May 28, 2019
Rep. Alexandria Ocsaio-Cortez, D-N.Y., and 2020 candidate Sen. Bernie Sanders, I-Vt., have apparently decided to try to ban credit cards. Sure, that’s not quite what Ocasio-Cortez and Sanders actually say (they just want to stop the swindlers profiting from excessive interest charges), but that’s the effect of their plan. They argue that interest rates should be capped at 15%. There’s a question about exceptions, but that’s what they mean. If you cap the price of something below the cost of production, then that thing vanishes. No one makes it (who desires to make a loss?) and therefore no one can have it.
It’s quite similar to the Venezuelan policy on food prices. Make chicken nice and cheap with a price ceiling so no one can have any.
Interest rates are simply a price, they’re just the cost of money. They work the same way as all other prices. As The Federal Reserve of New York noted when considering payday loans: “ Except for the ten to twelve million people who use them every year, just about everybody hates payday loans. “ They also pointed out that payday loans are expensive to provide. As the New York Times reported way back in 2007 (long enough surely for even Sanders to have gotten the news) thrift stores providing nonprofit payday loans still had to charge north of a 200% annual percentage rate just to break even. Thus, as the Fed says, interest rate caps abolish payday loans:
The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researchers treat a 36 percent cap as an outright ban. In view of this, “36 percenters” may want to reconsider their position, unless of course their goal is to eliminate payday loans altogether.
That reference to “normal profits” is how we can and should work out whether loan rates are “too high.” Or, in the economic jargon, are providing excess profits as a result of market power. There’s an average return to capital across the country and economy. People who consistently make more than that are making those excess profits. They’re either terribly, terribly, good at what they do in a non-repeatable manner or there’s some regulatory barrier to people competing with them. We like that first reason and abhor that second.
Normal profits are defined as making the same sort of return on capital as can be found in those other businesses in other parts of the economy. As with payday loans, there’s no evidence that credit card providers are making such excess. So, prices aren’t “too high,” they simply reflect the cost of providing the service. The biggest cost is those people who never do repay what they borrow on those credit cards.
None of this is remotely controversial among those who have been bothering to pay attention. But then there’s people like Sanders and Ocasio-Cortez. An example of their devotion to detail is the manner in which they talk about credit unions having had a 15% interest rate cap, including upon credit card balances, since 1980. Their knowledge of reality would be enhanced if they noted that it has actually been 18% since 1987. Knowing how the world works is a useful prelude, precursor, and even precondition to forming plans to change how it works.
But sighs about economic ignorance aren’t enough here. They’re calling this the Loan Shark Prevention Act, something it most definitely isn’t. So, people who desire credit (an awful lot of Americans, given that there’s about $1 trillion of this card debt out there) can’t get it legally because prices have been set so low that there are no providers. What happens next? They’ll go get that credit illegally, won’t they? That is, this is the Loan Sharks Generation Act.
Quite why Sanders and Ocasio-Cortez wish to drive a hundred million or so Americans into the clutches of the leg breakers is uncertain. But shouldn’t we be getting angry at their blatant shilling for such a despicable industry? For that is what they’re doing — price controls on legal and legitimate debt, to the point of its disappearance, just produce good times for the local neighborhood knee-breaker. It’s even possible to muse that this might not quite be a useful goal of public policy.