Bad Reasons to Oppose the Consumer Protection Agency

Have you heard the rumor that the Consumer Financial Protection Agency would jack up interest rates and put a stranglehold on job growth after the recession? If you did, you might be able to trace it back to David S. Evans, of the University of Chicago Law School, and Joshua D. Wright, of George Mason University School of Law, who wrote the study The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit. (h/t Volokh Conspiracy.) In it, they make some pretty bold claims about the effect of the CFPA on the greater economy. But do the claims hold up to scrutiny? Let's take a look.


One can read the paper by clicking 'Download' in the link above. Here's the Executive Summary:

The U.S. Department of the Treasury has submitted the Consumer Financial Protection Agency Act of 2009 to Congress for the purpose of overhauling consumer financial regulation. This study has examined the likely effect of the Act on the availability of credit to American consumers...Based on our analysis we have concluded that the CFPA Act of 2009 would make it harder and more expensive for consumers to borrow. Under plausible yet conservative assumptions the CFPA would:

• increase the interest rates consumers pay by at least 160 basis points;

• reduce consumer borrowing by at least 2.1 percent; and,

• reduce the net new jobs created in the economy by 4.3 percent.

Increased interest rates by 1.6%! Reduced net new jobs created by 4.3%! Those are some bold conclusions. If they proved that net new jobs created during the economic recovery would be reduced by over 4% I'd be picketing this in the streets. We all should be! That's insane, and not worth any tradeoff. I wonder what kind of model they used to predict this though. If they are using historical data, over what time frame? Let's see what their argument is for this (my underline):

Startup firms with fewer than 20 employees accounted for 86.7% of net job creation in the United States from 1987-2005...We do not believe that it is implausible that the CFPA Act could result in a significant number of aspiring new small business owners not being able to obtain the consumer credit necessary to get their businesses off the ground...Suppose that the increase in credit prices and reductions in the availability of credit results in a 5 percent reduction in the number of aspiring entrepreneurs were not able to start their firms. If we focus just on firms with fewer than 20 employees, that could lead to the elimination of roughly 4.3 percent (.05 x .867) of net new jobs.

Umm. Suppose some numbers that equal 4.3%, and thus 4.3%? That's it.

This line of argument reminds me of when Owen Wilson's character Eli from the movie The Royal Tenenbaums says "Well, everyone knows Custer died at Little Bighorn. What this book presupposes is...maybe he didn't."

I have no problems whatsoever with provocative thought experiments, but the idea that this 'conclusion' leads as a scare statistics in the Executive Summary is quite misleading. I can already hear talking heads saying someone has proved that this will destroy 1 out of every 20 new jobs, though the proof offered is entirely unfalsifiable.

Presented by

Mike Konczal is a fellow at the Roosevelt Institute.

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