We told you that Trump’s proposed cap on credit card interest was a poor (and fundamentally progressive) idea for improving consumers’ well-being. The conservative policy movement seems to agree.
Over two dozen conservative organizations — ranging from old stalwarts like Americans for Prosperity to new shops like Mike Pence’s Advancing American Freedom — have co-signed a letter to Congress urging members to reject price controls and other regulatory dictates on credit cards. On both parts of the issue, these groups are commendably breaking with President Trump.
The president demanded earlier this month — without any legal force behind his pronouncement, as per usual — that credit card companies limit the interest rates they charge borrowers to 10 percent. On cue, the progressive pair of Senators Bernie Sanders (I., Vt.) and Josh Hawley (R., Mo.) jointly introduced a bill to codify this economic intrusion.
The conservative policy groups see Trump’s populist appeal for what it is: a thoughtless attempt at a price control, which has never worked out well. Apparently, we must be reminded:
Price controls harm consumers and have repeatedly failed to fix the very problem they attempt to solve. The most infamous example was in 1971 when President Nixon ordered a 90-day freeze on all wages and prices to curb spiraling inflation. This policy is memorable for demonstrating how heavy-handed government intervention failed to curb inflation and lower prices.
Caps on interest rates have already been documented failures in states like Illinois. A study on the effects of Illinois’ 36% cap on consumer loans showed that 49% of low-income households reported that their financial well-being had declined. A 10% interest rate cap on consumer credit will reduce credit access. Interest rates reflect borrower risk for the lender — people with higher credit scores and reliable payment histories enjoy lower interest rates than those with lower credit scores. A 10% cap would effectively limit credit access to only people with high credit scores and extensive borrower histories. The impact of rate caps cannot be overstated. The Electronic Payments Coalition found that a 10% cap could eliminate credit card access for up to 190 million Americans, or close to 90% of American cardholders.
On similar grounds, the organizations also decry the Credit Card Competition Act, a sadly bipartisan proposal to have government commandeer credit card networks that has been kicking around Congress for years, and that President Trump recently endorsed. Through a burdensome routing mandate, the legislation aims to limit the interchange fees that are charged to merchants as a way to ultimately lower prices for consumers.
Congress already tried this with debit cards when it capped their swipe fees in the so-called Durbin Amendment to the Dodd-Frank Act of 2010. That didn’t go as planned. Worse, the provision effectively killed off free checking accounts, as banks had to compensate for lost revenue by charging fees directly to account-holders:
The original Durbin Amendment failed to deliver its promise of lowering prices. A 2015 study by the Richmond Fed found that nearly 99% of merchants either increased or maintained prices following the Durbin Amendment’s enactment. Research also found that if the original Durbin amendment had not been enacted, 65% of checking accounts offered by banks would be free today. The report also found that minimum account balances on checking accounts to avoid monthly fees skyrocketed by 50% as a direct consequence of the Durbin Amendment. That record undermines proponents’ claims that increased government intervention in the marketplace will deliver savings to consumers.
The Durbin Amendment may have failed to reduce end-user prices because, according to a 2015 study by the Federal Reserve Bank of Richmond, the rule “had limited and unequal impact on reducing merchants’ costs of accepting debit cards, and it has produced unintended consequences for some merchants in terms of raising costs.” Researchers from Georgetown University and the University of Pennsylvania calculated in 2019 that the interchange fee cap decreased the provision of free checking accounts by 40 percentage points, while finding “little evidence of across-the-board consumer savings.” Overall, their analysis concluded that “consumers are not helped by this interchange regulation.” No kidding.
Extending regulatory mandates, especially price controls, to the credit card market would only add insult to injury — constraining most Americans’ access to credit, redirecting costs in less desirable ways, and risking cardholders’ rewards. Republicans in Congress should listen to their allies in the conservative policy sphere on this issue, not our economically illiterate president.