Why Everything Elizabeth Warren Told You About Consumer Credit Is Wrong

By Todd J. Zywicki and Thomas A. Durkin

Why do people borrow? To hear law professor turned Senator Elizabeth Warren, it is because they are seduced by rapacious lenders and a consumerist culture into living beyond their means, buying big-screen televisions, new cars, and expensive vacations. And before you know it, you are under the thumb of the big banks—or, even worse, of the street corner payday lender.

But as we show in our new book, Consumer Credit and the American Economy, economists have long understood why consumers borrow. Although there are exceptions to any rule, for most it bears little resemblance to Senator Warren’s picture of hapless victims goaded into debt by rapacious credit card issuers. Instead, consumers borrow for essentially the same reasons that businesses borrow: for capital investments and to smooth disruptions in income and expenses. And paternalistic regulations that make credit more expensive and less available typically makes people poorer.

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