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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

A Step Towards Postal Banking?



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I’ve long been attracted to the idea of postal banking as an alternative to tighter regulation of private banks. (I should warn you: I’m about to conflate many different ideas in a potentially confusing way.) Last April, I wrote:

In many countries, including the United States in decades past, the demand for consumer-friendly financial products has been met directly by the state, e.g., through postal savings accounts invested in ultra-safe state assets. We’ve moved away from this model and towards explicit guarantees for for-profit firms. It’s hardly surprising that these guarantees come with strings attached — more and more strings all the time.  

As I suggested last week, Steve Randy Waldman’s call for a reform of deposit insurance is one way forward: provide large depositors with a powerful incentive to monitor the financial health of the banks. But another way to go, one that’s not incompatible with that approach, is simply to offer postal savings accounts with “vanilla” features, and allow the private financial firms do what they’d like. Rather than have the public subsidize for-profit firms, we’d create a “public option.” Many will object to this as statist. But is it actually less statist than pervasive state guarantees for virtually all firms? The idea is to make the subsidy narrow and explicit. The public “vanilla” products would presumably be less attractive than private products in many respects — they’d just be less risky. 

I imagine that there are many problems with this approach, but I wonder if it’s preferable to demanding that all new consumer financial products meet a state-mandated standard of safety. I found Steve Randy Waldman’s notion of a Treasury Express card intriguing:

While transactional credit provision is a perfectly good business, it might be reasonable for the state to offer basic transactional credit as a public good. This would be very simple to do. Every adult would be offered a Treasury Express card, which would have, say, a $1000 limit. Balances would be payable in full monthly. The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors. (Private creditors would be expected to inquire whether a person is in arrears on their public card when making credit decisions, but would not be permitted to obtain or retain historical information. Nonpayment of public advances would not constitute default, but the exercise of an explicit forbearance option in exchange for denial of further credit.) Unpaid balances would be forgiven automatically after a period of five years. No interest would ever be charged.

Let’s think about how this would work. For most people, access to various forms credit — transactional credit, auto and home loans, unsecured revolving credit, whatever — is worth more than $200 per year. Although people might occasionally fall behind, for the most part borrowers would pay off their government cards, simply because convenient participation in the economy is worth more than a once-in-five-years $1K windfall. However, people with no savings and irregular income (for whom transactional credit is a misnomer, since they haven’t the capacity to pay) might well take the money and run. The terms of the deal amount to a very small transfer program to the marginal and disorganized, and a ubiquitous form of currency for everyone else. People with higher incomes would want more transactional credit, or revolving credit, which they would acquire from the private sector.

This all comes to mind in light of a new IRS program to grant tax refunds in the form of government-issued debit cards, as Sudeep Reddy reports in the Wall Street Journal:

The U.S. Treasury Department plans to launch a pilot program Thursday to deliver tax refunds through prepaid debit cards, an effort to cut the expense of paper checks and aid lower-income taxpayers who don’t have bank accounts.

About 600,000 low- and moderate-income taxpayers nationwide, a slice of those earning about $35,000 or less annually, will receive letters inviting them to activate a debit card that can receive direct deposits.

It is easy to imagine this becoming an effective vehicle for delivering government services. Martin Feldstein’s brilliant 2009 call for universal catastrophic coverage including the following proposal:

 

Two related problems remain. First, how would families find the cash to pay for large medical and hospital bills that fall under the 15 percent limit? While it would be reasonable for a family that earns $50,000 a year to save to be prepared to pay a health bill of, say, $5,000, what if a family without savings is suddenly hit with such a large hospital bill? Second, how would doctors and hospitals be confident that patients with the new high deductibles will pay their bills?

The simplest solution would be for the government to issue a health-care credit card to every family along with the insurance voucher. The credit card would allow the family to charge any medical expenses below the deductible limit, or 15 percent of adjusted gross income. (With its information on card holders, the government is in a good position to be repaid or garnish wages if necessary.) No one would be required to use such a credit card. Individuals could pay cash at the time of care, could use a personal credit card or could arrange credit directly from the provider. But the government-issued credit card would be a back-up to reassure patients and providers that they would always be able to pay. [Emphasis added.]

I can see many people objecting on the grounds that a Treasury Express card that could be used for health expenditures among other things represents an increase in the the scope of government. I would argue that the expansion of regulatory authority is more troublesome than this far more transparent and contained concept, which would actually allow the federal government to pare back the regulation of private firms. We could just say no to either approach. But like it or not, that doesn’t seem to be an option. 



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