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December 2, 2017

Elizabeth Warren sowing panic to 'regulate' the credit industry

By Robert Mariani

It's a point that's been made to death: U.S. politics have never been polarized as much as it is polarized today.  Rhetoric has become more heated in what seems like an arms race to stoke – and capitalize on – the most outrage.

Christmas came early for regulation demagogues on September 7, when Equifax, a credit-reporting agency, announced that it had suffered a catastrophic data breach.  People panicked – up to 145 million Americans had their identity data compromised.  Nobody can blame Americans for reacting this way to being exposed to identity theft.  But not so blameless are Senators Elizabeth Warrior (D-Mass.) and Brian Schatz (D-Hawaii), who introduced the FREE Act.  It's regulation of an increasingly common kind: thoughtless, opportunistic legislation with bad solutions.

The FREE Act and other bills inspired by it would mandate that companies provide credit freezes to consumers for free.  The rhetoric behind it follows the same rubric as all demagoguery: approach complex issues with

1.outrage-mongering and

2.simplistic solutions.

It goes without saying that the government can't just mandate prices of services to become zero without any negatives.  The result will be less efficiency in the credit industry, and average Americans will be the ones hurt the most due to the constraint in the availability of credit.  Credit ratings exist as a metric to rationally evaluate credit risk, and preventing resources from being used in this evaluation will just make credit harder to come by.  And shrinking the credit availability of an entire sector of the economy has serious consequences.

Regulating credit freezes would also serve to empower the notoriously lawless Consumer Financial Protection Bureau, the brainchild of Senator Warren before she took office.  The rhetoric supporting her pet agency should be familiar in its hyperbolic slant: Warren characterizes any criticism of the CFPB as a conspiracy between banks and "their Republican friends in Congress."

That's ridiculous and should immediately raise a red flag.  Serious people seeking the common good do not characterize their critics as Saturday-morning cartoon villains.

And perhaps more worrying is the intersection of this overblown rhetoric with its stated goals.  Warren thinks the whole credit-reporting industry "should be completely transformed."  That's a big goal, and far-reaching legislation can't be motivated by hyperbolic black-and-white thinking.  That's how the worst kind of policy finds its legs.

Senator Warren should prove that she is committed to a sober pursuit of rational policy.  Here's how she can do it:

1. Offer an evidence-based, non-emotional explanation for why the FREE Act won't lead to new costs for consumers and businesses.  Economic theory indicates that credit freezes and unfreezes are a service that requires resources, and mandating that such a service be provided for free will lead to market disruptions.  Argue convincingly that this will not happen.

2. Offer evidence that Equifax's blunders indicate that the credit industry in general is broken and in need of transformational reforms.

3. Honestly engage with the discussions of the Consumer Financial Protection Bureau's lack of accountability.  Arguments that Republicans are wicked henchmen of a conspiracy to hurt consumers are not an honest engagement of these ideas.

4. Paint what is, in your mind, the most realistic picture of how the credit industry works.  Then compare this to the models that are the consensus of non-partisan economists. 

5. Demonstrate how better oversight and enforcement with on-the-books regulations would not suffice.

6. Demonstrate that you understand the actual arguments of the critics of the FREE Act and not your own emotionally laden caricature of those arguments.  This can be done through what's known as an ideological Turing test.

Point number five is perhaps the most important.  Senator Warren expects hyperventilating words and absurd misrepresentations of her opponents to do the work for her.  But that isn't how good policy is crafted.  Good policy comes from sober and evenhanded analyses of the facts.  Until proponents of the FREE Act can demonstrate their commitment to such analyses, they can't be taken seriously as crusaders for the common good.

The two sides of this argument couldn't be more different.  One sees apocalypse and conspiracy in every instance of opposition to the latest regulatory power-grab.  The other calls for scrutiny and moderation.

It's not going to be the end of the world if the FREE Act passes.  That's an absurd thing to believe.  Elizabeth Warren isn't evil.  That's also absurd.  The FREE Act is a well intentioned but badly reasoned piece of legislation – the precise type that tends to further bloat the morass of the federal bureaucracy.

It's a point that's been made to death: U.S. politics have never been polarized as much as it is polarized today.  Rhetoric has become more heated in what seems like an arms race to stoke – and capitalize on – the most outrage.

Christmas came early for regulation demagogues on September 7, when Equifax, a credit-reporting agency, announced that it had suffered a catastrophic data breach.  People panicked – up to 145 million Americans had their identity data compromised.  Nobody can blame Americans for reacting this way to being exposed to identity theft.  But not so blameless are Senators Elizabeth Warrior (D-Mass.) and Brian Schatz (D-Hawaii), who introduced the FREE Act.  It's regulation of an increasingly common kind: thoughtless, opportunistic legislation with bad solutions.

The FREE Act and other bills inspired by it would mandate that companies provide credit freezes to consumers for free.  The rhetoric behind it follows the same rubric as all demagoguery: approach complex issues with

1.outrage-mongering and

2.simplistic solutions.

It goes without saying that the government can't just mandate prices of services to become zero without any negatives.  The result will be less efficiency in the credit industry, and average Americans will be the ones hurt the most due to the constraint in the availability of credit.  Credit ratings exist as a metric to rationally evaluate credit risk, and preventing resources from being used in this evaluation will just make credit harder to come by.  And shrinking the credit availability of an entire sector of the economy has serious consequences.

Regulating credit freezes would also serve to empower the notoriously lawless Consumer Financial Protection Bureau, the brainchild of Senator Warren before she took office.  The rhetoric supporting her pet agency should be familiar in its hyperbolic slant: Warren characterizes any criticism of the CFPB as a conspiracy between banks and "their Republican friends in Congress."

That's ridiculous and should immediately raise a red flag.  Serious people seeking the common good do not characterize their critics as Saturday-morning cartoon villains.

And perhaps more worrying is the intersection of this overblown rhetoric with its stated goals.  Warren thinks the whole credit-reporting industry "should be completely transformed."  That's a big goal, and far-reaching legislation can't be motivated by hyperbolic black-and-white thinking.  That's how the worst kind of policy finds its legs.

Senator Warren should prove that she is committed to a sober pursuit of rational policy.  Here's how she can do it:

1. Offer an evidence-based, non-emotional explanation for why the FREE Act won't lead to new costs for consumers and businesses.  Economic theory indicates that credit freezes and unfreezes are a service that requires resources, and mandating that such a service be provided for free will lead to market disruptions.  Argue convincingly that this will not happen.

2. Offer evidence that Equifax's blunders indicate that the credit industry in general is broken and in need of transformational reforms.

3. Honestly engage with the discussions of the Consumer Financial Protection Bureau's lack of accountability.  Arguments that Republicans are wicked henchmen of a conspiracy to hurt consumers are not an honest engagement of these ideas.

4. Paint what is, in your mind, the most realistic picture of how the credit industry works.  Then compare this to the models that are the consensus of non-partisan economists. 

5. Demonstrate how better oversight and enforcement with on-the-books regulations would not suffice.

6. Demonstrate that you understand the actual arguments of the critics of the FREE Act and not your own emotionally laden caricature of those arguments.  This can be done through what's known as an ideological Turing test.

Point number five is perhaps the most important.  Senator Warren expects hyperventilating words and absurd misrepresentations of her opponents to do the work for her.  But that isn't how good policy is crafted.  Good policy comes from sober and evenhanded analyses of the facts.  Until proponents of the FREE Act can demonstrate their commitment to such analyses, they can't be taken seriously as crusaders for the common good.

The two sides of this argument couldn't be more different.  One sees apocalypse and conspiracy in every instance of opposition to the latest regulatory power-grab.  The other calls for scrutiny and moderation.

It's not going to be the end of the world if the FREE Act passes.  That's an absurd thing to believe.  Elizabeth Warren isn't evil.  That's also absurd.  The FREE Act is a well intentioned but badly reasoned piece of legislation – the precise type that tends to further bloat the morass of the federal bureaucracy.