price controls

There Are No ‘Price Controls,’ There’s Just Scarcity

Prices are the way that a market economy organizes itself. It’s too easily forgotten, but it’s through naturally arrived at prices that providers of goods and services divine what to bring to market, and what not to.

A logical corollary to the above is that there’s no such thing as price controls, rather there’s just scarcity. When prices of goods are not allowed to reach natural levels thanks to governments substituting themselves for the marketplace, scarcity is the inevitable result. Put another way, there’s no such thing as a free lunch.

All of the above is worth keeping in mind in light of the Federal Reserve’s latest assault on banks. For an entity charged with doing its best to maintain a sound banking system, the Fed has an occasional tendency to operate in ways inimical to its remit. Except that we’re getting ahead of ourselves.

Traveling back in time to 2011, it was then that the Fed initiated efforts to limit the per swipe amount that debit-card issuers could charge retailers. Getting into specifics, the Fed wanted to place a .12 cent price cap on debit-card transactions. Which requires a pause.

Whether it’s a debit card or a credit card, when holders of each purchase goods and services with it, a card-issuing financial institution is financing the transaction. Though a debit-card purchase is backed by money in the buyer’s bank account, the transaction itself is still being facilitated by a bank. And banks pay a rate of interest for the funds they keep on hand so that they can finance our transactions. Yes, there’s a very real cost to maintaining the capital that allows banks to operate as financial intermediaries.

In which case, stop and think about the illogic behind price controls on debit-card purchases. To place a price cap on them is to shrink (or even obliterate) the profitability of such a service. And since there’s nothing free in this world, the imposition of price controls logically results in lesser service, or none at all.

Applied to banks, ultimately the .12 cent per swipe cap was boosted to .21 cents, and all was sort of well. Sort of is operative simply because a price control is still a price control, and with regulators having restrained the profitability related to financing debit-card purchases, services or perks related to same were shrunk. More than a few readers doubtless remember the subsequent result.

Indeed, there was a time when debit-cards were associated with all manner of commercial entities, including airlines. For instance, Citibank offered its customers Citi/American AirlinesAAL debit cards whereby purchases made on those cards brought with them one airline mile per dollar of purchase. It was a nice benefit.

Of course, the benefit vanished with the imposition of the aforementioned caps. Again, there’s no such thing as a price control. There’s only scarcity, and with the profitability of debit-card finance hamstrung by regulatory and political force, the rewards associated with debit-card usage suddenly went away.

Please keep this top of mind as the Fed throws its weight around the swipe-fee space yet again. The central bank is eager to revisit its price caps from 2011, only this time it’s in hot pursuit of a .14 cent per debit transaction cap. How very generous, right? Figure that central bank officials sought .12 cents per back in 2011, which renders .14 cents a princely sum?

Except that .1 cents, .14 cents and a dollar are moving targets in terms of value. Applied to the dollar, it’s weaker relative to 2011, which means a .14 cent cap in the present would be more draconian than .12 cents in 2011. Yet that’s a digression.

The crucial truth as discussed at the beginning of this write-up is that without naturally arrived at prices, markets can’t function. Banks are not immune to the previous tautology. In particular, they can’t offer the services they would prefer to offer if regulators are rendering their services unprofitable by decree.

Which means we have a choice now: either real prices, or scarcity. There’s nothing else.

Republished from RealClear Markets

Author

  • John Tamny

    John Tamny is a popular speaker and author in the U.S. and around the world. His speech topics include "Government Barriers to Economic Growth," "Why Washington and Wall Street are Better Off Living Apart," and more.

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