The Core Regulatory Question

Megan McArdle has two posts here and here on consumer credit and payday loans.  My chief takeaway is that the majority generally benefits from the availability of diverse (though sometimes expensive) forms of consumer credit, while a minority are tragically and very visibly worse off.  The question seems to boil down to whether regulation should be crafted that relatively invisibly makes the majority worse off but visibly helps a minority.  This same question exists with programs from trade protectionism (where job losses due to foreign trade are more visible than the broader well-being of consumers and customer industries) to health care (where it looks like a lot of people will have worse health care to help a few people with visibly tragic stories). In all these cases are elites who are more than willing to opine that smart people like themselves should be allowed to force their "superior" decision-making on others.

The other thing I found intersting was her discussion of the Dave Ramsey anti-debt formula.  She imagines a Ramsey-ite world with a high savings rate.  But its a weird world with with lots of capital formation but little actual capital use.  My gut feel is that it is almost certainly a poorer world, given how much technology and new wealth is created by entrepeneurship.  While I am sure some do it, few great entrepeneurs created success without debt.

One thing neither post discusses is the role of loansharking and illegal forms of credit.  The need for credit strikes me to be at least as strong as the need to gamble or get illegal drugs.  If getting credit becomes illegal, then people will go underground for their credit, with almost certainly more dire consequences than over-paying a payday loan company.


  1. Michael:

    Steve Jobs is a good example. After getting the boot from apple, he started NEXT. While a failure, it left us with html.

  2. Brian Dunbar:

    While a failure, it left us with html.

    Hunh? Tim Berners-Lee invented HTML.

  3. KR:

    NEXT brought us OSX, anyway.

  4. Brian Dunbar:

    NEXT brought us OSX, anyway.

    Because making unix user friendly was easier than fixing Windows.

  5. Captain Obviousness:

    Re the Dave Ramsey anti-debt formula - it seems like your implying that consumer savings equates to a failure to use capital. That's not the case. If consumers save more then banks have more money to lend and interest rates go down. Entrepreneurs and businesses can therefore borrow more cheaply. Consumers going in debt to pay for a car or lifestyle they can't afford is actually squandering capital that would otherwise be available for lending to businesses. I think the Ramsey formula is that personal debt for basically anything other than a house should be avoided as much as possible. Business debt is entirely different, as theoretically that debt is used to pay for capital investments that ultimately raise productivity. Buying a $50,000 Mercedes on credit is not making a capital investment in yourself. You'd be better off buying a Toyota with cash and saving the rest of your money in a bank where it can be lent out to business.

  6. Captain Obviousness:

    Doh! "you're" not "your"

  7. Evil Red Scandi:

    "The need for credit strikes me to be at least as strong as the need to gamble or get illegal drugs."

    And hookers. Don't forget the hookers.