Sen. Bernie Sanders (I-Vt.) And Rep. Alexandria Ocasio-Cortez have proposed drastically limiting the availability of credit to lower-income and low-credit Americans. The other prong of their proposal would be just as disastrous — getting the Postal Service, an organization that lost $2 billion last quarter alone, into banking.
Like other Sanders and Ocasio-Cortez proposals, the intent is commendable. Access to credit is crucial to many low-income Americans in order to cover unexpected expenses and to make investments in their future. Small-dollar “payday loans” do exist, but they carry with them high interest rates that make them an unappealing option to some.
In some ways, this comes from applying a misleading metric to payday loans. As Daniel Press of the Competitive Enterprise Institute points out, annual percentage rate (or APR) should not be used for payday loans because payday loans are not meant to be used on an annual basis. A $100 loan with a 400 APR sounds outrageous, but it equates to just over $15 of interest on a $100 two-week loan. Using APR on payday loans is akin to comparing 30 nights in a hotel to monthly rent for a studio apartment in a given city. And some users do get caught in a cycle of “rolling over” payday loans to pay the interest on past loans. This creates a “debt trap” that can be difficult to escape.
Yet the Sanders/AOC postal banking plan would be a poor solution indeed. The basis of the idea is a combination of the fact that postal banking existed until 1967, and that the Postal Service is actually very popular among Americans. Yet even at its heyday, buoyed by wartime interest rates and post-Depression fear of private banks, postal banking attracted only four million customers and managed just $3.4 billion in deposits. And the Postal Service is popular because it undercharges — great when you can ship packages for cheap, but bad for the federal government’s balance sheets. And, of course, bad for taxpayers.
Would the Postal Service remain popular when thrust suddenly into the business of banking and collecting on defaulted loans? Unlikely. Only Sanders and Ocasio-Cortez would think that the way to fix an organization that consistently loses billions of dollars and is bound up by congressional inertia every time it attempts cost-cutting measures would be to put this same agency in charge of a vast new operation. There’s a good reason that a December Treasury Department report specifically rejected the idea of postal banking.
Fortunately, there are some solutions to providing access to credit to the general public. Community banks and credit unions have also rolled out new offerings intended to target the “unbanked” and “underbanked” population.
Much like their credit interest limit proposal, the Sanders/AOC postal banking idea fails to fill a need and would harm those it aims to help. The Postal Service has enough problems with staying afloat delivering mail — it doesn’t need to add banking on top of that.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy education at all levels of government.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.
