President Trump’s announcement of new tariffs on imported steel and aluminum drew swift warnings from free traders, including here at the Cato Institute, that such naked protectionism will lead to job losses and reduced prosperity. But don’t just take our word for it. A new study released this week by the Coalition for a Prosperous America (CPA), a protectionist interest group, concludes that the tariffs will result in both net employment losses and reduced economic activity. While the CPA highlights the study’s finding that tariffs will lead to 18,859 new jobs in “iron and steel nonferrous metals,” it also concedes that these will be more than offset with losses in other sectors, including over 10,000 jobs in construction and nearly 7,500 in manufacturing, for a net loss of 411 jobs. Additionally, the study finds that the tariffs will leave Americans marginally poorer, predicting a decrease in U.S. GDP of $1.4 billion. In other words, the debate is no longer whether these tariffs will be harmful to the U.S. economy—the protectionists have effectively run a white flag up the pole on that question—but rather the magnitude of the damage. Also worth noting is that the CPA study presents a best-case scenario, using assumptions that are, if not questionable, perhaps overly optimistic. For example, the model’s apparent assumption of full employment—by no means obvious given that recent sizeable monthly employment gains have not led to a reduction in the unemployment rate—appears in tension with the study’s claim that steel and aluminum will see relatively restrained cost increases of 6.29 percent and 2.5 percent owing to “available U.S. capacity and competition.” Presumably, any increase in production to partially offset the decline in imports will require additional workers, which may be no easy task in a full employment economy. Furthermore, the study makes no mention of the impact of retaliation that is sure to follow from U.S. trading partners in response to Trump’s tariffs. The study’s finding that the tariffs will result in 464 new agriculture jobs, for example, is hard to square with retaliation threats from the European Union which include targeting American exports of corn, cranberries, rice, orange juice, and tobacco. In contrast, a recent analysis conducted by the Trade Partnership consulting group found that retaliation would contribute to net U.S. job losses of over 468,000. Even absent retaliation, the Trade Partnership found a net loss of 146,000 jobs in a previous study—one that the new CPA report was conducted in response to. The exact amount of the employment decline or loss in economic welfare, however, is almost a second order question on the steel and aluminum tariffs. Directionally, a consensus has been reached, with both free traders and protectionists in apparent agreement that they will cause harm to both jobs and the overall economy. Thus far, President Trump has not heeded the warnings of free traders and appears determined to proceed with his act of self-sabotage. Perhaps he will lend an ear to his fellow protectionists. 

Can the government force private parties to speak against their own interests and disparage the products they offer? The answer is yes when potential consumer harms are significant (think tobacco labels and other safety warnings) or there’s informational asymmetry (securities offerings)—and indeed fraudulent offerings (the prototypical snake oil) are prohibited altogether. But mandated disclosure regimes are proliferating far past these sorts of traditional disclosures, stretching the First Amendment to the breaking point regarding commercial speech.

A recent example of this phenomenon involves Nationwide Biweekly Administration, whose business is saving customers a significant amount on their mortgages by structuring smaller biweekly payments in place of traditional monthly payments—allowing for an extra reduction of principal each year. To market its services, Nationwide uses public information to send potential customers mailers illustrating how much they might save over the life of their loans. Despite front-and-center statements that Nationwide is “not affiliated, connected, or associated with, sponsored, or approved by the lender listed above,” California decided that this information was insufficient to guarantee that consumers wouldn’t be confused. The state required the company to state on solicitations that they are “not authorized by the lender.”

Nationwide challenged this requirement in court, arguing that the state’s message itself was misleading (by implying that lenders have any power to “authorize” Nationwide’s actions) and forced the company to disparage its own services by suggesting that they were somehow not permitted to offer them. But the federal district court, and then the U.S. Court of Appeals for the Ninth Circuit, approved the mandated disclosure, citing the Supreme Court case of Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio (1985).

Zauderer held that “purely factual,” “uncontroversial” disclosures could be required to directly combat consumer deception. While this is a lower form of constitutional scrutiny than most speech restrictions receive, it’s not without teeth. The government still needs to prove actual deception—and once that hurdle is crossed, those compelled government scripts must be both purely factual and uncontroversial, and take care not to burden the speaker any more than necessary.

The Ninth Circuit opted to ignore the Court’s instructions, conflate the prongs of the test, and eliminate the need to justify its reasons for compelling government-mandated scripts by declaring that, “in the interest of administrative simplicity, the state may reasonably decide to require disclosure for a class of solicitations that it determines pose a risk of deception.”

If that new and unfounded legal standard is allowed to stand, Zauderer means nothing at all, and governments can mandate almost any controversial or self-disparaging script for almost any reason. Mom ‘n’ Pop car lots could be required to announce in bold script that “the safety of this car has not been guaranteed by [insert car maker here].” Walmart could lobby a locality to require its competitors to display Walmart’s prices alongside their own, just in case consumers are unaware that retail prices fluctuate between sellers. Generic drug manufacturers could be required to insist in large type that “the safety of this drug is not guaranteed by the company that originally developed it,” and Sprint and T‑Mobile could be forced to proclaim that their advertisements are “not authorized by Verizon.”

Speech compulsion violates the sphere of freedom protected by the First Amendment just as speech restrictions do, so Cato has filed an amicus brief supporting Nationwide’s request that the Supreme Court take up Nationwide Biweekly Administration v. Hubanks review and reverse the Ninth Circuit’s deeply flawed decision.

During his campaign, President Trump promised to target the “bad hombres” in the United States illegally. But Immigration and Customs Enforcement (ICE) statistics indicate that his administration has cast a much wider net. More than one in four immigrants that ICE arrested last year had no criminal convictions at all, and of the rest, their convictions were mostly victimless crimes—largely traffic infractions, immigration offenses, and drug offenses. Almost 90 percent were for nonviolent crimes. ICE cannot justify its broad crackdown based on these figures.

Figure 1 shows immigrants arrested by ICE by whether they had a criminal conviction (top left) and the distribution of the convictions by type of conviction (bottom right). ICE statistics only provide a list of all convictions that the entire population of criminal aliens committed, meaning that they only show the distribution of convictions, not the distribution of immigrants based on their most serious offense. That said, a majority of all convictions were for crimes with no private victims (i.e. not the government or “society”). Just 11 percent were violent crimes (just one percent were homicide and sexual assault).

Figure 1: Immigrants Arrested by ICE by Criminal Conviction and Distribution of Criminal Convictions

Source: Immigration and Customs Enforcement

Figure 2 shows the distribution within each broad category of convictions. Most violent crimes were assaults, which include simple assaults defined by the FBI to include assaults “where no weapon was used or no serious or aggravated injury resulted” and include “stalking, intimidation, coercion, and hazing” where no injuries occurred. The FBI excludes simple assault from its definition of violent crime, but ICE fails to break down this category, so we cannot. The plurality of property crimes were larcenies, which include “thefts of bicycles, motor vehicle parts and accessories, shoplifting, pocket-picking, or the stealing of any property or article that is not taken by force and violence or by fraud.”

Almost two-thirds of the “possible victims” category includes DUIs, which usually don’t have a victim but impose the threat of injury on people. This category also includes some nebulous categories like “privacy,” “threats,” and disturbing the peace, which are undefined in the ICE report. Nonviolent sex crimes include statutory rape as well as lude behaviors in public. Fraud and forgery could have victims or they could be crimes where immigrants allow their family members to use their identities to obtain work in the United States. Family offenses include “nonviolent acts by a family member (or legal guardian) that threaten the physical, mental, or economic well-being or morals of another family member” that aren’t classified elsewhere (e.g. violating a restraining order). Kidnapping convictions generally arise from custody disputes over children, so I included them in this category.

Figure 2: Distribution of Convictions of Criminal Immigrants Arrested by ICE

Source: Immigration and Customs Enforcement

Victimless offenses were traffic infractions that were not DUIs, immigration offenses such as entering the country illegally, or “vice” crimes (drugs, sex work, or alcohol). Immigration “crimes” include illegally entering the country, reentering after a deportation, falsely claiming U.S. citizenship, and smuggling. Obstruction offenses mainly include parole and probation violations or failure to appear in court.

Cato Institute research has previously shown that illegal immigrants are less likely to end up incarcerated in the United States than U.S.-born individuals of the same age. A new paper by my colleague Alex Nowrasteh concludes that illegal immigrants in Texas are significantly less likely to commit a variety of crimes than U.S.-born adults. Illegal immigrants are not generally threats to Americans. Only certain serious criminals who happen to be immigrants are.

ICE provides a public service when it apprehends and removes immigrants from society who are threats to Americans. It fails the public when it deports other people and, by reducing the number of peaceful people in the society, actually increases the proportion of criminals. This strategy will not make Americans safer—indeed, it will make them less safe. Congress should again require ICE to focus on serious criminals.

Table: FY 2017 Total ERO Administrative Arrests Criminal Convictions

Source: Immigration and Customs Enforcement

On the unhappy 15th anniversary of the start of the Iraq War, the Charles Koch Institute’s William Ruger and Boston University’s Andrew Bacevich offer important and timely op eds.

Writing in the New York Times, Ruger sees Iraq as “just the worst in a string of failures” of U.S. foreign policy in the past quarter century, a range of missions that have cost nearly 7,000 American troops killed, tens of thousands wounded, and trillions of dollars spent, with precious little to show for it. “Underlying all of these failures,” Ruger writes, “is the view, endorsed by both parties, that we need an active military presence around the globe to shape what happens almost everywhere.” He calls for an “alternate approach to the United States’ role in the world,” a “constructive but realistic mind-set [that] would put our safety first while expanding America’s opportunities to engage productively with the world.”

Bacevich takes the occasion of this sad anniversary to comment on the disconnect between the American people and the elites who sold the war. He attributes Donald Trump’s victory in the 2016 election to the “blood sacrifice vote” — the “communities that paid a high price for the Iraq War in terms of casualties.” Hillary Clinton prevailed among those who preferred to let “someone else’s sons and daughters do the fighting.” It is the sort of scathing critique that Bacevich has come to be known for, but it is no less accurate or insightful for having been written before.

Trump voters, Bacevich posits, supported him, despite the fact that they suspected his “America First” campaign to be “all but devoid of substantive content”:

because Trump said aloud what they themselves knew: that the Iraq War had been [a] monumental error for which they, and pointedly not members of the political elite, had paid dearly. In short, a vote for Trump offered them a way to express their disdain for establishment politicians whose dishonesty they considered far more odious than Trump’s own pronounced tendency to shave the truth.

I’ve written before of how the yawning gap between the foreign policy elite and the people who fight the wars and pay the bills paved the way for a person like Donald Trump to win the presidency (see especially here and here). But I do think it worthwhile to dwell, for a moment, on Iraq as a particularly important step along the process that turned that gap into a chasm.

We should also recall the arguments of those who actually made the case against war in 2002 and 2003. Donald Trump wasn’t one of them. But there was the advertisement in the New York Times paid for and signed by 33 respected academics. They concluded that the Bush administration had not presented conclusive evidence, and that a war against Iraq lacked sufficient justification. They disputed claims that the war would end quickly. “Even if we win easily,” they said, “we have no plausible exit strategy.” The statement envisioned a long-term U.S. presence because Iraq was “a deeply divided society” and would take “many years to create a viable state.” Lastly, the signatories of the New York Times advertisement saw the war in Iraq as a dangerous distraction from the more urgent concern: al Qaeda and transnational terrorism.

Within the Beltway, most foreign policy experts either endorsed Bush’s war, or kept their silence. Scholars at the Cato Institute, however, were particularly active in their opposition. Cato’s Chairman, William Niskanen, came forward with one of the earliest arguments against war with Iraq, in December 2001, in a debate at the institute with former CIA Director James Woolsey, and in a follow-up article in the Chicago Sun-Times under the headline “U.S. Should Refrain from Attacking Iraq.”

Other Cato scholars joined in. Ted Galen Carpenter challenged the war boosters’ optimistic predictions of a short and cheap engagement. “The inevitable U.S. military victory,” Carpenter predicted, would “mark the start of a new round of headaches.” “Iraq [is] a fissiparous amalgam of Sunnis, separatist Shiites and Kurds,” noted Gene Healy in the magazine Liberty. “Keeping the country together will require a strong hand and threatens to make U.S. servicemen walking targets for discontented radicals.”

In December 2002, Cato published a full-length study making the case against war. Authors Ivan Eland and Bernard Gourley concluded:

The United States deterred and contained a rival superpower, which had thousands of nuclear warheads, for 40 years; America can certainly continue to successfully deter and contain a relatively small, relatively poor nation until its leader dies or is deposed. An unprovoked attack on another sovereign state does not square with—and actually undermines—the principles of a constitutional republic.

This isn’t entirely self-serving. I joined Cato in early February 2003; by then, the die was pretty much cast. But I did manage to fire off one warning before the war started. And it still isn’t too late to learn the proper lessons from the Iraq War, and the problems with primacy, the underlying the foreign policy philosophy that gives rise to Iraq-type wars.

The front page of Monday’s New York Times featured a story about a dirty little police practice colloquially known as “testilying.” Testilying is the name police officers coined to describe lying in official statements, such as sworn affidavits, about particular facts to make a criminal case appear stronger. It happens most often in officer assertions of probable cause to conduct a search of a person or their property without a warrant. For example, an officer could say that contraband was “in plain sight” after he pulled a driver over, giving him the probable cause to suspect a criminal act and thus bypass the warrant requirement of the Fourth Amendment.

The most generous rationalization for this behavior is something like, “The suspect was guilty of a crime, I knew he was guilty but I couldn’t legally prove it, so I found a way around the rules and discovered the criminal evidence I needed to make an arrest.” Put simply, the ends (an arrest for criminal behavior) justifies the means (an unconstitutional search). But, very often, what the officers “know” is wrong and they violate the rights of perfectly innocent people. Even when they are right, illegal searches and the lies to cover them up corrupt the law in order to enforce it. That’s not how policing is supposed to work. Police are supposed to protect our rights, not violate them to make an arrest.

And as the Times story explains, the lie is not only used against people who are breaking the law:

There had been a shooting, Officer Martinez testified, and he wanted to search a nearby apartment for evidence. A woman stood in the doorway, carrying a laundry bag. Officer Martinez said she set the bag down “in the middle of the doorway” — directly in his path. “I picked it up to move it out of the way so we could get in.” The laundry bag felt heavy.

When he put it down, he said, he heard a “clunk, a thud.”

Officer Martinez tapped the bag with his foot and felt something hard, he testified. He opened the bag, leading to the discovery of a Ruger 9‑millimeter handgun and the arrest of the woman. But a hallway surveillance camera captured the true story: There’s no laundry bag or gun in sight as Officer Martinez and other investigators question the woman in the doorway and then stride into the apartment. Inside, they did find a gun, but little to link it to the woman.

It took over a year for the woman, Ms. Kimberly Thomas, to clear her name with the help of surveillance video. In a way, she was very fortunate to even get that chance.

“There’s no fear of being caught,” said one Brooklyn officer who has been on the force for roughly a decade. “You’re not going to go to trial and nobody is going to be cross-examined.” The percentage of cases that progress to the point where an officer is cross-examined is tiny. In 2016, for instance, there were slightly more than 185 guilty pleas, dismissals or other non-trial outcomes for each criminal case in New York City that went to trial and reached a verdict. There were 1,460 trial verdicts in criminal cases that year, while 270,304 criminal cases were resolved without a trial.

The presumption that an officer will be able to swear a false affidavit and never be challenged in court is a casualty of a criminal justice system that has grown absolutely dependent on plea bargains. The justice system’s overreliance on plea bargains removes the safeguards and incentives that are supposed to hold the government and its officers accountable for lies and petty abuses.

You can read the whole piece here.

More than seven decades ago, litigation over the Emergency Price Control Act of 1942 left courts with an embarrassing black eye that would affect decisions for decades. In Bowles v. Seminole Rock & Sand Co. (1945), the Supreme Court decided to give controlling deference to administrative agencies’ interpretations of their own regulations. In Auer v. Robbins (1997), the Court unanimously doubled down on Seminole Rock. As the late Justice Antonin Scalia noted in a 2013 case when it seems he began having a change of heart, “[f]or decades, and for no good reason, [courts] have been giving agencies the authority to say what their rules mean.”

These “interpretations,” for which there are no standardized processes, can come in informal contexts, as was the case in Garco Construction v. Speer, where the government’s deferred to “interpretation” that didn’t come around until litigation was well underway. This year, the Supreme Court had a golden opportunity to finally do away or at least curb this problematic doctrine, but alas it was an opportunity it failed to seize, today denying Garco’s petition for review (which Cato had supported with an amicus brief).

There are a multitude of arguments for overturning Seminole Rock and Auer. Even when the cases were decided, the Court gave little justification for the doctrine beyond administrative and judicial convenient. To the contrary, giving agencies the authority to interpret (and reinterpret) their own rules violates principles of separation of powers, as well as the Administrative Procedure Act. As Justice Clarence Thomas pointed out in 2015, the doctrine combines “the power to prescribe with the power to interpret,” and the separation of those two powers was one of the primary goals of the Founders. Justices John Roberts, Scalia, Sam Alito, Thomas, and Neil Gorsuch have all written opinions questioning — or outright rejecting — the doctrine’s scope on that ground alone.

Further, the APA provides that it is for the reviewing court to “determine the meaning or applicability of the terms of an agency action,” and that all legislative rulemaking go through public notice-and-comment procedures. With Seminole Rock/​Auer, however, agencies have been enabled to get around these requirements by simply “promulgat[ing] vague and open-ended regulations that they can later interpret as they see fit.” Even where regulations are not so vague, though, this doctrine rears its ugly head. In Duquesne Light Holdings v. Commissioner of Internal Revenue, in which Cato just today filed an amicus brief, a regulated entity followed controlling regulations to the letter, but was nonetheless penalized tens of millions of dollars after the Third Circuit deferred to the IRS’s countertextual reading of its own regulations.

It seemed that Garco Construction was a great vehicle for adjusting Seminole Rock/Auer deference. Garco Construction won a contract to build housing on an Air Force Base in Montana. The contract, and its prior contracts, allowed Garco to use employees who had criminal records. Base regulations, however, allowed officials to refuse entry to any workers who had any outstanding “wants and warrants.” After Garco began work on its contract, base officials suddenly began running full background checks on all workers, and refusing those with any criminal record, not just those with an outstanding want or warrant (whom Garco didn’t employ). This change forced the contractors to hire, train, and transport new workers who could pass the suddenly tightened rule. The contractors requested reimbursement of these costs, but were denied by the government.

Garco was never given a reason for the sudden change — until litigation seven years later, when base officials justified the denials by testifying that they interpreted “wants and warrants” to mean, as Justice Thomas pointed out in his dissent from denial of certiorari, “wants or warrants, sex offenders, violent offenders, those who are on probation, and those who are in a pre-release program.”

Justice Thomas, who was joined by Justice Gorsuch, is right. Garco Construction would have been a good case to reconsider Seminole Rock, “as it illustrates the problems that the doctrine creates … an agency was able to unilaterally modify a contract by issuing a new ‘clarification’ with retroactive effect.” “This type of conduct ‘frustrates the notice and predictability purposes of rulemaking, and promotes arbitrary government.’” In declining to hear the case, the Court has “passed up another opportunity to remedy ‘precisely the accumulation of governmental powers that the Framers warned against.’”

Perhaps the other justices shied away because Garco involved the military, which generally gets more deference than other governmental institutions. But regardless, this issue isn’t going away and, as Justice Thomas put it, “Seminole Rock deference is constitutionally suspect.”

The seven-year saga of Madden v. Midland began as a dispute over a four-figure consumer debt. But billions of dollars’ worth of loans, and the future of consumer lending markets, now hang in the balance.

Madden began in 2011 as a lawsuit based on a claim of usury. The plaintiff, Saliha Madden, a New York resident who had defaulted on $5,000 worth of credit card loans. The balance owed was later acquired by Midland Funding, a debt collector headquartered in California. Midland attempted to collect the debt with a default interest rate of 27 percent. Although the loan contract stipulated that it would be governed by Delaware law, which does not have a usury cap, Madden sued Midland, alleging unfair debt collection practices under federal law and usury under New York law — which considers interest rates above 25 percent usurious.

The Southern District Court for New York ruled in favor of Midland, rejecting the claim of unfair collection practices and finding that the National Bank Act pre-empted the application of state usury law. But the Second Circuit Court of Appeals — which covers Connecticut and Vermont as well as Madden’s home state of New York — reversed the District Court ruling, finding that the National Bank Act pre-emption did not apply to Midland because Midland is not a national bank. Therefore, the opinion went, applying state usury law in this instance would not hinder any national bank’s powers. The Second Circuit thereby remanded the case back to the District Court, which in turn found that New York law should apply since applying Delaware law, which provides for no usury limit, would “violate a fundamental public policy of the state of New York.”

Should the District Court’s decision stand, Madden would jeopardize the long-standing judicial precedent of “valid-when-made,” which holds that non-usurious debt remains valid when acquired by a third party, even if the interest rate implied in the latter transaction is usurious. Not surprisingly, the uncertainty sparked in the aftermath of the Second Circuit’s ruling has prompted policymakers to turn to a legislative fix to restore the “valid-when-made” precedent by making it federal law governing consumer credit markets.

U.S. courts have long recognized the potential that usury caps might make the credit market more illiquid. The Supreme Court’s 1833 ruling that cemented the valid-when-made doctrine stated that:

by converting a sale on a discount into a loan on usury, and thus rendering null and void the act of endorsing it, a contract wholly innocent in its origin and binding and valid upon every legal principle is rendered at least valueless in the hands of the otherwise legal holder, and a party to whom the provisions of the act against usury could never have been intended to extend would be discharged of a debt which he justly owes to someone.

Back then, private promissory notes were used as collateral for transactions, both within and across state lines. But, as the notes changed hands, acquirers might discount them more steeply than the original lender, sometimes exceeding state usury limits. Valid-when-made ensured that the original validity of a loan would not be affected by changes in its implicit interest rate in subsequent transactions.

More recently, courts have tended towards a liberal interpretation of the National Bank Act, holding that it pre-empts state usury laws in all cases and not just for national banks. Georgetown law professor Adam Levitin has argued that this interpretation is inappropriate and that the pre-emption should only apply to national banks, which are subject to a specific federal statute.

Levitin states that a broader pre-emption only goes back to 1978. This date is significant because the late 1970s marked a turning point in U.S. consumer credit markets as banks started to consolidate and expand beyond state boundaries, credit card use became widespread, and loan securitization took off. The case Levitin cites, in fact, concerned a credit card dispute and the applicability of different state usury statutes. As trade in loan instruments grew and participating institutions became more varied, allowing for valid-when-made to overrule state usury laws was important to ensure these transactions could take place.

Note that the elements which gave rise to the change in judicial doctrine are in and of themselves positive. A secondary market for loans enables financial institutions to offload risky assets and free up capital to lend to new borrowers. Securitization, for its part, achieves this while also creating diversified instruments and thereby lowering loan risk. Both tend to lower the cost of credit to borrowers.

Last month, the House of Representatives passed the Protecting Consumers’ Access to Credit Act with bipartisan support. The bill, now with the Senate Banking Committee, acknowledged that “the valid-when-made doctrine, by bringing certainty to the legal treatment of all valid loans that are transferred, greatly enhances liquidity in the credit markets by widening the potential pool of loan buyers and reducing the cost of credit to borrowers.” Legislative change will, it is hoped, put an end to any lack of clarity as to the ability for consumer loans to be subsequently transferred across firms and states. The freedom to transact is essential for consumer lending markets to operate efficiently. To understand this, we must move from legal to economic principles.

The interest rate on any loan is composed of two parts. The first part represents the time value of money, that is, the fact that access to funds today is more valuable than access tomorrow, or next year. Secondly, there is a risk premium that compensates the lender for delays and potential non-repayment of the loan. Other things equal, the greater the likelihood of non-repayment, the higher the risk premium and so the total interest rate.

When loans are backed by collateral, such as a house or a car, the interest rate can be lower because lenders can always recoup at least some loan value by seizing the collateral. Collateral also acts as a signal: only borrowers with confidence that they will repay would place their possessions as guarantee. Consumer credit, such as credit card debt, is typically unsecured, so it carries a higher risk premium.

More variable earnings, a higher chance of unemployment, propensity to incur unexpected costs, and the absence of a financial cushion to fall back on are all credit risk factors. Because they are more common among lower-income households, loan interest is viewed by some as regressive: those of lesser means will pay more for a given amount of credit. This is how modern proponents of usury laws have often justified them.

Yet, as with other price controls, the consequences are often the opposite of those intended. A high interest rate is the only way that a high-risk borrower can compete for funds with a lower-risk borrower. In the absence of adequate compensation for additional risk, lenders eschew the high-risk borrowers — who are often those most in need of credit. Not only that, but credit risks can change as a loan matures. If a borrower fails to repay on time, her credit score will change and interest rates on future borrowing will adjust upwards.

This is what happened to Madden: her default created additional monitoring and collection costs, and it also revealed information about her likelihood to repay future borrowing. In the eyes of any lender, Madden had become a higher-risk borrower than previously anticipated. Her interest rate went up.

Last year’s Second Circuit decision surely made Madden happy, but it is unlikely to benefit future borrowers who find themselves in her position. Riskier applicants are more likely to be among those rationed out of the borrower pool. There is, in fact, already evidence that Madden has changed the fortunes of borrowers in the three states covered by the Second Circuit’s ruling. Those with low credit scores saw loan volumes decline by half in the months after the ruling; for similar borrowers elsewhere in the country, loan volumes more than doubled.

Madden has thrown consumer lending markets in the three states affected into disarray, so it is appropriate for Congress to provide clarity through legislation and ensure access to credit is available to those who can and are willing to pay for it. Not just legal precedent but economic reality demand a move in this direction.

[Cross-posted from Alt‑M.org]