price controls

Interchange Price Controls: Gift to Big Merchants, Lump of Coal for Consumers and Community Financial Institutions

by John Berlau on December 15, 2010 · 3 comments

in Deregulate to Stimulate, Economy, Property Rights, Regulation, Tech & Telecom

On Thursday, the Federal Reserve — at the direction of Congress in the Durbin Amendment to the Dodd-Frank financial “reform” bill — will give a giant gift to some of the nation’s biggest retailers. This present is in the form of of direct and indirect price controls on the interchange fees they pay to financial institutions to process debit cards payments

Yet unless Congress acts to delay or repeal the Durbin Amendment, consumers, community banks, and credit unions will be getting a large lump of coal in their stockings by next December as the expenses of running an efficient payment card system are shifted almost entirely onto their shoulders. Consumers have already seen the costs of this rule through the loss of free checking as a result of banks’ anticipation of an estimated 60 to 80 percent loss of revenue from merchant fees. Moreover, the price controls and other provisions of the Durbin Amendment will like reduce investment and innovation to counter emerging hacking and security threats to the payment system.

The Durbin Amendment regulates the debit card issuers as public utilities — something they are not, as the amendment itself makes reference to a “the number of payment card networks” — but it sets price controls more severe than even rate regulation for local phone companies and utilities by not even explicitly allowing for profit.

Thus, as argued by a lawsuit challenging the Amendment from Minneapolis’ TCF National Bank, the fee controls likely violate both the Due Process and Takings Clauses of the 5th Amendment because they deprive banks and credit unions that issue cards of their property rights to a return on capital invested. The Supreme Cou,rt in its 1989 case Duquense Light Co v. Barasch, affirmed that  a government-set “rate is too low if it is so unjust as to destroy the value of the property for all the purposes for which it was acquired.”

The Durbin Amendment likely crosses this constitutional line by requiring the Federal Reserve to set interchange fees at a rate “proportional to the cost.” And the measure expressly discourages some costs from being considered by the Fed. Expenses such as paying employees to service the complex payment system and long-term fixed costs in setting up the sophisticated infrastructure may be excluded.

In fact, amazingly, the Merchants Payments Coalition, which represent Wal-Mart, Walgreens (who Sen. Durbin admitted — on the Senate floor — lobbied him for price controls), and some of the nation’s biggest stores, says that the cost for retailers should be “at par” or zero. Even Ebeneezer Scrooge or the Grinch couldn’t come up with a more self-serving call for corporate welfare.

And consumers have already started paying for the merchants’ “free lunch.” At banks of all sizes, free checking accounts are disappearing, particularly for lower-income consumer who don’t have linked accounts or can’t maintain higher minimum balance thresholds.

And given the experience of other countries with interchange price controls, consumers will likely lose even more without reaping any significant savings from retailers. The Government Accountability Office of the U.S. Congress found last year that after Australia enacted fee controls on credit cards, Aussie consumers faced “reduced rewards and raised annual fees,” and that there was no “conclusive evidence” that any of the retailers’ $1.1 billion in savings had been passed on to consumers.

The Durbin Amendment will also hurt community banks and credit unions. Durbin and his supporters make much of the fact that the bill officially exempts financial institutions with less than $10 billion in assets from the price controls. But both the Credit Union National Association and the Independent Community Bankers of America remain in opposition to the bill, recognizing that government controls of the market rates of credit and debit card networks will adversely affect all financial institutions that issue these cards. And smaller financial institutions are not exempt for the the other, indirect price controls in the bill, such as the routing rules that also compromise consumer privacy and data security.

Obviously, the Fed should interpret the mandates as flexibly as it can and not be bound by the vague language of some of the measures. But Congress can’t absolve itself of responsibility for this burdensome and regressive measure. This includes normally conservative Republicans, such as the duo from the state of Georgia, who speak out correctly against price controls in health care but voted for the controls in the Durbin Amendment after lobbying from Atlanta-based Home Depot

It should enact a bipartisan repeal — or at the very least delay — the Durbin Amendment at its first opportunity. It should gift-wrap this legislation by titling the bill, as I have suggested before in The Wall Street Journal, the “Free Checking Restoration Act.”

Photo credit: tidewater eyesores’ flickr photostream.

Rent Is Too Damn High

by Kathryn Ciano on October 20, 2010

in Property Rights, Regulation

Not much to add to this brilliant insight: The rent is too damn high!

Jimmy McMillan doesn’t get into details about what he intends to do about such high rent. The answer is clear: Let the markets go!

Sure it’s nice to live in a safe, high-rent neighborhood. Hopefully Jimmy McMillan understands that the problem with rental price caps (like rent control) and regulations (like banning food trucks) is that these policies create spikes and troughs across abutting rent districts. This artificially ghettoizes neighborhoods rather than permitting rents to rise and fall naturally to reflect the more nuanced actual rent prices people are willing to pay.

If he intends to fix the “too damn high” problem by mandating a maximum rental price, neighborhoods will suffer. From a 2004 CEI paper:

Price controls are, historically, a dismal failure; in the short-term they may produce a drop in prices, but they also destroy the incentives to produce more goods. Under rent control, housing stocks deteriorate[.] A survey of economists 20 years ago demonstrated that the destructive effect of price controls is more widely recognized by economists than is practically any other regulatory effect. As a Swedish(!) economist once noted, “rent control appears to be the most efficient technique presently known to destroy a city–except for bombing.”

Even that bastion of conservative thought the New York Times filled its latest article decrying the “disappearing rent-controlled treasures” with tale after tale of sad disrepair. The simple truth is that when housing boards prevent landlords from earning market price for the apartments they rent, landlords cannot afford to fix apartment problems as they arise.

After all, city-imposed rent control may keep the rent from getting too damn high, but the price of plumbing, masonry, flooring, repairing a leaky roof, bread for the landlord, plumber, et al–none of these fall under a price cap.

That’s how markets work, kids, in a nutshell. Prices aren’t pegged to anything; they simply reflect information.

Pegging one item’s price to an arbitrary number will either destroy the market for that item or it will require such extreme control over all related markets that even a Stalinesque dictatorship can’t keep it together. Only when the government lets go of price control entirely do prices correctly reflect what things are worth to the relevant market.

Rent is high. When rent is too damn high people move. Relate to your people all you want, Mr. Politician, but keep your hands off of price control!

Net Neutrality: A Dialogue With Ars Technica

by Jack O'Connor on July 24, 2009 · 1 comment

in Regulation, Tech & Telecom, Zeitgeist

CEI’s broadband reply comments from earlier this week received a generous quotation by Ars Technica’s Nate Anderson. Mr. Anderson took issue, however, with our claim that net neutrality mandates are essentially price controls:

“In particular, [neutrality rules] require ISPs to offer content providers a price of zero, and to differentiate prices to consumers only in certain limited ways,” says CEI’s filing. “The disastrous consequences of price controls are all too familiar. And while neutrality may currently align with industry best practices, that fact limits the possible benefits just as much as the possible harm.”

Content providers pay for bandwidth on the competitive market, so it’s not clear what the line about “a price of zero” refers to (that money is passed along to other ISPs along the network path through the mechanism of “peering and transit“). But it is clear what groups like CEI want from a broadband plan: nothing at all.

There’s a lot more to say about net neutrality, especially regarding antitrust and regulatory capture. (For a brief summary of CEI’s broadband comments, check out our topic-by-topic summary.) This post aims to address Mr. Anderson’s objection on net neutrality in particular.

One of most incendiary moments in the history of the neutrality debate came during a 2005 interview with Ed Whitacre, then CEO of SBC. Ars reported Whitacre’s remarks:

How do you think they’re [Google etc.] going to get to customers? Through a broadband pipe. Cable companies have them. We have them. Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it. So there’s going to have to be some mechanism for these people who use these pipes to pay for the portion they’re using. Why should they be allowed to use my pipes? The Internet can’t be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo! or Vonage or anybody to expect to use these pipes [for] free is nuts!

Reactions to that comment have been at the core of the neutrality debate. Whitacre was asserting SBC’s right to charge content providers directly for their use of SBC’s lines — in essence, the right to set the price of premium service quality higher than zero — and neutrality advocates have clamored ever since to prohibit that kind of pricing. CEI wasn’t the first group to recognize the dangers of price controls at the core of net neutrality. A paper by Robert Hahn and Scott Wallsten,  “The Economics of Net Neutrality,” made the same point three years ago:

Mandating net neutrality amounts to price regulation. In this case, the regulation would state, in part, that broadband providers charge content providers a price of zero.

Mr. Anderson was correct when he pointed out that content providers already pay ISPs indirectly through various transit and peering agreements, and he linked to an excellent Ars piece explaining how these payments work. The Cato Institute’s Timothy Lee raised the same point in his 2008 policy analysis, “The Durable Internet,” in reference to Hahn and Wallsten’s argument. Lee ultimately acknowledged, however, that direct and indirect payments are not perfect substitutes, and his conclusion was simply that direct payments are inefficient:

With thousands of network owners and hundreds of millions of users, it would be prohibitively expensive for every network to charge every user (or even every online business) for the bandwidth it uses. Transaction costs would absorb any efficiency gains from such an arrangement. It would make no more sense than an automobile manufacturer requiring its customers to make separate payments to the manufacturers of every component of a new automobile. One of the services an ISP provides to its customers is “one stop shopping” for Internet connectivity. This arrangement has important economic advantages and is unlikely to change in the foreseeable future.

It’s indeed unlikely that direct payments would be worth the cost to negotiate them. Net neutrality is targeting prices that would probably remain zero anyway, at least for the foreseeable future. But for the most dynamic marketplace in history, etching the business models that prevail today in stone would be unwise — especially considering how often inefficient, outdated regulations impede market evolution.

It’s impossible to predict the evolution of content and technology online or the ways in which new developments might conflict with one another, and thus with neutrality. ISPs might even invent ways to save money for consumers by “unbundling” content, like the FCC nearly forced cable companies to do. No one knows. What is certain, though, is that thwarting innovation in service and pricing will close the widest open door to competition.

Congress ponders Price Controls for credit card companies

by Ryan Radia on April 14, 2008 · 9 comments

in Economy

I don’t visit ATMs much anymore. Instead, I mostly rely on credit cards. Credit cards are now accepted by all kinds of stores, from small, family-owned restaurants to national department stores. And since many credit card transactions no longer require a signature, paying with plastic is quick and easy, eliminating the need for cash withdrawals and coin-filled pockets.

Yet this recent explosion of credit card use may soon come to a halt thanks to a new law under consideration in Congress. CNN reported last Friday that merchants are lobbying hard for new legislation to regulate interchange fees (the charges credit card companies assess retailers whenever a card is swiped). These fees have drawn the ire of retailers, who pay around 2% of each transaction to the credit card issuer.

Despite being widely demonized, interchange fees have an upside. Many card-holders benefit from rewards programs made possible by interchange fees. For example, on my Bank of Americard, I get the equivalent of 1% cash back of all purchases I make. And since my card has no annual fees, I actually save money paying by card instead of cash. Not to mention the simplicity of paying my credit card bill with just a few clicks online, electronically transferring funds from my checking account without the hassle of paper statement.

Nobody is forcing retailers to take credit cards. If a business doesn’t want to pay interchange fees, it is free to go cash-only, or accept checks instead. Still, most shops gladly take plastic, because they’ve realized that customers spend more when they can pay with a credit card.

Retailers say regulation is needed because card issuers supposedly collude to keep prices high. But there is competition among credit issuers, as the Wall Street Journal recently observed, and it has intensified in the past few years. Visa and MasterCard may be the most ubiquitous, although many retailers also accept American Express and Discover, and online credit card alternatives are coming on strong. Claims of oligopoly are tenuous, and there’s no justification for imposing price controls on the credit card market.

Credit card usage has spiked since 2000, and is slated to keep growing quickly. But if Congress punishes credit card companies for being too successful, the market for new payment methods will stagnate, and consumers will be stuck using dumb currency in a smart economy.