Now a Credit Card Crisis?

U.S. Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez plan to introduce legislation that would cap credit card interest rates at 15%. Proposals such as this sound great on paper – cap interest rates, and consumers will benefit. But is that all that would happen?

Consider the Following Track Record

* College Tuition

Rise in College Tuition 2If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase. In 1978, subsidies became available to a greatly expanded number of students. In 1980, college tuitions began rising year after year at a rate that exceeded inflation.” William Bennett, Secretary of Education, Our Greedy Colleges, The New York Times, February 18, 1987.

* Health Care

Rise in health care costThe U.S. “health care cost crisis” didn’t start until 1965. The government increased demand with the passage of Medicare and Medicaid while restricting the supply of doctors and hospitals. Health care prices responded at twice the rate of inflation. Mike Holly, How Government Regulations Made Healthcare So Expensive, Mises Wire, May 01, 2017

 

* Housing

Rise in California RentsRent controls protect tenants when rents rise faster than incomes. Because it makes owning rental properties less profitable, rent control discourages landlords from maintaining apartments and encourages them to convert apartments to condominiums, thus reducing housing supply. California’s current housing crisis has resulted in calls to expand rent controls, despite evidence that this practice may drive up rents in uncontrolled buildings.   Jenny Schuetz, Under US Housing Policies Homeowners Mostly Win, While Renters Mostly Lose, Brookings, July 10, 2018

* And Now Credit Cards

Like any other economic good or service, interest rates are subject to the laws of supply and demand. The supply of genuine savings and the demand for those savings embody the interest rate, and this is reflected by its price. When the price of a good or service is capped, this produces a disincentive for entrepreneurs and suppliers to engage in economic activity in the affected industry. This is simultaneously coupled with an artificially low price, which in turn increases demand. The result of a decreased supply and an increased demand is a shortage.  Logan Davies, Ocasio-Cortez’s Plan to Cap Interest Rates is a Horrible Idea, Eccentric Economics, Being Libertarian, June 9, 2019.

Caveats and Externalities

Seldom there is just one reason that explains a situation; although often there is a fundamental reason. Also, it is sometimes difficult to establish whether concurrent events are causal or incidental; but if the incidence of a type of concurrent event produces similar results, one would suspect a causal relationship. Thirdly, economics is a fungible discipline that can regard John Maynard Keynes as well as Milton Friedman with equal seriousness, although the economic theories of these two folks are diametrically opposed.

And fungibility of economic theory is good at both including widely – collective-leaning hypothesis are as acceptable in the economic arena as are market-leaning ones – and excluding imprudently. A couple of lines on a diagram cannot possibly take into account the countless characteristics in human behavior; therefore, those lines simply illustrate a scenario whereby “all other things being equal,” which hardly ever happens in real life.

Subsidy diagramFor example, the diagram at left is often used to illustrate the benefits of subsidies.  The higher “S” is pre-subsidy price, and the lower “S1” is post-subsidy.

A college administration’s greed response to government subsidies as described by Secretary William Bennett would be difficult to include in this diagram. Greed, that is, the capture of any marginal benefit, negates the assumption that all things remain equal. Thus, as subsidies grew, so did the number of college administrators, the variety of student services outside of basic instruction, and employee benefits such as pensions. It was not just demand that grew.

Are We Dealing With Microwave Mentality?

People use microwaves because they want their edibles now, not later. Microwave users want theirs now!

When politicians insists on, say, free college for all, universal health care, rent control, or a cap on credit card interest rates, they are catering to voters’ microwave mentality. In order to get elected or re-elected, politicians need to showcase immediate events that benefit constituents and ignore negative externalities that harm them.