Credit card use and abuse: a Veblenian analysis.

Author:Scott, Robert H., III

There is an overwhelming amount of consumer credit card debt in the United States. Revolving credit card debt is close to $900 billion, and has increased at an average annual rate of almost nine percent over the past ten years. The average United States household has eight credit cards, which are used to charge nearly $2 trillion in goods and services annually. This became possible when an institutional failure led to reduced regulations on credit card lending. Consumers, for their part, have borrowed heavily using credit cards. Frequently, consumers use credit cards inappropriately and spend beyond their means accumulating inessentials that they cannot reasonably afford. Neoclassical economic theory is ineffective at explaining why credit card borrowing continues to reach record levels; and, more importantly, it fails to recognize that credit card debt is a problem requiring attention from regulatory agencies. Thorstein Veblen's social institutional theory of consumption better explains why credit cards continue to grow in popularity and why revolving credit card debt will keep rising unless different policy perspectives and lending practices are adopted.

The Emergence of Credit Card Debt

Credit cards were invented in post-industrial revolution .America just before World War I, and coincided with a general rise in the issuance of consumer credit for many types of goods and services. The first credit cards were issued by retail stores and oil companies to increase sales and make customer identification easier. Until the early 1980s, most people thought of credit cards as a luxury payment method afforded only by good credit standing and responsible borrowing. However, something important changed to allow the modern credit card industry to emerge. That change was the Marquette Decision. Arguably, the modern credit card market did not exist until the early 1980s, when credit cards were effectively deregulated. Credit card issuers until this time were constrained by state and federal usury laws that placed tight restrictions on the interest rates banks could charge on their credit card loans. However, the U.S. Supreme Court's December 1978 Marquette Decision paved the way for elimination of price regulations (Ausubel 1991; Watkins 2000, 921-2). The general ruling stated that only the usury ceiling of the state in which the bank is located, and not that of the state in which the consumer is located, will restrict the interest rate banks can charge. The banks were then free to move their credit card operations to states where there were no (or limited) usury laws (Ausubel 1991, 52). States such as South Dakota and Delaware became popular depots for banks' credit card operations because they had slack usury laws (Mandell 1990; Watkins 2000).

Since the Marquette Decision, credit cards have exploded in use, supply, and demand (Watkins 2000, 922). On the demand side, there are 1.5 billion credit cards in circulation in the United States. According to data provided by the Federal Reserve (2006a; 2006b), in 2005, households spent over one percent of their income servicing credit card debt, which is more than double what it was ten years previously. On the supply side, credit card issuers mass mailed over six billion credit card offers to United States households in 2005, which marked an increase of over 500 percent since 1990. This practice along with that of blindly issuing credit card checks are collectively known as carpet bombing--a term appropriately borrowed from the military to describe complete destruction of an area with gravity or incendiary bombs.

The institutional changes that led to increased credit card lending do not account for why consumers took advantage of available credit cards and began steadily accumulating revolving credit card debt at exorbitant interest rates. The reasons are likely multi-fold, but two major influences follow. First, credit card companies influenced merchants to start accepting credit cards by convincing them that people spend more money using credit cards than any other form of payment (Evans and Schmalensee 2005). Second, the increases in inequality of income and wealth in the United States in the past twenty five years has helped promote credit card borrowing. Many people's incomes are insufficient to cover basic necessities, so people will many times rely on their credit cards to help them get through a difficult financial period. However, once credit card debt is established, a combination of high interest rates, fees, and insufficient income usually keeps people from paying off their debt (Peterson 2001, 174-5). This has also contributed to America's recently reported negative savings rate (-0.5 percent)--something that has not occurred since the Great Depression (Rankin and Armah 2006). Veblen captures this idea perfectly by claiming that "any retrogression from the standard of living which we are...

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