Congress can’t legislate away unintended consequences

Sometimes, bipartisanship is a great meeting of the minds. Other times, it’s a meeting of minds that don’t understand economics. The latter is the case with recently proposed legislation to cap credit card interest rates, introduced by Rep. Anna Paulina Luna (R-Fla.) and her reliably misguided counterpart, Alexandria Ocasio-Cortez (D-N.Y.).

Let’s start with common ground. Most people agree that credit card interest rates, which now average well above 20%, are excessive. No one should pay 20% or 30% interest annually unless facing a true emergency, and even then, that debt should be paid off as quickly as possible.

Policies that sound good in theory often fail in practice, and capping credit card interest rates is one of them.

Pricing serves as a signal, providing consumers with critical information. A high interest rate should send a clear message: Avoid carrying a credit card balance. Paying off the full amount each month prevents the burden of excessive interest charges.

However, in typical fashion, lawmakers who put political appeal over economic literacy ignore the unintended consequences of their policies. Proposing a cap on interest rates disrupts this pricing signal and creates a cascade of negative effects.

The most immediate consequence is reduced access to credit. High credit card interest rates exist largely because lenders assume the risk of defaults, including the possibility that borrowers may discharge their debt through bankruptcy. To compensate for this risk, lenders adjust costs accordingly.

Capping credit card interest rates while maintaining the bankruptcy “out” forces lenders to adjust their underwriting process. As a result, many borrowers — including those with poor credit and even some with decent credit — will lose or be denied access to credit from traditional sources. To compensate for lost revenue, lenders will likely introduce additional fees, making borrowing more expensive in other ways.

Predictably, lawmakers like Luna and Ocasio-Cortez will then complain about financial discrimination against low-income borrowers who suddenly find themselves locked out of the credit system.

Without access to traditional credit, many of these individuals will turn to riskier, more expensive alternatives, such as payday lenders or even black-market sources, further exacerbating the problem policymakers claim to be solving.

Ultimately, Congress cannot legislate away unintended consequences. In fact, Congress is typically a source of unintended consequences.

Some may argue that restricting credit access is beneficial for certain individuals, but denying access doesn’t mean people won’t seek credit elsewhere — often from riskier, more expensive sources.

More importantly, what gives the government the authority to regulate financial responsibility? Should Congress also prevent people from buying cars they can’t afford, placing sports bets, purchasing designer clothes, or enjoying steak dinners?

Financial responsibility cannot be legislated, especially in a country with minimal financial literacy education.

And let’s not forget that Congress itself has accumulated $36.5 trillion in national debt. Hardly a role model for fiscal responsibility.

Policies that sound good in theory often fail in practice, and capping credit card interest rates is one of them. Instead of creating more financial hurdles, Congress should focus on fixing its own fiscal mismanagement and addressing affordability issues. People shouldn’t feel forced to borrow at insane rates just to make ends meet.