With polls continuing to show affordability as the top issue of voter concern, there has been a proliferation of bad ideas from both left and right on how to deal with it. Last week, the Trump administration announced two proposals that belong near the top of that list.
The latest effort to ignore basic economics is President Trump’s call for a 10 percent cap on credit card interest rates, effective January 20.
Price controls have never worked over the long run. That’s not going to change simply because Donald Trump orders it rather than, say, Zohran Mamdani.
For example, if a credit card issuer borrows at the current prime rate of 6.75 percent and lends the money to the card holder at 10 percent, there would be a margin of only 325 basis points (3.25 percent) to cover all the lender’s operational expenses and losses from defaults. That’s a pretty thin margin even for good credit risks.
Low-income Americans, however, are unsurprisingly much more likely to default, meaning they are riskier and more costly to service. A study by the Federal Reserve Bank of St. Louis found that credit card holders living in low-income zip codes had default rates as high as 22.8 percent compared to 8.3 percent for those living in highest income areas.
If credit card companies are unable to charge interest rates commensurate with the risk, it will become increasingly difficult to find anyone willing to lend money to lower-income Americans. And it may not be just the lowest-income Americans who have trouble finding credit. One estimate, by the Electronic Payments Association, an industry lobbying group, warns that as many as 82-88 percent of current credit card accounts could be closed or restricted in some way (lower credit limits, higher missed payment penalties, the loss of reward programs) under a 10 percent cap. Credit cards would effectively become a privilege for the wealthy.
At the same time, low and middle-income Americans’ need for credit is not going away. Poorer borrowers will simply turn to riskier and more expensive forms of credit, such as pawn shops, payday lenders, loan sharks, and so on. This is exactly what happened in Arkansas and Illinois when those states experimented with interest rate caps.
The second idea the president floated last week will do less immediate harm, but is likely to be equally ineffective. With an eye toward reducing housing costs, President Trump says he will prohibit institutional investors from buying single family houses to rent out. Blaming investors like BlackRock for the high cost of housing has become fashionable of late. In actuality, however, large institutional investors own only about 0.5 percent of available housing stock, hardly enough to make a significant difference in home prices.
Moreover, while investor purchases indeed take some single-family units off the market, making home purchase more expensive, it simultaneously increases the supply of rental units by an equal amount, thereby slightly reducing rental prices. Since higher income Americans are more likely to purchase and lower-income Americans are more likely to rent, banning institutional investors from the market will, to the degree it has any impact, benefit higher incomes at the expense of those who earn less.
It is unclear how either of these proposals would play out in practice. When asked what would happen if credit card companies didn’t reduce their rates, President Trump said that they would be breaking the law. But there is no sign that Congress is planning to act before January 20, and no matter how many capital letters the president uses, posting something on Truth Social does not make it law. So far, credit card companies appear to have ignored the edict. And, while the president may have a few more levers when it comes to home-buying, issuing decrees about who can and cannot buy a house would not be among them.
It is good that President Trump has finally started to focus on affordability. Unfortunately, though, socialism from the right is unlikely to work any better than socialism from the left.