January 2012

CEI Weekly: Ethanol Tax Credit Set to Expire

by Nicole Ciandella on October 22, 2010 · 1 comment

in Ethanol, Features

CEI Weekly is a compilation of articles and blog posts from CEI’s fellows and associates sent out via e-mail every Friday. Also included in the weekly newsletter is a brief description of CEI’s weekly podcast and a feature on a major CEI breakthrough made during the week. To sign up for CEI Weekly, go to http://cei.org/newsletters.

CEI Weekly
October 22, 2010

>>Featured Story
The Volumetric Ethanol Excise Tax Credit will expire at the end of the year–unless Congress decides to renew it. This week, Agriculture Secretary Tom Vilsack urged congressmen to extend the credit. In response, Senior Fellow Marlo Lewis spearheaded a coalition letter signed by several free market groups asking Congress to allow the ethanol tax credit to expire. Also this week, Research Associate Brian McGraw published an op-ed in The Detroit News entitled “Biofuel or Bust: Ethanol Subsidies Should Be Dropped.”


>>Shaping the Debate
Perspective on the Foreclosure Scandal
Fred Smith’s blog post in The National Journal

New Energy Standards
Ben Lieberman’s interview on Fox News

Would you Like a Union With That, Comrade?
Vincent Vernuccio’s op-ed in The American Spectator

Reforming Michigan’s Auto Insurance Industry
CEI‘s commissioned study by the Mackinac Center for Public Policy

Mobile Phone Bill Shock: FCC, Carriers Face Off
Ryan Radia‘s citation in PC World

Ray LaHood: The Man with the Money
Marc Scribner’s citation in The Wall Street Journal Blogs

>>Best of the Blogs

Poker and Private Property in South Carolina
By Michelle Minton

Malthusian Indoctrination of Your Children Funded With Taxpayer Dollars
By Lee Doren

A Surge Toward a New “Scientific-Technological Elite”?
By Fran Smith

EPA Ozone Standard Would Destroy 7.3 Million Jobs, Study Estimates
By Marlo Lewis

>>CEI Podcast: October 21, 2010: Relic of Prohibition

CEI Director of Insurance Studies Michelle Minton analyzes proposals to privatize Virginia’s liquor stores. Virginia is one of 18 states where the government holds a legal monopoly on the sale of spirits.

>>Support CEI

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Mayo, Mustard, or Communism? Radical Union Tries to Organize Minneapolis Sandwich Shop

by Vincent Vernuccio on October 22, 2010 · 1 comment

in Labor

This morning voting started at nine Jimmy John’s restaurants in the Minneapolis area. The Industrial Workers of the World (IWW) is attempting to unionize several Jimmy John’s sandwich stores.

As I reported in the American Spectator earlier this week, the vote is significant for two reasons. First, only 1.3 percent of workers in the fast food industry union members. A Jimmy John’s union could be a forerunner to several other fast food unions. Second, the IWW is an avowed communist organization that doesn’t mince words about its goals.

The preamble to its constitution states that “between [the working class and the employing class] a struggle must go on until the workers of the world organize as a class, take possession of the means of production, abolish the wage system, and live in harmony with the earth…. It is the historic mission of the working class to do away with capitalism.”

Wednesday The New York Times noted:

Most unions have shied away from trying to organize fast-food workers because the employees tend to be young, with high turnover. But that has not dissuaded the Industrial Workers of the World, which tried to organize workers at Starbucks coffee shops without success.

A century ago, the I.W.W. — better known as the Wobblies — was a swaggering, radical union with 100,000 members and legendary leaders like Mary Harris Jones (known as Mother Jones) and Big Bill Haywood. The union often clashed with police officers and Pinkerton security guards as it organized lumberjacks, dockworkers and miners.

These days, the Wobblies have just 1,600 members in the United States, and have union contracts with a handful of employers. But if they can flex their muscles anywhere, it may be in organizing the Jimmy John’s workers of Minneapolis. Union supporters say more than 60 percent of the workers signed cards asking for a unionization election.

“A union in fast food is an idea whose time has come,” said Emily Przybylski, a bike delivery worker at Jimmy John’s who is also a social work student at the University of Minnesota. “There are millions of workers in this industry living in poverty, with no consistent scheduling, no job security and no respect. It’s time for change.”

Mike Mulligan, the franchisee who owns the Jimmy John’s shops here, is pressing employees to vote against joining the I.W.W., which he says is a dangerous “socialist-anarchist organization” that “proudly preaches the overthrow of capitalism.”

“This is a group hellbent on bringing down someone, anyone, in the fast-food industry, and we just happened to be the next on the list,” said Mr. Mulligan, a retired senior vice president with Supervalu, a national grocery company.

Fast food unions would be expensive for consumers. If labor costs go up, so will prices on the menu. If those chains are also forced to pay higher wages and benefits based not on what the market will bear but on how hard a bargain union negotiators can derive, they will not be able to offer the low food prices consumers enjoy.

The IWW is targeting students for their unionization effort. The union is correct that youth unemployment is a serious problem. As the Bureau of Labor Statistics reports, “July 2010 marks the first time in the history of the series that less than half of all youth 16 to 24 years old were employed in that month.” However, raising the cost of employment will not help low-skilled workers. If employers are reluctant to hire young people now, they will be even more so if young people become more expensive.

Here is an economics 101 lesson for the students trying to organize: When the price of a product or service goes up, demand for that product or service decreases. Yet students are cheaper to hire than other workers, but that’s because they do not have the experience, skills, and knowledge of veteran workers. Indeed, by raising the cost of employing workers at Jimmy John’s, some workers may  organize themselves out of a job.

From The New York Times:

Steven Smith, a 42-year-old meat cutter who earns $8.35 an hour after three years, also opposes the union. He said it would be difficult for Mr. Mulligan to pay much more than minimum wage because his competitors generally pay the same amount. “How much do you expect to get paid for making a baloney sandwich or cutting a pickle in half?” Mr. Smith said. “This is not rocket science.”

Morning Media Summary

by Lee Doren on October 22, 2010

in Economy, Energy, Environment, Legal, Personal Liberty, Regulation, Trade

Tech:

Google in new partnership with the Post:
“We live in an evolving market and is going from being a letter to the distributor to become a communications operator with both digital and physical services.”

U.S. Government Prepares to Regulate Internet Privacy:
“There are at least five U.S. government efforts to regulate data and online privacy, according to a new U.S. government internet policy official, who said that some kind of privacy regulation appears likely.”

Google testing high-speed fiber network at Stanford:
“Google has reached an agreement to build its first ultra-high-speed broadband network near Stanford University, the search giant announced on Thursday.”

After news of Google tax dodges, Obama raises money with Google execs:
“On the day it was reported that Google uses income shifting techniques known by such arcane names as the “Double Irish” and the “Dutch Sandwich” to avoid paying taxes on its foreign profits, President Obama attended an intimate, high-dollar fundraiser at the Palo Alto, California home of a top Google executive. He didn’t mention Google’s tax tricks, according to a White House transcript of his remarks.”

Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes:
“Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.”

Global Warming / Environment / Energy:

Building a Giant Lab to Test Disasters:
“On Tuesday, the industry-funded Institute for Business & Home Safety will open a facility that breaks new ground in the world of disaster labs: replicating hurricane conditions on a large scale.”

Why Silicon Valley Won’t Be Detroit For Green Carmakers:
“We’ve thought about it for a year, and discussed it with many people. And we don’t believe it. Silicon Valley is the wrong place to build an auto industry, for three main reasons.”

Chinese Freeze Before Gov’t Turns on the Heat:
“Since the Communists came to power, November 15 has been circled in red on many Beijing calendars. It’s not Mao Zedong’s birthday. November 15 is the day when city officials dutifully flick the switch to turn on the capital’s centrally-controlled heating system, supplying warmth to most of Beijing’s 22 million residents.”

Insurance / Gambling:

Manitoba: Another Canadian Province Not Ready for Online Gambling:
“Because of the way Canadian gambling laws are structured, regulation of internet gambling does not happen at a national level. Instead, each individual province can choose to either regulate and license internet gambling sites, or just stay away entirely. The Canadian province of Manitoba has become the second province in the last week to announce they are not ready to dive into the world of internet gambling, following a similar announcement a few days ago by Nova Scotia.”

Health / Safety:

Horror disease hits Uganda:
“A disease whose progression and symptoms seem straight out of a horror movie but which can be easily treated has killed at least 20 Ugandans and sickened more than 20,000 in just two months.”

Diabetes to double or triple in U.S. by 2050: government:
“”We project that, over the next 40 years, the prevalence of total diabetes (diagnosed and undiagnosed) in the United States will increase from its current level of about one in 10 adults to between one in five and one in three adults in 2050,” the CDC’s James Boyle and colleagues wrote in their report.”

Dozens dead in Haiti from suspected cholera outbreak:
“The victims suffered diarrhoea, acute fever and vomiting. More than 1,500 people were infected, officials said.”

Hormone Found In Rich People Linked To Longer Life:
“A hormone found predominantly in wealthy people was linked to a longer life, according to British research published Thursday.”

Economics:

Tax Audits Are No Laughing Matter:
“Barack Obama owes his presidency in no small part to the power of rhetoric. It’s too bad he doesn’t appreciate the damage that loose talk can do to America’s tax system, even as exploding federal deficits make revenues more important than ever.”

Juan Williams calls for the government to defund NPR:
“Juan Williams, the former National Public Radio news analyst who was abruptly fired this week for expressing a personal view on Fox News, called for the federal government to stop funding the radio organization.”

Obama stump speech: Car still in ditch, no Slurpees:
“You’ve heard it a lot. Barack Obama describes the economic crisis by accusing Republicans of driving the nation’s economy into the ditch and then sitting back and watching — “sippin’ on a Slurpee” — while Obama and the Democrats did the dirty, exhausting work of pulling the car out of the ditch.”

Brutal new ad: “The Chinese professor”:
“Too good to be dumped into Headlines and forgotten about. So effective is it, in fact — note the Hollywood-quality production values — that it leaves me wondering why a more high-profile outfit didn’t think of it first. Surely Rove’s group or some other mega-PAC is capable of stuff this sharp. Maybe they’re afraid of the inevitable racism charge? Can’t blame ‘em if so: Members of a racial minority saying or doing something contrary to progressive interests is, after all, pretty much the textbook definition of racism.”

REID: ‘But for me, we’d be in world-wide depression’:
VIDEO

In wake of Williams firing, Republicans want NPR funding examined:
“Three potential 2012 Republican presidential candidates chimed in Thursday on the firing of NPR news analyst Juan Williams, with two of them calling on Congress to scrutinize NPR’s federal funding.”

Credit Cards Soon to Get Makeover:
“Next month, Citibank will begin testing a card that has two buttons and tiny lights that allow users to choose at the register whether they want to pay with rewards points or credit, at most any merchant they please.”

Legal:

Would you Like Fries with that lawsuit:
“You won’t be able to get fries with your order, but you can use the drive-thru at Manchester’s newest law office.”

Niche Lawyers Spawned Housing Fracas:
“The paperwork mess muddying home foreclosures erupted last month. But the legal strategy behind it traces to a lawyer’s gambit in 2006 that has helped keep one couple in their home six years beyond their last mortgage payment.”

Colgate Accused of Stealing Thousand-Year-Old Toothpaste:
“A legal dispute between the U.S. and India over a herbal toothpaste was leaving a bitter aftertaste between the two countries Thursday, with Colgate Palmolive accused of filing a bogus patent.”

Labor:

The Democrats and the Union Label:
“Republican and Tea Party candidates have directed a lot of their attacks on the public sector unions, which have been bulwarks of support for the Democrats. These unions have been big financial contributors and get-out-the-vote engines for the mostly Democratic candidates they support. But this year, voters who are angry about stories of big pension payouts and government spending are putting public employees on the defensive.”

SEIU Blasts Indiana GOP Challenger Todd Young over “FairTax” stance:
“Dan Mitchell, a tax policy specialist at the libertarian Cato Institute, criticized the ad for leaving out the notion that the Fair Tax would replace the income tax. But he acknowledged that “there is potentially an element of truth to the secondary point about taxing seniors who earned money while young, paid income tax, saved some of the after-tax money, and now want to spend that money.” Mitchell added that not all seniors would be affected equally — it would more heavily affect seniors who had substantial savings outside of 401(k)s or other plans in which income is not taxed initially.”

Transportation/ Land Use:

Committee blasts Palo Alto bullet train station:
“Planners for California’s proposed $43 billion San Francisco-to-Los Angeles bullet train might want to dodge Palo Alto.”

Ethanol and Energy Efficiency

by Brian McGraw on October 21, 2010

in Energy, Ethanol

The U.S. Agriculture Secretary Tom Vilsack spoke today at the National Press Club on the future of biofuels in the United States. His remarks contained the expected boilerplate that the White House had previously blogged about here.

Growth Energy, the cheerleader of the ethanol industry, were very supportive of his remarks. But both Vilsack and Growth Energy got one thing wrong — the efficiency of ethanol production.

Growth Energy wrote:

During the Secretary’s speech, he mentioned that there have been efficiency gains in ethanol production. In fact, according to a new report out of the Office of Energy Policy and New Uses at the USDA, there have been significant net energy gains from converting corn into ethanol over the last two decades that have made ethanol one of the cleanest burning fuels on the market. For every Btu put into creating ethanol, we get 2.3 Btu’s in return—a significant increase from the 1.76 BTUs produced in 2004.

Robert Rapier, who writes an excellent energy related blog, explained the creative accounting employed by the USDA in these efficiency “gains” in a post titled “Fun With Numbers: The New USDA Report on Corn Ethanol. Incidentally, Rapier is the CTO of a bioenergy holding company and has a healthy respect for biofuels, but is quick to call BS when he sees it.

The post is long (worth the read if you’re interested in things like the methodology used by the USDA to calculate the amount of energy it takes to produce ethanol), but the cliff notes are that the USDA takes residuals from ethanol production, mainly grain, and subtracts that energy from the denominator of the energy return on energy invested equation. This is a misleading metric , it subtracts residual energy from the input rather than counting it as an output. It’s especially misleading as this wasn’t the methodology they used in some earlier reports, so the casual reader might believe that huge efficiency gains were achieved when most of these gains came from changing the methodology used to calculate the energy return.

Two excerpts from his post:

Imagine if financial returns were calculated in this manner. Say you invested $100, and got a return of $35 cash plus goods (byproduct) that you valued at $30. What is the return on investment? Most people would say that you got a total return of $65 on the investment of $100, for a total return of 65%. Or we could say the cash return is 35%. But if we utilize the USDA’s ethanol accounting, we would use the $30 co-credit to offset our initial investment. We could then argue that we only “really” invested $70 to get a cash return of $35, for a cash return of 50%. So, the answer to the question – “When can a $35 return on a $100 investment amount to a 50% return on investment?” – is “Whenever we apply the rules the USDA uses for ethanol accounting.”

That’s not to say it’s the “wrong” way to do it, but it is certainly a method that inflates the energy returns for ethanol. In the example above, the $35 cash return is analogous to ethanol production, and you can see how a 35% return gets inflated to 50%.

And

So if we keep the accounting methodologies consistent, here are the ethanol-only energy returns (ethanol output/total energy input) from the raw data in the USDA reports:

2002 – 1.09
2004 – 1.06
2010 – 1.42

Here are the ethanol plus byproduct energy returns (ethanol plus byproduct output/total energy input):

2002 – 1.27
2004 – 1.26
2010 – 1.69

Here are the ratios from utilizing the USDA’s 2002 methodology (subtracting byproducts from the inputs) across all three reports:

2002 – 1.34
2004 – 1.32
2010 – 1.93

Finally, the ratios that the USDA highlighted and reported across all three reports:

2002 – 1.34
2004 – 1.67
2010 – 2.34

Yes, the ethanol industry has made efficiency gains, but not nearly to the extent that they’d like you to believe.

New CEI Podcast — October 21, 2010: Relic of Prohibition

by Ryan Young on October 21, 2010

in Nanny State, Personal Liberty, Podcast, Regulation

Have a listen here.

CEI Director of Insurance Studies Michelle Minton analyzes proposals to privatize Virginia’s liquor stores. Virginia is one of 18 states where the government holds a legal monopoly on the sale of spirits.

General Motors’ Losses Hidden by Deferral of Union Pension Obligations

by Hans Bader on October 21, 2010

in Bailout Watch, Economy, Employment, Labor, Regulation

Any General Motors bonds issued this year will be classified as junk by a key ratings agency.  Why?  There’s some risk GM will go bankrupt again, and it hasn’t really returned to profitability, the way it appeared to have. That’s because GM’s recent quarterly profit, which came after years of losses and tens of billions of dollars in taxpayer bailouts, was artificially created by the temporary deferral of billions of dollars in pension obligations that it owes to the United Auto Workers union.  Those unfunded pension obligations have risen by $6 billion since the end of 2009.  As Charles Lane of The Washington Post notes,

[A] little-noticed October 6 report from Fitch, the ratings agency, which highlighted the major unresolved issue of the bailout: pension obligations to its United Auto Workers employees. The union successfully resisted efforts to trim this long-term burden on the company through the bankruptcy process, and they continue to weigh heavily on the company’s future. Specifically, GM’s relatively robust free cash position – one of its major selling points in its pending IPO – is being artificially propped up by the fact that it is not yet legally required to make multi-billion-dollar payments into its ‘heavily underfunded’ U.S. pension funds. How underfunded are they? Well, the U.S. plans alone are $17 billion underfunded as of the end of 2009, Fitch says. When you include global operations, the total is $27 billion. . . GM’s pension obligations are actually $6 billion higher than they appeared at the end of 2009.

These obligations will likely have far more impact on GM’s financial future than the recent revelations that it lied about the Chevy Volt, which it was trumpeting in a “publicity stunt” to curry favor with politicians crusading against global warming.

Earlier, GM lied about whether it had paid back taxpayers for its bailout, which resulted in GM getting $50 billion in taxpayer money, and its finance arm GMAC getting another $17 billion.  (GM also received billions indirectly from taxpayers, through programs like the incredibly wasteful Cash for Clunkers, which cost  used-car and car-parts dealers billions.)

The Obama administration used the bailouts to keep the United Auto Workers’ massive compensation (worth up to $70 an hour), pension benefits, and rigid union work rules largely intact, while giving the UAW a big chunk of General Motors‘ stock, even though the UAW helped bankrupt the company.  The auto bailouts were so wasteful and so biased in favor of the UAW that they disturbed even the liberal Washington Post editorial board.

Another reason for treating GM bonds as junk is the way the Obama administration mistreated GM’s past bondholders.  It engineered the wiping out of General Motors’ bondholders, some of whom were non-union employees who had invested their life savings in the company, so that the GM stock that the Obama administration was giving the UAW would be worth more.

GM also faces increased regulatory burdens, such as CAFE rules ratcheted up in the name of global warming  (the initial tightening of those rules will wipe out at least 50,000 jobs in the auto industry), that will make it hard for it to expand its anemic 19 percent market share.  Other EPA global warming rules are expected to wipe out at least 800,000 American jobs and impose heavy costs on suppliers of materials used in manufacturing automobiles.  The EPA’s proposed ozone rules would wipe out 7.3 million jobs, according to one study.

Ray LaHood’s Smoke and Mirrors

by Marc Scribner on October 21, 2010

in Mobility

This morning, The Wall Street Journal‘s Washington Wire quoted me “disapproving” of Transportation Secretary Ray LaHood’s TIGER II grant picks. LaHood “countered” critics of his program by… not addressing their criticisms.

Mr. LaHood countered that much of the money will build bridges and improve railways to relieve congestion. Overall, the department said about 29% of the money handed out would go to road projects, 26% is aimed at mass transit, 20% for rail projects, 16% for port improvements and just 4% for bike paths and walkways — the favorites of environmental groups.

Mr. LaHood added he would have preferred to have $600 billion to work with instead of the $600 million he was allotted ($15 million of that was for administrative costs.) The DOT noted that states proposed $19 billion worth of projects.

“If their criticism is that we didn’t haven [sic] enough money, or enough resources, they ought to talk to Congress,” he said of his critics.

No, Secretary LaHood. Our criticism is not about you lacking a bigger pot of money to dole out to your preferred projects; it’s about a significant portion of the transportation grants going to projects that harm mobility. These include diverting scarce transportation resources to projects that aim to narrow roads, convert a highway section to a lower-speed city street, and build expensive bike/pedestrian trails in low-density areas with nonexistent bicycle commuters (apparently, DOT has become an extension of the Park Service). Not to mention the $100 million that went to wasteful rail transit projects.

Is Obama’s DOT anti-mobility? Take a look at the list of TIGER II grant winners (capital grants, planning grants) for yourself, note which projects received the most funding, and draw your own conclusions.

Afternoon Links: October 21, 2010

by Nicole Ciandella on October 21, 2010

in Zeitgeist

1. Designers “collaborate” with honey bees to make one-of-a-kind furniture.

2. After a slew of complaints from heartbroken singles, Facebook is now tailoring its “Photo Memories” feature to avoid showing users pictures of their exes.

3. California officials used affordable housing funds to pay for their vacations.

4. Eliot Spitzer may have been embraced by CNN, but the Harvard Club of New York isn’t so forgiving: they’ve denied his application for membership.

5. Megan McArdle: “The Gentrifier’s Lament.”

Sex in the Board Room!

by Fred Smith on October 21, 2010

in Culture, Odds & Ends, Politics as Usual

Over at the Boards at their Best blog, James Kristie, editor of the journal Directors & Boards, recently proposed a rule requiring that at least 40 percent of corporate board members be women.  Support for diversity on corporate boards has become customary.  But, for some diversity advocates, voluntary change is no longer viewed as sufficient.

In 2003, Norway enacted a law setting a 40 percent gender quota for that country’s corporate boards.  Firms that fail to comply face dissolution!  Now Kristie wonders why we don’t bring just such a law here to the United States, and his is not an isolated view.  Having asked the question, though, Kristie sought out a range of opinions from various experts, and these are featured as the cover story in the fall 2010 edition of the journal.  You can read my contribution here.  Since the length was tightly limited, I thought I’d expand on my thoughts and add a few points I couldn’t make in that shorter format.

It’s no surprise that a proposal like this would be adopted first in Norway. After all, including women in political governance has long been a Nordic tradition – Gro Harlem Bruntland became the first female (and youngest) Norwegian Prime Minister way back in 1981.  But is it wise to dictate that kind of diversity in corporate governance?  I suggest the answer is no.

There are important differences between politics and business, and it does no one good to blur those distinctions.  Governments may need diversity to legitimize their ability to exert coercive power, but firms have only the power granted them by consumers.  Whether women or men, Catholics or Protestants, engineers or accountants would strengthen a board’s ability to meet these challenges is best determined by consumers via competition.

Corporations are specialized entities organized to meet specialized human needs.  Corporate boards oversee these institutions, seeking to ensure that top managers effectively coordinate the firm’s employees to achieve that task.  And the modern corporation has been extremely effective in aligning the self-interest of firms and their employees to advance human welfare, as John Micklethwait and Adrian Wooldridge document so well in their book, The Company.  They achieve in the large what Adam Smith noted long ago happens in the small: “It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Corporate boards oversee these management decisions, so the challenge of selecting the appropriate mix of individuals to play these roles is critical.  Why would we expect politicians (focused on the general duties of government) to better select the specialized team needed to achieve these highly specialized tasks?

Not surprisingly, proponents see the Norwegian law as a “great success.”  Kristie, for example, notes that, “In 2003 women represented 7% of board directors in Norway.  Today, that total is 40%.”  What else would we expect when the law mandates that at least 40 percent of corporate directors be women?  But, while this surely benefits those women who’ve been promoted to the boardroom, is it good for their firms?  Is it good for society?  A recent University of Michigan study notes that the law has reduced corporate performance.  The reasons for this are unclear, though the authors suggest it may reflect the shorter workplace experience of the women appointees.

As in so many cases, politics is impatient.  Technological and institutional innovations have reduced the biological pressures for differentiated sexual roles, and those factors are having major impacts (note how the proportion of women in MBA and legal programs has exploded in recent decades).  Feminists may argue that “justice delayed is justice denied!”  But is it wise to promote those women now playing valuable mid- and senior-management roles to the boardroom before they’re ready?  The Norwegian experience suggests not.

The private world experiments and adopts changes as they prove their competitive value.  It is not surprising that these factors will operate very differently in different business sectors.  But, when innovations prove their worth, they are adopted.  Politicians may gain voter support by promoting such policies, but they may well harm consumers far more than we realize.  It is far better to strengthen competition and allow the market to determine what firms do — and with whom they select to do it.

The Free Checking Restoration Act of 2011

by John Berlau on October 21, 2010

in Deregulate to Stimulate, Economy, Nanny State, Personal Liberty, Precaution & Risk, Regulation

“Free checking as we know it is ending,” says the lead paragraph of a widely-read and tweeted story this week from the Associated Press. Noting Bank of America’s announced monthly charge of $8.50 for most checking accounts, the article reports that “almost all of the largest U.S. banks are either already making free checking much more difficult to get or expected to do so soon, with fees on even basic banking services.”

And other reports have noted the possible demise of free checking at many regional banks as well. Daniel Indiviglio blogs for The Atlantic that “free checking will soon be something only economic historians talk about.”

But the tide of economic history doesn’t necessarily have to turn this way. As noted in both The Atlantic and AP, the primary reason for free checking going by the wayside is not market forces, but new regulations from Washington.

The main culprits in free checking’s demise are the Federal Reserve’s rules that severely restrict banks from charging overdraft fees when customers make debit card purchases that exceed the balance of their checking accounts and the amendment from Sen. Dick Durbin (D-Ill.) putting price controls on the interchange fees merchants pay to banks and credit unions to process debit cards. On Tuesday, as noted in the AP story, Bank of America took a $10.4 billion charge against earnings from projected loss of revenue due to the Durbin amendment.

The rules were sold as “protecting” the majority of consumers, but in reality they shifted costs to responsible middle-class consumers from irresponsible consumers who didn’t keep track of their checking accounts. Some of the nation’s biggest retailers also used bank-bashing rhetoric to get  their share of corporate welfare at consumers’ expense. As The Atlantic‘s Indiviglio writes, “At this point, banks are forbidden from squeezing as many fees out of bad customers and have less freedom to charge merchants. So their only alternative is to demand more money from their good customers.”

I propose that, as one of its first orders of business when it convenes next January, Congress enact “The Free Checking Restoration Act of 2011″ that would remove these cumbersome rules and will almost certainly result in competitive banks and credit unions offering traditional free checking to once again attract customers. The bill would get rid of the Fed’s overdraft rule and the Durbin amendment that puts price controls on merchant interchange fees.

Of course, as the economic expression goes, there is no such thing as a free lunch, and one could argue that free checking was “subsidized” by overdraft and interchange fees. Yet it is hard  to muster an argument from either a prudential or an egalitarian perspective in favor of the cost-shifting that results from the regulations to responsible middle and lower-income consumers with small accounts.

As my CEI colleague Hans Bader noted previously on OpenMarket,  “Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.” At Reason, Kathryn Mangu-Ward points out that, “for the most part, accounts with high balances, bank credit cards, or other products geared to the middle class and rich won’t be affected by these changes.”

But what about the minority of consumers “protected” by the overdraft rule who, as the AP story notes, were hit with a $35 fee because they “overdrafted their account by buying something small like a Starbucks latte.”  Since when was it written that there should be no cost for acting imprudently by not balancing one’s checkbooks. In the “good old days” before debit cards, folks who wrote bad checks would sometimes go to jail when one bounced — $35 seems like a much fairer punishment.

Liberals who have a problem with private institutions penalizing individuals for their behavior should think of an overdraft fee as a “sin tax” that discourages bad behavior in the same way the taxes they champion on cigarettes and increasingly on fatty food purport to do. It is no more an illicit cross-subsidy than the “subsidy” from reckless drivers paying fines that go to improve roads for drivers who obey traffic rules. Overdrawing bank accounts is certainly behavior society should discourage, so what exactly is wrong with private institutions — in innovative ways — doing so instead of the government.

And the Durbin amendment mandating “reasonable and proportional” interchange fees banks charge to merchants is completely indefensible even from an egalitarian redistributionist perspective. As Ryan Radia and I have written, capping interchange fees greatly harm consumers, community banks, and credit unions for the benefit of some of the nation’s wealthiest merchants.

Among those lobbying hard for the Durbin amendment were giant retailers like Home Depot, 7-Eleven, and Walgreens. On the Senate floor, Durbin even had the gall to invoke Walgreens lobbying him for the measure as a reason for its attachment to a bill whose ostensible purpose was to rein in “fat cats.”

These retailers benefit greatly from consumers using cards, both in increased sales and in protection from the costs of fraud from bad checks, yet they go charging to Washington to avoid paying fees for these services that the market allocates. How would Walgreens and Home Depot and other hypocritical retailers like it if the government suddenly mandated that they could only charge “reasonable and proportional” markup to consumers for the products they buy from suppliers?

At CEI, our mission is to make good policy good politics, and under current circumstances, promising voters the return of free checking accounts suddenly fits this bill. Since the  promise some 80 years ago of ”a chicken in every pot,” political “freebies” have been a mainstay of modern campaigns.

Fiscal conservatives and libertarians usually look askance at these promises since most of the time they involve either spending a sum of money to bring the ”free” good to certain member of the population or mandating that businesses spend to provide this good, and the cost will have to be made up somewhere. But  in this instance, Congress would not have to spend or mandate to provide this free good.

Rather, all it would have to do is remove misguided rules that were pushed through thoughtlessly in the Obama administration’s rush to regulate.

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