Sen. Josh Hawley is a really bright person who aims to dumb his abundant smarts down. His call for caps on credit card debt will be used to make the previous case here, though not for the reason that readers might think.
The easy way to criticize Hawley would be to state the obvious: price controls of any kind invariably lead to scarcity. If credit card companies are limited to an 18% cap on rates charged to cardholders, the logical result will be reduced access to credit cards for those who need them. Markets always have their say, but to make this argument against Hawley’s errant policy proposal is to shoot fish in the most crowded of barrels.
Instead, the most galling aspect of Hawley’s mindless Capping Credit Card Interest Rates Act is that as a Senator representing the state of Missouri, Hawley is almost certainly familiar with recent legislation passed in neighboring Illinois. In 2021, Illinois legislators passed the Predatory Loan Prevention Act, which capped at 36% the rate of interest that non-bank lenders could charge to subprime borrowers. There’s a Missouri angle to the law. Please read on.
About the legislation, J. Brandon Bolen (Mississippi College), Gregory Elliehausen (Board of Governors, Federal Reserve), and Thomas Miller (Mississippi State) decided to test their supposition that the rate cap would result in loan scarcity. It did. Bolen et al found that loans to subprime borrowers subsequently declined 30 percent, including 60 percent for black borrowers. The lack of credit was found to have exacerbated credit and life problems for some of Illinois’ poorest simply because they were shut out of the small-dollar loans they previously relied on to pay bills, plus they similarly lacked credit access necessary to pay for items like car repairs that enabled doing their jobs, or getting to and from work.
Notably for the purposes of this write-up, the researchers chose Hawley’s Missouri as an “appropriate counterfactual” to their supposition that rate price controls would shrink lending. What happened in neighboring, cap-free Missouri proved eye-opening. The researchers found that loan growth (26%) to subprime borrowers in Missouri well exceeded that in Illinois (14%) in the aftermath of the legislation.
Much more important was the impact of the IL rate cap on the size of loans made. Precisely because it was no longer as economic for lenders to make loans to the deepest of subprime borrowers, the size of lower-end loans in Illinois increased. Translated, borrowers with reasonably good credit histories were the recipients of bigger loans as lending to smaller, less-creditworthy borrowers dried up. Not so in Missouri. Since rates were allowed to reflect market realities in the Show Me state, the size of loans didn’t increase, thus reflecting the ongoing creditworthiness of Missouri borrowers based on market rates of interest prevailing. Translated, the most subprime of subprime borrowers in Missouri still had access to credit in ways that borrowers of similar means in Illinois did not.
What’s frustrating is that underlying Hawley’s act of know-nothing populism is a very smart individual. The latter is a sign that Hawley was and is likely aware of the faulty rate-cap legislation in Illinois, and its impact vis-à-vis Missouri. Yet he’s still promoting a national version of what failed in Illinois.
No doubt Hawley and those close to him would point out that politics inform his efforts to feign a lack of intelligence, which is truly what’s so shameful about all this. Hawley knows better, yet despite knowing better, he’s going forward with legislation that he knows will harm those it’s intended to help.
