One irony in the calls for price caps from a certain type of populist, whether on the (nominally) left or (nominally) right, is that price levels are, in some respects, as representative of popular opinion as it is possible to get.
Should prices be set (directly or indirectly) by countless interactions between countless people, or should they be set by someone in government — in Washington — who supposedly knows best?
Oh well.
We have had plenty of commentary around here to the effect that credit card interest rate caps (like almost all price caps) are a bad idea, as indeed they are. They are, as our writers have pointed out, counterproductive. They often hurt those that they are meant, it is claimed, to help. Charlie Cooke quoted JD Vance in Hillbilly Elegy to this effect:
The senators and policy staff debating the bill had little appreciation for the role of payday lenders in the shadow economy that people like me occupied. To them, payday lenders were predatory sharks, charging high interest rates on loans and exorbitant fees for cashed checks. The sooner they were snuffed out, the better.
Charlie added:
Given that payday loans are almost universally regarded as being less desirable than credit cards — and that the most likely consequence of a reduction in the availability of credit cards is an increase in the use of payday loans — one can safely assume that Vance’s argument must apply neatly against the policy that President Trump is attempting to push.
Writing in his Substack, Jack Salmon reports on how lending caps worked in Colombia and the U.K. Spoiler (not really): not well.
And so, in the U.K.:
When the U.K. introduced a cap on high-cost short-term credit in 2015, acceptance rates at the final stage of loan applications fell sharply, from around 50% to 30% within a year.
The Financial Conduct Authority anticipated a decline of 11% in loan volume and a 21% drop in the number of borrowers. The actual declines resulting from the interest rate cap were 56% and 53% respectively.
Rejected applicants were disproportionately younger, poorer and more likely to be unemployed. The cap reduced lending volume without eliminating demand.
When formal credit becomes less available, demand does not disappear. Borrowers turn to alternatives.
As Vance would once have told the Brits.