osewalrus (osewalrus) wrote,

University of Chicago School Economist Changes Mind Based on Evidence. I may swoon.

You so rarely see a paragraph like this in the world.

"Looking at the data forced us to rethink our understanding of the effects of regulating consumer financial products,” Mr. Mahoney told me. “The data changed our view of the world. That is what’s so exciting about being an empirical economist.”  

The New York Times article quoted above addresses the impact of the CARD Act. The credit card protection act passed in that brief moment in 2009 when people were sufficiently shocked about the depredations of the financial industry to actually do something. Professional economists, like the authors of the study, confidently predicted that banks would simply raise rates overall and/or availability of credit to the higher risk pool would shrink.

Turns out, this totally didn't happen. The Act worked great, saving consumers on average 2.8% on their bill for a total of about $20 billion overall since the law was passed. Think of it as a $20 billion econ stimulus. It also does not appear to have impacted availability of credit for higher risk card holders, although the case on this one is less clear (the authors of the study observe that while banks did tighten credit availability, that related to the financial collapse rather than the CARD Act. Banks can still charge higher rates of interest for those with worse credit scores, they just can't rip them off with bogus charges).

I will note that this works because the market for credit cards is still competitive. It is the combination of competition and regulation that is effective. But the conventional wisdom that consumer protection regulation is invariably ineffective is simply wrong. And it is nice to see a U of C economist say so.

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