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No Credit to Congress: House Judiciary Committee Votes on Price Controls

Posted By James Gattuso On July 15, 2008 @ 4:03 pm In Economics | Comments Disabled

In 1979, Robert Schuettinger and Eamonn Butler wrote a book called “Forty Centuries of Wage and Price Controls [1],” detailing 4,000 years of disastrous attempts by government to control market prices. Tomorrow, the House Judiciary Committee will vote on adding a 41st century to that litany of failure. The target: credit card “interchange fees.”

Interchange fees are the fees paid by one bank to another, and passed on to merchants, as the price for processing a credit card purchase. They are set by credit card associations, such as MasterCard and Visa based on complex formulas, but average around two percent of each transaction.

The stores that pay these fees have long complained that these fees are too high. And, they say, faced with the market power of the credit card associations, they have no ability to bargain them down.

This claim is suspect, to say the least. While the merchant’s coalition now lobbying Congress includes many small businesses, such as convenience stores and gas stations, giants such as Wal-Mart have also played an active role. Anyone who thinks the folks from Bentonville can be pushed around by anyone just hasn’t been paying attention.

Smaller merchants had hardly been victims either. Not only is there competition between credit card associations, but there’s competition between credit cards and cash itself. Political memories may be short, but only a few years ago it was still impossible to make a small purchase using a credit card: cash was still king. The expansion of credit since then has been a true retail revolution, benefiting merchants as well as consumers. This result wasn’t the result of monopoly, but of competitive firms making their product more attractive in the marketplace.

Nevertheless, Congress is moving ahead with a scheme to have the government decide what interchange fees should be. Under bill being voted on tomorrow, H.R. 5546 [2], sponsored by Reps. John Conyers (D-MI) and Chris Cannon (R-UT), three newly-minted “Electronic Payment System Judges” would be charged with deciding the correct rate from among final offers from merchants and credit card associations when negotiations fail. Specifically, they are to: “establish rates and terms that most closely represent the rates and terms that would be negotiated in a hypothetical perfectly competitive marketplace.”

Of course, to make sure the judges get things right, the law specifies the qualifications of the judges: They must be lawyers with seven years experience.

That’s somewhat less than reassuring. Does anyone think that three government-appointed judges – even (or especially) if they are lawyers — will be able to determine what prices should be in the complex and fast-changing world of credit financing? More likely, they will make a hash of it, as did regulators in Australia [3] a few years ago, when credit fee limits resulted in skyrocketing direct fees to consumers.

Forty centuries is enough for price controls. Let’s not go for a 41st with price controls on the credit system.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/07/15/no-credit-to-congress-house-judiciary-committee-votes-on-price-controls/

URLs in this post:

[1] Forty Centuries of Wage and Price Controls: http://search.barnesandnoble.com/Forty-Centuries-of-Wage-and-Price-Controls/Eamonn-Butler/e/9780891950233

[2] H.R. 5546: http://thomas.loc.gov/home/gpoxmlc110/h5546_ih.xml

[3] Australia: http://www.unfaircreditcardfees.com/uploads/Muris.pdf

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