When Bernie Sanders and Donald Trump agree on something, it’s a sign that trouble is afoot. And last week, the senator from Vermont said that he would gladly work with the president-elect to cap credit card interest rates at 10 percent, a promise Trump made during the campaign.
Their complaint is simple: Americans who have to pay 20 percent or 30 percent interest on their credit card debt are being ripped off. Those rates do sound unjust, but imposing a cap would just make things worse — for borrowers more so than banks.
Consider the industry’s background. Competition among credit card issuers in the U.S. is intense. A large number of banks and companies offer cards, which compete along many dimensions — annual fees, payment services and options, travel rewards and points, and borrowing rates. If a consumer does not like these terms, they can go elsewhere. One recent survey counts 643 credit cards from 156 issuers.
With so many different suppliers, it is likely that the offered terms of trade reflect the costs of production — in this case, the costs of expected default or delayed payment. Currently the total of revolving balances is estimated at $628.6 billion, which is 71.3 percent of outstanding balances. Average debt per borrower is more than $6,300, and delinquency rates have reached 3.3 percent.
Given that background, simple economics would indicate that an interest rate cap of 10 percent would mean that only people with strong credit ratings would be able to borrow money on their cards. Those with lower net wealth, or poorer payment histories, would be blocked from using credit cards for credit, because they would no longer be profitable to serve.
The Sanders-Trump proposal, pursued consistently, would choke off borrowing for people with high credit risk. Should the government close all the pawn shops as well? In the limiting case, there are loan sharks and other more desperate measures. Why give those businesses greater opportunities to expand?
It is a legitimate question, of course, whether so much consumer borrowing is productive and beneficial. But the ability to borrow money is inextricably linked with other liberties. Sanders, for instance, is pro-choice when it comes to abortion. So why would he support restricting a woman’s right to borrow money to finance that abortion or to borrow money to travel across state lines?
Ultimately, freedom of choice is intertwined with the freedom not only to spend money, but also to borrow it. And since money is a general medium of exchange, there is no way to stop only the “bad uses” of borrowed money.
Thus there arises a fundamental question: Who is more qualified to make the final decisions about how best to use their financial resources, U.S. citizens or their government?
Voters, and consumers, should be wary of any politician who sides with the government on this question. Overreach is a temptation on both ends of the political spectrum.
Tyler Cowen is a Bloomberg Opinion columnist and a professor of economics at George Mason University.
