What’s the difference between the average big-government liberal and a full-fledged socialist?
Socialists sometimes comprehend the devastating effect regulation has on private enterprise — and for them, that’s half the point of regulation.
Socialists also don’t try as hard as ordinary liberals to hide the fact that they don’t trust you to make decisions for yourself.
Socialists Bernie Sanders and Alexandria Ocasio-Cortez are trumpeting a new proposal, the Loan Shark Prevention Act. It would ban lending at effective interest rates, including all fees, greater than 15%.
On Twitter, Sanders, the independent senator from Vermont, touted this as an extension of his home state’s price controls on credit. “In Vermont, the payday loan industry doesn’t exist,” Sanders bragged, “because interest rates on small dollar loans are capped at 18%.”
We’re glad he put it that way, for this is a proposed control on the price of credit, and too many advocates of price controls speak as if they are making the thing more affordable. In fact, as Sanders acknowledged, price controls make the thing in question unavailable.
Tell short-term lenders they can’t charge interest according to risk, and they will not suddenly start charging a lower rate. They’ll stop selling or lending. Sanders and Ocasio-Cortez seem to understand that their rule would have this effect.
Ocasio-Cortez suggests perfidy on the part of financiers. “Big banks won’t service poor communities unless they make a killing off them,” she explained on Twitter on Thursday. “That’s why they charge predatory rates.”
Wrong again, Ocasio-Cortez! When lenders charge high rates, it’s not to “make a killing,” it’s to make a profit and thus stay in business.
If a lender charges rates disproportional to the risk of default and operational costs, a competing lender would charge lower rates and scoop up the business and profit. Sure enough, payday lenders’ profit margins seem to be perfectly ordinary, in a range between 5% to 10%, according to estimates.
Price controls on credit simply means no credit for borrowers with low incomes or who are a high risk for some other reason.
The “big banks,” criticized by the New York Democratic congresswoman, backed out of short-term lending because of regulatory pressure from the Obama administration. More regulation generally means less competition, which leads to the higher prices that socialists say they are fighting.
For them, it’s a happily virtuous cycle. Regulations drive up prices, and they respond by imposing price caps. When these drive companies away, they declare a shortage. To overcome this supposed “market failure,” they propose that the government take over the industry — full-fledged socialism.
Sure enough, Sanders and Ocasio-Cortez have an idea: Let Uncle Sam enter the short-term lending business. Ocasio-Cortez says she’s “pairing” price controls with a proposal for “postal banking.” They want Uncle Sam to be the payday lender. The federal state should replace private enterprise, they argue. That’s why they’re called socialists.
The other premise behind these policies is that the government ought to treat adults as if they were children. Banning interest rates above 15% says to a person who is willing to pay $7 to borrow $500 for a month (an annual rate of 16.8%): You’re just wrong to do that; it’s not good for you; we’re banning it.
Treating adults like children and having the state replace private industry are bad ideas. It is, in a literal sense, un-American. The country was founded on the premise that people should be free to govern themselves and take responsibility for the consequences.
Sanders and Ocasio-Cortez are relatively honest about their terrible ideas, but they’re still terrible ideas.