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Stage-One Thinking: Debit Card Edition
Yet another example of the unintended consequences of poorly-thought-out regulation has surfaced. Back in 2010, Senator Dick Durbin of Illinois added an amendment to the Dodd-Frank bill that capped the amount a bank could charge a retailer for a debit card transaction.
In The Economist this week, an article describes what has happened as a result of this amendment. Durbin assumed that the rate reduction would be passed on to the consumer. Instead, retailers kept the rate difference, and banks raised their fees on a host of services in order to make up for the lost revenue:
Mr Durbin’s amendment has cost the banks $6.6 billion-8 billion annually, according to a paper by the International Centre for Law and Economics (ICLE), a think-tank. But retailers, whose profits have been sapped by the weak recovery from the financial crisis, seem to have pocketed most of the windfall, just as they did when interchange fees were cut in Australia. (Their shares jumped when the new rules were announced.) Meanwhile the banks, which are in even worse shape, have tried to make up for the lost revenue with higher charges for other things, including monthly fees for having a debit card, or even a current account. In 2009 banks provided 76% of America’s current accounts free of charge; last year the figure was only 38%. The higher charges in turn, have pushed 1m Americans out of the formal financial system—not the result Mr Durbin was aiming for.
Does anyone have a theory as to why progressives seem incapable of understanding that individuals and companies will tend to act in ways that will benefit their own economic interest?
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I have a theory.
They act that way because their actions put more money in their pockets, win them additional political support, or often both.
Disasters unleashed upon the public at large are merely further opportunities for graft.
Ummmm… Because they’re stupid?
There may be some truth to comment # 1, but perhaps there is something deeper going on. Many liberals are immune to evidence. They are the opposite of reality-based. Their self-conception is bound up with their political views, so when evidence contradicts the latter, they must turn away from it for the sake of preserving the former. Of course, this is true for people across the political spectrum, but it is less true for conservatives. Conservatives cut against the cultural grain, so they have to be very good at making arguments to support their views. They are accustomed to having to defend themselves with reason. Liberals rarely have to do that, so when faced with evidence that undermines their views, they are less able to defend themselves. As a result, they quickly become emotional, quickly turn to anger and to epithets. They unwittingly fail to see the facts clearly in order to preserve their self-understanding.
OK, I just read comment # 2. Occam’s razor favors it.
I’ve noticed that lefties pretend the world actually is what they wish it were in many instances. Never trouble them with the facts please. This appears to be one of those instances.
Just a manifestation of the underlying problem. Liberals FEEL, they do not think. Attention to evidence and outcomes requires thought. They feel like if they do something to those nasty banks, the poor oppressed masses will benefit. It matters not a whit that the actual effects of price controls are deleterious to the economy.
I basically agree, but I think it’s better thought of as progressives being insanely moralistic about economics. They simply don’t understand how people respond to incentives.
Better yet, they’re insanely moralistic about others’ participation in the economy.
In virtually all of the conversations (debates?) I’ve had with friends of mine who are liberal, on subjects such as the economy, the wars, climate change, the genius of BHO, etc., I find that they absolutely refuse to engage with even indisputable facts that contradict their preconceived notions.
For example, they can’t deal with the hiatus in warming. They believe that Bush’s deficits were much higher than Obama’s. They think the Iraq war cost as much as $4 trillion. They ignore the problem posed by the national debt. They still believe that Obama is the smartest man ever to serve as president. They believe that Hobby Lobby wants to prohibit all contraceptives for its employees. They don’t want to accept that there has been an equal pay act for women since 1963. They don’t want to hear about how a minimum wage increase will cost many of the poorest workers their jobs.
And these people are the reality-based community. Hah.
Not to call liberals stupid, but they’re generally disinterested in market economics. I mean, surely this was predictable. If you assume that the banks have any control over pricing at the margins (and they surely do), they were going to make up for this relatively small change in other ways. They have. And, why would retailers (a low margin business to begin with) slash prices even further, when they could just keep the difference, and 99% of their customers won’t notice, because they’re paying the same price for goods as they did before?
Womp womp. Seems like a dead weight loss to consumers. Thanks Democrats!
Because each time individuals and companies react to new laws or regulations by modifying their behavior to benefit their own economic interests, it gives progressives an opportunity to establish additional laws and regulations prohibiting such modifications. It’s a never-ending cycle the upshot of which is always enhanced government control.
Liberal politicians are entirely insulated from individual financial incentives, so it isn’t too surprising that they don’t really believe they matter. For them, they don’t. That’s probably true for all national politicians, but Democrats are able to monetize their ignorance.
How ’bout a combo of both?
Insane moralism describes the sentiments most progressives consciously feel. The opportunity to establish more intrusive regulations in the future describes the political incentives they (mostly) unconsciously respond to.
I think they do–And it scares them. So they fight against it. The only exception is themselves: Their Money, Property and Home are sacred.
There are 3 kinds of Progressives (in my small mind):
All 3 look at the US Government as a bottomless pit of money, power and influence. Very sad really.
The odd thing that I haven’t figured out is that while the bill reduced exchange fees on debit cards it did nothing to the fees charged to the retailer by credit cards which can run upwards of 3%. If it was the retailers that were behind the law I would expect that those fees would have been attacked also. I understand that debit cards charged a fixed fee, which on small purchases (<$10) were much higher than credit cards.
I spent a semester abroad in college, and one of my assigned suitemates was another American who was an avowed communist — he said he believed private property is evil, all property is theft, etc. I didn’t think much of it until it came time to split the grocery shopping each week. We all agreed to take turns and split the cost equally. But while the communist was happy to partake from the communal stock, we soon discovered that he also kept his own private store of the food he especially liked and didn’t want to share. The other three of us, capitalists all, would never think to renege on our bargain. Go figure.
Economics is deceptively simple. Person 1 wants something Person 2 has. Person 2 wants money; Person 1 has it. They swap and it’s done. So to the Progressive, it shouldn’t be too hard to add another step in there to guide towards outcomes they imagine to be best.
Except it’s not that simple, and there’s much going on before, during, and after that’s hard to quantify. By meddling in one part, Progressives stir up the rest of these processes which will react accordingly.
Thus they are always surprised at the outcome.
I have a theory that for leftists, history starts whenever they decide they want it to start — preferably tomorrow. And if they are forced to acknowledge uncomfortable history, well, This time it’s different!
This effect of the Durbin amendment to Dodd-Frank was accurately forecast by conservatives. Unfortunately, as with Obamacare, being able to say “I told you so” is cold comfort. Also as with Obamacare, the whole thrust of Dodd-Frank is for the central authorities to design the financial products and use the private sector (insurers and banks, respectively) merely as delivery systems and administrators. The banks are effectively pushed to all offer the same thing, and they can’t really compete on price either — except in the case of the wealthy, who can fashion end runs around the standard offerings. As usual, it’s the mass-market consumers who are adversely affected by the government’s ham-handed attempt to protect them from capitalism.
My understanding is that Visa and MasterCard took advantage of this amendment by increasing the rates they charge small merchants. Perhaps you are looking in the wrong direction.
As will the government, a business also. :) It too will always act in its own economic self-interest.
I can rarely attribute politicians’ disregard for likely outcomes (as opposed to desired outcomes) to incompetence or a failure of imagination, especially when the likely outcomes are blindingly obvious to any observer with a Planck Mass of common sense.
Even if the individual legislator was too stupid to see a likely outcome, it is near-impossible that everybody on the legislator’s staff, or among those who lobbied the legislator, or other people in an advisory position, were also too stupid.
As such, I generally must conclude that the real-world outcome actually was the desired outcome, for at least one party within the decision-making apparatus.
So, for me, the question isn’t “why didn’t progressives see this coming?” but rather “how does this outcome benefit progressives?”.
Most bad economic decisions stem from simple misconceptions and terminology.
Liberals look at health care and they see a price problem. So they enact regulations that control prices. Conservatives look at health care and we see a cost problem. But liberals aren’t interested in controlling the cost of services because they are in the pockets of those who make costs spiral – people such as trial lawyers.
Lower down the scale, low-information voters are the same way. I had a Twitter exchange with a liberal young lady the other day who insisted that members of Congress get free health care. While it may be that they have little or no out-of-pocket fees paid as individuals, that doesn’t make the service free. Someone (guess who!?!) still pays. Again, a confusion between price and cost.
With Dodd-Frank, the government attempted to regulate price charges but did nothing to alter the costs of doing business. In fact, it could be argued that they increased those costs, all of which will be extracted from consumers.
I think members of Congress always paid a percentage of their health insurance premiums under the Federal Employee Health Benefits program, the same program used by other federal employees. The government subsidized the remaining premiums just as private employers often did and do. With Obamacare, they were kicked out of the FEHB and into the exchanges. The Obama administration then allowed them to take the former FEHB subsidy with them to help pay their new Obamacare premiums. A pretty sweet deal, but not really free.
Without throwing too much of a wet blanket on this pig pile, I think the issue is slightly more complicated.
Look again at what happened: an expense for merchants was made lower, with the expectation that competition would force merchants to pass that savings onto the end consumer. Instead, it turns out the merchants pocketed the savings themselves.
From reading Ricochet or listening to a number of pro free-market outlets online or on TV (including the illustrious Econtalk), you would think the free-market defenders would agree with the first prediction. I have read/heard constantly here and elsewhere about how savings are always passed on.
Meanwhile, if you ask the average liberal on the street (or on MSN) what a business does with unexpected windfall, he would reply: the greedy business would keep the money for itself. Which (aside from the greedy part) is exactly what is happening.
Both sides have a point. Imagining oneself in the shoes of the merchant could help illustrate how the process works:
Sally, our hypothetical merchant, has a retail business that offers payment by debit card.
She has expenses that she has to cover in order to keep doing business. She covers these expenses by factoring them into the price of the goods she sells.
The trend over time is for these expenses to increase, generally-speaking, due to inflation, regulation, market forces, etc.
One of these expenses is the transaction fees for her debit machine.
So, one day, she finds out that the transaction fees are being reduced.
She has a choice to make.
She could reduce the price of her goods to pass the savings along to her customers, or she could pocket the difference by keeping prices the same.
Knowing that overall expenses are likely to rise over time, she knows that any price reduction she makes due to the reduction of an individual expense will only be temporary. Eventually she will have to raise the price again as other expenses increase.
So, she has to decide if it makes more sense to temporarily reduce prices knowing that they’ll have to go up again eventually, or to keep prices at the same level with the assumption that it will mean being able to delay raising prices again in the future. She has to decide if her customers will appreciate (and reward her with more business) a lower price in the short-term more or less than they would appreciate a longer period of time at the same price.
She also has to predict if any increase in short-term business from the price cut will outweigh the costs of fluctuating prices (admin costs, advertising costs, etc).
Regardless of which choice she makes, the customer benefits from the reduction in transaction costs. It’s just that the benefit is more visible in the short term if she chooses to cut prices rather than choosing to use the windfall to extend the status quo a bit longer.
It’s yet another question of the seen vs. the unseen.
How do we know stores did not lower their prices? Is that in the think tank research?
My problem isn’t that this result conflicts with any free market theories. There are several plausible explanations in line with basic economics, including yours.
My problem is with our “talking points.” Most pundits on the right (and left) don’t work situations through like you did in your comment, and most media consumers on the right (and left) don’t have the patience to read through such an explanation.
Both sides naturally gravitate toward simple answers. To the question “what happens in a competitive marketplace when merchant expenses become lower?” the knee-jerk, simple answer on the right is “the savings are passed onto the consumer,” while the knee-jerk, simple answer on the left is “the prices don’t go down because of greed.”
Your average lefty would have predicted this outcome better than your average righty, even if the lefty got the mechanism all wrong.
And here’s why I think this point is relevant:
One of the better arguments in favor of eliminating Obamacare, which is often repeated on Ricochet and other thoughtful forums on the right, is that if we eliminate the mandate (and differential tax status) for employer-provided healthcare, those costs to the employer will be passed onto the employee in the form of higher wages/salary. But will they? Or will employees see only a small raise in income while being saddled with much higher healthcare costs?
I am uncertain of your point, of course they did, could you clarify this a bit? The assumption of competition being in play is entirely illusionary.
This is incorrect, I believe you have misunderstood such arguments. The free-market position is that competitive forces will benefit consumers. There is no assumption of charity or philanthropy here.
Well, of course they don’t, due to time constraints. My response required over 350 words, which violates Ricochet’s (former?) word limit, let alone the amount of time a pundit has when being interviewed on television.
Another wrinkle: Imagine that another person, who we shall name Susan, is savvy enough to do the math and realizes that Sally’s prices are x % higher than they have to be in order to turn a profit.
If that percentage is high enough, it might be enough of an incentive for Susan to open a store of her own at prices that are lower than Sally’s.
Without the fee reduction, this extra competition might not exist.