03 September 2014

An Important Interview About Consumer Credit

Go here to listen an interview with Todd Zywicki about the new book he and three others co-authored, Consumer Credit and the American Economy (OUP 2014). I've posted about Zywicki's work before (here) but this 600-page book is a mammoth undertaking.

Based on the interview, the book makes several arguments. First, that consumer debtors know what they're doing when they incur consumer debt. Most consumer debtors use sources of consumer credit, ranging from credit cards to payday loans, because either they need the money for legitimate purposes or access to credit evens out fluctuations in income. Second, efforts to restrict access to consumer credit (always someone else's credit, by the way) ebb and flow with economic and financial cycles. And third, creditors and debtors will always find a way to work around efforts to restrict access to consumer credit. A corollary to the third point, however, is also important: To the extent there are impediments to access, the cost of consumer credit will increase.

I suspect the authors support these claims with an abundance of reason and evidence. Yet I have two bones to pick.

One question the interview didn't address is the nature of inefficient choices consumers make that increase their need for credit. For example, while income-smoothing is useful, the need to resort to credit rather than savings is often the resort of poor choices. And, without succumbing to the view of many behavioral economists that human decisions are always irrational, we needn't return to law-and-economics 1.0 that posited universal instrumental rationality, i.e., that individuals always make the most rational decisions when it comes to effecting their subjective preferences. Consumer education is vital to enable folks to make better, more efficient choices. Go here to read about the American Bankruptcy Institute's CARE (Credit Abuse Resistance Education) program for materials that can be used to educate high schoolers (and others) about consumer credit choices. The Chalmers Institute at Covenant College provides excellent resources for adults.

A second point that Zywicki didn't address is one of philosophical anthropology. The book presupposes that the nature of human beings is properly defined in terms of being consumers. Human beings have always consumed but only in fits and starts since the eighteenth century have we come to identify ourselves as consumers and our social identity in terms of consumerism.. In other words, Consumer Credit and the American Economy represents a working out of economic libertarianism. As my long-time readers will remember, I have objection to political libertarianism (some here, here, and here), many of which carry over to its economic sibling (here and here).

Notwithstanding these criticisms, Consumer Credit and the American Economy stands poised to make a substantial contribution to fact-based decision making in the field of consumer credit. It is particularly important to consider the facts in light of continuing "Progressive" efforts to nudge consumers in a an "enlightened" direction.

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