Americans are rightly concerned about affordability. From healthcare and housing to groceries and utility bills, Americans have found it difficult to afford these daily necessities for far too many years.
In response, President Donald Trump and Republicans in Congress are pursuing multiple policies aimed at lowering costs for the American people.
While the president and our former Republican colleagues in Congress generally have good economic and regulatory instincts, there are certain policies worth reconsidering because they could worsen the affordability crisis.
For example, as Congress reviews the proposed 10 percent price ceiling on credit, Republicans should follow their instincts by recognizing that these types of price controls have a long history of damaging unintended consequences for working families and small businesses.
When governments impose an artificially low price for a product or service in a competitive market, the result is always the same: reduced supply. This isn’t just a theory. It is a historical fact.
In 1971, President Nixon imposed price controls on retail gasoline. Because drivers paid less at the pump than the actual cost of gasoline, demand increased. But because gasoline producers and retailers couldn’t recoup their full costs from the artificially low prices, they supplied less to the market. The result was a predictable shortage of gasoline and Americans waited in long lines at the gas pumps.
Several major U.S. cities, including New York City, San Francisco, and Los Angeles, are capping rent increases at varying rates, preventing landlords from recouping their investments in maintenance and improvements, resulting in neglected maintenance, reduced improvements, and a shortage of new housing.
CONSERVATIVE INFLUENCER CALLS TRUMP’S CREDIT CARD CAP AS PROPOSAL THAT ‘SOCIALISTS’ SUPPORT
Price controls on credit cards would have a similar effect. They would reduce the availability of credit.
Banks charge interest on credit cards because there are costs and risks associated with issuing and managing them. For example, banks must cover credit card infrastructure costs, including administration, maintaining security, administering chargebacks and offering credit card rewards programs. Credit card balances are unsecured loans with high default rates, which impose significant costs on banks.
By capping rates at an arbitrary and artificially low level, such as 10 percent, banks would either have to make up for lost revenue elsewhere with higher fees and charges, or stop issuing credit cards to high-risk, low-income customers.
Consumers who lose access to credit cards altogether would be forced to turn to more expensive, riskier alternatives, such as loan sharks and payday lenders. The Cato Institute emphasizes that “history has shown that this [price] controls lead to shortages, black markets and suffering. Either way, the consumer loses.”
For those consumers who could keep their credit cards, banks would “likely respond to a credit card limit by reducing rewards programs and other card benefits, including fraud protection, while replacing lost interest income with fees payable by all credit card users,” the American Action Forum explains.
A cap on credit card rates would also mean government interference where free market competition already works to the benefit of customers. In fact, there are already dozens of credit cards with an introductory rate of 0 percent for a significant period of time. Economist Stephen Moore wrote a report last year detailing the harm a rate cap would have on consumers, concluding that the “system is not broken. Credit cards are more popular than ever… But rules that make cards less profitable and more vulnerable to the risk of losses from non-payments threaten this well-functioning and economically vital market.”
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For decades, Americans have voluntarily used credit cards to build businesses, borrow money – and simplify the purchases of everyday life. The free market has made these activities possible and should not be disrupted by the government. The government’s role in regulating the financial services industry is to ensure proper disclosures, competitive markets and system stability – not to set prices. Tariff ceilings would undermine market function and competition and return us to a seriously failed price control policy.
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Senator Elizabeth Warren, Senator Bernie Sanders and U.S. Representative Maxine Waters have long supported caps on credit card interest rates. Fortunately, most Republicans know better. Leaders, including Senator Mike Rounds, Senator Pete Ricketts, House Speaker Mike Johnson, and Senate Majority Leader John Thune, have expressed serious concerns about these price controls, with Senator Thune correctly noting that the proposal would “likely deprive a lot of people of access to credit across the country.”
Free markets provide consumers with better products, services and choices than price setters in Washington. Congress should allow the marketplace to continue providing consumers, working families, and Main Street businesses, of all incomes, with access to the credit they need.
Kevin Brady served as a U.S. Representative from Texas from 1997 to 2023. He is an advisor to Americans for Free Markets.
