Horrible Idea of the Day: Government Credit Cards for Everyone

John on June 23, 2010 at 10:16 am

Actually, this is from two days ago, but I just saw it. Matt Yglesias endorses the idea of a government issue credit card for every American. He quotes Steve Waldmann suggesting:

Every adult would be offered a Treasury Express card, which would have, say, a $1000 limit. Balances would be payable in full monthly. The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors.

Yglesias argues that most people would pay off their balance every month because the cost of not doing so (frozen credit) isn’t worth failing to do so. Makes sense. But then he says:

This would basically decouple the convenience of paying with plastic from participating in a marketplace whose business model is heavily focused on bilking the customers.

As someone who recently got a form letter (from a credit card company I’ve dealt with for more than a decade) saying they were altering the terms of my credit for the worse, I don’t have a lot nice to say about the industry right now. That said, the way most cards work is you only pay interest if you fail to pay your balance. In other words, it’s the people who don’t pay their balance who get “bilked.” The people who do pay don’t get charged much if at all.

So if the plan is to specifically aid those who are getting bilked, then you better plan on those being the same people who won’t pay off their treasury card balance each month. These are also the people who are probably not making rational decisions like the one Yglesias suggests, i.e. better to pay than to have frozen credit.

What this proposal does is encourage irresponsible borrowing by removing any penalty associated with it. The most likely result is that the very people you are supposedly helping wind up with more debt and frozen credit. Now I suppose you could say that freezing these people’s credit is doing them some good, since it will keep them out of further debt. But is that really helping them in the long run? It sounds a bit like helping an alcoholic by giving him one last free bottle of Jack. Meanwhile, the people who “drink responsibly” don’t really need a free bottle.

And there are surely all sorts of situations where this would turn out to be a nightmare for ordinary citizens as well. Trying to buy a house but at the last minute you discover a $1 balance on your government card…Sorry, Charlie, no credit for you. What happens if someone steals your identity? No credit for you…not anywhere. It can take months if not years to restore your credit after identity theft.

That’s not to mention that extending $1,000 credit to 200 million adults is going to potentially cost us 200 billion dollars, plus an army of bureaucrats to staff the program. Wanna bet that, unlike most big card companies, you won’t be able to reach your Treasury card staff 24/7. Forget about nights, bureaucrats don’t work weekends. This winds up being a very short term benefit for the irresponsible and, essentially, no benefit for the responsible.

What a horrible incentive. What a horrible idea.

Category: Energy & Economy |