Shortly after President Trump was elected, congressional leaders set an aggressive schedule for addressing healthcare, taxes, and financial services this calendar year. With the prolonged fight over healthcare continuing, and now with United States involvement in Syria looming large, the calendar will likely need to be adjusted. The original goal was to get tax reform done by August recess, but now the administration is openly questioning whether that's possible. One thing Congress shouldn't do, however, is let wholesale reform of Dodd-Frank fall by the wayside. The financial services industry desperately needs reform.
Dodd-Frank, passed in the wake of the financial crisis, has strangled economic growth. The bill was needlessly complicated and added layers of regulation targeting things that were entirely unrelated to the causes of the financial crisis. It became a grab bag for left-wing grievances against the financial services industry. A perfect example is the so-called "Durbin amendment," named after its sponsor, Senator Richard Durbin, D-Ill.
The Durbin amendment directed the Federal Reserve to set price controls on interchange fees – the fee paid by the merchant's bank to the consumer's bank – on debit card purchases. This was a handout to large retailers: it's estimated that the cost on the average interchange fee declined from about $0.50 to about $0.24 per transaction. This may have been great for consumers if retailers passed along the savings by way of lower prices. But the data do not bear this out.
Todd Zywicki, a prominent law professor at George Mason University and a senior fellow at the Mercatus Institute, and two coauthors found there was no evidence the savings from the price controls were passed along to consumers. The authors also found that the Durbin amendment reduced the availability of free checking accounts while doubling the minimum account balances required to maintain free checking accounts and led to a significant increase in the amount of people without a bank account. For merchants, the Durbin amendment meant a loss of flexibility.
While the Durbin amendment directly benefited large retailers, not all businesses have been supportive. A recent study from Javelin Strategy & Research found that smaller merchants value "choice and flexibility" more than lower prices on interchange fees. This belies claims made by progressive activists and large retailers that virtually all businesses are supportive of the Durbin Amendment.
Thankfully, House Republicans have taken notice of the problems with the Durbin Amendment. In last fall's comprehensive financial services reform bill, the Financial Choice Act, House Financial Services Chairman Jeb Hensarling, R-Texas, included a provision that would have repealed the Durbin Amendment. Hensarling is preparing an updated version of the Choice Act, which should serve as the basis of the House's efforts to simplify the regulatory landscape of the financial services industry. Free market advocates are hopeful the chairman will keep the Durbin Amendment repeal in the next iteration of the Financial Choice Act, which is to be released at some point this year.
Government price controls have been discredited every time they've been tried, the effects of which range from relatively benign to inhumane and deadly. From the oil shortages in the U.S. during the 1970s to recent food shortages in Venezuela, the economics are clear: price controls lead to rationing and shortages by decreasing the supply of the good or service in question. It is obvious to the overwhelming majority of economists that the market, not government, should set prices.
If policymakers are concerned about interchange fees, they should look for ways to increase market competition through the elimination of regulations and barriers to entry – not resort to ineffective and blunt instruments like government price controls.
Clark Packard (@clarkpNTU) is a contributor to the Washington Examiner's Beltway Confidential blog. He is counsel and government affairs manager for the National Taxpayers Union.
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