Daniel Indiviglio has a strange post at The Atlantic that I have been trying to ignore, but the website editors there keep putting it on their front page in a box called “Things you might have missed”. His argument is that credit should be criminalized because that would make the economy more stable. Daniel recognizes that the effects would be devastating in the short run, but claims that eventually it would only mean that the economy grows “a little slower”. This is not just my ungenerous interpretation:
It would involve an extraordinarily difficult transitional period, including massive job losses, deflation, and a deep recession as the government and population adjust. But if Congress managed to embrace a credit ban, we would end up with an overall economy that grows a little slower, but is incredibly stable. All that systemic credit risk? Gone. That reward would be well worth the cost. [Emphasis mine]
Would it really be worth the cost? Let’s consider what criminalizing credit would really mean. In reality it would mean lending would be pushed into the black market, because people would not be ridiculous enough to abide by a law that prevents borrowing to make investments with positive net present value, or making loans with a positive expected return.
To the extent that people don’t circumvent the law, a credit ban would mean a lot of terrible growth destroying stuff in the long run, not just during a “transitional period”. One growth destroying impact would be that people couldn’t borrow money to go to college, which would gradually erode the human capital stock of the country. People also couldn’t borrow money to buy cars to drive to their jobs, which would mean settling for worse jobs that are closer by, thereby inefficiently distorting the allocation of labor. They also couldn’t borrow money to make simple investments in durable goods that would save them money in the long run, like buying a washer and dryer instead of spend money at a laundromat.
It would also mean that when someone suffered a temporary and unexpected income shock that wiped out their savings they would have to begin selling off their possessions instead of using credit cards to make it through. Of course that’s only if they have valuable possessions to sell. The evidence in developing countries suggests that when poor families have no or limited access to credit, they are more likely to respond to income shocks by pulling their children out of school and putting them into child labor. So we’d probably see some child labor, which also represents a massive destruction of human capital.
Of course rich people wouldn’t see their access to education or mobility limited, nor would their resources to weather income shocks be noticeably diminished, because they have lot’s of wealth and savings to draw on. Thus banning credit would mostly hurt the poor, and thus would significantly increase income inequality. The ability to borrow money is much more important to low income people, and for so many it is an absolute necessity if they are to pull themselves out of poverty.
So no, even in theory, even on paper, we should not criminalize credit.