Friday, April 22, 2005

Bushisms #1 and #2: Remarks

by Tom Bozzo

1. "If someone does not pay his or her debts, the rest of society ends up paying them."

A big part of the bankruptcy bill's sales pitch is that it will make life cheaper for everyone by eliminating a supposed cross-subsidy of bankrupt debtors by the creditworthy, as President Bush's statement above implies.

The problem with the argument is that lenders assess credit risk in various ways and price accordingly — unless, as a family member of mine in the business might tell you, the marketers run amok and start giving money away. (And whose fault is that?)

In any event, through the extraction of default risk premiums (not to mention by selling explicit credit insurance), lenders ensure that people with high default risk pay for their own defaults in an insurance-pooling sense.

Good bankruptcy reform might reduce those risk premiums. But did Bush sign a good reform bill? Not bloody likely. Plus, it can't do much to help those of us who aren't paying much of a premium to begin with.

An additional note is that people like me are basically getting paid to use our credit cards (i.e., we pay no finance charges and get around 1% of the transaction volume kicked back in the form of frequent flyer miles or other perks). The question is, how do card issuers make money off us?


2. "Offering young workers a 1930's-era retirement system is like trying to persuade them that vinyl LPs are better than iPods."

Ken Houghton knocks this one nicely down the middle of the fairway in comments: discerning ears prefer vinyl records on quality playback equipment to digital music.

The iPod is a great gadget, particuarly for the ease with which it's possible to haul a huge music collection from home to car to office (or a suitable modification for students and big-city dwellers with more pedestrian routines). But pure sound quality isn't its forte. At one cut, the President's comment amounts to saying something like, "Apples are better than ketchup."

Then there is the question of whether the intended analogy is legitimate. As we've been over before (among many other bloggers), there are two basic flavors: pig-in-a-poke (the basic carve-out plan with additional benefit reductions to reduce program cost), and pie-in-the-sky (Ryan-Sununu, with its government insurance of financial market returns among other things small-government conservatives should just adore). My analysis: Steve Jobs should not be happy about the iPod's halo being used this way.

See also a good take on this at Economist's View.
CC companies charge the merchant for using their card. I haven't kept up, but the charge used to be around 2.5-3.0% for MC/BA and it's higher (4% comes to mind) for AmEx.

The short summary is that a customer such as you (or my wife) is fine for the CC companies--they get a haircut from the merchant and incur limited admin costs due to reliable payments and few demands.

I'm going to try to finish my writeup this weekend on why the Bankruptcy Bill will raise rates overall (think "moral hazard" and "ROI by sector" and the abstract becomes obvious).
The Wikipedia entry on credit cards helpfully notes that the bulk of the merchant charges go to card issuers, so you're right that the issuer gets something out of the deal -- though not a whole lot. They probably pray for the occasional revolved balance. I'm curious as the % of fraudulent transactions.
I still think Bushism 1 is fine. As you indicate, if higher risk credit users don't pay, the debt gets spread among all higher risk credit card users. Maybe not to society as a whole, but still, why should a "high-risk" person who is working their butt off to make ends meet pay even higher rates, because some jerk decided to buy a plasma TV and other irresponsible purchases and couldn't pay them off and declared bankrupcy? And why does the gov't have to continually make work-arounds for people who aren't responsible? I imagine if the gov't didn't provide so many bailouts, we'd be in much better shape.

As for Bushism 2, I also think that one makes total sense. For us "younger" workers, like me, I grew up with casette tapes and CDs, and I always associated records with old people. If Bush wants to connect with younger voters, I'd say that's about as good of an analogy as you could make. And why shouldn't Steve Jobs (a hero of mine BTW) be happy? Free advertising from the top dog ain't bad. Not to mention.... the iPod gives you choice, which is what da Prez wants to give us with SS.

On #1, indeed, why do we give some people so many bailouts?

Re #2, my point is that the iPod analogy is false, regardless of whether it proves effective. Apart from the quality of the choices on offer, it's not like economic uncertainty -- and thus the need for social insurance -- has been reduced since old-timers like me were buying vinyl records.

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