Paternalism vs. Debt
The recent debates over Covid policy have often referred to “healthcare paternalism.”
This gets my attention. Paternalism is extremely relevant to the problems of debt.
- Should we let young people who are ignorant of finance take out student loans?
- Should we let anyone with a modest income have an unsecured credit card?
- Should we ban high-interest payday loans?
- Should we have banned teaser-rate mortgages in the years before 2008?
- Should we allow seniors to take out reverse mortgages, and eventually run the risk of losing their home?
The advocates of paternalism – and I am becoming one — assume that some products and practices are truly, objectively harmful.
Paternalism believes that decisions about debt should not be left solely to the individual. Paternalism opposes the general trend of American law, which allows adults to accrue significant debt so long as they can find a willing lender.
Paternalism recognizes that many borrowers will end up suffering through their own actions .
In a 2007 posting on the blog Credit Slips, Elizabeth Warren stated:
“Credit card issuers make a profit from trying to get people to hurt themselves. That isn’t about consumer choice. That’s just reprehensible.”
We need to recognize that paternalism has been in a long decline in American culture. The preservation of female virginity is basically gone. Prohibition and the War on Drugs had a troubled history, to say the least.
However, paternalism in economics is more promising (or threatening, depending on your ideology).
Paternalism does require some courage and creativity. If you want to make people stay away from usury and risk, you must provide them safer modes of financial assistance.
For example, if we ban the worst types of student loans, we should increase scholarships and grants for young people without money. Biden’s latest budget would double the Pell Grant by 2029 – but that is far too timid.