NDP Policy: the fatal conceit in interest rates

So far in this election I have been critical of both the Conservative’s and the Liberal’s first policy planks. The NDP, however, win the worst first policy award. Congratulations to the NDP!

The NDP are proposing that the federal government introduces a price control on credit card loans. More specifically the NDP want a cap on the interest rates that credit cards can charge. They also want to empower government employees to decide when banks are charging “excessive” interest. I am left wondering on what basis the government can make a judgment on what is the appropriate interest rate.

To those that are unfamiliar with F.A. Hayek’s Fatal Conceit, allow me to briefly explain the importance of price signals. In society we as individuals cannot possible know enough to always make the right economic decision, even if we are perfectly rational. A lot of the needed knowledge is too dispersed or difficult to communicate to reach the average individual. Price signals make up for this problem by making an incentive for people to behave as if they had the needed knowledge.

For example, if I go to a grocery store and notice that apples are suddenly much more expensive I will consume fewer apples. I don’t need to know that apples have become scarcer because of a draught somewhere. All I need to know is that apples are more expensive and I will consume less of the suddenly scarce apples.

Imagine then that the government (in its conceited way) decided to fix the price of apples at a certain rate. I as an individual then would not bother to eat fewer apples because I am unlikely to be aware that they have become scarcer. The inevitable result is a crisis in the apple supply.

Now apply that same model to credit. Banks increase interest rates not for a laugh but because for whatever reason credit has become more scarce. With a cap on interest rates consumers would not know if credit is scarce and thus there will be an inevitable crisis in the supply of credit.

Government is just as incapable of knowing all the relevant economic information as an individual. The price that governments set will then inevitably be wrong. It is only a matter of degrees on how wrong they are. The kind of policy that the NDP are proposing can only lead to more economic difficulty.

I would say one good thing about Jack Layton. The disturbing increase in household debt is something that we should think seriously about. This is just exactly the wrong approach. We should be looking instead at the core of the problem:

Is government policy already making credit cheaper than the market price?