The Subprime Welfare State? Payday Lending, PRWORA, and State Politics

• In Event: The Politics of the Credit Welfare State: Access, Inequality, and Democracy

Abstract

The comparatively small U.S. welfare state has been explained in part by the comparatively robust consumer credit markets that have supplemented social programs (Prasad 2012, Trumbull 2012). These analyses are largely centered on prime credit markets, using data on housing credit or total household debt loads. By contrast, this paper tests the welfare-credit substitution hypothesis at the margins of the credit welfare state, looking at the relationship between subprime credit markets—specifically payday and auto-title lending markets—and state-level TANF programs.

Payday and auto-title loans emerged in the wake of federal banking deregulation, and markets for these products expanded significantly over the 1990s and early 2000s. Between 1990 and 2000, nearly two-thirds of U.S. states passed bills legalizing the high-cost loans that would have otherwise been prohibited by existing consumer credit regulation. During this same time period, state governments began shrinking public cash assistance programs, a process that accelerated after PRWORA was enacted in 1996. However, significant variation in both TANF program rules and fringe credit regulation exists across states. Did policy-makers consider fringe credit to be an alternative to public assistance?

Using an original longitudinal dataset tracking fringe credit regulations in all 50 states, I estimate the effect of authorizing payday or auto-title lending on income eligibility thresholds for state TANF programs. I hypothesize that TANF programs should have more restrictive eligibility rules after a state legislature authorizes payday or auto-title lending, as compared with eligibility rules prior to authorization. I find some evidence for this hypothesis, and also find that the effect is higher in more urban states with larger populations of racially marginalized groups.

Author

• Rhea Myerscough, University of California, Berkeley