Stop the Presses: University of Chicago Discovers Regulation Works

On November 7 New York Times business columnist Floyd Norris writes about a study of a 2009 federal law intended to force down the hidden fees credit card companies impose on their customers.

When Neale Mahoney, an economist at the University of Chicago’s Booth School of Business, set out to evaluate the effect of that law, he was confident he knew what he and his colleagues would find: It didn’t work.

“I went into the project with this sort of conventional wisdom that well-intentioned regulators would force down fees and that other fees and charges would increase in response,” he told me this week, comparing hapless rule makers to the carnival visitors playing the game known as Whac-a-Mole, where a mole springs up somewhere else as soon as one is knocked down.

But his expectation was wrong. The study came to a conclusion that surprised Mr. Mahoney and his colleagues: The regulation worked. It cut down the costs of credit cards, particularly for borrowers with poor credit…we find no evidence of an increase in interest charges or a reduction to access to credit.”

The study…estimates that the law is saving American consumers $20.8 billion a year.

“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.”

Now that Mr. Mahoney’s empirical research has changed his “view of the world” perhaps he could do his University of Chicago colleagues, and the country a service by widening his lens.  He would quickly discover that government regulations often accomplish exactly what they set out to do–save lives and protect consumers at the lowest possible cost (e.g. mandatory seat belts, elimination of leaded paint and gasoline).

Once Mr. Mahoney persuades himself that government rules benefit society he might take the next step in his journey toward apostasy and go beyond regulation to explore government ownership.  And here too he will encounter empirical evidence that upends his worldview that business outcompetes government.  He will find, for example, that using government employees usually is more cost effective than contracting out to private firms.  Government health insurance outcompetes private insurance companies.  Government-owned water utilities have lower rates.  Government owned prisons have lower costs and better safety.

Who knows?  Eventually Mr. Mahoney and his colleagues at the University of Chicago may discover the wisdom in Marcel Proust’s observation, “The real voyage of discovery consists not in seeking new lands but in seeing with new eyes.”













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David Morris

David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.