When Neale Mahoney, an economist at the University of Chicago’s Booth School of Business, set out to evaluate the effect of [the 2009 Credit Card Accountability Responsibility and Disclosure Act], he was confident he knew what he and his colleagues would find: It didn’t work.
“I went into the project with this sort of conventional wisdom that well-intentioned regulators would force down fees and that other fees and charges would increase in response,” he told me this week, comparing hapless rule makers to the carnival visitors playing the game known as Whac-a-Mole, where a mole springs up somewhere else as soon as one is knocked down.
But his expectation was wrong. The study came to a conclusion that surprised Mr. Mahoney and his colleagues: The regulation worked. It cut down the costs of credit cards, particularly for borrowers with poor credit. And, the researchers concluded, “we find no evidence of an increase in interest charges or a reduction to access to credit.”
… “Looking at the data forced us to rethink our understanding of the effects of regulating consumer financial products,” Mr. Mahoney told me. “The data changed our view of the world. That is what’s so exciting about being an empirical economist.” [Keep reading]
This is not only “exciting.” It also demonstrates the social importance of empirical social science. It is all too common, sometimes based on mathematically or logically sound (but empirically untested) models, sometimes based on dogmatic acceptance of “laws,” to either overestimate or underestimate what can actually be achieved by politics or public policy. The first principle of empirical social science is that beliefs need to be tested against reality. In this case, it turns-out, contrary to common belief, regulation in the public interest was possible. There are, of course, plenty of cases where empiricism will lead to the opposite conclusion, and that this will challenge or refute widely held optimistic beliefs. Since erring on either side–overestimating or underestimating what can be accomplished–is costly, it is of supreme importance that beliefs be constantly tested against reality.