A few weeks ago, I was invited to speak to a sizable group of Melbourne activists campaigning to stop the federal government’s new Work for the Dole scheme. Various tactics are in plan to stop businesses replacing paid workers with unpaid workers, and for the not-for-profit welfare sector to resist any involvement with this latest attack on the unemployed.

The latest McClure report on welfare reform was a major topic of conversation. I asked what people thought of the proposal to increase access to cheap credit such as the No Interest Loans Scheme run by Good Shepherd Microfinance – a Catholic not-for-profit. Most thought it was a good idea but saw the scheme as fairly marginal to their lives. NILS doesn’t offer cash loans, only credit to buy a limited range of products such as a fridge or washing machine and services like car repairs or dental work. Running out of money for day to day living – the chronic problem for most people on Centrelink payments – meant relying on borrowing cash from friends, family or commercial lenders such as Cash Converters. Sure, the small loans from these finance organisations were expensive, but that was accepted as just another fact of life for low-income people who often rent their televisions, struggle to pay their rent and scout around each fortnight for resources to make ends meet.

These sentiments echo strongly with my findings in Caught Short, an Australian Research Council funded report on the small loans sector I co-wrote in 2012. The study overwhelmingly found that the main reasons people were typically borrowing $50 to $300 for a fortnight was to buy food or necessities for their kids and pay mobile phone, utility bills and the rent. Nearly 8 in 10 of those interviewed were receiving a Centrelink payment. Very few thought the industry should be closed down as they had no alternative way of securing a small loan.

The report’s finding that most people get caught up in an expensive cycle of repeat borrowing has led to calls by the media and consumer advocates to further regulate the sector and even close it down. A financial counsellor interviewed for the study summed up what is wrong with this argument:

It’s very easy for a bunch of middle class advocates, financial counsellors, whatever, to say this shouldn’t be happening – but walk a mile in the shoes of the people who have no other access. I think our entire premise should sit around that Centrelink payments are inadequate for people to live with dignity in this community.

Media interest is again heating up as the Australian government may conduct a review of the current regulations in July this year. A Four Corners program is being produced and SBS are considering a two-part overview of the sector. Let us hope that their narrative arcs are more sophisticated than recent headlines such as ‘They’re no different to drug dealers: Payday lenders thriving despite tougher rules’.

Demonising small loan providers as sharks may give some a quick rush of doing something morally and politically worthwhile. But much like a methamphetamine hit, it is ultimately hollow. It is a lazy way of blaming a symptom rather than attempting to understand the disease. We need to take a step back from this unedifying discourse to ask two questions. Why are over a million Australians taking out small loans each year from companies like Cash Converters, Money3 and Nimble? Why have they only been doing this since the early 1990s?

There are three interconnected reasons why below-average income earners are relying on small loans. Firstly, there has been a general transfer of risks and costs that accompany disadvantage from the state to both individual households and businesses in the last two decades. Jacob Hacker terms this reallocation ‘the great risk shift’. As a result, there has been a decline in the social wage – the public provision of health, education and welfare. Secondly, there has been an increase in inequality and precarious work. Thirdly, there are no other viable options. Susan Soederberg’s recent book Debtfare States and the Poverty Industry describes how new credit markets for low-income earners have blossomed in the United States. A thriving ‘poverty industry’ has emerged as social provisioning has ebbed, inequality intensified, and personal debt of student loans, credit cards and payday loans has boomed. There are now more shopfronts offering small ‘payday’ loans in the USA than Starbucks and McDonalds combined.

There is a knee jerk reaction by media and consumer advocates to frame small loans simply as a market problem that can be addressed by greater regulation and smaller fees. The short answer is no it won’t. It is expensive to be poor, and the higher risks associated with lending to those on a low income means that any tighter regulation will abolish this now-established market and send it underground. Secondly, ignoring the wider societal issues that drive casual and low-waged workers to online lenders and welfare recipients to street front lenders leaves the status quo unchallenged.

People borrowing these loans are portrayed in the media as passive, easy prey and financially illiterate. However, as the Caught Short report and other studies suggest, a person taking out a small loan is often making a highly rational choice to manage their credit and debt in small amounts over short periods of time rather than putting themselves at greater risk of being overwhelmed by a ballooning credit card debt.

Narrowly moralising against one financial symptom of current society lets the Australian government off the hook, airbrushes away the real financial struggles of low income earners, and offers no viable strategy to resolve their financial problems. A more useful start for those wanting to make a difference would be to support campaigns to increase the social wage and access to steady, well-paid jobs. I suggest that grassroots initiatives to stop Work for the Dole and the current union-led campaign to defend the minimum wage and social services are far more useful ways to actually temper the demand for poverty industry financial products such as small loans.