In the United States, we’ve long had a free market system, but that system is not what it once was. Total government spending–state, federal, and local–has grown in real terms by more than 400 percent since 1965. Government spending is now one-third of the economy. As the private economy retreats, the importance of a new marketplace grows: the political marketplace. Products and services are no longer judged according to their usefulness to the economy at large–they’re judged according to whether or not they are politically useful or connected.
The political marketplace is the marketplace of crony capitalism. Its supply and demand are lobbying expenditures and the resulting federal program or carve out. Its actors are not firms, but the political class and the politicians they influence. This won’t be anything new to people who have been following Washington over the years, but I do want to talk about a textbook case of this–it’s called the Durbin Price Control and it affects regular Americans every day, whether they realize it or not. The Durbin Price Control is a price control on the fees retailers pay to banks whenever a consumer uses a debit card.
I suspect that most readers of this publication know that price controls aren’t effective policy. But what’s even more interesting is how this provision came into being. Unlike the private market, the political marketplace works best in the dark, and that’s what happened with the Durbin Price Control. There was no debate or hearing on the provision in Congress. It was included in the 11th hour of the Dodd-Frank Conference Committee and pushed through by a liberal Democratic Senator.
Another key feature of the political market is that the products it delivers, government interventions in the free market, aren’t beneficial to the average taxpayer. They’re beneficial to the narrow interests that got them in. Durbin is very much in that mold. Before Durbin, more than 75 percent of banks offered free checking. Now only 40 percent do. The average checking account fee cost has more than doubled, from $5.90 per month to $13.25 per month. Most people haven’t noticed, but the ones that do are generally on the lower end of the income scale. It’s been estimated by the International Center for Law and Economics that working class Americans now see between one and three billion dollars in additional banking costs because of Durbin.
The political market is also increasingly looked to as a weapon of last resort to settle market disputes in unrelated areas. The arguments being made in the service of the price control are that the market for debit cards is broken, because prices on swipe fees have gone up and that the price control actually restores the free market. The cause of the increase is supposedly monopoly power by debit card issuers like Visa. If that sounds a great deal like an antitrust dispute, that’s because it is. We have two different laws on the books, each more than a century old, to figure out these types of problems, but the federal courts have ruled against the claims three times, in rulings going back to 1986. Even the Ninth Circuit, no friend to free-market economics, has ruled against retailers making the antitrust argument.
I’m a retailer myself, and I used to own a gun store in North Carolina. I’ve personally paid tens of thousands of dollars in swipe fees. It was also my choice whether or not to accept debit cards, and I did so because I thought it was worth the price. Retailers around the country have made the same decision.
Jeb Hensarling, Chairman of the Financial Services Committee (a committee on which I sit) has introduced a Dodd-Frank repeal bill that eliminates the Durbin Price Control. If we were able to get a full repeal, it would strike a blow to the political market, one of the most important we’ve seen in a long time. I’m looking forward to a sharp debate, and I’m hopeful that the full repeal provision holds strong throughout the process.