Last fall, I suffered through a conversation with a teacher who wanted me to include a dose of drivel from “federal education standards” in my syllabus.
The "suggestion" was to “have the students cite an example of market failure where government intervention would be required.” I refused, and explained that I wouldn’t adopt federal standards because the feds had no constitutional power to create such standards, and, more important, because there was no such thing as “market failure.”
I had to explain that the market is a process that includes individual failure and experimentation in it in order to show preferences, prices, and what works and does not. To say that the market can “fail” is akin to saying the scientific method can fail. The method itself exists to reveal failing theories and successes, from which others can learn. In fact, the only way humans can learn is if they have the freedom to fail. This reveals personal preferences, allows prices to be set, and resources to flow to where people want them, at whatever level they desire.
Sadly, like that teacher, Sen. Bernie Sanders (I-VT) and Rep. Alexandria Ocasio-Cortez (D-NY) can’t lay claim to being familiar with fundamental economics, either. And their latest proposal, pushed ostensibly to “help the poor” escape the rapacious capitalist, is another classic example.
On May 9, Alex Suderman reported for Reason that both of those brilliantine masters of money mischief have a new mandate in mind that, as usual, will backfire, and mess up the valuation process necessary for the market to function.
Like the emotion-based poison of telling insurance companies that they must accept people with preexisting conditions, and do so at approximately the same rates as healthy people of the same age (something that inspires young people to wait until they get ill to get insurance, decreases the “clean money” premium payments from younger clients going to companies, and forces the companies to increase rates for those still holding policies, which inspires another group of people to drop policies as they see their costs rise), the Socialist Supremos want to...
Cap the rates for credit cards! Genius!
According to Suderman, they want to:
… (cap) interest rates on credit cards at 15 percent. Currently, the median interest rate for credit cards is a little more than 21 percent. Borrowers with good credit typically pay about 17.7 percent, while those with lower credit scores pay about 24.9 percent, according to The Washington Post.
And it’s that “eeevil” interest rate differential Bernie and AOC don’t like, so, since they’re in government, they seem to feel as if they can simply “pass a law” to make it go away, to “make things fair.”
Of course, as anyone who knows anything about credit ratings knows, the credit card companies charge higher rates based on past performance. If you’ve been an inveterate delinquent, repeatedly leaving loans unpaid, the higher rate of interest reflects your higher risk.
And as anyone who understands supply, demand, and the price system is aware, if politicians place caps on prices, suppliers of the goods or services (in this case, credit card loans) will be unable to see the price signals telling them to stay in or enter a market. The result: the service will not be offered as much, or at all.
This is an elemental axiom of economics and cannot be avoided. Ask anyone who lived through Richard Nixon’s price controls on gasoline. Higher prices for oil and gasoline could have inspired entrepreneurs to find new margins to look for more, get new suppliers, and find alternatives. As much as one might not like seeing prices rise, higher prices signal entrepreneurs to switch from one endeavor to the one where the price is reflective of unsatisfied demand, allowing for more supply, more competition, and an eventual lowering of prices. But Nixon’s price controls stopped that system, led to gas shortages, lines around the block, fist fights, and, possibly, even Disco.
Okay, the Disco crack was unwarranted. But the fundamental principle about price caps is important, and its rule cannot be avoided.
As Suderman notes, this is the kind of elitist behavior and pseudo-care that Sanders already has evinced with an attack on payday loan companies in VT – an attack that drove them out of the state. Suderman found a pretty little tweet from The Berner all about it:
In Texas, the average annual interest rate on a payday loan is 661%. In Vermont, the payday loan industry doesn’t exist, because interest rates on small dollar loans are capped at 18%. We must cap interest rates on consumer loans and credit cards at 15% nationwide.
Great. Bernie’s dislike of what others were voluntarily doing has driven an entire industry out of the state.
But it hasn’t eliminated the demand. Instead, poor people who used to frequent payday loan businesses in Vermont will likely head into the black market to seek alternatives, or won’t get the loans at all.
And on an ethical level, who are Sanders and Ocasio-Cortez to tell others how to run their credit card or payday loan businesses? Not only is this move patently unconstitutional, if these politicians don’t like how others do business, let them open their own credit card companies with their own private capital. Compete the peaceful way. Don’t use the threat of government agents to force people to operate in the way their thuggish edicts command.
Sadly, such fundamental lessons in ethics and economics aren’t part of their lexicon. They would rather peddle in class envy and government force, claiming they’re helping “the little guy.”
No one helps anyone by employing threats to stop peaceful market interactions. All they do is kill options and make life harder for everyone.
Just the kind of thing socialists have always done.