Retailer's Cronyism Hurts Consumers

We live in the gilded age of crony capitalism, where those with influence in the highest echelons of government can get rich from government contracts and other favors provided by politicians. Businesses are no longer leery of government action.

Today, many from Wall Street to Silicon Valley encourage it. While the influential get rich, the American taxpayers are forced to cover the exorbitant costs of this unchecked cronyism.

You know the basics. Rather than declare bankruptcy and reorganize their debts and labor contracts, General Motors received an infamous taxpayer-supported bailout during the Great Recession. At the same time, Wall Street investors got rich from government largess handed out like candy to “green” companies like Solyndra.

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But did you know that while these events were being covered in the news, retail giants like Walgreens also used their friend Sen. Dick Durbin (D-Ill.) to impose price controls on "interchange rates,” the fees charged to retailers when consumers use debit cards? Consumers, of course, got the short-end of the stick in this deal too.

When a customer uses a credit or debit card, the risk of whether the consumer will actually pay his bill shifts from the store to the credit card company or bank. To cover the cost of this risk, retailers pay a small fee to the card issuers. Consumers gain the convenience of not having to pay cash. Stores complete more sales, while credit card companies make a small profit off of each transaction. In the free market, this is called a mutually beneficial exchange. In fact, a study by AEI Brookings noted that debit cards are the most efficient form of payment for retailers, saving as much as $1.65 over checks and $0.39 over cash. In short, with these transactions, everyone wins.

Although card transactions have benefited all parties involved, large retailers attempted to get out of their end of the deal by demanding that the government price fix the interchange fees. This lobbying campaign was led by Illinois-based Walgreens, which appealed to Sen. Durbin to get the government involved. Without a hearing or adequate debate, The Durbin amendment was offered to the infamous Dodd-Frank bill, forcing the Federal Reserve to be the arbiter of the debit interchange fee.

Politicians and large retailers promised that should the government set prices, consumers would win. The reduced fee would be passed along to consumers. Did anyone ever really buy that argument? A recent analysis found that “Most large retailers have seen significant cost reductions as a result of the Durbin Amendment, yet to date there is no evidence that those cost savings have been passed on to consumers. The authors “estimate that as a result of the Durbin Amendment, there will be a transfer of $1 billion to $3 billion annually from low-income households to large retailers and their shareholders, which have been the primary beneficiaries of the Durbin Amendment to date.”

The stated purpose of this debit card campaign was to impose a below-market price. But as any Economics 101 student would tell you, when the government price-fixes a given good, shortages are created and someone else is forced to cover the costs. Not surprisingly, once the Federal Reserve issued this debit card rule, instant damage was done to consumers and small retailers. As Margarette Burnette explained, business have hiked consumer fees on other transactions to make up for the revenue loss caused by the Durbin Amendment, which a recent study estimates is in the $2 billion range. Those include inactivity fees, insufficient-fund fees, and new monthly maintenance charge. Free checking and card reward programs have also become a thing of the past.

The Durbin Amendment has once again proven that price controls are not a panacea for consumers, but rather a handout to certain established industries and cronies. Republicans in Congress should take advantage of their majority status while they still can and repeal this classic example of cronyism immediately.

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