On December 20, 2005, I watched part of the secret history of the credit card, on frontline, on PBS television.
According to frontline, in the early 1980s the supreme court made the marquette decision. The marquette decision said that consumer loans are subject to the laws of the state where the bank loan officer is physically located when the bank loan officer approves the loan. The laws of the state which chartered the bank, the laws of the state where the bank's headquarters are located, and the laws of the consumer's home state do not apply. As a result of the marquette decision, most credit card companies chose to locate in South Dakota or Delaware, because South Dakota and Delaware had laws more favorable to credit card companies than other states.
At first glance, this appears to be competitive federalism in action. The federal government does not regulate credit cards, and allows states to regulate credit cards. States must compete to determine which state regulates which credit card. The states with the best credit card regulations win the competition and regulate most credit cards. Consumers are subject to the best regulations and are protected from bad regulations.
However, this is bad competitive federalism because it gives credit card companies an advantage over credit card users. Credit card companies have a better opportunity to chose their states than credit card users. It is difficult to find out which state has the best regulations. Credit card companies are willing to make the effort to find out which state has the best regulations because credit card companies can make a lot of money by choosing the right state, or lose a lot of money by choosing the wrong state. Users of credit cards can make or lose money by choosing the right or wrong state, but users of credit cards will make much less than credit card companies by choosing the right state, and users of credit cards will lose much less money than credit card companies by choosing the wrong state. For most users of credit cards, the costs of finding out which state has the best credit card regulations exceeds the benefits of knowing which state has the best credit card regulations. Some economists call this rational ignorance.
Some people say credit card companies and credit card users have asymmetrical information. Credit card companies and credit card users have access to the same information at the same cost, but credit card companies have a greater incentive to spend the money to acquire the information. Credit card companies have more information than credit card users, but credit card companies do not have more information opportunities than credit card users. Credit card companies pay consultants millions of dollars to tell credit card companies which states have the best credit card regulations. Credit card users have the same opportunity to pay a consultant millions of dollars to tell them which state has the best credit card regulations. The difference is that this is a sensible investment for a credit card company, but not for a credit card user. Therefore the phrase asymmetrical information is misleading. It would be more precise to say asymmetrical information benefits or asymmetrical information value.
Also, most credit card users do not know which state regulates their credit cards. Most credit card companies do not try to inform credit card users which state credit card company has chosen to regulate the credit card. This is not a problem. This is a symptom of other problems. Credit card companies do not inform credit card users which state regulates the credit card because most credit card users do not want to know. Since most credit card users do not know which state has the best credit card regulations, the information about which state regulates which credit card is useless to most credit card users. I do not think that there is a conspiracy of credit card companies to prevent credit card users from finding out which state regulates which credit card. I think that if most credit card users wanted to know which state regulated which credit card, then most credit card companies would provide the information. The problem is that most credit card users do not want the information because most credit card users cannot use the information, not that credit card companies are witholding the information.
So since credit card companies have a greater opportunity to chose the regulator than credit card users, most credit cards are regulated by states which have credit card regulations which allow credit card companies to do whatever credit card companies want. In other words, credit cards are unregulated.
Unregulated credit cards have not destroyed America. Credit cards are available to most people. Credit card fees and interest rates are low for most people. Most people are satisfied with their credit cards. Most credit card companies try to be good to credit card users because credit card companies do not want to lose their customers. The unregulated free market in credit cards seems to be working, just like proponents of free markets predict. The unregulated free market in credit cards is not the disaster that opponents of free markets predict.
We know that a system of unregulated credit cards works, but we do not know if there is a different system which works better. Some people say there are better systems, and some people say there are not, but neither can prove anything.
For example, would society be better off if the government prevented people from borrowing too much from credit cards? Since most people choose credit cards based on major terms like annual fees and interest rates, would society be better off if the government fixed minor terms like grace periods and late fees?
Competitive federalism ought to allow multiple systems to coexist, so different systems could be directly compared to each other, and we would know if one system was better than another system. Competitive federalism ought to allow people a choice of several systems. When people choose a system, people should receive the costs and benefits of that choice. The costs and benefits of that choice should not be shifted onto other people.
For example, suppose you choose a credit card which prevents you from borrowing too much money from the credit card. Some people think this benefits other people because you are less likely to become bankrupt and become dependent on other people for charity. Maybe this is true, or maybe it is not true. Suppose it is true. Why should other people receive the benefits from your choice? There is no reason for you to make the choice if all the benefits go to other people. Economists call this market failure.
Since credit card companies have an advantage over credit card users in choosing which competing government should regulate the credit card, one solution is for the central government to make a law requiring all credit card companies to offer all credit card users a choice of any competing government to regulate the credit card. When applying for a credit card and once a year afterwards, the credit card company would give the credit card user a form listing every competing government, and the credit card user would check the box beside the name of the competing government which the credit card user wanted to regulate the credit card. The credit card company would offer different terms depending on which competing government the credit card user selected. This solution would be wrong.
The biggest problem is that a competing government could require lower fees and more services than other competing governments, effectively forcing the credit card companies to lose money. The credit card companies would have to make extra profits in other jurisdictions to cover the losses. Intelligent people would be better at collecting the subsidies. Since intelligent people are usually richer, the final result would be that credit card companies would overcharge poor people and subsidize rich people, taxing the poor to give to the rich.
Credit card companies ought to have a reasonable opportunity to refuse to do business in any jurisdiction. If a competing government attempts to force businesses to lose money, the businesses ought to be allowed to refuse to do business in that jurisdiction. It is not right for a competing government to force a business to rob distant citizens of other competing governments and give the loot to local citizens. But if the central government allowed the credit card companies to refuse to accept some competing governments, then credit card companies might refuse all but one competing government, which would give credit card users no choice of competing governments.
Also, the number of competing governments ought to be very large, so a form which listed all competing governments would be very large and confusing. And it would still be difficult for a credit card user to acquire enough information to make a rational choice.
The best solution is for credit cards to be regulated by the competing government which the credit card user has chosen to be a citizen of. Most people will ignore details like credit card regulations and choose a competing government based on overall quality of life. Competing government will not be able to achieve a good overall quality of life without having good policies on minor issues, so competing governments have an incentive to have good regulations on minor issues like credit cards in order to achieve a good overall quality of life in order to make the competing government attractive to potential citizens. It is still difficult for people to chose the best competing government, but much more is at stake than credit cards, so it is worthwhile for people to make the effort to make a good choice. Choosing one competing government to regulate everything is much easier than choosing one competing government to regulate credit cards, one competing government to regulate employment, one competing government to regulate housing, one competing government to regulate health care, one competing government to regulate education, one competing government to regulate retirement, and one competing government for each of every other trivial issue. Credit card companies would be free to refuse to issue credit cards to citizens of any competing government if the credit card companies did not like the regulations of that competing government.
The central government would still need to make some laws to punish credit card companies which trick credit card users into accepting some jurisdiction which the credit card users did not want, and also to punish credit card users which trick credit card companies into accepting some jurisdiction which the credit card company did not want. Also the central government should discourage competing governments from becoming too large, to prevent competing government from becoming powerful enough to force credit card companies to overcharge noncitizens and subsidize citizens.