No to credit controls
There are reports from Washington that the administration is considering controls on consumer credit, in particular credit cards, as part of its anti-inflation package. We oppose such a move. Credit controls would tackle a problem that does not exist and therefore would be mere window dressing.
If anything, Americans are already cutting back on their use of credit cards. There was a sharp dip in consumer use of credit in February. Moreover, real retail sales (taking inflation into account) have been essentially flat for a year. Real consumption spending -- a broader sales figure covering around two-thirds of the nation's total output of goods and services -- has risen only 1 percent in the past year.
The banks, too, finding that high interest rates make the card business less profitable, are not pushing them on the public as hard as they have in the past.
Credit-card controls would simply not be effective in fighting inflation. For one thing, the large increases in prices of the last two months have not occurred in general merchandise or apparel -- the type of goods usually bought with a credit card. One major factor in the price surge has been a bulge in energy prices. Rising mortgage interest rates have been another.
Nor is there any great evidence of shortages of consumer goods that would warrant tightening up on credit. Controls have been imposed in the United States during wartime. Then the military needed so many materials to maintain its armed forces and supply them with weapons that there were serious shortages in the civilian economy. That is not so today.
Indeed, the imposition of credit controls might deepen somewhat an expected economic slowdown. If consumers have less access to credit, they presumably would cut back on their spending at a time when it already shows signs of slowing.
Today's high rate of inflation already is trimming the real income of consumers. Citibank's chief economist Leif Olsen figures that the broadest measure of inflation, the socalled gross national product deflator, has been rising at an 11 or 12 percent annual rate so far this year. That is two or three percent higher than it had been climbing previously.
Consumers now are feeling the damage to their pocketbooks and are expected soon to cut back on their spending. They could even increase their rate of savings and their cash balances since they probably are anticipating correctly that their incomes will have a hard time keeping up with inflation.
The widespread view that credit cards enable consumers to increase their spending in an infinite amount is mistaken. Consumers who use credit do not usually increase their debt up to the point where regular repayments become terribly uncomfortable. There is a self-imposed limit.
It is true that there has been a major increase in consumer installment debt in the last two years -- from 16.4 percent of disposable personal income (after tax income) at the end of 1977 to 18.1 percent at the end of 1979. In an inflationary environment there is often good reason to buy goods now rather than later when their price has gone up. But most consumers are intelligent enough to know when to stop piling up debts.
In Mr. Olsen's view, credit controls would be nothing but a "placebo" to make it appear the administration is doing something. In his words, "There is nothing in the credit markets that is unusual in character in any way -- either business or household -- that requires direct intervention of any sort."
Needed, rather, is a tighter budget and a good measure of patience while monetary policy takes effect. The present disorientation in the credit markets, that is, the rapidly rising interest rates and near-panic, has been due to a lack of a convincingly restrictive monetary policy, a casual budget proposed by the administration, and the dramatic increase in inflation. But the latest news shows the Federal Reserve System is having greater success in restraining the growth of money. Furthermore, President Carter is expected to come up this week with a considerably leaner budget. And the surge in energy costs and mortgage rates should soon pass through the economy.
It is therefore not necessary for President Carter and Congress to panic and pass such a useless measure as credit controls.