Personal Finance, Public Finance, and the Political Economy of Debt

This morning I relaxed to watch the morning news shows and as often happens decided to switch channels.  Analysis of the upcoming NBA draft and news that Brandon Jennings is having problems passing his standarized tests and therefore might go to Europe rather than play at Arizona can keep me occupied for only so long.  So flicking from ESPN to NBA.TV back to ESPNU had to switch to something else.  As I hit Showtime, a documentary caught my attention --- MAXED OUT: HARD TIMES, EASY CREDIT, THE ERA OF PREDATORY LENDERS.  How many of you have seen this before?

What is interesting to the economist watching the documentary is how easily they link reckless personal finances with reckless public finances --- see the trailer.  When I was learning economics in the late 1970s and early 1980s, the Keynesian hegemony argued against this simple point about fiscal responsibility.  You know the fallacy of composition and all that.  Buchanan's Public Principles of the Public Debt, in fact, was the best professional statement of the "old time fiscal religion" that defined classical political economy.  The second point which strikes the economist viewer of the documentary is how the causal explanation is a combination of credit card company greed, and political connections.  Nowhere in the documentary, nor in the various people interviewed is it explained that the source of the problem is the perverted incentives in the banking industry that create moral hazards with regard to lending practices.  Of course, there is also an issue of prudent decision making that should be raised but isn't on the part of consumers. But that would get in the way of the story that is being weaved --- credit card companies want to suck unsuspecting consumers into debt, and that the most profitable position for the credit card companies is for these debt ridden consumers to pay the monthly balance, but never pay off the debt. And the risk side of this practice is covered by their political connections.  The Bush adminnistration, in particular, is responsible for the financial debackle that we are living through at a personal and public level.

Now there are many points raised in the documentary which demand comment from Austrian and public choice economists. Has anyone from that perspective ever written a review essay?

Comments

[Sinclair Davidson]

Not that I'm aware of. I was recently looking for a review essay on this very topic but ended having to rely on Buchanan's original book.

Clearly a gap in the market to expand and update the argument.

[Flash Gordon]

The idea that credit card companies want their card holders to pay the monthly minimum and never pay off the complete debt is curious. It is my understanding that the credit card companies charge merchants about 3% of the purchase price for everything you buy with your credit card. If you pay your card off in full every month the credit card company is making 3% on money that is out for only 2-4 weeks. That must be an annual rate of somewhere around 36% to as high as 78%.

While credit card interest on unpaid balances is high it isn't that high. It would seem that the best customer for a credit card company is one that regularly makes large purchases by credit card and pays it off in full every month.

Journalists and documentary makers wouldn't have to be professional economists to think that one through and realize that no lender profits by lending to people who don't pay it back.

I think that for the 3% return I would like to finance the purchases of others with as much money as I have or can obtain by borrowing at a lower rate if I could be sure I'd get paid back in less than a month.

[Flash Gordon]

Actually, since the credit card company pays the merchant $97 for every $100 dollars you put on your credit card the return is even better, about 3.1% or 37.2% to 80.6% annually.

It might be true that credit card companies don't much mind late payments because of the large late fees they charge, but borrowers who habitually pay late usually stop paying altogether at some point.

[mjh]

It's a pity that there isn't an austrian economist available (even on this website) that has seen the film that could write a review. Of course, said economist would have to first do a thorough search of all other austrian economists to ensure that no such review existed. Being required, of course, to not write a review of a film that's already been reviewed. Double review? What a waste. Couldn't one argue that, in order to prevent such waste, a government program be developed that would ensure only one austrian economist would write reviews of films?

(Sorry about the snark. I couldn't resist.)

[Peter Boettke]

I don't really understand the "rules" of blogs and the internet in general. Instead, I view these are open arenas for questions and discussion. I asked a question about something I am completely ignorant of and asked for somebody to point me in the right direction. I didn't make a claim to know something that in fact I didn't know, I claimed instead that I didn't know and perhaps somebody could straighten me out. Perhaps there are lots of reviews of the movie from an Austrian perspective, if so I would still be interested in the pointer. Because I remain ignorant of their existence. Perhaps I should do a google search to eliminate my ignorance, but I thought instead to ask a question aloud in this blogosphere classroom. Is that a violation of the rules of the blogosphere? If so, please tell me and I will not ask any more like questions.

Pete

[mjh]

Clearly, the smile that was on my face as I wrote my smart-alec comment was not transmitted. I did not mean to suggest that you violated any rules. My apologies. No offense was intended. Sorry if it happened.

What was intended was to make a light-hearted suggestion that you write a review of the show. I was also trying to suggest that the existence or lack of existence of other austrian reviews shouldn't impact your decision to review it. Finally, I was trying to put in a (sarcastic) plug for a government program to ensure that one and only one austrian review ever existed. (I don't really think such a program should exist.)

So again, my apologies. Re-reading my post, it's easy to see how it might not come off as good natured ribbing, which is how I intended it.

[Rachael]

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