Want higher air fares? Overregulate credit cards

This morning, the Consumer Financial Protection Bureau and the Department of Transportation are holding a joint hearing “investigating” airline and credit card reward programs. The Director and Secretary of the respective agencies will be hearing from a variety of what are these days called stakeholders, such as spokesmen of industries, labor unions, and people who claim to speak for consumers.

The hearing is part of the Biden administration’s support for the Credit Card Competition Act, which would attempt to interfere with a well-working market to force larger banks to offer a second payment network over which merchants can run transactions using credit cards. The consumer will have no choice in the matter. I have explained elsewhere why this is bad for banks.

The Act is simply a give-away to large vendors, who have wanted to juice their profit margins at the expense of the banks and credit card users for many years now. They succeeded in getting restrictions on debit card fees with Sen. Dick Durbin’s (D-IL) last- minute amendment to the Dodd-Frank Act over a decade ago. This amendment led to the elimination of debit card rewards programs, a million people dropping out of the banking system, and a $1-3 billion wealth transfer from low-income households to large merchants.

The credit card bill takes a different tack, but will have just as serious results, and rather more wide-ranging. The reason for the Department of Transportation’s involvement is that airlines and their labor unions are keenly aware that the proposed bill threatens credit card reward programs. Airlines get approximately 20 percent of their revenue from selling air miles to banks to offer as part of their rewards programs.

If this bill results in significantly reduced income from credit card transactions, rewards programs will be the first thing hit. Airlines won’t be able to sell as many miles, which means a big hole in their revenue streams. That will mean fewer flights, fewer jobs, more crowded flights, and higher fares.

Moreover, millions of Americans use credit card air miles to plan vacations. Tourism will also suffer as a result.

It’s not just airlines, however. Millions of low to middle income Americans use cash rewards as a vital lifeline, whether it be to reduce gas prices or as a reserve savings account.

And while the bill will certainly benefit large merchants, it is likely to hurt smaller businesses, which are often minority- or women-owned, as Patrice Onwuka explains here.

As Henry Hazlitt put it so well in Economics in One Lesson: “The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy, not merely for one group, but for all groups.”

Tracing the consequences of this policy for all groups leads inexorably to the conclusion that this is a bad bill with bad effects. Even those of us who don’t have rewards cards will suffer, but few of us will realize that when waiting for an overcrowded flight in a few years.