An epidemic of economic illiteracy seems to have inflicted
both parties. While Republicans suffer from President Trump’s fixation on taxing
imports to make America great again, Democrats, eager to prove that they
also fail to understand basic economic principles, have unveiled a proposal for
price controls on credit cards.
The proposal is the brainchild of the Democratic Party’s two
leading democratic socialists, Sen. Bernie Sanders (D-Vt.) and Rep. Alexandria
Ocasio-Cortez (D-N.Y.) and is targeted at what the pair call “exorbitant
credit-card interest rates” in a statement.
Their “Loan Shark Prevention Act” would a 15-percent federal cap on interest
rates and empower individual states to establish lower limits.
Channeling Ron Paul’s references to “banksters,” Sanders said,
“The reality is that today’s modern-day loan sharks are no longer lurking on
street corners breaking kneecaps to collect their payments. They wear
three-piece suits and work on Wall Street, where they make hundreds of millions
in total compensation and head financial institutions like JPMorgan Chase,
Citigroup, Bank of America and American Express.”
Per the statement, the pair claims that the median credit
card interest rate is currently 21 percent and argues that there is no reason
for banks to charge such a high interest rate.
“There is no justifiable reason that a person—no matter
their background—should be charged an interest rate higher than 15 percent,”
Ocasio-Cortez said. “Rates higher than 15 percent are predatory debt traps,
designed to keep working families underwater and allow predatory companies to
enrich themselves off the misfortune of others.”
Like many bad ideas, this one sounds good on the surface.
Bankers make an easy target for populists and everyone hates paying credit card
In reality, however, high interest rates on credit cards do
serve important purposes. One of the most important purposes is to discourage
consumers from carrying even larger amounts of revolving debt. By March 2018,
Americans carried $1.027
trillion in debt on their credit cards. Without high interest rates, the
amount of indebtedness would be even higher.
By making revolving credit expensive, banks encourage consumers
to only charge to their cards what they can pay off at the end of the month. If
you pay off your balance every month, you don’t pay any interest at all.
High interest rates also signal the risky nature of credit
card loans. Credit card default rates are down from a high of 6.7
percent during the Great Recession, but credit card payments are often one
of the first things to stop when times get hard. With an average balance of $6,354,
banks can be left on the hook for many thousands of dollars when credit card
Even though credit card debt can be hazardous to your
financial health, credit cards are a near-necessity of modern life. The availability
of high interest rate cards allows many people who are considered credit risks
to get a card that would not be available to them otherwise. If the
Sanders-Ocasio-Cortez bill becomes law, the effect would be a shortage of credit
for many Americans. It is axiomatic that price controls, such as an interest
rate cap, lead to market shortages.
In the early days of credit cards, the now-ubiquitous plastic
payment devices were used almost exclusively by the wealthy. It has only been
in recent decades that credit cards became commonplace among the middle- and
lower-income groups. Under the Democratic proposal, it’s likely that the trend
of easily available credit for the common man would be reversed.
Some would argue that reducing credit card use would be a
good thing. I have sympathy for this argument as a guy who has paid off thousands
of dollars in credit balances more than once. Credit cards are a financial tool
that can be very destructive if used improperly.
The problem with the Bernie-AOC solution is that government intervention in the markets would inhibit people who need access to credit from getting it. Rather than reducing credit card use overall or capping interest rates, a better solution would be to teach consumers to use credit responsibly.
Until then, I’m sure that Bernie and AOC would give voters the guarantee, “If you like your credit card, you can keep your credit card.”