a first-string CEO from a second-stringer eludes them.

Yet there is a market for corporate managerial talent, just as for athletes and actors. The people who pay CEO salaries are not board members but shareholders. Theirs are the pockets CEO pay comes out of, not the corporation’s hourly workers. Labor is also purchased in a market. It the firm pays too little, it can’t buy the workers it needs. If it pays too much, it goes out of business. CEO pay is unrelated to the firm’s payment of its workers. So much for the “Management controls the board of directors which picks the CEO” component of the overpaid CEO hypothesis. So much for the “CEOs are paid more than their true worth” component of the hypothesis.

Time-series comparisons of CEO and worker pay are not meaningful because there is no technological or economic reason why those ratios should remain steady over time. Over the course of the 20th century, athletes and entertainers increased their earnings tremendously compared to those of their bosses. The reasons for this were both technological and economic. While this was happening, it also became possible for CEOs to add more shareholder value to the firms they managed. Consequently, their salaries and bonus earnings increased accordingly.

Cross-section comparisons between American and Japanese CEOs presumably reflect political and cultural differences that blur the relevant distinctions. But here, as elsewhere, the OYPI Challenge emerges to cut through the murk and clarify the issue: If Japanese firms pay their CEOS less and otherwise perform as well as U.S. firms, there should be more left over for shareholders, the residual claimants of the firm’s earnings. So, a corollary OYPI Challenge is that believers of the overpaid CEO hypothesis should invest in Japanese firms and brandish their above-normal rates of return as proof of their hypothesis. If they can produce them, that is.

The hardest part of dealing with the overpaid CEO hypothesis is not refuting it; it is stating it in a form that is halfway sensible in the first place. But the inescapable truth is that supporters of this hypothesis are implicitly alleging the existence of a free lunch, a $1000 bill just lying there on the sidewalk, waiting to be picked up but languishing all by its lonesome because nobody notices or cares that it’s there. In reality, the overpaid CEO hypothesis is one more myth laid low by the ultimate myth buster, the OYPI Challenge.

Payday Loans

For sheer heart-tearing poignancy, no concert for strings can match a publicity campaign against “payday loan” or high-interest loan companies. High-interest loans are those whose interest rate exceeds that normally carried by bank, finance-company or even pawn loans. The loans are unsecured, which gives them the highest risk.

The term “payday loan” derives from the popular practice of arranging the term of the loan to expire on a future payday, thus insuring that sufficient funds for repayment will be delivered in the borrower’s paycheck. Standard operating procedure is to provide bank account information – account number, routing number, etc. – to the loan company, which then automatically debits the borrower’s bank account for the loan service fee or repayment, whichever is the case.

The “first law of finance” is the inverse relationship between risk and rate of return. The extreme high risk of payday loans comes from the fact that they are unsecured loans made to those who cannot qualify for any lower-cost alternative. Thus, payday loan borrowers typically cannot qualify for (or have maxed out on) a credit card or a consumer finance loan or mortgage, and have exhausted all other borrowing alternatives. The first law of finance postulates the inverse relationship between the rate of return of any asset and its risk. In the case of payday loans, this can mean that borrowers may pay an effective annual interest rate to maturity exceeding 400%. Only true loan sharks – that is, members of organized crime who use physical violence to collect on their loans – charge higher loan rates of interest.

A jeremiad against payday loan firms goes something like this: Evil, greedy lenders prey on poor, unsuspecting borrowers by lending them money at stratospheric, usurious rates of interest. Once sucked in by the irresistible lure of immediate cash, the borrowers are caught in a fatal downward spiral of debt repayment at 400%+ annual rates of interest. The only way to prevent these financial merchants of death from sucking the wealth of the poor into their own pockets is by driving the payday lenders from the market or, at a minimum, capping the interest rates they charge.

The countervailing OYPI Challenge is this: Apparently, payday-lender-enders believe that payday-loan firms have discovered the financial equivalent of the perpetual motion machine – a way to turn the poverty of the poor into their own wealth. OK, prove it – start your own payday loan firm and charge (say) a mere 200% or so effective annual interest rate. You’re lifting a heavy burden on the poor by cutting their costs in half while proving your contention that those dreadfully high payday loan interest rates are indeed abusive, excessive and unnecessary for the operation of a viable high-risk loan firm.

Of course, that is the $64,000 question – do the crusaders really believe their own inflammatory rhetoric? A local talk-radio host in Kansas City, MO recently offered a counterproposal to draconian legislation against payday loan firms; namely, that religious charities should loan money to the poor at a rate of 4%. At this point, one is moved to inquire: Why not 3%? Or 2% Or 1%? Why charge any interest at all?

The charging of interest reflects the phenomenon that economists call “time preference.” People prefer consumption in the present to consumption in the future, and the interest rate is an index of the discount placed on future goods – the farther out, the greater the discount. (If this were not true, the productivity of investment would induce an infinite amount of saving, since it would always be possible to increase the amount of real income available for consumption purposes by saving.) The interest rate charged by a lender must be at least sufficient to assure him or her of consumption opportunities greater in the future than those available today.



Super-high interest rates reflect the fact that unsecured loans made to low-income, bad-credit borrowers result in extremely high default rates. Thus, interest payments made by current borrowers must be sufficient to compensate for these defaults, which are simply written off by the payday-lending firms. (Mafia loan sharks, by contrast, never write anything off the books and collect in pain, suffering and death what they cannot collect in cash.) Anybody who doubts that 400% interest rates are necessary to insure a profit plus a rate of return commensurate to the risk has simply never been in the business.

In reality, the payday loan business is a highly competitive business just like any other competitive business. The dozens of recent entrants in national and local markets, like Cash America, have succeeded in lowering the effective interest rates somewhat from the norm of $30 per month per $100 borrowed (an annual repayment total including principal of $460). The fact that those rates remain very high is proof that the OYPI Challenge will not be successfully met.

Incredibly, a question often posed by payday-lender-enders is: Why would anybody borrow money at 400%+? Isn’t this presumptive evidence of economic stupidity, justifying community action to save borrowers from themselves? Put this way, the question virtually answers itself. Payday-loan (or high-interest loan) customers are those who need money quickly and lack alternative access to money or credit. Legitimate needs are legion, ranging from home and automotive repairs to pet medical emergencies to avoidance of fees for overcharges and defaults. Really, virtually any sudden need might give rise to a payday loan, and people from every strata of society have sought them.

The truly penetrating questions are never asked. What gives payday-loan critics the right or the hubris to run the lives of borrowers by denying them access to the only form of credit open to them? What gives them the right to virtually run law-abiding businesses out of business? How would they feel if somebody came along and began running their lives based on confused and inaccurate analysis?

The OYPI Challenge Strikes Again

Public discourse is traditionally like the weather; everybody talks about it but nobody does anything about it. Everybody goes on believing what they began believing on the basis of their instincts and emotions. Nobody subjects their beliefs to scrutiny or test.

The OYPI Challenge is truth’s counterattack against the encroachments of habit, superstition and fable. It poses what the great economic historian Deirdre (formerly Donald) McCloskey called “the American Question: If you’re so smart, why ain’t you rich?” In McCloskey’s vein, we might call it “the American comeback: Put up or shut up.” After all, the one distinctive American school of philosophy is pragmatism.