Two senators, Josh Hawley, a Republican, and Bernie Sanders, a Democrat, are putting forward a bill to cap credit card interest rates at 10 percent.
Back in September, Donald Trump said that if elected president, he would put a “temporary cap on credit-card interest rates” of “around 10 percent.” He said, “We can’t let them make 25 or 30 percent.”
A price is not just a price, it is (at least in reasonably well-functioning markets) a signal, a form of communication. Price control is a form of censorship. It suppresses information that would otherwise be of value to buyer, seller, or both.
It’s thus no surprise that price controls can lead to severely distorted markets, as we discussed around here at some length after they were floated as an idea by Kamala Harris.
Now there’s the news that two senators, Josh Hawley, a big-government Republican, and Bernie Sanders, a big-government Democrat, are putting forward a bill to cap credit card interest rates at 10 percent. The measure is designed to be temporary, expiring in 2031. Temporary? Come on. As we know from, to take one notorious example, rent control, “temporary” price controls have a way of sticking around. Who, other than Argentina’s Javier Milei, wants to be the politician who approves lifting or removing that cap?
It’s no surprise that Bernie Sanders, a socialist seemingly unconcerned by the shortages that price controls almost always bring, would endorse that measure, but it is (albeit at this stage only marginally) disappointing that Hawley would go along. Then again, Hawley has been something of a fan of former antitrust apparatchik Lina Khan, a bureaucrat who had little time for free markets or, for that matter, consumer welfare, but quite a bit for Brussels.
Even so, it is sad that Hawley’s flight from economic literacy has gone so far that he no longer appears to believe in the power of incentives. But incentives matter: Firms offer goods or services only if it is worth their while. While working out what is worth their while is messier than some might imagine (PR, cross-subsidization, and loss-leading are three factors that can complicate the calculation), they will not go into a line of business until it offers, directly or indirectly, the possibility of what they consider to be an adequate return.
It may be that political criticism of credit card interest rates (which, optically, at least, are high, averaging 22.8 percent in 2023) might persuade some banks to shave a little off what they charge, but it might also persuade some that this is a business that they want to scale back, meaning that less credit would be available. As for capping rates at ten percent, well . . .
Writing after Trump mentioned the idea, Dominic Pino envisaged what such a cap would mean if it came into force:
- Limit credit-card access only to people with very high credit scores. Even having an average credit score would not cut it for an interest rate of only 10 percent on a short-term, unsecured loan.
- Require collateral from less creditworthy borrowers. It would become part of a credit-card application to put up assets as collateral to secure the loan, as is typical for other loans with lower interest rates.
I’d add a third possibility, which is extending only negligible amounts of credit to people with low credit scores. Foreclosing on collateral backing small credits can be an expensive, time-consuming business, and it is not a good look either. Many issuers would not want to deal with it and would rather just cut their lending back. But if less well-off borrowers cannot get the money they need from a regulated source, they will — if no alternative can be found — go elsewhere and pay the vig to loan sharks who don’t worry about bad publicity (and, under certain circumstances, may even welcome it, pour encourager les autres). Where there are price controls, there are black markets.
Two other points.
The first is that the “message” contained in banks’ high credit card interest rates is that this type of short-term credit should primarily be used only in an emergency or, say, when seasonal bills (a vacation, Christmas gifts) are piling up, but the borrower has a plan to pay the debt down.
The second is that price controls inevitably create an unhealthily close relationship between those fixing the price of a good or service and those who sell it. If controls were to be imposed on credit card issuers, those issuers would inevitably cultivate the politicians who could give them more headroom, in return for, well the list of possibilities is endless, and few are normally associated with good banking practice.
There may be some in Washington who think that would be a good thing.