Author Archive | Todd Zywicki

The Economics of Credit Card Security

The WSJ has an interesting article today on the Target credit card security breach. As the article notes, the US card system is less secure than elsewhere in the world, most notably Europe, which has a “chip and PIN” system, which has a computer chip embedded in the card and requires the purchaser to insert a PIN as well to make a transaction. The Target security breach has led many to wonder–and implicitly the WSJ–why the US has lagged on adopting this more secure technology.

Well it turns out that the economics of credit card security is more complicated than it appears at first glance. But first, an important thing to keep in mind: historically the United States has been a high-trust, low-fraud country when it comes to payment card usage. For example, the conventional practice of handing over your credit card (or debit card) to a waiter in a restaurant and having him disappear into a back room with it is something that must strike people in other countries as somewhat bizarre. Nevertheless, we do it all the time and rarely does anything go wrong in this process. So, this makes a difference–in a high-trust, low-fraud country it generally is not necessary to invest in as elaborate security protections as elsewhere. As an analogy, consider that in the U.S. very few restaurants, stores, or hotels routinely post visible armed guards at their front door, whereas this precaution is not uncommon in other countries.

With that background in mind, the WSJ article contains some interesting numbers relative to the optimal level of credit card security.

First, consider the size of the potential dollar size:

But if the chip cards were used in the U.S., fraud losses could be halved, Aite Group estimates. U.S. merchants and banks had 2012 losses of

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Payday Lending and Overdraft Protection

I’ve noted previously, I have a forthcoming paper with former Comptroller of the Currency Robert Clarke that examines competition between payday lending and bank overdraft protection. The central point is easy to grasp–payday lending and overdraft protection are products offered by different providers but which compete for the same customers. And evidence indicates that in choosing between the two products consumers generally choose rationally.

The point came to mind (yet again) reading the Wall Street Journal yesterday, “Hefty Bank Fees Waylay Solders.” According to the article, many members of the military are frequent users of bank overdraft protection, which has caused some concern in some quarters. The article provides no hard evidence that usage of overdraft protection has risen in recent years, but implies that the general impression is that it has.

Assuming that the perception is correct that usage of overdraft protection by military members has risen in recent years, why would that be?  Well, how about the enactment of the Military Lending Act in 2007, which imposed a 36% APR cap on payday loans to military members, effectively outlawing payday loans (and some other products for military members):

 Congress cracked down with the Military Lending Act, which, starting in 2007, limited to 36% the APR interest on many payday-style loans to military members.

Since then, overdraft programs have replaced payday lending as the leading financial problem for many military personnel, says Adm. Abbot of the Navy-Marine relief society. Some financial institutions serving the military have reined in overdraft fees, he says, while others are engaged in “predatory or punitive overdraft practices.”

Eliminating access to a particular product (payday loans) doesn’t eliminate the need for credit. It is entirely predictable that eliminating payday loans to service members will result in increased use of bank overdraft [...]

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Jonathan Haidt on Psychology and Politics

A little while back I read Jonathan Haidt’s book The Righteous Mind: Why Good People are Divided by Politics and Religion and had the opportunity to meet him and hear him speak at a book party in NYC. I’ve been meaning to say a few things about it and the recent appearance of a piece by Haidt in Time magazine prompts it, an article and a quiz that illustrates his points. If you are not familiar with Haidt or his methodology, I encourage you to click over and do the quick 12 question quiz now before reading further; even if you are, you might go ahead and do it anyway because it is fun and will refresh your memory. Go ahead, I’ll wait.

So what’s Haidt’s argument? His basic idea is twofold. First, that people do not rationally choose their ideologies. You do not come into the political arena as a blank slate and then just examine all the moral and consequential arguments for different policies and pick the one that is most “correct.” Instead, you come into the political arena with subconscious, largely unexamined psychological beliefs. Initially for Haidt what he focused on was ideas of “disgust.” Over time that has broadened and he describes five key vectors or values of psychological morality: (1) care/harm, (2) fairness, (3) loyalty, (4) authority, and (5) sanctity. Haidt finds in his research that self-described “conservatives” tend to value all five vectors of morality (as he defines them). Liberals, by contrast, place a high value on “care” and “fairness” and a lower value on loyalty, authority, and sanctity. On the two values that conservatives and liberals both value (care and fairness) they do not define those terms the same way, although they both value them according to their different definitions.

The second part [...]

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Real Clear Radio Hour with Bill Frezza

Denizens of Boston may be interested in the premiere of a new radio show this weekend, “Real Clear Radio Hour with Bill Frezza” brought to you by the Competitive Enterprise Institute.  It will air from 10:00-11:00 AM on Bloomberg radio’s WXKS 1200AM & WJMN 94.5FM-HD2.  You can also find it on several Internet services (at the link).  I’ve been working with Bill and CEI on the rollout (in my capacity as a CEI board member) and I think it is a show that VC readers will find appealing.  It is pitched at a high level of listener sophistication and is many ways sort of an NPR without the not-so-sutble political agenda.  Bill himself is a fascinating guy, a serial entrepreneur and founder of several technology start-ups, and his guests Saturday reflect his interests, particularly new ways of thinking about solutions to pressing public policy problems and the powerful impact of individual entrepreneurship in addressing political, social, and economic issues.  The guests on this Saturday’s show are illustrative:

Tune in Saturday morning for the debut program, featuring two very different kinds of entrepreneurs—Will Galvin of Self Help Africa who will discuss his distinct foreign aid and community investment model and Jonathan Downey of Airware, who’s proving that drones are bigger business than military.

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John Berlau on How American Taxpayers Saved Turin Instead of Detroit

President Obama boasted during the Presidential campaign that the taxpayer bailouts of Chrysler and GM saved “Detroit” (a particular locution that he wisely doesn’t use any more, as I noted yesterday).

But as John Berlau also observed yesterday, with respect to the Chrysler bailout it might be more accurate to say that it “saved Turin,” Italy that is, rather than Detroit, U.S.A.

(Disclosure: I am a member of the Board of Directors of the Competitive Enterprise Institute where Berlau works). [...]

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Steven Harper Responds

Steven Harper sent me an interesting response to my post yesterday on his essay in The Chronicle Review.  Here it is in full (I apologize for not having first noticed it in March–I just came across it the other day when a friend emailed it to me and I had assumed it had been more recent):

I’m certainly grateful that Professor Zywicki read an excerpt from my book, The Lawyer Bubble – A Profession in Crisis (Basic Books, 2013). The excerpt first appeared in the March 15, 2013 issue of the Chronicle of Higher Education, and I’m even more appreciative that recently he took the time to share his reactions. Perhaps my comments will help advance the discussion.

Professor Zywicki agrees with my observation that many universities have viewed law schools as profit centers: “Universities are incredibly mismanaged with very short term time horizons for their leadership, so finding a profit center and milking it is pretty much what you’d expect. That makes sense to me.”

But he concludes that my criticism about the influence of rankings “seems to miss the point” by confusing “cause and effect on the importance of rankings.” He offers a two-step argument.

First, he suggests that rankings have become important because students consider them important. I agree – and my book devotes significant attention to the stupidity of such reliance. Indeed, in my Northwestern University undergraduate course on the legal profession, we spend a week on that subject. Invariably, students come away shaking their heads in disbelief at the absurd U.S. News methodology and the danger in using the resulting rankings to make one of life’s most important decisions.

One comment to Prof. Zywicki’s piece observed: “Flawed or not, they’re better than nothing and the author should feel free to come up with

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Confusing Cause and Effect for the Law School Bubble

Steven J. Harper has an essay on the popping of the law school bubble.

The lawyer bubble began to form when vital institutions—law schools and the American Bar Association—abdicated their responsibilities in favor of misguided metrics and insularity. Law-school deans are supposed to be the profession’s gatekeepers, but far too many have ceded independent judgment in an effort to satisfy the mindless criteria underlying law-school rankings, especially U.S. News & World Report’s annual list.

Those rankings didn’t exist until 1987; now they rule the law-school world for both students and administrators. Flawed methodology infects each category—quality assessment, selectivity, placement, and resources. But with the acquiescence of the ABA, deans inflate their schools’ rankings with incomplete and misleading information and encourage prospective students to pursue dreams that, for most of them, are impossible, all in the name of increasing applications, enrollments, and tuition revenues.

In the 1990s, the U.S. News law-school rankings began to gain in popularity and became a key element in the competition for new students. Meanwhile, as applications to first-year classes rose generally, universities increasingly saw law schools as profit centers worth expanding. Recently the Maryland Department of Legislative Services concluded that the University of Baltimore School of Law sent 31 percent of its 2010 revenue back into the general university budget. For private schools, these data are difficult to uncover, but the University of Baltimore report corroborates a widely held view that universities in general impose a “tax” amounting to between 20 and 25 percent of their law schools’ gross revenues.

When U.S. News published its first law-school rankings, in 1987, total law-school enrollment in the 175 ABA-accredited institutions had remained about 120,000 for a decade. Since then, 25 more law schools have come on line, and enrollments have steadily risen, to more than 145,000. By

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Bruno Leoni Institute Video Celebrating Leoni’s 100th Birthday

One of the most influential books that IHS introduced me to when I was in college was Bruno Leoni’s Freedom and the Law (available in pdf here). So I was delighted to have been invited to participate in a program celebrating Leoni’s 100th birthday today at the Cato Institute. Alas, we have been snowed out. So, instead, I will point you to this nifty short video on Leoni’s life and ideas produced by the Bruno Leoni Institute. I hope we will be able to reschedule it at some point in the future.

The video is a nice introduction to two key ideas of Leoni’s. The first is Leoni’s comparison of common law and legislation as law-making systems. Of particular interest here is (as Alberto Mingardi nicely explains) it appears that Leoni had a profound impact on Hayek’s thinking on the common law between The Constitution of Liberty and Law, Legislation, and Liberty. In the Constitution of Liberty (1960), Hayek very focused on the Rechsstaat model of law and the legislative notion of law-making. Then, suddenly and somewhat out of nowhere, the common law emerges as the core organizing principle of Law, Legislation, and Liberty Volume 1, “Rules and Order.” It appears that the key contributor to Hayek’s migration on this point was his introduction to Leoni’s ideas on the common law, especially as elaborated in Freedom and the Law (published in 1961).

The second key idea that comes out in the video is the importance of Leoni’s essay “The Law as Individual Claim” (available as a supplement to the Liberty Fund edition of Freedom and the Law). That essay makes explicit the organizing ideas of Freedom and the Law. This essay is particularly interesting in demonstrating the pernicious influence of legal positivism in changing our understanding [...]

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CFSA Poll of Payday Loan Customers

There’s a new poll by Harris Interactive taken on behalf of the Community Financial Services Association of America (CFSA), a payday lenders trade association.  Some interesting results:

  • 84% of those surveyed said it was easy to repay the loan (52% said “very easy”)
  • 95% said the understood “well” or “very well” how long it would take to pay off the loan and 94% said that they paid off the loan in the amount of time that they expected to do so
  • 95% “agreed” or “strongly agreed” with the statement, “It should be your choice whether or not to use payday lending, not the government’s choice.”

One interesting finding in this poll, which differs from the findings of other research on payday loans, is that when asked the reason for taking a payday loan the most common answer (49%) was to deal with an unexpected emergency, such as a car repair or medical emergency.  44% said that it was to meet expenses, 28% said it was to avoid paying a late fee on a bill, and 23% said it was to avoid bouncing a check. Remarkably, 19% said it was to help out a friend or relative who needed money.

While the survey was solicited by the payday lending industry and some of the details of the study differ from the findings of other research on payday loan usage, the findings are generally consistent with the findings of other studies as to why consumers use payday lending and their awareness of the product’s cost. [...]

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