The Case against Credit Allocations

There is a strong case to be made against the many proposals for credit allocations now under consideration in Congress. A system of credit allocations would, in the long run, have little if any effect on the way credit is actually distributed; and, insofar as it has a short-run effect, the effect would be deleterious. Moreover, credit allocations would impose substantial costs on the economy, and as an investment tool they are inferior to direct subsidies and explicit taxes.

The private market makes mistakes but the errors of market allocations are insufficient reason for replacing the free market with government controls. Government controls have their own inefficiencies, which may well be worse than the inefficiencies of the free market. For example, farm price support programs, which were intended to help destitute farmers in the Great Depression, have actually given the most benefits to rich farmers. Controls over natural gas prices, which were to aid buyers of natural gas, are about to deprive many of them of natural gas. Regulation Q, which puts ceilings on the interest payable to small savers, was to provide a breathing spell for hard-pressed thrift institutions. But it has instead provided them with a permanent crutch, and has had such side effects as levying a regressive tax on small savers and stimulating the potentially destabilizing Eurodollar market.

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Thomas Mayer

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There is a strong case to be made against the many proposals for credit allocations now under consideration in Congress. A system of credit allocations would, in the long run, have little if any effect on the way credit is actually distributed; and, insofar as it has a short-run effect, the effect would be deleterious. Moreover, credit allocations would impose substantial costs on the economy, and as an investment tool they are inferior to direct subsidies and explicit taxes.

The private market makes mistakes but the errors of market allocations are insufficient reason for replacing the free market with government controls. Government controls have their own inefficiencies, which may well be worse than the inefficiencies of the free market. For example, farm price support programs, which were intended to help destitute farmers in the Great Depression, have actually given the most benefits to rich farmers. Controls over natural gas prices, which were to aid buyers of natural gas, are about to deprive many of them of natural gas. Regulation Q, which puts ceilings on the interest payable to small savers, was to provide a breathing spell for hard-pressed thrift institutions. But it has instead provided them with a permanent crutch, and has had such side effects as levying a regressive tax on small savers and stimulating the potentially destabilizing Eurodollar market.