When protection becomes exclusion

For years, interest rate caps have been defended as a way to protect vulnerable borrowers. In theory, these limits stop lenders from charging abusive rates. In practice, they often achieve the opposite. When the legal ceiling is set below what a lender needs to cover risk and operating costs, the incentive to lend disappears. High-risk borrowers are not protected; they are excluded. A rule that was meant to help ends up blocking the people who need credit the most.

This logic was understandable in another era. Credit markets were smaller, less transparent, and dominated by a handful of institutions. A ceiling had some justification when borrowers faced a concentrated industry with little competition. In finance, that world no longer exists. Today there are hundreds of banks, credit cooperatives, and fintech lenders. Information is widely available, competition is abundant, and borrowers have more options than ever.

A simple example makes the problem obvious. Imagine a lender evaluating a borrower with a high probability of default. To compensate for the risk, the lender would need to charge around 45% annual interest. But the legal cap is at 30% annually. The lender cannot issue the loan without violating the law, and the borrower cannot access the formal financial system, even though they would willingly accept the 45% interest rate. The borrower ends up taking loans from informal lenders who charge far more and offer no protections. A policy designed to prevent abuse ends up pushing people toward the most abusive form of credit available.

The labor market suffers from the same type of restriction. A minimum wage may sound like a tool to protect workers, but when set above the value of someone's current productivity, it prevents them from entering the workforce. This price control also made sense at a different point in history. Labor markets were highly concentrated, mobility was limited, and employers had disproportionate power. A wage floor was one way to avoid extreme exploitation. But the context has changed. Today there are thousands of employers, a more dynamic labor market, and far more accessible information about jobs and wages. The imbalance that once justified a wage floor is no longer present.

The example here is straightforward. A young worker without experience applies for a job. Their productivity is worth around $8/hour to the company. But the minimum wage is $15/hour. Hiring them creates a guaranteed loss. The worker loses the chance to learn, improve, and earn money. The company is forced to automate or hire someone more experienced. A simple transaction that would have benefited both sides is prohibited.

The underlying problem is the same in both markets. When regulators set prices by decree, they block voluntary exchanges that make economic sense for the people involved. A maximum interest rate restricts the supply of credit. A minimum wage restricts the supply of formal jobs. Neither policy reflects the actual conditions of modern markets, and neither is needed when competition is abundant. They do not protect individuals; they exclude them.

As long as competition is healthy and information is widely available, there is no need for price floors or ceilings. Letting prices reflect risk and productivity creates more opportunities, not fewer. It allows people to enter the financial system and the workforce at the price point where they currently stand, and it gives them room to grow. These kinds of price controls are unnecessary. Removing these artificial limits is not about weakening protections. It is about removing barriers that prevent millions from participating in the first place.