In September, Sen. Josh Hawley, R-Missouri, introduced legislation to cap the annual percentage rate for credit cards at 18%. While many people were caught off guard by a Republican making such a proposal, Hawley's legislation is only one of many recent attempts by members of both parties to implement price controls.
And while price controls might have populist political appeal, they are a terrible policy that universally harms the people most in need of the item being controlled. The payments sector — both debit and credit markets — is no exception.
One of Hawley's stump speeches demonstrates both the appeal and the faulty logic behind price controls. He insists that "Americans are being crushed under the weight of record credit card debt — and the biggest banks are just getting richer. Capping the maximum credit card interest rate is fair, common-sense and gives the working class a chance."
The "big banks," just like "Wall Street," are always an easy target. They are a hazy, faraway force, and few people think about what they really do until something goes wrong. And nobody can argue with an interest rate that's fair, driven by common-sense and gives the working class a chance. So, how to arrive at that rate is the only question that remains.
One alternative is the free enterprise model. Companies can compete to provide credit and payment services. They incur costs and try to charge a price that covers those costs. And, yes, they try to earn a profit.
The more competitive the market, the "fairer" the price. That is, the more people competing to provide the service, and the more customers they provide it to, the more objectively we'll know what price is a "fair" one.
Of course, none of this means that some people won't still think the price is unfair, or too high. And it doesn't mean that everyone will get exactly what they want. But the beauty of this system is that it provides the opportunity for anyone who doesn't like the outcome to jump in and provide the service at a lower — in their eyes, fairer — price.
One alternative to this approach is to give elected officials (or bureaucrats) the power to determine which price is the fairest. If, for example, they think that credit providers are "just getting richer" off the backs of the working class, then they can simply set the price for everyone.
The danger, of course, is that if credit providers can't cover their costs, they will no longer provide as much credit. And it doesn't take much imagination to guess which group of customers will lose in this scenario. Hint: It's not the best customers who barely need credit in the first place.
Another alternative, though, is that Hawley gets into the business of providing credit. If Hawley, like his colleagues Sen. Bernie Sanders, D-Vermont, and Rep. Alexandria Ocasio-Cortez, D-New York, truly believes interest rates are too high, and the "biggest banks" are just charging too much so that they can get richer, it's a golden opportunity. If they're right, they'll provide cheaper credit to millions of people, while teaching those profiteering banks a lesson.
Setting aside any emotions toward Wall Street, that's really how the free enterprise system works. In contrast, their top-down approach will likely have a small effect on the largest banks' profits, but a relatively larger negative impact on smaller credit providers and the people who have the hardest time getting credit.
This prediction is hardly novel. Paul A. Samuelson — the first American to win the Nobel Prize in economics — explained to Congress in 1969 that the shortages created by interest rate caps "result in drying up legitimate funds to the poor who need it most and will send them into the hands of the illegal loan sharks."
Simply put, price controls restrict access to goods and services, ultimately hurting the people the controls were designed to protect. No matter how well intentioned, rate caps do not make credit more affordable. They prohibit higher market prices for credit, but that's not the same thing.
All the price control does is take away the freedom to charge a higher price to offset higher credit risks, forcing credit providers to choose between losing money or denying higher-risk consumers credit.
Nonetheless, elected officials and bureaucrats are engaged in a broad effort to increase their power and control while taking away business owners' and consumers' freedom. Recently, Sens. Dick Durbin, D-Illinois, and Roger Marshall, R-Kansas, introduced legislation to extend price controls and routing requirements to credit card companies. In the spring, the Consumer Financial Protection Bureau introduced a plan to restrict credit card late fees, and in early 2023, President Joe Biden declared a "war on fees," targeting everything from banks to resorts.
It's perfectly understandable that Hawley and others desire a better economy, one that benefits all Americans. But price controls will not produce that kind of economy.
