Henry Hazlitt’s Economics in One Lesson is one of the best primers in the discipline. The test of any work in economics is the test of time, and Hazlitt passes with flying colors. The latest example is Washington’s’ “reigning in” of the credit card companies.
Congress passed and Obama signed the so-called Credit Card Accountability Responsibility and Disclosure Act of 2009. Among other things, this piece of legislation limits many of the penalties credit card companies can charge their customers. These rules went into effect on Sunday. Today—with interest rates at an all-time low—the average credit card interest rate is 14.7%, 1.6% HIGHER than it was a year ago. We were told that consumers would SAVE money as a result of this legislation, but the reality is that many Americans with credit card balances will pay more in interest to compensate.
This should come as no surprise, and was really an easy prediction. Hazlitt warned policy-makers of the UNINTENDED CONSEQUENCES of their economic manipulations over 60 years ago. Yet, Obama and Congress apparently didn’t understand this when the bill was passed, and many in the mainstream media don’t even get it now. The credit card business is not that complicated. Individuals who carry large balances and/or don’t make their monthly payments represent a higher risk of default, so they have to pay more or companies won’t issue them a card. If companies can’t levy hefty penalties, they’ll have to charge higher interest rates.
I heard an unrelated AP report the other day that illustrates the same intellectual folly: “It’s going to cost more for travelers to fly American Airlines.” AA, like other airlines, is starting to charge a little more for its most desirable coach seats. We were told that this raises the cost of flying, which is clearly not true for two reasons. First, it only raises costs for passengers who want the purchase those desirable seats. Second, it will LOWER the cost for everyone else in the long run because AA is able to charge more to those passengers. Airlines have to cover their costs from somewhere. The more OTHER PEOPLE pay for their seats, the more likely you are to get a better deal on yours.
As a university professor, I hear a lot about the need to teach critical thinking skills to my students. It never ceases to amaze me how much critical thinking appears to be in short supply among our politicians and throughout the mainstream media. Perhaps they really understand and are just banking on the fact that we can be easily fooled.
By the way, the solution to the credit card problem is simple: Pay your bills on time and you won’t have to worry about penalties or high interest rates. If you’re in the hole now, cut back on your lifestyle and pay your way out of it. We can’t expect Washington to live within its means if we can’t live within ours.
Great blog. I am a HUGE Hazlitt fan. I think the liberals understand the unintended consequences but just want to fool us. They hope we keep blaming credit card companies, airlines, and the rest of the business world for our own problems. It gets them elected.
I DISAGREE! CREDIT CARD COMPANIES SCREW THE PUBLIC ON A ROUTINE BASIS. THEY SEND YOU PRE-APPROVED CARDS AND CHANGE FEES WITHOUT YOUR APPROVAL. THE BILL OBAMA SIGNED LAST YEAR WON’T SOLVE EVERYTHING BUT ITS A STEP IN THE RIGHTT DIRECTION. THE GOVERNMENT SHOULD SET THE RATES AND CREDIT STANDARDS FOR WHO GETS A CARD. IF BANKS DON’T LIKE IT, THEN THEY DON’T HAVE TO ISSUE A CARD. ITS THE ONLY FAIR APPROACH.
Another Anon your comment is so sad it is almost funny. Just as soon as Doc Parnell talks about the lack of critical thinking, you post this. The public gets “screwed” because they are either not reading the credit card rules and/or they are spending more than they can afford. It really is just as simple as that. The screwing is completely self-inflicted. Cut the pre-approved card in half and throw it in the trash.
You should also read up on the consequences of price controls, which is what you are suggesting with rate setting. Look at the housing crisis for evidence of what happens when gov’t sets standards for who gets a house. You want that again with credit cards? What’s fair is that people who are financially responsible shouldn’t be paying for people who are not.
You’re right Jeff, but we’ve got to do something about the current credit card mess. If we can’t get some help to people deep in debt for credit cards or mortgages, then we’ll never get out of this recession. I want people to be responsible for their own finances, but sometimes the government has to step in. Maybe a moratorium on foreclosures and a cap for credit card interest at 5% for a couple of years might help. I don’t have all the answers, but we’ve got to find a middle ground.
Hey Jason, the middle ground is what got us into this mess in the first place. We tell people manage their own finances and then try to renegotiate for them when things go wrong. If you can’t pay your credit cards or make the mortgage on a house you can’t really afford, it’s your problem. This might not be a perfect solution, but it’s better than making someone else who has nothing to do with the problem pay for it. The ONLY reasonable solution is to hold each person accountable for his own decisions. THIS IS CAPITALISM AND CAPITALISM IS BOSS!