Over the past two days (here and here), I’ve castigated the Trump Administration for being economically illiterate on the issue of trade.
In the interest of fairness, I should have pointed out that Biden also was a protectionist. So the American economy has been burdened in recent years by bipartisan economic illiteracy.
Today, we’re going to write about another example of bipartisan economic illiteracy.
Sen. Josh Hawley, a supposed Republican from Missouri, has joined with “Crazy Bernie” in the Senate to propose price controls on credit card interest rates. Meanwhile, Rep. Anna Paulina Luna, a supposed Republican from Florida, has joined with the infamously left-wing AOC to propose similar legislation in the House of Representatives.
The Wall Street Journal‘s editorial from last month summarizes this bipartisan lunacy.
These are confusing political times on the right, as self-styled conservatives adopt left-wing economics. The latest example is the mind meld between Missouri Sen. Josh Hawley and Vermont socialist Bernie Sanders on a bill to cap credit-card interest rates at 10%. …The Republican Senator says President Trump endorsed a 10% interest rate cap during the campaign, and now’s the time to deliver. Mr. Trump floated this sop to voters seemingly without giving a thought to the negative consequences. …Remember when economists and Republicans criticized Kamala Harris for proposing price controls on groceries? Well, a cap on interest rates is a price control on credit. When you put a price control on something, you are asking for less of it. …credit-card issuers aren’t getting “richer and richer.” They’ve adjusted rates to compensate for increasing costs and customer risk. Capping the interest rate at 10% would render most credit cards unprofitable. Issuers might try to compensate by charging higher fees. But the 2009 CARD Act restricts the kinds of fees issuers can charge. The result of that law is instructive. Card issuers responded by raising rates and reducing credit to non-prime borrowers. …The same would be true of the Hawley-Sanders bill. Some might have to turn to payday loans, which carry higher fees.
It’s not just the pro-market WSJ that understands why price controls will backfire.
In a column for the Washington Post, Natasha Sarin also explains why government intervention is a bad idea.
When…Donald Trump and Sen. Bernie Sanders (I-Vermont) agree on a policy, we should take note. They both want to cap credit card interest rates at 10 percent. …but there’s a catch: Credit cards won’t be as easy to get. …card companies argue that capping interest rates means they will extend less credit to riskier borrowers. Those borrowers will be forced to turn to much more costly options such as payday lenders that charge interest rates of almost 400 percent. … caps would…hurt the most vulnerable borrowers with the lowest credit scores. …when it comes to helping the poorest Americans, capping interest rates could end up doing more harm than good.
Ms. Sarin is hardly a libertarian, and her column is friendly to other forms of intervention, but at least she recognizes the adverse consequences of what Trump, Hawley, and Luna are prosposing.
By the way, there is a paternalistic argument in favor of a cap on credit care interest rates (neutrally explained here), which is based on the notion that some people are too dumb or too short-sighted to manage their personal finances.
I’m sure that’s true, but I’ll wrap up today’s column by citing this article in Reason by J.D. Tuccille. The bottom line is that those people will seek credit that is even more expensive.
It would be nice if one of our two major political parties was consistent in its advocacy for free markets—for all freedom, for that matter. Instead, we get two senators, a Republican and a socialist who sits with the Democrats, teaming up to condescendingly save Americans from their own desire to borrow money. Their proposal to cap credit card interest at 10 percent is supposed to shield people from “exploitative” borrowing costs. Instead, it’s bound to cut off higher-risk borrowers from traditional credit and drive them into the arms of payday lenders and loan sharks. …It’s said that great minds think alike. So, apparently, do the minds of economic ignoramuses with supposedly competing political brands. Hawley and Sanders peddle salvation from expensive credit, but instead they offer a world of hurt to the people they say they want to help. …government intervention in finance has already raised the cost of doing business with lower-income, higher-risk customers to the point where many traditional financial institutions believe it’s not worth the hassle or expense and turn them away, leaving less pleasant options. …capping credit card interest rates at 10 percent is going to have a very predictable effect. It’s going to drive borrowers to riskier, more expensive, and sometimes illegal lenders who are willing to do business with people turned away by credit card companies.
By the way, Biden also intervened to make credit more expensive and less accessible.
P.S. I have a three-part series on why price controls are misguided (here, here, and here).
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
