Friday Afternoon Socialism
Steve Waldman draws a useful distinction between transactional and revolving credit and proposes:
In fact, while transactional credit provision is a perfectly good business, it might be reasonable for the state to offer basic transactional credit as a public good. This would be very simple to do. Every adult would be offered a Treasury Express card, which would have, say, a $1000 limit. Balances would be payable in full monthly. The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors. (Private creditors would be expected to inquire whether a person is in arrears on their public card when making credit decisions, but would not be permitted to obtain or retain historical information. Nonpayment of public advances would not constitute default, but the exercise of an explicit forbearance option in exchange for denial of further credit.) Unpaid balances would be forgiven automatically after a period of five years. No interest would ever be charged.
Let’s think about how this would work. For most people, access to various forms credit — transactional credit, auto and home loans, unsecured revolving credit, whatever — is worth more than $200 per year. Although people might occasionally fall behind, for the most part borrowers would pay off their government cards, simply because convenient participation in the economy is worth more than a once-in-five-years $1K windfall. However, people with no savings and irregular income (for whom transactional credit is a misnomer, since they haven’t the capacity to pay) might well take the money and run. The terms of the deal amount to a very small transfer program to the marginal and disorganized, and a ubiquitous form of currency for everyone else. People with higher incomes would want more transactional credit, or revolving credit, which they would acquire from the private sector.
Since the government is already in the business of withholding from people’s paychecks for tax purposes, you could even modify this proposal so that someone in arrears had $1 a day garnished for 1,000 days rather than Waldmann’s “five years and you’re forgiven” policy.
At any rate, I think that this—or something close to it—is probably a good idea. Our notions of what kind of services should be provided by the state and which should be left exclusively to the private sector have more to do with path dependence and tradition than anything else. Having a government agency deliver the mail made a ton of sense given the communications technology prevailing in the late 18th century. I’m not totally convinced it needs to be such a high priority today. But modern conditions make this sort of credit proposal seem very plausible to me. Somewhat similarly, rather than requiring people to purchase bare-bones car insurance from for-profit providers (who need to take a cut for profits, and spend money on marketing and advertising and sales) we could put a tax on car ownership and provide the bare-bones insurance publicly. People would save some money, there wouldn’t be as many annoying GEICO ads on TV, and administration of claims would be simpler.
29 Responses to “Friday Afternoon Socialism”
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May 22nd, 2009 at 5:34 pm
Yeah basically the only peopel hurt by this would be the Pay day loan sharks.
So we should be hearing our conservative trolls defending them in 5, 4 ,3…
May 22nd, 2009 at 5:48 pm
I thought this was a joke…
You are serious about the federal government throwing away money on a regular basis?
Loan Sharks would just give out 500 dollar loans with the promise that you will pay them back with 1000 the next time your credit is wiped.
May 22nd, 2009 at 5:49 pm
The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors.
This facet would actually a boon to most private credit providers and a complete disaster for the people you are purportedly trying to help.
May 22nd, 2009 at 5:57 pm
No interest at all? Why not a low rate that’s tied to inflation or to the base Fed rate or something? This plan would be literally giving away money. People would be stupid not to use every cent, whether they needed it or not.
May 22nd, 2009 at 6:00 pm
I mean I appreciate the paternalism of this proposal, but read this part again:
“Although people might occasionally fall behind, for the most part borrowers would pay off their government cards, simply because convenient participation in the economy”
It’s more than ‘convenient participation’ – it’s a near complete shutout. If one is behind on the govt card, (and presumably other bills) one has *no* ability to extricate themselves through any means of refinancing – short of presumably bankruptcy – because all new credit is denied. No new credit cards, no car loan, no mortgage refis.
If you want a ’serious’ socialist proposal, push for more credit union charters that enable universal participation. This idea is immensely ill-conceived.
(and wrt auto insurance: please learn, if it ain’t broke don’t fix it)
May 22nd, 2009 at 6:03 pm
At any rate, I think that this—or something close to it—is probably a good idea.
KDrum is correct. This is essentially what debit cards are for. Handing out an endless stream of thousand dollar loans is probably not going to be helpful. I’m fine with having a government agency (’Exchange Trust’) handling common financial transactions for people, in a manner similar to the Post Office. (Such as wire transactions, money orders, etc.) I’d also be fine with requiring credit card lenders to actually give people fixed interest loans (and account plus a debit card from which to use them) rather than revolving credit.
Actually just directly issuing loans that don’t have to be repaid is going to result in all kinds of scams, coupled with all kinds of free riding, which is going all kinds of political trouble.
max
['It's a nice try though.']
May 22nd, 2009 at 6:09 pm
I have advocated this for at least two years, going back on Brad’s blog. I called if Fed America, I would grant one to every North American willing to state their nation of citizenship.
Further I would make it a secret account, unavailable to any government agency.
May 22nd, 2009 at 6:11 pm
But, and here is my catch. If you are poor, the Fed gives you a 2% subsidy on any money kept for six months, rather than the automatic bankruptcy rule Waldman recommends.
May 22nd, 2009 at 6:24 pm
The thing about car insurance is dumb, too. That’s one area where the market has worked very well. GEICO is cheap and they’ve responded perfectly anytime I’ve needed their service. I’ve heard the same about other companies. Why? Competition. It’s easy to change your insurance and the rates are fairly easy to understand. Why would we expect a federally owned & operated system to work any better?
Saying that a private firm will cost more because it has to spend money on stuff like profits and advertising … that just totally misunderstands everything about capitalism.
May 22nd, 2009 at 6:40 pm
What’s the point? Why do we need the ability to take out a loan at every cash register? Talk about path dependency — the notion of a credit card is a silly one and would make no sense if we weren’t already so accustomed to it. If (1) I didn’t get rewards points and (2) the laws protecting debit card use were as consumer-friendly with regard to fraud as the laws protecting credit cards, I would immediately cut up my card and never look back. Pretty much any merchant who takes credit cards these days also takes debit cards. And anyway, since I automatically pay off my balance in full each month with an automatic withdrawal from my checking account and at no point dip into negative net worth, the damn thing is functionally equivalent to a debit card anyway (setting aside the regulatory arbitrage aspect).
Don’t get me wrong. Credit is a great thing. Credit markets create an enormous amount of wealth by moving money across time. The whole system fails when debt markets don’t work. But when you take consumer psychology and educational disparities and — hmm — lack of “future-time orientation” into account, consumer credit is not obviously so good. Yes, for buying houses and other enormous purchases which most people can’t afford with cash, but unless it is used like I use it (and I understand it is somehow difficult or even impossible for many people to use it with the restraint that comes fairly easily to me), it is a facilitator that allows people to go into debt for impulse buys.
I see impulse credit as not dissimilar to gambling or highly addictive drugs. It’s an indulgence that takes advantage of some sort of infirmity in our ability (well, some people’s ability) to make rational decisions, and I think it would probably be banned altogether in a utopian society — or at least banned among people whose credit histories were not flawless.
And that’s all before diving into the idiocy lodged in the minutiae of this particular plan. Zero-interest? Why? If you tell someone “I’ll give you a $1000 zero-interest loan that you don’t have to repay unless you want another one from me later on the same terms,” what you’ve basically said is “I’ll give you $1000.” If the government implemented this program, the very first thing I’d do is withdraw my $1000 from it, throw the card away, and continue to use my credit/debit card as before. I wouldn’t give it another thought until five years had elapsed, whereupon I’d do it again. And those people who actually tried to use the card as intended, faithfully repaying the money when they could and never keeping a multi-year balance? You’re essentially taxing them $200 per year as a punishment for their responsibility.
Oh, and is there any reason to think the government would do a better job running all the (considerable) instant payment infrastructure that the credit card companies handle now?
So here’s what my utopia would look like: The government would heavily restrict lenders’ ability to make impulse-buy loans to consumers (certainly no reward points!). (Loans in general would not be restricted — just loans targeted at facilitating impulse purchases.) It would ban it altogether for consumers who demonstrated any semi-recent tendency to be bad with debt. It would reform the anti-fraud consumer protections so that debit cards were better protected than credit cards. And it would encourage all of the cashless convenience advantages that credit and debit cards offer by subsidizing small businesses to get set up with the necessary debit card readers. And I haven’t thought this last point through as hard as the others, but the government would subsidize banks’ costs for offering a bare-bones bank account that came with a debit card (even if not a checkbook) so that EVERYONE could have one, for free, regardless of their net worth or personal behaviors. Oh, and the consumer privacy laws with regard to debit transactions would be fierce — healthcare-like standards of privacy while the data is retained by the bank, a ban on data-mining or any use of the data for marketing or other targeted sales projects, a limited period after which the data had to be destroyed, and draconian fines and penalties under a strict liability standard for any leak of consumers’ data.
May 22nd, 2009 at 7:19 pm
The Federal Reserve DOES run a large part of the payment infrastructure now. Who do you think settles checks between banks in different states?
MY has a far clearer view of this than most of the commenters.
For strange, history-dependent reasons, the US has a truly fscked up payments system. On the one hand there is vastly more dependence on paper checks than in other civilized countries; on the other hand the electronic payment system is in the hands of monopolists who are incompetent, charge a fortune for poor service (try setting up credit card payments for an internet business), and appear to have no interest in security. The system is in no way optimized for anything except funneling money in the hands of VISA.
It’s hard to imagine why the Federal Government would do worse. I suspect you could hire the Soviet government to design a replacement system and what you get would be an improvement.
May 22nd, 2009 at 8:51 pm
Really? The feds entering the credit card biz?
Has the “free market” flamed out so completely that the feds are the best solution to all our business problems?
(This from a liberal, not a Reaganite.)
May 22nd, 2009 at 9:12 pm
…or how about, we leave the issuance of credit to the private market, where it has resided for centuries, and rebuild the reasonable regulatory state that worked so magnificently for the four decades after the New Deal, until it was demolished by market fundamentalists?
May 22nd, 2009 at 10:11 pm
too many steves,
I think you win post of the day! You probably didn’t know this, but GEICO stands for Government Employee Insurance Corporation.
May 22nd, 2009 at 10:32 pm
If we are spending hypothetical government money on politically unfeasible hypothetical programs, I think we should bite the bullet and go for BIG.
May 22nd, 2009 at 10:40 pm
How about this? Unpaid balance on the card earns interest equal/proportional to your income tax rate, and paying off the interest is mandatory come tax day. Accomplishes the same thing while only giving free money to people who need it.
May 23rd, 2009 at 12:19 am
I dunno, nobody would need $1000 in transactional credit if they had a thousand dollars in the bank in the FIRST PLACE!. The only reason a “deadbeat” (a nonrevolver) uses credit cards is because they allow them to walk around without carrying large numbers of bills, and it frees them from having to worry about your cashflow on a week-to-week basis.
Why don’t we just give people a place where they can earn higher than bank interest by socking away extra cash to give them float and ease their cashflow… Oh, if only our government would do that.
May 23rd, 2009 at 2:21 am
[...] Matthew Yglesias comments: [...]
May 23rd, 2009 at 2:47 am
OK, there is no reason for Uncle Sam to outsource its signiorage power- the right to create money– for every dollar Uncle Sam “prints”, banks can create 9 more by making loans.
That’s the way the system is set up, I guess we’ll have to wait for some kind of banking crisis or financial downturn before any politician, other than Dennis Kucinich, will discuss socializing the power to create money by nationalizing the Fed. Let’s just hope that there isn’t a former president of the New York Fed serving as Treasury Secretary when that downturn occurs.
So if we’re stuck with creating money via banks, then lets socialize the banking system. Its worked pretty good for the people of North Dakota
http://www.webofdebt.com/articles/state_bank_option.php
May 23rd, 2009 at 10:09 am
beowulf:
I’m not sure your post reflects a coherent view of the fiat currency system. The relationship between a state government and its banks is fundamentally different from the relationship between a federal government and its banking system. If you don’t understand that you are not really in a position to be offering policy prescriptions.
MY:
I spoke to a fairly influential economist recently about the question of whether there is any real advantage to having the private sector provide insurance.
His answer, in a nutshell, was that there really isn’t. The difference between your premium (what you pay) and the average benefit (what you receive in claims paid) serves no purpose. The government could provide insurance much more cheaply than the private sector because in insurance the profit motive doesn’t motivate quality or efficiency anyway.
The main obstacle is, of course, the insurance industry and their clear and legitimate interest in continuing to make profits. But there’s no reason, from the perspective of the public interest, for most insurance functions not to be nationalized.
May 23rd, 2009 at 10:41 am
With respect to the insurance proposal, even if we ignore the fact that lots of people make a living through car insurance, would the state charge different car taxes to people who, actuarilly speaking, were more dangerous drivers? Could the government even legally engage in that sort of discrimination? The ability to mess with the rates of bad drivers is an important function of car insurance companies.
May 23rd, 2009 at 7:27 pm
I’m sure anyone who needs the sovereign power of the State to buy milk thinks this is a great idea. Concerns about informing the police and the IRS of your every transaction are just “traditional” and can be safely ignored.
No wonder you delete posts and restrict commenter registration. I wouldn’t want to defend an idea like this in a fair debate either.
May 24th, 2009 at 10:02 am
chernevik writes: I’m sure anyone who needs the sovereign power of the State to buy milk thinks this is a great idea.
Nope. Or at least, I don’t think it’s a good idea, and I use the sovereign power of the state to buy milk all the time. It’s printed right there on those pieces of paper I give the store: “This note is legal tender for all debts, public and private”. When I use plastic, the sovereign power is a little less obvious, but it’s enforcing the contracts between me and the credit card company, the bank, and any other involved parties.
May 25th, 2009 at 12:44 am
I think if we left everything the same and just had a $1000 credit option with the treasury (which had no bearing on private credit), that in itself would be a great idea.
Alot of poor people go deeper and deeper by being charged high interest rates and dealing with the payday advance type places.
For alot of people with low finances, the credit they routinely seek is just “buy groceries” or “pay the cable bill” type of credit, small sums. So, maybe they could get a government $1000 credit card and, if worse comes to worse, the government could take small garnishments from their earnings It’s a humane, people-friendly, reasonable idea in my opinion.
May 25th, 2009 at 9:27 am
This government does not believe in doing what the private financial sector can do.
Socialize the private secotr losses, privatize the gains occurred with BankUnited.
The FDIC zeroed out BankUnited’s former shareholders. It’s not clear what they did with $4.8 billion owed to the Federal Home Loan Bank. The FDIC did guarantee 60-95% of loan losses for the winning consortium, which includes The Carlyle Group and Blackstone. They anticipate the federal subsidy to be $4.9 billion.
Yet, progressive websites will give this no play under Obama. They would be shouting from the rooftops if Bush did it.
http://peureport.blogspot.com/search?q=bankunited
May 26th, 2009 at 3:25 am
Ape Man,
Sorry for not dumbing it down for you, geez. Actually what I’m suggesting is fundamentally different from both federal and state regulation of banks. The example I gave (Bank of North Dakota) is one of government ownership, not government regulation. That’s why I posted it under “Friday Afternoon Socialism”.
As for a government insurance company, the State of Wisconsin has been in the life insurance business for 98 years (State Life Insurance Fund). I don’t know if there’s even been a state-owned car insurance fund, but I think that was a part of Andrew Tobias’s pay at the pump insurance plan.
http://www.andrewtobias.com/bkoldcolumns/981210.html
May 26th, 2009 at 10:17 am
Ken –
Touche. (Where is unicode when I need it?)
There is, of course, a distinction between establishing a fundamental framework and dictating outcomes within that framework. Needing a government for currency and courts is one thing. Needing government-subsidized credit is another.
May 26th, 2009 at 10:55 am
chloebop (#27 – and is this also chernevik #22?): Obviously there is some sort of line separating the appropriate and inappropriate government functions. However, that line shifts over time.
There was a time in the United States, not really all that long ago, when the whole concept of the “Federal Reserve Note”, unbacked by any gold, was viewed with deep suspicion as a grab for unneeded, and illegal, power by the government (and there’s still a few gold-bugs around). But the attitude has changed gradually, and people now accept it.
I suspect a government line of credit would pass through the same stages. The only real question is whether we should start it – no, sorry; now that I think of it, we’ve already had it for decades, but only for banks and corporations. The question is whether we should extend it to individuals.
May 29th, 2009 at 11:09 am
A big reason (and there are others) why it might be more efficient or otherwise better for the government to do something is economies of scale. If it is far less costly for there to be just one giant provider, then this benefit may outweigh the benefits of competition (and with the free market, competition may die out naturally anyway, as the largest and lowest cost producer prices out every single competitor, thus the term in economics, “natural monopoly”).
In this case, if you leave it to the private sector you end up with one giant monoploy which is far less efficient, and far worse, than the government providing it, or you use anti-trust law to prevent monopoly, and end up with many inefficiently small private providers. Either way it’s inefficient. You could have a regulated monopoly, but very often the monopoly is too difficult and costly to monitor and regulate well, so government provision ends up being more efficient and less costly.
An important point is that in a modern high-tech economy, great economies of scale become more prevalent, and what may not have made sense for the government to provide in the past, may make sense today.