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Volokh Conspiracy

John Berlau Reviews "Consumer Credit and the American Economy"


John Berlau of the Competitive Enterprise Institute reviews "Consumer Credit and the American Economy" today at the Law and Liberty blog: "The Surprising Economics of Consumer Credit":

In the past few years, popular books about economics, such as Freakonomics and The Undercover Economist, have become surprise best-sellers, wowing readers by showing how economic reasoning can be applied to everyday topics like real estate commissions, sumo wrestling, and even street gangs. Yet a book had yet to be written applying economic logic to Americans' use of credit. Now, four economists set out to change this, and readers may be surprised to learn that when it comes to credit, most of what they know "ain't so."

At 640 pages, Consumer Credit and American Economy probably won't catch on like Freakonomics did. But hopefully it will serve as a basic reference on the economics of credit that will be useful to journalists, policy makers, and interested members of the public.

The book's authors, George Mason University law professor Todd Zywicki, former Fed economists Thomas Durkin and Gregory Elliehausen, and Michael Staten, director of the Take Charge America Institute at the University of Arizona, take on the some of the greatest myths about credit-myths that are unfortunately shaping the public policy debate and limiting viable credit options for Americans. (Full disclosure: Zywicki is chairman of the Competitive Enterprise Institute, my employer.)

One such myth is the notion that an "explosion" in credit has been foisted on poor and middle class consumers who don't understand payment terms and get in over their heads. The authors show that most consumer credit growth has occurred at upper income levels and is no cause for alarm, while making a distinction for mortgage credit, which as they point out, has been affected by numerous flawed government policies.

"Although the picture is not unambiguously positive, and there certainly are individuals who experience debt difficulties," the authors write, "the overall thrust of the evidence from the disaggregated data is that much of the sector's debt is owed by households that have ample resources to service it."

A common theme running through the book is that debtors are often wiser than they're typically given credit for. In the introduction, the authors observe that "a significant component of the underlying, basic economic demand motivation for consumer credit is the desire by consumers to change both the size and timing of their resource inflows and outflows."

John goes on to discuss several specifics about the book, including our chapter on high-cost credit such as payday loans.