The Stash

The Credit Card Bill's Behavioral Experiment

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I know, I know--too much is made of the Obama administration's affinity for behavioral economics. (Frank and I tried to preempt that criticism in our piece about Obamaism by downplaying the behavioral discussion and burying it in the second half of the piece. But even that was a bit much for some readers...)

Still, this subset of provisions in the credit-card legislation strikes me as an important and direct application of behavioral economics. From the Journal:

Information once relegated to tiny print must be made clearer, and consumers will soon be told how long it would take to pay off a balance if they pay only the minimum due. ...

For consumers, the legislation aims to change habits -- perhaps leading them to make fewer big-ticket purchases with credit cards -- by clarifying the cost of using card debt. Several provisions in the legislation are geared toward forcing consumers to recognize how much they're paying in interest.  
A hyper-rational utility-maximizer should be able to tell how much he or she is paying in interest and act accordingly. Actual human beings have trouble even finding the right information, much less processing it correctly. It'll be interesting to see how much this affects the amount of credit-card debt people are willing to carry. If it drops significantly, score one for the behavioralists.
 
Conversely, you'd probably have to score one against the banks, since this would lower profits. Which is normally a good thing. But, as I think both Simon Johnson and Felix Salmon have pointed out (can't find the links easily), it may be a bit at odds with the administration's hope that banks will earn their way out of the current crisis and therefore won't need additional federal money.
 
Having said that, from a pure distributional standpoint, it's probably preferable to end the hidden fees and interest rate hikes even if it costs taxpayers more in terms of bailout money. I'm guessing the fees disproportionately hit the working- and lower-middle class while federal tax revenue (with the exception of the payroll tax) is raised pretty progressively.
 
--Noam Scheiber
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