I’m sure it’s an honor just to be nominated.

A recent opinion from Judge Posner cites our very own Josh Wright (Joshua D. Wright & Todd J. Zywicki, “Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009,” Lombard Street, Sept. 14, 2009, available here) (by the way, the essay has drawn a few comments, my favorite of which is definitely the one titled, “are you stupid or scumbags[?]“).

The opinion is vaguely interesting touching as it does on the propriety of short-term, high-interest loans, but the holding rests on an analysis of the commerce clause so is pretty well beyond my ken.

At issue is an Indiana statute that purports to apply Indiana’s restrictive usury laws to consumer contracts executed outside the state, but with creditors that have advertised or solicited sales within Indiana.  The Indiana usury statute at issue constrains consumer loan interest to terms under which “the ceiling is the lower of 21 percent of the entire unpaid balance, or 36 percent on the first $300 of unpaid principal, 21 percent on the next $700, and 15 percent on the remainder,” with an exception for payday loans.  Such terms would preclude payday loans if they weren’t excepted under the statute and does preclude car title loans of the sort at issue in the case.  The court rules that the restriction on out-of-state transactions is impermissible under the constitution and strikes down the Indiana law.

The interesting part (to me) of the case, and the part where Josh (and Todd) are cited, is where Posner discusses the law and economics and related scholarship of car title and payday loans.  He doesn’t really come down on one side or another in this debate except to aver that Indiana has a colorable interest in protecting its citizens from “predatory lending,” if it so chooses.  It seems to me that he gives too much credit to the behavioral-economics-based arguments on the “predatory lending is, well, predatory” side of the debate, but he really doesn’t wade into the debate.  Nevertheless, Josh and Todd get their mention (Todd actually gets a couple of mentions) in this section, and kudos to them (and to FinReg21, where their essay appears) for drawing Posner’s attention.

Oregonians, my fellow residents of the Beaver State (and, by the way, the only state in the Union with a different image on each side of its flag), voted yesterday to increase top marginal income tax rates and corporate tax rates, including minimum corporate tax rates and the addition of a tax on gross receipts.  I’m still waiting for Paul Krugman to decry the anti-stimulus measure, but I doubt it will happen (he’s a partisan hack, you know).  But there is a “bright” side: Capital (human and otherwise) flight from Oregon to its neighbors (including income-tax-free Washington to the North and foundering behemoth California to the South) will help those states with their economic troubles!  <sarcasm>And fewer people and less economic activity in Oregon will be good for spotted owl habitat, after all</sarcasm>.  I just hope the local beer industry survives.  I don’t know what I’d do without the ability to drown my sorrows in a few bottles of Terminal Gravity IPA.

Jim Van Dyke (who contributed to our interchange symposium) has an interesting post up today recounting a brief glimpse of life without payment cards:

What would a day without payment cards be like? I had a glimpse into that just this morning, when my usual Bay Area morning routine of using my prepaid card to get a cup of Peet’s coffee and then check email and news was changed up by the coffee shop’s downed Internet connection. I was the store’s first customer for their 5:30 am opening, and the two young clerks were visibly nervous because they couldn’t take my merchant’s prepaid card and credit cards had to be processed with an old-school “knuckle-buster” device. From my usual seat in the corner I watched as the barista duo struggled to keep up with even the slightest trickle of customers, and the line of customers quickly backed up until the work crew doubled to four as sleepy-eyed and bed-headed backup workers arrived on the scene following emergency calls for their help. If we eliminated prepaid and credit cards, everything would change for merchants and retail customers. I’ve all but eliminated checks from my daily existence, but until I heard the now-unfamiliar sound of change jingling in my pocket I hadn’t realized how infrequently I use cash.

Now, there may be valid, empirical arguments that for some transactions cash is more efficient (see this post and comments for a brief discussion and for the key academic references).  And, of course, in the situation Jim describes, with time and regularity the burden of cash transactions would surely be reduced (the Second Law of Demand).  But the merchant-driven campaign against payment cards, in full recognition of the reality that making payment cards more expensive for consumers will lead to an increase in the use of cash and checks, is problematic.  For many, in fact, the move to cash is a feature, not a bug.  Suze Orman is (indignantly) leading a “Back to Cash Movement.”  Merchant advocacy groups tout cash and checks as a cheaper choice–for consumers–than credit cards.

But costs like the ones described by Jim in his post are not well-accounted for, as Todd Zywicki discussed in detail in his second interchange symposium post here.  Presumably the merchants who are advocating for greater use of cash in an effort to avoid interchange fees believe that the costs of cash born by merchants are less than interchange fees.  I’m not sure they are right given the costs to retailers of dealing with cash (from theft to accounting to transportation to security to employee time, etc., etc.), but let’s grant that revealed preference carries the debate (assuming the “back to cash” advocates really speak for all retailers . . . which is doubtful).  But what about the costs to consumers and taxpayers?  What about the costs of going to the ATM, maintaining precautionary checking account balances, budgeting without monthly statements, not having a float or access to consumer credit?  What about the huge and growing cost of not being able to engage in online commerce?  And what about the costs of increased tax evasion and enforcement, printing cash, protecting it, and transporting it?  Merchants are extremely critical of the cross-subsidy from cash customers to credit card customers they purport to see in the imposition of credit card interchange fees that raise retail prices for all consumers.  But what about the subsidy ofrom people with high time costs to those with low time costs when the costs of processing cash are imposed on all customers who have to wait in longer lines?

These costs may not be dispositive, but merchants and their advocates pretend like they don’t exist, and without knowing anything systematic about the magnitude or incidence of these (and many other) costs blithely advocate yet another round of government micromanagement of important parts of the economy.

Meanwhile, in the UK, banks are actually moving to eradicate paper checks completely:

There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement.

Our friend and University of Chicago law professor, Omri Ben-Shahar, fresh off a run participating in our credit card interchange fee symposium, has penned a guest post following up on our ongoing discussion of annual fees:

There is no annual fee for shopping at Wal-Mart, but there is an annual fee for shopping at Sam’s Club. Is there a consumer protection problem here?

Some people think that credit card issuers are acting badly by not charging annual fees, thus luring consumers into services that involve back end costs. By this logic, should retail stores like Wal-Mart be condemned for NOT charging annual membership fees, luring customers in, and making profit at check out lines? In fact, some stores probably charge a “negative” fee.  High-end retailers (Whole Foods, Neiman Marcus) provide a pleasant shopping experience and free samples. Low-end retailers distribute discount cards. They all charge these negative “membership fees” because they surely make up for it at the cashier. Should these retail techniques be regulated to protect consumers?

I find it puzzling why some retailers and service providers charge annual membership fees and others don’t. Why, for example, do wholesale clubs like Costco and Sam’s Club charge memberships while retail department stores do not? I am sure there is much to be learned from finding the answer to this puzzle, but I don’t think it has anything to do with consumer protection. Consumers are doing quite well in either format, and if there are problems of deception they are independent of the annual fee dimension.

Adam Levitin has a blog post up responding to Todd Zywicki’s recent WSJ editorial on credit card interchange fees.  As most readers know, this is a topic of significant interest around here, and Josh blogged about Todd’s op-ed just yesterday.  I’m on vacation so I’ll be brief, but I thought Adam’s post was so wrong it necessitated my getting off the beach for a reply.  Adam writes:

Todd is right that consumers are happy to see annual fees go away, but the disappearance of annual fees wasn’t a freebie for consumers.  It came about as part of a shift in the credit card business model whereby upfront fees were replaced with backend fees that have lesser salience to consumers when the consumers decide which cards to carry and use.  This was a move that was made to increase revenue for card issuers (or put another way, to siphon off more consumer surplus); it was not a charitable act.  The disappearance of annual fees is an important innovation, but I think it is a stretch to call it a pro-consumer innovation, when it is viewed contextually.

The disappearance of annual fees was a step in the democratization of credit (or put another way, the decline in underwriting standards).  Whether this was a good thing is unclear.  It certainly increased consumer’s borrowing ability and choices, and might have led to a substitution from secured installment credit to unsecured revolving credit.  But greater ability to borrow and more borrowing choices are not necessarily good.  They are only good to the extent that a consumer is capable of repaying the increased credit line and making informed choices among credit options.  Both of those are questionable for many consumers.

Adam’s incessant claims that consumers are idiots, fooled time and again by rapacious capitalists, is tiresome.  The behavioral econ/behavioral law and econ literature just doesn’t support these strong claims.  Yes, there are some interesting theories.  No, there is no empirical proof, and there are plenty of counter-explanations.  There are some experiments that support these claims.  And they have been called in to question (sorry I can’t take the time to link right now, but we’ve discussed the behavioral literature quite a bit on this blog).  Todd’s competition story is the Occam’s Razor argument here and unsupported claims to the contrary should be scoffed at.

The “contextual” reality is that the “backend” fees that have replaced annual fees are born by a small fraction of cardholders and are avoidable, as opposed to unavoidable annual fees born by all cardholders.  These backend fees have likewise been falling in magnitude and incidence over recent years.  And meanwhile, they act to make borrowing more expensive for the helpless people Adam and other self-appointed consumer advocates claim to want to protect from themselves and less expensive for those who don’t “need” Adam’s protection (scare quotes because I’d say no one “needs” Adam’s help).  On Adam’s own terms this should be a feature, not a bug, and it is arguably more efficient, lowering consumer credit costs for everyone.

Adam’s view that these backend fees make credit seem cheap to profligate spenders in a way that annual fees do not is absurd.  Maybe the first time, but I’d have to say that fees imposed directly when repayment is not forthcoming, for example, and showing up on a statement at the very moment they are incurred should have much more “salience” than annual fees imposed once a year with no relationship in time or magnitude to any behavior on the part of consumers.  Meanwhile, there is a whole industry of protectors warning consumers of the dangers of over-extending, and very few daytime talk shows warning of the perils of annual fees.  I’d wager the behavioral fee is much more “salient” than the annual fee.

This is the problem with the behavioral literature on which Adam relies: It is a set of non-rigorous, just-so stories that can be tortured to support any a priori policy view. The bottom line is that credit card markets have seen falling fees, increasing benefits (rental car insurance, airline miles, purchase protection, etc., etc.) and structural changes that respond to consumer preferences.  The just-so story that would turn this into a story of corporations preying on ignorant consumers is insulting and unsupported.

First, Peter Klein:

I am bewildered. But, more than that, I am angry. I can’t count how many news accounts I’ve seen about the poor, struggling homeowners who can’t make the monthly mortgage payment, are about to be foreclosed, and risk losing the family home, yard, white picket fence, and piece of the American Dream. But I haven’t heard one word about the poor, struggling renters, the ones who scrimped and saved and put money away each month towards a down payment, who kept the credit cards paid off, stayed out of trouble, and lived modestly, and thought that maybe, just maybe, the fall in housing prices meant that they, finally, could afford a house — maybe one of those foreclosed units down the street. These people are Bastiat’s unseen. For them, Obama’s housing plan is a giant slap in the face. To hell with the prudent. Party on, profligate! Now that’s what I call moral hazard.

Here’s Tyler Cowen (with lots of other links to other economists’ reactions — some much more favorable):

We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income.  (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income.  The government then steps in to lower payments to 31 percent of income.)  I don’t feel moral outrage (although it is morally outrageous), I just don’t think it is a good use of money.  I also wonder how it works when your income is quite variable year to year.  Are they sure there is no way to game this?  It will in the short run prevent some (enough to matter?) foreclosures.  But it won’t keep up the long-term price of homes or prevent eventual foreclosures when the home has negative equity.  It adjusts interest rates on the payments, not principal on the loans (thank goodness).  Most of all it is a bad precedent which we will live to regret.  It is a significant move away from the idea of commercial decisions based on contract.

My colleague Todd Zywicki offers an empirical rebuttal to the Warren-Tyagi “Two Income Trap” hypothesis which asserts that families with two incomes end up more leveraged than families with single incomes and more susceptible to negative economic shocks than otherwise for a number of reasons, including, e.g. counterproductive bidding for housing, child care expenses, etc. The hypothesis is designed, in part, to explain the increase in bankruptcy filings in the US during the 1980s and 90s. After a bit of number crunching, Zywicki concludes that the largest difference between the typical family in 1970 and 2000 is the tax burden not the mortgage expenses:

expenses for health insurance, mortgage, and automobile, have actually declined as a percentage of the household budget. Child care is a new expense. But even this new expenditure is about a quarter less than the increase in taxes. Moreover, unlike new taxes and the child care expenses incurred to pay them, increases in the cost of housing and automobiles are offset by increases in the value of real and personal property as household assets that are acquired in exchange.

Overall, the typical family in the 2000s pays substantially more in taxes than in their mortgage, automobile expenses, and health insurance costs combined. And the growth in the tax obligation between the two periods is substantially greater the growth in mortgage, automobile expenses, and health insurance costs combined.

Interesting stuff.

Benjamin Barber (the author of the polemic, Jihad vs. McWorld) has an editorial in the LA Times today.  Its title is:  “Overselling capitalism: Why today’s markets are headed for disaster unless there is a shift in focus.”  At first the editorial looks like a pretty standard entry in the growing line of comments suggesting we deny credit to the poor–you know, for their own good.  But then it really goes off the rails.  Can anyone explain to me what this means:

Capitalism’s success, however, has meant that core wants in the developed world are now mostly met and that too many goods are now chasing too few needs. Yet capitalism requires us to “need” all that it produces in order to survive. So it busies itself manufacturing needs for the wealthy while ignoring the wants of the truly needy. Global inequality means that while the wealthy have too few needs, the needy have too little wealth.

Huh?  “Too many goods” and “too few needs” implies a baseline.  Does anyone (least of all Barber) know what that baseline is?  In what way does “capitalism” require us  to do anything?  What does that even mean?  And how could it possibly be the case, giving the most charitable interpretation possible, that our economic system requires us to need all that it produces?  Has he not heard of bankruptcy?  Of Schumpeter?  I’d file this under “most idiotic paragraph I’ve read today,” but I’ve been reading some choice materials relating to the Microsoft EU case, so I can’t legitimately make that claim.

Really, this is an example of the worst kind of intellectual elitism and hubris–the belief that cute slogans can capture the complex reality of the market, reduce it to a manageable concept, and then enable perfect ex ante regulation. 

Actually, the dumbest paragraph(s) I read today are the very next ones in the article:

Capitalism is stymied, courting long-term disaster. We still work hard, but only so that we can pay and play. In order to turn reluctant consumers with few unsatisfied core needs into permanent shoppers, producers must dumb down consumers, shape their wants, take over their life worlds, encourage impulse buying, cultivate shopoholism and invent new needs. At the same time, they empower kids as shoppers by legitimizing their unformed tastes and mercurial wants and detaching them from their gatekeeper mothers and fathers and teachers and pastors. The kids include toddlers who recognize brand logos before they can talk and commodity-minded baby Einsteins who learn to shop before they can walk.

Consumerism needs this infantilist ethos because it favors laxity and leisure over discipline and denial, values childish impetuosity and juvenile narcissism over adult order and enlightened self-interest, and prefers consumption-directed play to spontaneous recreation. The ethos feeds a private-market logic (”What I want is what society needs!”) and combats the public logic fashioned by democracy (”What society needs is what I want to want!”).

Just in case you don’t get the real point (Barber doesn’t want it to be too clear, you see, because although he is blaming “the Man,” it’s still borderline-racist and definitely-distasteful):  Poor people are like infants.  He talks about all of us, but he’s not interested in protecting the rich from themselves–his concern is cheap credit, shopping addictions and poor people who “need” iPods.  And it is the poor who are duped by the capitalist merchants of death (or, in this case, leisure.  Same thing, I guess) into an infantile stupor, where they consume beyond their means, deny their civic duties, and generally act like poopyheads (we’re all infants now).

You can bet there is a simple corrective in Barber’s book (which I doubt I will ever get around to reading):  Enlightened and benighted (and massive!) government regulation.  His editorial makes an oblique reference to “democratic institutions,” but he doesn’t go into detail.  Of course Barber has the answer:  Constrain the capitalists.  And don’t worry–he knows ‘em when he sees ‘em.  And if we just restrict the capitalists to produce only our “core needs,” there won’t be any manufactured wants to cause all these problems.  And poor people can get back to needing food instead of MTV and rich people can get back to . . . not being too rich.  Oh, and cancer will be cured, backyard nuclear fusion will become reality and no one named Bush will ever be president again. 

Why is this garbage taken seriously?

The answer is “yes” according to this MarketWatch article. Here’s a taste.

Forty-three percent of investors with a net worth of $5 million or more, not including a primary residence, say they prefer a guaranteed rate of return for the majority of their investments, according to a new report from Chicago-based Spectrem Group, a consulting firm. That percentage of investors compares with just 29% in 2003 and 38% in 2005 who said the same thing, according to the report “The Move Toward Investment Moderation.”

With April 15 looming, I’ve spent some time this morning figuring out whether to make contributions to my sons’ Coverdell Education Savings Accounts or their 529 plans (I’m no longer a big shot attorney, so I don’t have the funds to do both). The issue has come up because on a recent NPR show someone claimed that 529 plans are more favorable from a financial aid standpoint because the assets are considered those of the parent while the assets in an ESA are considered those of the student. This was news to me. My web research revealed conflicting information and advice on the point. But I think I located the definitive answer in this U.S. Department of Education letter. The letter states as follows:

Coverdell Education Savings Accounts and 529 College Savings Plans receive equal treatment in the calculation of federal financial aid eligibility. Specifically, both can be regarded as assets of the parent if the parent is the owner of the account, rather than the student, and thereby displace a smaller amount of financial aid.

Hence, I’ll be contributing to their ESAs. If you’d like to contribute to their 529 plans, let me know, and I’ll give you my PayPal information.