walkitout (walkitout) wrote,

_Paying with Plastic_, by David S. Evans, Richard Schmalensee

Subtitled: The Digital Revolution in Buying and Borrowing

I bought a used first edition; it was updated in 2005, but I am reading the 1999 MIT Press Pub.

First off, Evans and Schmalensee are _not_ historians and it shows. Rather than get into the details, I'll assume you understand well enough to not flagellate this particular deceased equine.

Second, it was published in 1999 and therefore researched and written some time before that. This is good, in that you can calibrate their ability to predict the next decade (Win: there will be fewer banks as they consolidate; Lose: Smart Cards will become prevalent). They consistently disclaimer predictions, so they deserve no special opprobrium for any errors.

I was hoping this would read like _Financing the American Dream_ Part II: After World War 2. But alas, it does not (see First off, above). While they seem to have some awareness of consumer credit before charge/credit/store cards (they even have a graph of installment plans against the other three), they repeatedly (like, in at least three separate places) commit the myth that Calder describes, in which people today think that one or two generations back everyone paid for everything out of current income. Their analysis of how credit cards reduce the need for a cash/checking/savings cushion is really good and really flawed. Here's the issue:

They set up a hypothetical head-of-family in the 1950s. Gotta have a bunch of money in checking, to write checks for everything against through the month even if you only get paid biweekly or monthly. Back then, you couldn't collect interest on checking accounts (apparently the regulations didn't permit it; hmmmm), so You Lose. Now, you can keep all your money in savings, or a money market account or whatever, where it makes you money, even during the "float" and write one check at the end of the cycle. So this compares that mythical (yes, those families existed! I KNOW! I grew up in one, timewarped forward a couple decades; but there were a lot of very different families, too) family to a "transactor" today. They recognize that some people are "revolvers". What they apparently do not recognize, or don't feel like it's worth discussing, are the old buy-everything-on-time crowd (a lot of young married from the past, as near as I can tell) to compare to the "revolvers" to discuss the tradeoffs there. And the discussion would be worthwhile (maybe I haven't got to it, if it's in the last third of the book), because under the old installment scheme, the seller/lender owned the item until the end of contract and could repo it, whereas under revolving accounts, not so much. The effect is to require credit card schemes to have a lot more fees/interest/etc. to account for those defaults, because they can't/don't repo the item, which the old installment plans used to do. The flip of that is that stores no longer have to go repo and resell stuff, which saves them a bundle that they are now willing to fork over as a merchant discount. Nothing wrong with the economics/math/thesis that credit cards are at least a wash if not a benefit for consumers and merchants, subject to individual circumstances; just a missing piece in the puzzle. Because they framed the puzzle incorrectly.

It would also have been nice to see a discussion of small loan lending/relatives/pawnshops vs. credit cards. They do a bank-loan vs. credit cards analysis, but if you're going to argue that poor people benefit from access to credit -- even expensive credit they tend to overextend on -- you should map it out against the alternatives. I think they're right -- I think it is an improvement, albeit not what it should be, but the argument is missing.

Other nice aspects: comparisons to how credit/charge/debit cards work around the world. Better than most summaries of European cards, these guys go into the details of the credit lines attached to many checking accounts in western Europe, and how that functions to supply the financing offered by credit cards in the US, and what the tradeoffs are for the various participants in the system.

If you decide to read this, get the second edition, and let me know if they fixed any of the problems. I'd also like to know if they expanded coverage of home-equity lending (barely mentioned in here, and primarily as a cheaper way to finance consumer purchases and we all can see now where that landed us). I bought it used on Amazon (got a amazingly pristine ex-lib edition for cheap) and will be swapping it along via TitleTrader when I'm done with it.
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