Bernie Sanders got an economics lesson a few years ago when he sent out a misguided tweet about student loans.
The once-quixotic but now horrifyingly mainstream junior senator from Vermont wrote, “It makes no sense that students and their parents pay higher interest rates for college than they pay for car loans or housing mortgages.”
Economists quickly rebuked him that actually yes it does make sense that student loans have higher rates. If someone defaults on a mortgage, the bank can get its money back as there’s an asset of value on the line — a house — which it can’t do with a worthless gender studies degree.
Sanders’s understanding of economics doesn’t seem to have made any progress. Indeed, it seems to have slipped back. Because now he is suggesting that “it makes no sense” that rates on credit cards are as high as they are.
Sanders has joined forces with Rep. Alexandria Ocasio-Cortez to introduce the “Loan Shark Prevention Act,” a bill which would cap interest rates on credit cards at 15 percent, among other things. Any higher rate is “grotesque and disgusting.” They promise this will benefit working families, but they are of course wrong.
Free economies demonstrate a thing called equilibrium, which sets a price that the market can bear for a product, based on the demand for its supply.
If the supply is too high, the price goes down; if it’s too low, the price goes up. If the government enforces price controls on something with inelastic demand, you get long waits at gas lines, shortages, and price gouging. There’s price elasticity only when there are substitutes for said product, which is why government demands like this usually backfire.
Or as one of my teachers in business school said, “A left-leaning economist is a contradiction in terms.”
Forcing a new lower limit on the credit-card interest rates would spawn a whole host of changes that would negatively impact working families. The market couldn’t bear this change, so financial industries would adapt with things like annual fees, new fees to qualify for a higher credit limit, and higher late-payment fees.
All of these would reduce access to credit for low-income consumers. Credit-card issuers charge high interest rates to offset the risk of lending to consumers with less reliable credit histories.
If someone racks up a lot of credit-card debt, and can’t pay it back, the creditor has no means to get their money back — the way they can with Bernie’s faulty mortgage example. Credit cards are also the main way most people build credit, so depriving consumers of this method for building credit would make it harder to qualify for larger loans (for a car or house).
So people who need to make purchases on credit would have to look for much riskier, much more expensive substitutes, like payday loans.
Now Sanders and AOC have an answer for that too, as their “plan” would also limit interest rates on payday loans at 36 percent — certainly lower than the 400 percent annualized interest rate some can charge but also a lot worse than 15 percent for a credit-card bill. This is a solution for which there’s no real problem, because (1) virtually no one ends up paying the 400 percent rate and (2) 90 percent of such debtors say they’re satisfied with the product.
Moreover, attacking payday lenders, as the good people at Freakonomics discussed when Obama foolishly tried to do the same thing, could put them out of business. Without credit cards or payday lenders, the only recourse many people will have is liquidating their assets at pawn shops or seeking out mafia legbreakers.
History warns that abolishing the supply of credit does not eliminate the demand, which is — again — inelastic. Before we learned this, illegal loan sharks preyed on the urban working class who suffered under a usury ceiling until a unanimous 1978 Supreme Court decision which deregulated credit card interest rates.
AOC probably thinks that history started the day Obama was elected, and Sanders probably can’t remember much from before his honeymoon to the Soviet Union and allegedly getting kicked off a commune for being too lazy. But even recent history teaches this lesson.
The other piece of damage this bill would do is end credit-card rewards, like frequent flyer mile programs.
We saw this when the Durbin Amendment of Dodd-Frank went into effect in 2010 and killed debit-card rewards. Durbin capped the interchange fees debit-card issuers could charge retailers and, without that extra revenue, banks had to pass the extra costs onto consumers. The programs died. As one expert said, “Banks are already a little queasy about the high cost of the rewards arms race, so taking a big bite out of their interest revenue certainly wouldn’t help.”
Sanders needs to study economics at the actual college level. AOC already has an econ degree, but the only thing she seemed to learn was identity politics. And they don’t need to worry about taking out a loan, because I’d reach into my own pocket to pay for them to finally get an education.
Jared Whitley is a long-time politico who has worked in the U.S. Congress, White House, and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. To read more of his reports — Click Here Now.
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