Have a listen here.
Every time you use your debit card, the merchant has to pay a fee to the company that issued your card, usually about 1 percent of the purchase price. On October 1, that price will be capped by law to 21 cents. John Berlau, Director of CEI’s Center for Investors and Entrepreneurs, explains the unintended consequences that will hurt consumers, merchants, and banks alike. John has written on interchange fees for The Wall Street Journal, Investor’s Business Daily, The American Spectator, and other outlets.
On last week’s Stossel (no video available yet), was mentioned that rich countries gain their wealth through the exploitation of poor countries. Professor Marc Hill of Columbia University opined that businesses operating in poor countries ought to pay workers an extra dollar per hour for their services. It’s a very nice thought at first; however, there’s no such thing as a free lunch (as I’ve mentioned — but it’s one of those things one can never say enough).
While companies could pay an extra dollar per hour of work, this increases the costs of producing their output. Let’s say that it’s shoes. Higher wages increase the costs of production and lead to a reduced supply of shoes. A lower supply of shoes entails a higher price for shoes and a lower quantity of shoes demanded (because people can’t afford the same amount at the higher prices). The reduced supply of shoes also means something more subtle: you need fewer workers to produce a reduced supply. While the workers who keep their jobs do benefit, what about the workers who lose their jobs?
This is one aspect of “fair trade” advocates that I find abhorrent. After imposing fairness, they completely ignore the unintended consequences of their “fairness.” They forget about the workers who lost their jobs as a result of “fairness.” In instances where attempts at free trade were subverted under the guise of waiting for fair trade, they forget about the workers who never even got the chance to take jobs.
Fair traders, by virtue of their actions, say, “Yes, so they’re starving and impoverished, and have lower economic growth, but at least they don’t have to work in sweatshops earning unfair wages. Besides it’s not a consequence of my fairness, it’s because of greedy capitalists. Now, I can sleep better at night, knowing that I created some positive benefits.” Even though the costs were far greater.
This same logic applies to the minimum wage as well.
This letter of mine ran in today’s New York Times in response to Paul Krugman’s July 4 column.
To the Editor:
Paul Krugman is at a loss to explain why some people oppose extending unemployment benefits. One reason people hold such an opinion is that when government subsidizes something, there tends to be more of it.
The more government subsidizes unemployment, the more people will indulge in it for longer periods of time.
Ryan Young
Washington, July 6, 2010
The writer is a journalism fellow at the Competitive Enterprise Institute.
Congress has used the financial crisis as an excuse to regulate what it calls “predatory lending.” As so often happens, its new regulations have had unintended consequences.
A bank in South Dakota, in order to comply with the new rules, is charging 79.9 percent interest for one of its low-limit credit cards. The pre-regulation rate was 9.9 percent.
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 makes it illegal to charge annual fees greater than a quarter of a card’s limit. For small-balance cards, the allowable fees are tiny now. That leaves banks with three options:
-1. Lose money. The Wall Street Journal correctly notes that “Banks can’t be expected to give money away, even if Congress is in the habit of doing just that.” So this option is unlikely.
-2. Stop offering low-limit cards. This will hurt people who need them, such as people with low incomes, people with bad credit records, and young people who are trying to establish a credit record.
-3. Charge higher interest rates to make up for the money lost in fees. This is exactly what is happening here with the 79.9 percent rate for a $250-limit card.
If the bank calculated correctly, the 79.9 percent rate will be roughly a wash compared to the earlier high-fee, low-rate policy. But different customers will be paying. The people who incur a lot of interest-rate charges are usually the people who can’t afford them. And they’ll be paying a lot more than they were before the CCARD Act.
People who can afford to pay their balances on time often don’t pay little or no interest interest anyway. The 79.9 percent rate doesn’t really affect them. And now their annual fees have gone way down. The CCARD Act is, completely unintentionally, a wealth transfer from poor people to richer people. Congress is actively hurting the very people it intended to help.
Marginal Revolution’s Alex Tabarrok points to a proposed rule in California that would reclassify adult film actors as being subject to certain employment regulations. The unintended consequences are potentially fatal:
California’s anti-discrimination laws prohibit requiring an HIV test as a condition of employment; therefore the adult film industry’s current testing process, in which every performer is tested for HIV monthly, would be illegal. Nor would adult film producers be allowed to “discriminate” by refusing employment to HIV-positive performers. As a result, untested and HIV-positive performers would be able to work in the industry, raising the risks of HIV outbreaks–particularly since condom breakage or slippage can occur.
Sounds like regulators and activists need to think that one through a little more carefully.
Since the beginning of his presidential campaign, I noticed something about Obama’s style of oration (and I’m not the only one). He has sweet, flowery, and yes, powerful words, but they are devoid of substance. His locution is very much in the vein of the daily newspaper horoscopes, which are so vague that they can apply to just about any reader–depending on how the reader interprets it. Obama care is everyone’s everything.
He has stated, correctly, that people on all sides of the issue agree that the health care system in this country is in shambles and needs to change. But adding more regulation is no change at all. In fact, moving toward socialized health care is exactly what we’ve been doing for decades.
The problem in the public discourse is that consistent meddling of regulations in America’s system of providing medical care has created such a tangled web of perverse incentives, subsidies, and unintended consequences that most people in this country actually believe that we don’t already have a government run health care system.
In his article Cato scholar Michael F. Cannon argues that despite our reliance on private health care providers, the US health system has the distinguishing features of a socialist economy: that is government controls decisions about what individuals produce, consume, and the terms of exchange.
They are wrong.Things are bad. But more government involvement in medical care will not improve matters. For those who think government will do a better job providing care for patients, I challenge you to walk into the DMV, US passport office, courthouse, or any other government run service provider and then ask yourself, is this how you’d like your doctor’s office to be?
Twitter can be very useful. Walter Olson of Overlawyered.com sent out a tweet this morning about an Amazon list of toys that will be affected by the Consumer Product Safety Improvement Act of 2008, which comes into effect February 10. This new law aims to protect children from the harmful effect of lead in toys, but does so, as usual, in an expensive and ham-fisted way that ignores unintended consequences. Intrigued, I researched further and found a classic tale of regulatory incompetence, but also an excellent example of resistance by the little guy (or often more gal, in this case).
The law, as written, appears to require makers of any new toys to be sold after February 10 to have a third party certify that they meet the lead restrictions. This will be ruinously expensive for small toymakers, especially those of traditional, hand-made wooden toys. No wonder that these manufacturers have taken to calling February 10 National Bankruptcy Day. They have, however, been very effective in using the blogosphere, specifically the “mommy blogs” to draw attention to the cause and have managed to make quick reform of the CPSIA the number six policy to be presented to the new President as voted on by users of Change.org. Investigative journalism by BusinessWeek has confirmed that the small businesses have reason to be afraid, as there has been no clarification from the CPSC that their fears are unjustified (a “debunking” at Snopes applies only to used toys, which will indeed not require testing, but their resale may still break the law).
This is an excellent example of how consumers and manufacturers, self-organizing, can alert people to the terrible consequences of well-meaning but ill-thought out regulation, and of how the regulatory burden can severely affect small businesses especially. The campaigners have a twitter stream at #CPSIA, which is full of useful links.
More from Forbes here, but note that some of the campaigners believe the exemptions cited are worthless.
…is the title of a useful contribution to the discussion from the International Policy Network in London and the Lion Rock Institute in Hong Kong. Their recommendations for finding a way out of the financial mess are worth attending to:
– Better mechanisms are needed to manage the failure of large financial institutions, some of which may now be both too big to fail and also too big to rescue.
– Open ended guarantees to depositors and other counterparties are expensive and unsustainable in the longer term.
– The rights and hierarchy of investors across the capital structure should be clear and honoured — not subject to arbitrary alteration by government.
– Closer attention to the rights of collateral providers and custodians in the case of failures can limit systemic risks.
– Hedge fund failures have not created systemic risks in this crisis and they should not be a target of policy action.
– Ad-hoc bailouts should be avoided, since they create ever expanding demands for further intervention.
– Much more thought needs to be given to the unintended consequences of over strict capital rules, rating agency privileges and rating based limits on pension investments.
As the authors say, “free markets thrive on creative destruction” and these recommendations would help in that respect. In fact, when it comes to free markets, creative destruction isn’t a bug. It’s a feature!
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