The latest crisis that has some Americans calling for government intervention to fix the problem is subprime auto loans to the poor. The New York Times has had a series of articles on the subject. And NPR’s On Point with Tom Ashbrook recently devoted a show to the topic.
The working poor with low credit scores who need transportation to get to work are increasingly taking out high-interest loans to purchase used cars. Thousands of these subprime auto loans are then bundled together and sold as securities to investors, including mutual funds, insurance companies, and hedge funds. The market for such securites has grown 302 percent, to $20.2 billion since 2010.
The demand for subprime auto securities has led to a rise in loans that contain falsified income or employment information. Justice Department examinations “are modeled on the federal investigation into the sale of mortgage-backed securities.” Billions of dollars in settlements have been reached.
Related to this are title loans on existing cars that allow owners to borrow money against their cars. Aggressive advertising on radio, late-night television, and billboards in urban, predominantly low-income communities promises quick cash, but with the price of high interest rates. According to a survey by the Federal Deposit Insurance Corporation (FDIC), “More than 1.1 million households in the United States used auto title loans in 2013.” A review of loan agreements by The New York Times found that “after factoring in various fees, the effective interest rates ranged from nearly 80 percent to over 500 percent.” The lenders, of course, “argue that they are providing a source of credit for people who cannot obtain less-expensive loans from banks.” High interest rates, they say, “are necessary to offset the risk that borrowers will stop paying their bills.” Nevertheless, for some Americans, these loans sometimes result in repossessions, increased debt, and ruinous financial consequences.
The Federal Trade Commission (FTC) — for the first time — recently went after two car-title lenders on suspicions that they misled borrowers by failing to accurately disclose the terms and costs of the loans. Aggressive advertisements by First American Title Lending and Finance Select, both based in Georgia, pitched loans “with zero interest rates but failed to disclose that the interest rates on the loans jumped after an introductory period.” A settlement deal between the lenders and the FTC requires the companies to “overhaul how they advertise and promote their loans” and “improve their disclosures about loan terms.”
Now, although everyone is opposed to fraud and false advertising, critics of subprime and title loans for automobiles invariably call not only for more government oversight, but for government-decreed maximum interest rates depending on the type of loan. This is no different from laws that cap interest rates on credit cards from banks and payday loans from pawn shops. Price-gouging laws likewise fall into this category. And so does agitation for legal limits on CEO pay.
But it is not just government maximums that some Americans clamor for.
It has been a year now since a new minimum wage of $15 an hour took effect in the city of SeaTac, Washington, home of the Seattle-Tacoma International Airport. It was the result of a ballot initiative that won by just 77 votes.
Minimum wages also went up in nine states (Arizona, Colorado, Florida, Missouri, Montana, New Jersey, Ohio, Oregon, Washington) at the first of the year because of indexed increases in their state law. The minimum wage is scheduled to increase later this year in six states (Alaska, Delaware, Maryland, Minnesota, New York, West Virginia) and the District of Columbia. The federal minimum wage has been $7.25 an hour since July 24, 2009. However, states are allowed to set their own minimum wages. Twenty-nine states and the District of Columbia have a minimum wage higher than the federal minimum.
Four states (Alaska, Arkansas, Nebraska, South Dakota) approved minimum-wage increases through ballot measures in the 2014 general election while legislatures in ten states (Connecticut, Delaware, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, Rhode Island, Vermont, West Virginia) and Washington, D.C., enacted increases during their 2014 sessions. As a consequence of this and previous legislation or initiatives, the minimum wage is already scheduled to increase next year in eleven states (Alaska, Arkansas, California, Connecticut, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Vermont).
Because only about a dozen states ban cities from setting their own minimum wage, some cities in addition to Washington’s SeaTac have their own minimum wage. Seattle’s minimum wage is scheduled to gradually increase to $15 an hour. New York City Mayor Bill de Blasio has called for a minimum-wage increase to $15 an hour by 2019. A recent poll “shows that 75% of Americans — including 53% of Republicans — support an increase in the federal minimum wage to $12.50 by 2020” and that “63% of Americans support an even greater increase in the minimum wage to $15.00 by 2020.”
Other forms of government minimums include programs to guarantee certain margins to the dairy and sugar industries.
There are a myriad of reasons offered by the government and supporters of government intervention for the necessity of government to set maximums and minimums: to protect consumers, to fight income inequality, to level the playing field, to help the poor, to keep people out of poverty, to thwart people from making bad financial decisions, to prevent people from being taken advantage of, and so on.
There are a number of problems and inconsistencies with these government maximums and minimums.
First, why maximums on some products and services but not minimums? And why minimums on some products and services but not maximums? If there should be a maximum interest rate to protect borrowers then why not a minimum interest rate to ensure that lenders get a decent return?
Second, why just certain products and services? Why not a government maximum on the price of hotel rooms, haircuts, and dishwashers? Why not a government minimum on the price of bananas, newspapers, and CDs?
Third, there is a thin line between the government’s setting maximum prices and minimum prices and setting actual prices. In fact, once you accept that the government has the authority, knowledge, and competence to establish maximum and minimum prices, no logical argument can be made against the government’s setting actual prices. Local governments actually do this on taxis.
Fourth, government maximums and minimums are an assault on free exchange, free trade, free contract, free markets, and a free society.
Fifth, government maximums and minimums are forms of Soviet-style central planning and industrial policy.
Sixth, government maximums and minimums are arbitrary. They are not based on some economic law or empirical study but are instead pulled out of thin air or in response to agitation by a particular interest group.
And seventh, government maximums and minimums are political. They are set at the whim of government bureaucrats, lawyers, economists, regulators, and statisticians.
The free and unfettered interaction between employers and employees, producers and consumers, buyers and sellers, borrowers and lenders, and businesses and customers is always to be preferred to government intervention.