Posts Tagged government regulation

Why Debit Card Fees Aren’t Going Away

And, a Deep Difference Between the Camps

A few days ago, Bank of America announced that it was canceling its planned $5-a-month debit card fees. Sen. Durbin (D-IL) immediately rejoiced on the Senate floor, taking partial credit for the change that he claimed was due to “a combination of reasonable regulation and consumers voting with their feet.” [1] Politico calls it “a win for President Barack Obama and Occupy Wall Street.” [2]

All of which is shortsighted. We’re still going to get charged those fees.

I pointed out in a previous post (see: Why Government Decisions Matter) that Sen. Durbin’s public attacks on BofA and their proposed fee were ironic, considering that the fee was a direct result of legislation he successfully attached to Dodd-Frank that capped debit card swipe fees charged to retailers. First off, expecting any other response on the part of the banks was ridiculous on its face, and demonstrates that he either has zero understanding of basic math, or the whole thing was a political song and dance meant to further endear the Democrats to those of an anti-Wall Street bent. Since Sen. Durbin does not come across as stupid, I will assume the latter.

For the record, it really is simple, basic math. If you write a law forcing a business to cut price X, they will respond by raising price Y. It’s that simple. Businesses aren’t going to provide services for free. If you regulate the price of a Big Mac to $1 (to help the poor!), McDonald’s will charge 6 bucks for a Coke. If you command that everything on the menu must be $1, then they will charge customers a $5 fee just to get in the door. See the result here–your actual price to get a combo meal goes up, and people that just wanted a Coke to begin with really get screwed. Or customers simply decide it’s no longer worth it to patronize these stores, and McDonald’s lays off employees due to loss of sales. It doesn’t matter that you intended to help the poor. This is the real-world effect of this type of government control over the economy.

Meanwhile, all of our taxes pay for the army of government bureaucrats working to enforce the harmful regulation, it’s harder and more expensive to start a business, and personal freedom is further eroded. (And Democrats continue getting votes because they say, “We cut prices on your Big Mac,” and the people cheer, and think no more of it.)

But I was talking about the debit card fees. They are not going away. The banks are going to get paid for that service. Dodd-Frank made them stop charging the way they were originally–so they attempted to put the fee up front. Everyone freaked out, so they took it back. This just means they’re going to put the fee somewhere else. Like a cover charge for McDonald’s, we will see interest rate changes, a reduction in some previously free service (like free checking accounts), etc. We’ll still pay the debit card fees. They’ll just be better hidden.

In a further irony, Sen. Durbin is now crusading against hidden and complicated bank fees–he wants them all simple and up front. Yet his policies help create the very situation he’s complaining about.

This is useful in that it illustrates a basic, fundamental difference between conservatives and liberals today. When presented with a problem, liberals often see a need for the government to step in and solve it. Conservatives, on the other hand, often want the government out of the way–because we understand that government solutions always have these unintended consequences.

In 1993, President Clinton attempted to deal with “unfair” CEO pay by capping the salary a company could write off on corporate taxes at $1 million. The next year, the ratio of CEO-to-worker pay, relatively stable for decades, began a ten-year spike that peaked at around 300:1. [3] Businessweek wrote that, “As a practical matter, the law… quickly established $1 million as the minimum base pay any self-respecting CEO expected from a major corporation.” [4] Companies began avoiding the new tax by paying CEOs in stock rather than straight salary–which led to more unintended consequences on the side, namely, the CEOs found themselves with powerful personal incentives to boost short-term stock gains at the risk of long-term health. (Not to mention that they also found themselves now paying a lower tax rate on their dividends than their secretaries paid on their salaries.)

Liberals, however, don’t see the changes in CEO pay or new bank fees as consequences of government interference. The government regulations are well-intended, so you’d have to have bad intentions to be against them, they say.

Conservatives look deeper. Intentions are important, but consequences are ultimately what really matter. Regardless of intent, if these regulations make things worse, they should go. If government interference in the market hurts us, we’re right to want less government interference in the market.

This means Dodd-Frank has to go. This means Sen. Durbin’s and President Obama’s economic solutions will not work. And this means we all need to support conservative candidates in the next few months so that these changes can take place.






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Should We Raise Taxes?

The Historical Record

During a recent debate with some friends, I was presented with a very intelligent challenge:

How do you explain the 1990s — as a fluke due to the internet boom? Weren’t there more regulations and higher taxes on the wealthy and corporations then? Can you really just say “but that was a different time!”
I don’t understand the logic behind saying that IF we raise taxes back to that level everyone will suffer. Data that shows this has historically been true may exist, but I’m just not aware of it. Please let me know if there is anything except what you consider common sense telling you that’s the case.

This led me on a fascinating flurry of research about the modern history of taxes in the U.S. But before we dive in to that, there’s a direct response on the issue of regulations.


The question refers to both taxes and regulations in the 90s. There’s no question that both will have an impact on the business environment (see also: Why Government Decisions Matter).

While it’s true that tax rates were higher then, that’s not quite the case for regulations. As I pointed out to my friend, the principal achievements of this administration have been huge regulatory increases–the Affordable Care Act, Dodd-Frank, the CARD act. The EPA this year has had to roll back its own implementation of new CO2 emissions rules because, by their own estimation, they would have to hire 230,000 workers to enforce them. Rather than admitting the new regulations are absurd, they simply decided to wait until 2016 to do it. [1] The FDA recently announced that it is reinterpreting a 1994 law in such a way that will add millions to the cost of doing business for an entire industry–possibly putting smaller companies out of the market. [2] [3]

This is a drastic change in direction compared to, really, any administration in the past 30 years. Even Clinton was caught up in a decades-long deregulatory wave (see Gramm-Leach-Bliley). [4] So yes, it’s clear in hindsight that the successes of the 90s were partially due to the tech bubble, but also due to the general reduction in government interference in the economy that started under Reagan and continued until the last couple of years, where we’ve experienced a major about-face.


This brings us to the other half of the challenge, the question of taxes. If taxes were higher in the 90s and things were okay, what’s the harm in raising them back to those levels now? Why won’t we still be okay?

Plot of top bracket from U.S. Federal Marginal Income Tax Rates for 1913 to 2009

Here’s what I found. Income taxes have only gone up a handful of times in the past century, and for various reasons. There’s a spike for WWI, one at the outset of the Great Depression, another halfway through the Great Depression, then two more in generally healthy times–the 1945/51 range and the 1991/93 range. [5]

At least on the surface, small tax increases during healthy economic times don’t seem to hurt the overall economy too much (the late 40s and the early 90s). And a temporary tax hike to pay for WWI apparently did no lasting damage.  Let’s look closer at some of those big swings.

Everybody is familiar with the Great Depression. Less familiar is the post-WWI recession of 1920-1921. Despite its lack of popular recognition today, the recession that began in 1920 was rough. Various estimates of unemployment agree that there was a rise from 3% or less to as high as 8.7-11.7% at the peak. Industrial production fell 30%. Stock prices as measured by the Dow Jones Industrial Average fell 47%. [6]

The government’s response was summed up in an article by Thomas E. Woods, Jr:

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923. [7]

Did we all catch that? This downturn was as severe as what we saw in 2007, as severe as the beginning of the Great Depression. Yet in less than two years, production had returned and unemployment was below 3%.

There was another market correction at the end of that decade. Industrial production fell. In 1930, unemployment was approaching 9% again, and this time, the government intervened. Immediately, major new tariffs were instituted to protect American jobs (sound familiar?). In 1932, taxes went up on everyone, falling largely on the top earners–top marginal rate went from 25% to 63%, the estate tax was doubled, and corporate taxes went up slightly (sound familiar?). Through the rest of the decade, taxes were raised again every year or two. The appalling lack of recovery after 6 years led to another large tax increase on the wealthy in 1935–raising the top rate from 63% to 79%. The stagnant economy responded by dipping back into recession though 1937 and 1938. [8] [9] [10]

Throughout the decade, unemployment stayed close to 15%–peaking much higher, around 25% in 1933. Despite massive government intervention and hiring, this depression simply would not end the way others did before and since.

Let me try to bring this all together. We have the following situations:

  • Raising taxes and more government involvement during good times: little immediate economic damage (late 40s, early 90s).
  • Cutting taxes and less government involvement during recession: quickly ending recessions (1920, see also early 80s and 2000-2001).
  • Raising taxes and more government involvement during recession: longer, deeper recessions (30’s).

Today, we have a choice. We see the effects already of 3-4 years of intervention since the first problems started in 2007. The lack of recovery is turning into a full-on double-dip recession right now. The President is currently asking for higher taxes and more intervention–the same policies that turned a situation like this one into the Great Depression.

I’ve presented the historical record on two general directions the government has tried. Our choice is, do we want to take a whole decade to get back to prosperity, like in 1930? Or do we want to take only a year to get back to prosperity, like in 1920?

[1]  Media Matters’ take on this is, “No, the EPA is not hiring 230,000 workers.” However, even in their own story, they can’t present any evidence that goes any farther than saying, “The EPA’s new rule would require 230,000 workers to enforce, but now they say they’re waiting until 2016 to do it.”



[4] For the record, I’m not intending in this article to argue the relative merits of GLB or Glass-Steagall. I’m not comfortable with anything being truly too big to fail, but there’s interesting arguments on both sides of that issue. This is just to point out that Clinton’s record during the 90s is not exactly an island of Big Government surrounded by Bushes–he was deregulating too.

[5] I’m using the top marginal income tax rate for simplicity, but corporate and capital gains taxes generally followed the same curve: The capital gains tax conspicuously breaks ranks throughout the 70s, and is raised in the late 80s as well, though offset that time by dramatic income tax cuts.






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Why Government Decisions Matter

There’s an annoyingly common belief that taxes and regulations have no effect on what a business can and cannot do. The standard argument for increased taxes and heavy regulations on businesses is based on a premise that raising said taxes or changing regulations won’t change the business. For example, Sen. Dick Durbin (D-IL) was behind recent legislation that capped the amount that banks can charge retailers for processing debit card transactions–then, nonsensically, he flipped out on the Senate floor when banks started charging consumers for the transactions instead, as if banks ought to be able to provide their services for free.[1] One wonders where Sen. Durbin thinks Bank of America gets the money to pay their 288,000 employees (not to mention the irresponsibility of a Senator publicly calling for a run on the nation’s second-largest bank).

In some people’s heads, it seems like every business, every business owner, every CEO has millions of dollars of pure profit coming in daily, and that it can’t cost much to run a business, so this is all just going into that CEO’s bank account. So many people, when they think about business owners, picture Scrooge McDuck swimming in a pile of gold coins.[2]

The thing is, this belief comes from these media and cartoon sources, and not from reality. Businesses and CEOs live in the margin. Let’s look at numbers rather than cartoons. If a corporation takes in $50 million in a given year, and pays its workforce of a few hundred people a healthy $30 million (including payroll taxes), and spends $20 million on materials, manufacturing, and distribution of its product… this $50 million dollar company makes zero profit that year.

If that’s our starting point, then check out the effects of a new regulation on this big, evil corporation that provides millions of dollars in payroll to hundreds of workers. If the government creates a new regulation that costs this company $500K a year to comply with, the company will have to find $500K worth of expenses to cut, or raise their prices to compensate. There was no profit margin to work with.

Pay no attention to the fact that it’s a $50 million dollar company. It doesn’t matter. Here’s the real effects. This means:

  1. a few people laid off, or
  2. everyone in the company losing some benefit, or
  3. trimming overhead (i.e. salaried employees now have to work unpaid overtime, etc), or
  4. raising prices (which means inflation, which means everyone in the world is poorer).

None of these options is going to lead to increased hiring or productivity.

Or, say the company was profitable. Say they were $1 million in the black. Now, the new regulation means their planned million-dollar construction project will have to wait, or they will have to cancel plans to expand your department and hire 10 more people, or whatever they were going to do.

Now imagine that we’re not talking about one company, but about a regulation that affects every business in America–say, the Affordable Care Act. Conservatives think it’s a bad idea not because we don’t want to take care of sick people, but because we understand its effect on the rest of the economy. This new regulation and others are partly responsible for our current high unemployment and the oft-referred-to $2 trillion or so that businesses are afraid to spend at the moment.

It’s important to keep these things in mind when listening to people complain that nobody is hiring or building, and that the government ought to regulate more to make things work better. That’s like opening your fridge to cool off the kitchen. Sounds like a good idea, but it will actually make things hotter overall. [3]

But back to the hypothetical company. There’s another possible outcome. Maybe the new cost imposed means there’s simply less profit going to the shareholders. People say, so what? They’re just the rich fat cats not doing any work. Thing is, that’s not true. For one thing, shareholders often means you and me. Anyone with a 401K holds stock in dozens or hundreds or thousands of companies.

And even when we’re talking about the rich company owners, what’s happening is that they are getting properly rewarded for funding and creating productivity. That’s a good thing. Remember productivity? Productivity is critical. The more the economy produces, the more jobs are available, the cheaper goods become, the more able we all are–rich and poor–to get the things we want. You’re not going to move someone in poverty to the middle class by giving them welfare–but you might if you give them access to a job and allow them to acquire real wealth themselves. It’s productivity that does that for people. We’re going to help the poor more by growing the economy than by handing out checks.

If we want more productivity, the last thing we want to do is remove incentives to be productive. Our system ought to reward the things that move society forward. It’s good when there are incentives to innovate, to be more efficient, to lower prices and get your product to more people.

And we’re absolutely not going to create more productivity or make people wealthier by making business more expensive. Conservatives understand that it matters when the government steps in and creates new, expensive regulations and taxes. That’s never going to make business easier or get more people working. How much the government allows a company to keep obviously and directly affects that company’s ability to hire you and me. Government decisions change everything from how many employees a company can hire, to how much it costs to swipe your debit card when you buy a Big Mac. Government decisions matter.

[2] Vaguely annoyed that I drafted this Scrooge McDuck swimming in gold coins reference a couple of weeks before it was in the recent Family Guy gag.
[3] Then you’re just running a motor in the middle of the room and making it hotter. The fridge moves heat from the inside of the box to the radiator on the back–that’s all. It doesn’t move it outside, and it certainly doesn’t create cold by magic–just like the government can’t create wealth by magic. It can just move things around.

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