The Volokh Conspiracy
Mostly law professors | Sometimes contrarian | Often libertarian | Always independent
I rarely (ok, never) read the New York Times but learned about an editorial today from a caller on the "Bob Zadek Show," on which I appeared as a guest. The Times editorial, "A Rate Cap for All Consumer Loans" isn't going to change my mind: "What is needed is a national consumer lending standard – and interest rate cap – to ensure fair credit in the country as a whole."
Much could be written about the foolishness of this editorial. But it isn't just foolish – the truth is, it is cruel. We've tried this experiment before and it has always ended tragically for the lowest-income and most vulnerable people in society – although, to be sure, the evidence suggests that usury ceilings do tend to redistribute wealth from low-income consumers to upper-middle-class borrowers like, well, the members of the New York Times Editorial Board.
We dedicate a whole chapter (Chapter 13) in "Consumer Credit and the American Economy" to the fiasco of usury ceilings through history and their disastrous effects, especially for those they are purportedly intended to help. It turns out that price controls on consumer credit don't work any better than price controls on anything else.
I won't belabor the point here. I'll just give two quotes from two famous economists – one the preeminent liberal American economist of the 20th century and one the most famous free-market economist of the 20th century – that will illustrate the consensus among economists for generations as to the folly of usury regulation.
Paul Samuelson (Nobel Prize, 1970; first American to win the Nobel Prize in economic sciences), testimony before the Massachusetts State Legislature Judiciary Committee on the Uniform Consumer Credit Code (Jan. 29, 1969):
"The concern for the consumer and for the less affluent is well taken. But often it has been expressed in a form that has done the consumer more harm than good. For fifty years the Russell Sage Foundation and others have demonstrated that setting too low ceilings on small loan interest rates will 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. History is replete with cases where loan sharks have lobbied in legislatures for unrealistic minimum rates, knowing that such meaningless ceilings would permit them to charge much higher rates."
Milton Friedman (Nobel Prize, 1976), "Defense of Usury," Newsweek, Apr. 6, 1970:
"I know of no economist of any standing from [Jeremy Bentham's] time to this who has favored a legal limit on the rate of interest that borrowers could pay or lenders receive – though there must have been some."
I could go on, but Tom Durkin and I discussed this extensively in our Friday post.
I will add one word about the Times's misguided enthusiasm for the new regulations that tightened the application of the Military Lending Act as a model for new price controls. The central point is constant – eliminating certain suppliers of consumer credit does not eliminate the demand for consumer credit. Thus, as I have noted previously, the Military Lending Act could be titled more accurately "The Overdraft Protection Stimulus Act" because among the primary beneficiaries of the Military Lending Act have been banks located on or near military bases.
Notably, in identifying the Military Lending Act as a model for further regulation, the New York Times provides no evidence that it has actually increased military preparedness, considered what happened to military members who were unable to get covered loans (i.e., did they simply increase their use of overdraft protection) or to what extent members of the military actually wanted the paternalistic protection of the law (anecdotal reports suggest that at least some military members would lie about their status or have their wives or girlfriends apply for loans instead). One suspects that this failure to actually consider whether the law works as intended is not a coincidence. In the world of the New York Times Editorial Board, actual effects don't matter – all that matters, apparently, is good intentions.