Distortionary Effects of Regulations and the Law of Unintended Consequences: Annual Fees Are Back
WASH POST -- "A law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.
It wasn't supposed to be this way. The law that President Barack Obama signed last May shields card users from sudden interest rate hikes, excessive fees and other gimmicks that card companies have used to drive up profits. Consumers will save at least $10 billion a year from curbs on interest rate increases alone, according to the Pew Charitable Trust, which tracks credit card issues.
But there was a catch. Card companies had nine months to prepare while certain rules were clarified by the Federal Reserve. They used that time to take actions that ended up hurting the same customers who were supposed to be helped."
Exhibit A: "Annual fees, common until about 10 years ago, have made a comeback. During the final three months of last year, 43% of new offers for credit cards contained annual fees, versus 25% in the same period a year earlier, according to Mintel International, which tracks marketing data. Several banks also added these fees to existing accounts. One example: Many Citigroup customers will start paying a $60 annual fee on April 1."
MP: This story clearly illustrates the Law of Unintended Consequences ("Any intervention in a complex system may or may not have the intended result, but will inevitably create unanticipated and often undesirable outcomes.") and why regulations are distortionary - because companies can change their behavior to avoid or circumvent them.
Other examples include free food on airlines to circumvent ticket price-fixing by the government in the old days, employer-sponsored health insurance to circumvent price/wage controls during WWII, free "stuff" (toasters, etc.) at banks in the 1960s and 1970s to avoid interest rate controls on savings accounts, charging points on a mortgage to circumvent interest rate maximums on mortgage loans, or in this current case a resurrection of annual fees, etc.
HT: Lee Coppock
Update: Reason article on this topic (thanks to Colin).