Thursday, May 21, 2009

The One Law that Congress Always Passes

Our betters in Washington are correcting our behavior again. The first order of business is the Credit Card Bill of Rights, which Congress passed by lopsided margins (never a good sign) and sent to President Obama for signature. The purported benefits of the bill sound promising enough, so long as you don't think about them too much:

“This bill will make the lives of hardworking Americans better,” said Representative Carolyn Maloney, a New York Democrat who sponsored the House version of the legislation. “It will help level the playing field and restore balance to credit-card contracts.”

People who ring up big bills on credit cards pay pretty high interest rates -- there is no doubt about it. There are others who pay their bills in full each month and don't pay any interest at all. The banks that issue credit cards make a lot of their money on transaction fees that they charge merchants, which is one reason why many merchants will offer a discount to cash buyers. The card issuers make the rest on interest payments from cardholders. So what is going to happen now that Congress and the President have decided to stop the credit card companies from charging as much interest?

Banks under the legislation will be prevented from pricing for risk, said Edward Yingling, president and chief executive officer of the American Bankers Association, said in a statement. Short-term unsecured loans will be turned into riskier, medium-term loans, and the bill will mean less available credit.
In other words, the benefits of a credit card (convenience, not having to carry cash, etc.) will be harder to obtain. And there will also be a return to annual fees and potentially the elimination of grace periods for charging interest, meaning that even those customers who pay their bills in full each month will now be charged interest. So what does it mean? Credit cards will be more expensive for everyone.

Then we have the Corporate Average Fuel Economy (CAFE) standard, a federal mandate that forces automakers to produce more fuel-efficient cars. The standard had not changed for a number of years, but President Obama changed it this week, raising the standard from the current 27.5 miles per gallon up to 42 in 2016. It's all seashells and balloons, according to environmentalist groups:

In introducing tough new CAFE measures the Obama administration is hoping to kill three birds with one stone: Resolve outstanding litigation by the Big Three automakers; enhance the administration’s international credibility in the fight to slow climate change; and offer struggling US automakers a chance at salvation by embracing cutting edge technologies.

And it appears that it’s going to work. US automakers are lining up behind President Obama’s initiative to set CAFE standards for new cars at 42mpg by 2016 — even though it means that they must improve fuel efficiency by 5% per year over the next six years. That’s a formidable challenge for an industry that has been all about power and speed decades. But automakers seem heartened by having a roadmap, stimulus funding, and an ally in the President who is working to help them meet the challenges of a low-carbon economy.

Chrysler is bankrupt and GM probably will be soon enough, but they are heartened to have a chance to enhance the administration's international credibility. It is good to have your priorities in order. But there is a little problem with this lovely scenario:

To improve fuel economy, auto makers primarily reduce the size and power of
vehicles. Unfortunately, this downsizing has tragic consequences (See Figure) . As far back as 1989, consumer advocate Ralph Nader admitted that "larger cars are safer - there is more bulk to protect the occupant." Numerous studies have proved this point. For example:

Researchers at Harvard University and the Brookings Institution found that, on average, for every 100 pounds shaved off new cars to meet CAFE standards, between 440 and 780 additional people were killed in auto accidents - or a total of 2,200 to 3,900 lives lost per model year. [See the figure.]

National Highway Traffic Safety Administration (NHTSA) data indicate that 322 additional deaths per year occur as a direct result of reducing just 100 pounds from already downsized small cars, with half of the deaths attributed to small car collisions with light trucks/sport utility vehicles.

Using data from the NHTSA and the Insurance Institute for Traffic Safety, USA Today calculated that size and weight reductions of passenger vehicles undertaken to meet current CAFE standards had resulted in more than 46,000 deaths.

Since the laws of physics will not change, requiring all vehicles to be smaller increases everyone's overall risk of death or injury in auto accidents. Insurance data bear this out; occupants of small cars do worse than passengers of larger sedans, minivans or sport utility vehicles (SUVs) in every kind of accident.

So yeah, people might die, maybe even thousands of them each year. If you want to make a tasty omelet in the CAFE, you need to break a few eggs, right? And if you drive at all, or are even a passenger in a vehicle, you know exactly what this means. In a crash between a Prius and a Suburban, the Suburban will win every time.

I guess Congress and the President can live with those deaths. Good to know. Meanwhile, it's always worth remembering what P. J. O'Rourke said -- the one law that always gets passed in Washington is law of unintended consequences.


Gino said...

maybe more folks will live as i do: no credit cards. i havent owned one in over 10yrs.

one other safety hazrd of high milage cars: longer stopping distance.
tires that grip better lower milage, but are safer/easier to stop.

Anonymous said...

I am one of the people who uses credit cards but pays the bill each month, so therefore I pay no interest. I have made some small sums of money through reward points for purchases. Not a ton, but every bit helps in today's economy.

If the Credit Card companies start charging for card, charging interest from day 1 of the purchase or curb rewards programs, I'll start paying cash once again, and will stop using the cards. I'll lose the 20 some day float, and rewards, but the credit card companies will lose transaction fees.

Your point about vehicle safety will be an intersting balance that the car companies will face as they try to live up to the CAFE standards.

There's a third more curious piece of legistlation that passed this week about carrying firearms in National Parks. I'm curious to hear your thoughts on that.

Mark Heuring said...


Excellent point -- again, those pesky laws of physics seem to have no respect for the dictates of our betters.


We're the same way -- we pay off the bills every month. And if we can't afford something, we don't buy it. And if the credit card companies try to start charging interest from day 1, we'll probably cut 'em up, too.

I don't have a lot to say about the guns in national parks vote, except that it shows that the gun control people are losing ground. And that's just fine with me.

night writer said...

My wife and I typically pay off our credit card balance each month as well. A friend of mine, who is an executive with a collection firm, told us that in the eyes of the industry we are "deadbeats." That's because we use a service without paying for it!

Actually, most of our credit card transactions now are done through a check card from our credit union; it comes right out of our checking account. We'd likely continue to use this because of the speed and convenience, but any cards with interest charges would go out the window (in pieces, of course).

With the car situation it will be interesting to see what affect this will have on auto insurance liability premiums if injuries and deaths spike.

Gino said...

since you guys are gonna cut up your cards, just send them to me.

i'll take care of it for ya. no need to ruin your own scissors for that.

Mark Heuring said...

i'll take care of it for ya. no need to ruin your own scissors for that.Next thing you'll be telling me you're actually a Nigerian prince or something.