If there’s one thing House Republicans should stand united against, it’s draconian government price controls. When it comes to government policies interfering with market prices, the GOP has loudly denounced everything from caps on oil prices that caused the gas lines during the Carter administration to the numerous ObamaCare price controls producing disastrous results. They have argued correctly that price controls always result in product shortages and other negative results for consumers.
Given this history, House GOP members should be rushing to repeal a price control measure sponsored by Sen. Dick Durbin (D-Ill.) back when he was Senate Majority Whip. The Durbin amendment of the infamous 2010 Dodd-Frank financial “reform” law slapped price controls on the fees that banks and credit unions charge retailers to process debit card purchases. Now, debit card issuers must charge prices the Federal Reserve defines as “reasonable and proportional to the cost.”
On top of that, costs that these fees can cover are only “incremental costs,” a definition that leaves out most fixed costs like computer hardware and software used to process the card transactions. Not only are banks and credit unions forbidden to make a profit on the debit card fees they charge to retailers, they can’t even cover all their costs. Talk about picking winner and losers.
In the House, Financial Services Committee Chairman Jeb Hensarling (R-Texas) is spearheading a plan, the Financial Choice Act, which repeals these price controls as well as other provisions in Dodd-Frank that are harmful to community banks, credit unions, and consumers. Earlier this month, Hensarling’s committee voted to approve the bill, but some GOP lawmakers are reportedly trying to drop the Durbin repeal provision from the bill before it comes to a House floor for a vote.
Why? Well, it may have something to do with strong lobbying from multibillion-dollar corporations lobbying hard to keep getting ill-gotten gains from Durbin Amendment price controls. Big retailers like Walmart and Home Depot have reaped a windfall from not having to pay the full cost of processing debit card purchases.
The Electronic Payments Coalition, a group representing payment card networks, banks, and credit unions of all sizes, calculates from Federal Reserve data that retailers have taken in $42 billion from the Durbin amendment. A Home Depot executive bragged on a stock analysts’ conference call that price controls could add up to $35 million per year to the chain’s bottom line.
If the Durbin amendment explicitly bars banks and credit unions from recouping the full cost of a debit card transaction from a retailers, who pays these costs? Consumers. The costs have been shifted to them in the form of reduced benefits, like free checking, and higher fees at their banks and credit unions.
In 2009, the year before Dodd-Frank was enacted, 76 percent of checking accounts were free of charge. By 2011, this share had fallen to 45 percent, and by 2012 to 39 percent, according to Bankrate.com. Service charges on non-interest bearing checking accounts have also increased dramatically. A 2014 George Mason University study calculates that the Durbin Amendment contributed to 1 million Americans losing access to the banking system — becoming “unbanked” — by 2011.
And the savings on retail goods and services that retailers said would be passed on to consumers turned out to be miniscule or nonexistent. Even accounting for some lower prices in highly competitive markets, the public still suffered a net welfare loss of $22 to $25 billion — the amount lost (in free checking and imposition of new bank fees) that exceeded any gains from lower retail prices — according to a 2015 study published in the Oxford Review of Law & Economics.
Smaller retailers are also losing out from the Durbin amendment. They often make purchases with debit cards and checking accounts, in addition to accepting them as forms of payments. So they have been losing their free checking, just as consumers have, and business debit card rewards.
If the Durbin amendment’s price controls stay in effect, eventually everyone will lose out. Price controls are notorious for choking off innovation, which could otherwise make payment processing better and cheaper. Only so many costs can be transferred to consumers, and both the quantity and quality of services from financial institutions in debit card processing may suffer from lack of investment. The results for retailers could be lost sales and a dearth of technology to fight the ever-increasing hazard of security breaches.
Shortages are an outcome of all price controls that act as price ceilings, as these do. As the great free-market economist Thomas Sowell writes in his book Basic Economics, price ceilings mean “less is supplied at a lower price than at a higher price — less both quantitatively and qualitatively.”
As the House moves forward with the Financial Choice Act, now is the time for Republicans to remember first principles and fight these price controls, just like they fought ObamaCare price controls. As conservative pundit Erick Erickson wrote shortly after Dodd-Frank and the Durbin amendment were enacted, “Standing idly by is an endorsement of Obama administration price controls and Dick Durbin’s leadership. It is also an abdication of conservative principles and responsibility."
Originally posted to The Hill.