What Would Happen if Credit Cards were Terminated

September 2, 2022

Philip Kotler

The vast majority of Americans use a credit card to pay for their groceries, new clothing, doctor bills, and sundry other items. We no longer need to carry a wallet full of cash to pay for our purchases. We just insert our credit card and the merchandise is ours.

I would go further and say that the credit card has been the key of our economic growth. If we did not have credit cards, our economic growth would be limited to our actual incomes. Persons would buy far fewer cars, appliances, and vacations.

The credit card is a miracle in that it makes it possible to live a good life beyond one’s actual means. Every purchasable thing and experience is available. The major cost is financing the good life at an annual interest rate of 5–10%. The car you purchased on credit cost you substantially more than the price of the car over time.

Who profits from the omnipresence of credit cards and credit in general? Certainly the banks and finance companies benefit. The business community as a whole benefits by achieving much higher sales. But the business community benefits in quite another way. Businesses can continue to pay unlivable wages! The availability of easy credit was set up to prevent a worker uprising.

To really appreciate this trick of capitalism where we make it possible for people to have cake while we pay them little, imagine what would happen if a law is passed that prevents banks from issuing credit to consumers. Suddenly, consumers find that they have to live on their income. They will have to cut down on their food and clothing purchases, buy a cheaper car, forego a college education, give up travel and vacations. They can no longer live a better life because the artificial prop, the credit card, is no longer available.

As life gets poorer and workers see the growing gap between their lives and the lives of the rich, they will start organizing and demanding higher pay. They will strike for high wages. They will rally against the high pay of CEOs and top managers.

In the past, businesses would use legislation and the police to stop workers from organizing or striking. But today the citizens and employees would press the legislators to protect the organizing of unions. If the workers organize and win higher wages, companies will make lower profits. They will have less money to invest in R&D and growing their business. Some companies will close down and unemployment might increase.

So we are faced with a Hobson’ choice. We can either keep credit flowing easily to consumers so that they can access the good life by bearing the burden of debt, or end the credit flow and face a declining economy that will be marked by strikes and conflict. Most people, I would guess, would want to continue easy credit rather than fight for a living wage and see the economy slide down.

Hopefully, there is a middle way. The basic remedy lies in tax policy. The taxes on the rich are too low. The rich in the U.S. pay 39% on the top bracket of their income. The rich in the Nordic countries pay 60–70% on the top bracket of their income. The Nordic countries use the higher tax revenue to make health care free, higher education free, and child and parent benefits higher, along with substantially longer vacations than the two week vacations in the U.S. The remedy is straightforward: raise the income tax rate on the rich, pass a wealth tax and raise the estate tax. These measures would hardly affect the lives of the rich while at the same time bring livable wages to the vast majority of citizens.

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Philip Kotler

Philip Kotler is the S.C. Johnson and Son Distinguished Professor of International Marketing, Kellogg School of Management, Northwestern University (emeritus)