The Unintended Consequences of ‘Consumer Protection’

By Jay Richards

For critics of the American economy, high-interest consumer credit cards are easy targets. They are near-universal whipping boys for the religious Left, who tend to assume that these credit cards are unjust. Poor people paying 20 percent interest on credit-card debt? That looks like usury.

Combine that assessment with frustrating experiences with credit card companies that we’ve all experienced, and you see why the “2009 Credit CARD (Card Accountability Responsibility and Disclosure) Act” passed without a lot of fanfare.

But of course, such moral assessments often rely on untutored moral intuition uninformed by economic analysis. Todd Zywicki of George Mason University has actually gone to the trouble of studying the disreputable forms of finance available to low income Americans and has discovered—surprise, surprise—that the Credit CARD Act has perverse unintended effects on many poor Americans.

Whether we like it or not, many low-income Americans depend on access to credit cards to pay bills when their paycheck comes up short. Those needs don’t go away just because new regulations make it hard or impossible for them to get a credit card.

Regulators cannot wish away the need of low-income consumers for credit: If your car’s transmission blows, you need $2,000 for repairs to get to work, whether or not you have it saved in the bank (and most low-income Americans don’t). If you can’t get a credit card, you’re going to have to get that money from a payday lender, pawn shop, or loan shark.

In case you’re wondering, those payday lenders often charge ten times the rate of interest of credit cards. We can assume that the terms of loan sharks are even worse. If you’ve been bit by the regulator bug, you might think that we need to bar entry to payday lenders and pawn shops too. That won’t help, either:

Nontraditional financial products serve an important role in the marketplace for the millions of consumers who count on them. Even pawn shops and loan sharks are more palatable and less expensive than the bounced checks and utility shut-offs that would result in their absence. Still, low-income consumers aren’t better off when they have to rely on such lenders because paternalistic regulations have deprived them of a credit card. And just wait until the Consumer Financial Protection Bureau comes on line, increasing costs and further restricting credit for low-income consumers.

Congress can pass all the laws it wants, but it can’t repeal the law of supply and demand and the law of unintended consequences.

I suspect that many who find high-interest credit cards unsavory aren’t thinking about these situations. They’re imaging poor people buying non-necessities such as video iPods and Gameboys with the cards, and then spending years paying off the credit card charge. This is a problem, of course, but it’s different problem, called consumerism. Millions of us spend and consume more than we earn, and we do so, not out of necessity, but because we want more stuff than we can afford. Still, we shouldn’t try to solve that problem with ill-conceived regulations that end up punishing the poor.