Marginal Revolution

Credit Card Crunch?

Frankly, I am tired of this topic but every time I try to check the data - as best as I can - it doesn't seem to support the rhetoric we are hearing from people at the top [despite real problems blah, blah, blah].  Here's Paulson today:

At least some of the remainder [of the bailout money], Paulson said, should be used to reinvigorate the market for credit cards, student and auto loans -- which combined account for some 40 percent of consumer credit.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said. (emphasis added)

I'll focus on credit cards.  It is true that credit card offers, i.e. junk mail, is down:

...one billion fewer offers mailed during the course of the year. Households with incomes under $50,000 will receive about 700,000 fewer offers in 2008 compared to 2007. These households account for the majority of the cutback and clearly indicate a major change in strategy by card issuers.

"The souring economy and industry consolidation have driven volumes down to levels not seen since 2003 [Crisis! AT]" said Andrew Davidson, Vice President of Competitive Tracking Services for Synovate’s Financial Services Group. "Card issuers are taking a more cautious approach, with lower income and high risk households receiving fewer offers or no offers at all."

But even so:

Despite the decline in offers for new cards, US consumers still have access to an increasing amount of credit. Household credit lines across all cards edged up to an average of $27,626 per household (YTD 3Q 2008) from $26,902 in 2007 despite evidence that issuers are cutting credit lines on certain customers.

..."Much has been reported about issuers reducing credit lines for certain customers but this is not the case for the majority of people. Across the industry as a whole, we continue to see credit access and usage at record high levels" said Davidson.

By the way, after listening to Tyler and me debate this topic Bob Murphy and Megan McArdle decided to run some tests.  So if you prefer your data by anecdote you can read Bob's results here and Megan's here.  I am partial to Megan's hypothesis #5.

Should the federal government encourage more credit card borrowing?

No, and especially not with federal dollars.  Give them back to the people who earned them!  Many people use credit cards as charge cards and of course that is both a) efficient, and b) not where the problem is.  We're talking about credit card debt as a means of financing consumption expenditures.  I am not sure what is the going credit card interest rate for the marginal borrowers who will be aided by this new change in the Paulson plan, but I believe it is over fifteen percent.

More spending today, in return for less spending in the future.  At a rate of, say, fifteen percent.  Or higher.  Think of our government as "borrowing" aggregate demand at a rate of fifteen percent or higher.  Of course our government can, on its own, borrow at a much lower rate of interest than that and then stimulate aggregate demand on its own, through state and local governments, or with a tax cut.  Maybe our government is afraid of damaging its credit rating but is it really a good solution to have its poorer citizens do the borrowing on their credit cards instead?

This is not the time to be subsidizing credit card expenditures.  And if our political discount rate is this high, I fear to think what other mistakes we will soon make. 

An update on the bailout

Gordon Tullock is a smart man:

When the government said it would spend $700 billion to rescue the nation’s financial industry, it seemed to be an ocean of money. But after one of the biggest lobbying free-for-alls in memory, it suddenly looks like a dwindling pool.

Many new supplicants are lining up for an infusion of capital as billions of dollars are channeled to other beneficiaries like the American International Group, and possibly soon American Express.

Of the initial $350 billion that Congress freed up, out of the $700 billion in bailout money contained in the law that passed last month, the Treasury Department has committed all but $60 billion. The shrinking pie — and the growing uncertainty over who qualifies — has thrown Washington’s legal and lobbying establishment into a mad scramble.

The Treasury Department is under siege by an army of hired guns for banks, savings and loan associations and insurers — as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages.

The real lesson here is about the massive fiscal stimulus on its way.  Beware, and don't be tricked by people simply postulating how the money "should" be spent.

Spin-Free Economics

The subtitle is "A No-Nonsense, Nonpartisan Guide to Today's Global Economic Debates" and it is by Nariman Behravesh.

I was shocked by how much I liked this book.  I think of it as a kind of contemporary Capitalism and Freedom, although it comes across as less partisan and the coverage is much more global.  I agreed with almost everything the author said and I thought the framing was effective and spot on just about all the time.

Many MR readers already know too much to be the appropriate audience here, but if you wish to give someone an economics book as a gift, or as an introduction to thinking about economic policy, here you go.  I'm still astonished at how remarkably good this book is and yes I did read it all the way through.  Greg Mankiw wrote a very nice blurb for it.

You can buy it here.  Here is the book's home page.  I haven't seen any serious reviews yet, nor has Google.

Against team players

When one team wins, another loses.  If the Celtics win the championship, the Lakers cannot.  Sports at the team level, within the context of a single season, is more or less a zero-sum game.  But ranking the quality and fame of players is more multi-dimensional and thus it is more positive-sum.  Maybe the advent of LeBron James diminishes the luster of Tim Duncan (or maybe it doesn't), but the total amount of fame produced still goes up because of LeBron and his efforts.

Players who maximize team wins are investing more resources into the zero-sum game.  (In fact team players in small markets with few fans are especially destructive of human welfare and it is those players who should be most encouraged to become ball hogs.)  Players who pursue individual glory -- even if at the expense of the team -- are investing more resources into the positive-sum game and thus they are doing more to benefit society.

So why is it again that we glorify the team players?