Commentary - When retailers want government price controls

Visa and MasterCard are resisting the price-control regulations, with a lobbying and public relations campaign of their own, but even those lawmakers who usually believe in the free market seem to be grooving to the retailers' disco-era message these days. If experience in other countries is a guide, consumers might suffer a bad hangover from this flashback.

Last week, this column discussed one (sort of) laissez-faire aspect of the Credit Card Fair Fee Act: the anti-trust exemption the retailers have requested in an effort to increase their ability to negotiate fees with the credit card companies and the banks that issue them.

But the heart of the bill is a provision to put the federal government in charge of setting the interchange fee--the percentage of each credit card transaction that ends up in the pockets of the credit card company and the banks involved (the merchant's bank as well as the bank that issued the credit card to the shopper).

The bill would create a three-judge panel to resolve disputes over fees between credit card companies and merchants who take credit cards. This makes the government the arbiter of the price that credit card companies can charge retailers for the service the card companies are providing--facilitating payments, thus increasing the volume of purchases and eliminating the labor involved in accepting, changing, and depositing cash.

In most commercial transactions in America, the government keeps its hands out of the mix: the widget seller names a price, and if the buyer can't bargain the seller down, he either pays the seller's price or he walks away without a widget.

While we often complain about high prices, in a sense, nobody ever pays for something more than he thinks it's worth--the act of voluntarily trading money for a good or a service means you'd rather have the good or service than the money. So what do you do if you want a service (such as a convenient way to process payments) but not at the price the sellers are asking?

If you're an industry that can spend $33 million a year on lobbyists, you call in Uncle Sam to regulate. The National Retail Federation, representing retailers ranging from Mom & Pop to Wal-Mart, has descended upon Capitol Hill arguing that the credit card interchange fee they pay Visa and MasterCard--somewhere between 1.5% and 2% of each transaction, depending on whom you ask--is unfair.

Congressmen usually averse to government intervention are open in this case to the idea of federal price controls because of the specifics of this market--stores feel they have to accept the major credit cards, and so they basically have to pay Visa and MasterCard whatever the companies ask for.

Should consumers care about this lobbying war between Saks Fifth Avenue and MasterCard? The Department of Justice and the Government Accountability Organization say yes, pointing to the example of Australia's price controls on interchange fees.

In a letter to Judiciary Committee ranking member Lamar Smith, Deputy Assistant Atty. Gen. Keith Nelson wrote, "Credit card networks forced by regulation to collect less from merchants may well respond by charging more to cardholders in card fees, or reducing card rewards programs and other features that are attractive to consumers."

The GAO report found that when Australia implemented fee caps retailers benefitted--lower interchange fees meant more profits--but consumers did not. Retail prices didn't fall, but credit card companies did increase their annual fees and curtail their reward programs.

Such are often the unintended consequences of price controls, which appeared to have gone the way of disco and polyester suits. Thanks to the retailers' lobby, however, this sort of government intervention is staying alive.

Examiner columnist Timothy P. Carney is senior reporter for the Evans-Novak Political Report. His Examiner column appears on Fridays.