Do as Reagan Did, And Free Credit Unions
The Republican party should continue to support free-market solutions by lifting a loan cap.

In the Oval Office, June 1988


John Berlau

In their post-mortem on the election, National Review’s editors stressed the need to “make the case that conservative policies would make the broad mass of the public better off” by “link[ing] small-government principles to attractive results.”

The editorial suggested that, most of the time, conservatives will be “duty-bound to oppose” the president’s policy proposals, but added that if Obama were to offer “some other worthwhile policy, conservatives should be willing to bargain with him,” all the while “articulat[ing] better alternatives.”

They have just such an opportunity with regard to a certain type of banking regulation. The Obama administration and Senate majority leader Harry Reid (D., Nev.) have committed to a modest deregulation the rules governing credit unions. They are supporting bipartisan legislation that lifts by a small amount the arcane member-business lending (MBL) cap, which severely constricts credit unions’ ability to make business loans to their member depositors.

Solid economic evidence shows that raising this cap — from the current limit of 12.25 percent of bank assets to 27.5 percent in the pending legislation — would have substantial benefits on businesses and job growth. The Credit Union National Association estimates that this increase in the cap would create 138,000 jobs in the first year, a figure that Pepperdine University economist David M. Smith calls “conservative and well within the bounds of a reasonable projection.”

Further, this policy change would merge good policy with good politics. Credit unions — nonprofit cooperative financial institutions owned by their members — enjoy popularity with the vast majority of American voters. A recent survey by the Temkin Group found credit unions to be among the businesses that “consumers are most likely to trust.” In the swing state of Wisconsin, for instance, 80 percent of voters want politicians to give credit unions greater freedom to lend more to their members’ businesses, according to a recent survey.

Based on the economic and political support, GOP congressional leadership should formalize their support for the bipartisan House and Senate bills that already boast the sponsorship of many conservatives in Congress, and are backed by free-market organizations such as the Competitive Enterprise Institute, Americans for Tax Reform, 60 Plus Association, American Commitment, Citizens Against Government Waste, and Campaign for Liberty.

Republicans should also go one better and propose to repeal the business-lending cap in its entirety, a free-market policy that would also have political appeal for the nation’s millions of credit-union members.

One would think lifting burdensome government regulations would come naturally for conservatives and the GOP. The bills are co-sponsored by Repesentative Ed Royce (R., Calif.), Representative Darrell Issa (R., Calif.), Representative Ron Paul (R., Texas), and Senator Rand Paul (R., Ky.). But some Republicans appear to have been cowed by the banking industry’s relentless lobbying against extending what many banks perceive as special privileges for credit unions.

As NRO readers know, I am often first in line to defend the banks when they put forth legitimate grievances against wrongheaded policies such as Dodd-Frank (the burdens of which policies often hit credit unions hard as well). I must part company, however, when banks seek to squelch competition from credit unions for borrowers and depositors.

Banking lobbyists tend to criticize the perceived tax advantage of credit unions, but this benefit is exaggerated and largely irrelevant to the issue of whether it is wise policy to lift restrictions on their ability to make business loans. Credit unions are exempted from taxation at the corporate level because they are member-owned cooperatives that don’t have the many means of raising money that banks do (such as the issuance of shares of stock). Credit-union members, however, are fully taxed on the dividends on their accounts, and are taxed at the ordinary income-tax rate for interest, rather than the lower rate for dividends.

Conservatives and libertarians have long argued that business income should only be taxed once, and credit unions provide a successful example of a single-taxation model. Some smaller banks are also eligible to be incorporated as subchapter S corporations, a single-taxation structure very similar to that of credit unions, giving them similar advantages of single taxation anyway.

Moreover, it is a bit rich for the nation’s banks to complain about unfair subsidization after they received more than $1 trillion in taxpayer largesse from TARP and other bailouts — including the “temporary” Transaction Account Guarantee (TAG), which provides unlimited deposit insurance to noninterest-bearing checking accounts, a policy the bank lobby is now pushing to extend.

When the banking industry lobbies for Big Government, as here, it affords the Republican party an opportunity to go a long way toward, in the recent words of Louisiana governor Bobby Jindal, “mak[ing] sure that we are not the party of big business, big banks, [and] big Wall Street bailouts.”


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