Sen. Dick Durbin’s price control crusade is doomed to fail

Derek Hunter Contributor
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Government efforts to control prices have failed whenever they have been tried.  Price controls inevitably create shortages and unintended consequences that hurt consumers and taxpayers alike. But if there’s one thing we can count on from Congress, it is they never let a bad idea die. The latest price control crusade — Sen. Dick Durbin’s campaign to control the price of “interchange fees” on credit card transactions — is doomed to fail and consumers will be left holding the bag.

Interchange fees are the fees charged by credit card companies to process each individual transaction, generally a small percentage of the cost of the transaction. That small fee guarantees the card is valid and the store will, in fact, receive payment for goods or services provided. It’s one of those conveniences most people take for granted because they never see it, but remove it and most people will be left wondering why things changed.

The history of price controls is pretty clear given examples like the resulting apartment shortages in New York after they were implemented and the infamous 1970s gas lines that President Nixon’s failed efforts to control the general level of prices on goods created.  Even the liberal deity John Maynard Keynes recognized the futility of price controls, writing in The Economic Consequences of the Peace, “the preservation of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself … the seeds of final economic decay, and soon dries up the sources of ultimate supply.”  In short, price controls don’t work and never will.

Now Senator Durbin and a majority of Senators have decided to try and impose a government price control on credit card interchange fees. This is not a new idea.  It has been tried — and failed.

Sen. Durbin and his allies on this issue — BP and the oil companies and huge retailers like WalMart — argue a government imposed pricing structure will save consumers money.  That is willfully naïve of both the history of price controls in general and in specific when it comes to interchange fees.

In Australia, government pricing schemes on interchange fees killed reward programs for consumers and were directly responsible for increases in annual fees paid for by consumers.  According to a November report by the Government Accountability Office:  “officials acknowledged that it would be very difficult to provide conclusive evidence of the extent to which these savings have resulted in lower retail prices because so many factors affect such prices at any one time. Moreover, the degree of savings depends on whether or not merchants are increasing their prices because of higher interchange fee costs. Some merchant representatives we interviewed told us merchants would take different steps to improve customer service if interchange fees were lowered, such as hire more employees. Customers also may not experience lower prices if merchants’ overall costs do not decrease.”  The $1 billion in savings that retailers received were never passed along to consumers in the form of lower prices.  In short, this is a lobbyist imposed scheme to shift the cost of processing credit cards from businesses to consumers. If you like earning miles on your favorite airline by using a certain credit card, you can thank Dick Durbin when that goes away because the results in Boston will be no different than the results in Brisbane.

But that hasn’t stopped lobbyists nationwide from trying.  The list of petroleum marketers who are pushing for this legislation is almost endless because seemingly no one buys gasoline or the snacks gas stations sell with cash anymore. So naturally, they aren’t happy that they have to pay anything for this service, but it is a service, a service they wish to continue to receive, the petroleum industry just wants you to pay for it on their behalf.  And guess who is a “Platinum Partner” for the Petroleum Marketers Association of America?  None other than British Petroleum.

In fact, their marketing arm, the BP Marketers Association, is a “National Partner.”

Forcing reduction of interchange fees will benefit BP and other huge corporations and hurt consumers.  Consumers will never see a penny of price reduction if BP pays less for processing their credit cards.  They will lose their rewards programs and will see a further tightening of the credit markets.  The Durbin Amendment is a raw deal.

Derek Hunter is a Washington based writer and consultant. He can be stalked on Twitter @derekahunter