Keeping Debt Profitable: Your Government at Work
By Martin Harris 

In a line of investigation which runs backward from contemporary credit-card regulation  to the Constitutional rights-of-contract to the Fourteenth Amendment curtailing some of those rights to Depression-era milk price regulation to Progressive-era grain-elevator regulation, I stumbled again (as befits an amateur in history and economics) on a couple of Supreme Court cases which I had earlier found interesting for wholly different reasons. 

One is the 1877 Munn v. Illinois dispute, in which politics made strange bed-fellows, as the National Grange farmer organization teamed up with the then-new Progressive movement (which claimed that high-intellect technical experts like them should run things, not a bunch of stupid voters) to demand government regulation of grain-elevator crop-storage prices. They got what they wanted, establishing the principle that some aspects of private business are too important to be entrusted to private businessmen.

The other is the 1933 Nebbia v. New York dispute, in which State government, fearing that low milk prices would drive too many dairymen out of business and thus generate higher milk prices for the then-new urbanite-majority of voters, established minimum retail milk prices. These were then resisted as "too high" by exactly the consumers and retailers they were designed to protect. SCOTUS approved the price-fixing at 9 cents per quart (which would translate, inflation-adjusted, to $5.98 per gallon today) establishing the practical principle that government regulation must include enough built-in supplier profit margin to keep them from quitting. It’s that same principle which requires State Public Service Departments to guarantee public utilities a return-on-investment in the 10-to-12 percent range when setting retail ratepayer costs. (Dairymen have no such guaranteed ROI, but that’s another story entirely.)

Given this history, you can see why government has dealt with the range of consumer-despised practices of the credit-card industry as superficially as it has. Once upon a time, the practical consumer response to business practices they didn’t like was to take their trade elsewhere, no government involvement expected, but that sort of libertarian politics has vanished. Now, consumers demand that government regulate, and so there are some new constraints on the industry --required delays in interest-rate changes, for example—which seek voter approval by placating consumer angst while keeping the industry  quietly and comfortably profitable. Consumers don’t like interest rates in the high teens and beyond, but the industry argues (no proof offered) that they’re needed to balance losses from defaulters, so that, as with the home-mortgage industry, the good risks end up subsidizing the poor risks. We know that banking is profitable –nearly a 20 percent return on sales, more than twice the 8 percent for the oil-and-gas industry, marginally less than the 22 percent for Big Pharma—but we aren’t allowed to see numbers for Big Plastic specifically. We can reasonably expect that government won’t convert the credit-card industry into a regulated public utility –after all, no one really "needs" a charge card—and cut the lenders’ rates to, say, a CD return of 3 percent; and we can reasonably expect that government won’t set minimum prices for consumer credit as it has set them for milk in various places,  or prescribed prices per unit as it has set them for power and communications of various types.

In a parallel universe, government might have chosen to reduce and not increase credit-card-industry regulation to encourage competition, just as the Grange, starting in the 1880’s, might have chosen to compete, price-wise, with the grain elevators, instead of suing them. Then, if one card issuer got too abusive of its customers, new credit-issuers would spring up, and consumers could take their borrowing elsewhere, and competition would regulate for service-quality in a cost-effective way that government never can. 

Actually, in this universe, the Grange did just that, albeit in a half-hearted way. There’s still a handful of grain storage facilities, with the Grange logo clearly painted on each of them, here and there in farm country. And the Grange, historically, urged its members to invest in private, on-farm storage, so as to gain better control over farm-gate commodity prices. But it did so far less aggressively than the National Farmers’ Organization; which, I suggest, explains why the NFO is today a far more serious and effective force for farm prosperity than the Grange. Maybe the loudly complaining, forever lobbying, and regulation-demanding  Consumer Federation of America ought to get into the credit-card business, to show those rascally bank-based lenders how it should ideally be done?

Martin Harris is a former Chairman of Citizens for Property Rights