Nonetheless, Senator Dick Durbin (D-IL) made it plain that he intends to extend pricing controls and routing rules to the credit card business. (For those who don't recall, Durbin was the architect of Section 1075 of the Dodd-Frank Act of 2010, popularly known as the Durbin Amendment, which imposed interchange ceilings and routing restrictions on debit card purchases.) At the time, Durbin also stated that 1 to 2 percent interchange fees for credit transactions were "understandable since there is risk involved."

The Durbin Amendment hasn't served consumers well, and Congress should have abolished it in 2017, but Durbin and his acolytes aren't ready to give up.

The Durbin gang wants the public to accept a whole different tale, regardless of how much proof there is that the credit card network sector is very competitive. Visa and MasterCard, for example, control the sector and utilize their clout to impose exorbitant fees. Of course, only Congress has the power to solve the situation. (This sector has a long history of lawsuits, with both sides winning and losing at various times, but retailers were unwilling to risk going to court as customers began to rely more heavily on debit cards.) As a result, the Durbin Amendment was enacted, along with a fresh campaign to enlarge it.)

All parties in this argument are looking out for their own interests, but there are reasons to doubt the Durbin gang's story.

First, when the credit card industry is considered independently from the combined credit and debit card market, Visa has around a 50% market share (by volume), while MasterCard and American Express AXP each have about 20%. Since at least 2016, this structure has been consistent, with Discover (the fourth largest card network) rising slowly but consistently.

When measured by the percentage of Americans who own a certain card, Visa has less than a 50% market share, MasterCard has less than 40%, Discover has 18%, and American Express has 15%. Although Visa is the larger corporation, the networks are undoubtedly in competition for volume. Discover increased its market share by 2 percentage points in 2021, while fintech startups continued to pose new competitive risks to the industry's established payment methods.

To put it another way, Visa and MasterCard do not, in any objective sense, control the credit card business.

Regardless, if Visa and MasterCard are indeed ripping off retailers, there's a clear solution: start a card network that undercuts their prices and steals all of their business.

In the United States, there are over 150,000 convenience shops, more than 20,000 independent supermarkets, and more than 1 million retail outlets. If the Durbin gang is correct, and it is so simple to manage a card network while charging drastically cheaper costs, these business owners are missing out on billions. So why not join a payments organization, much like banks did in the 1970s to build the Visa network, and compete directly with the current networks?

They'd almost certainly generate enough money to quit paying the National Association of Convenience Stores (NACS) to lobby for lower merchant fees.

Of course, they should consult with the Discover team beforehand.

When Sears introduced the Discover credit card in 1986 to compete with Visa and MasterCard, it featured no annual fee, cash back benefits, and no merchant fees. Discover was the only credit card accepted at Sam's Wholesale Club because of its no-fee feature.

Discover eventually acquired universal acceptance, but only after several blunders, millions of dollars in losses, and a shift in approach. Discover currently charges interchange fees ranging from 1.5 percent to 3 percent, which are similar to the rates charged by Visa and MasterCard.

The merchants should also contact American Express, which charges interchange fees ranging from 1.5 percent to 3 percent. They should, of course, speak with Venmo, the upstart payments startup that costs retailers 1.9 percent.

At the absolute least, they'll learn a lot about how to create and maintain a payments network in the United States.

It may appear that I am being unjust to retailers, or that I am ignorant about Visa and MasterCard. But I'm neither of these things. There's little doubt that both parties are looking out for their own interests, and there's nothing wrong with the NACS representing its clients.

Still, it's important to remember that the NACS is asking Congress to act as a market judge and jury rather than putting its ideas to the test. On the other hand, the card networks rely on the market to be their judge and jury.

They continually test their pricing in the market, balancing the interests of all parties to determine how much they can charge, even if it means losing business if they charge too much. That's about as objective as we can get as humans, and it's one of the main reasons why a free market is preferable to a tightly regulated economy with government-imposed price limits and mandates. It is true that not everyone will be pleased with the amount they pay the card networks, but that is beside the point.

For two reasons, I find it difficult to accept the NACS's viewpoint at face value. First, its general counsel, Doug Kantor, requested that Congress consider eliminating the networks' authority to compel shops to accept all of their cards. This request reveals the NACS's obvious self-interest: they are only interested in gaining influence, not in saving customers money.

If Congress takes away the networks' authority to require stores to accept all cards in their network, customers would suffer and retailers may be threatened. One of the key reasons that retail businesses accept Visa and MasterCard as payment is that any customer having a Visa or MasterCard credit card can use it to make a purchase. The NACS is requesting that Congress consider taking that benefit away from the networks and, as a result, consumers.

It is essentially a threat to make the Visa and MasterCard networks smaller and more localized, rather than larger and more nationalized. It would be fascinating to discover how many NACS members genuinely want that outcome, particularly those who sell petroleum near interstate roads.

My other problem with the NACS’s position is that Kantor’s written testimony twists the facts regarding a Kansas City Fed research paper. According to Kantor (see page 5):

News stories often make it sound like the Fed only "controls" our economy's "interest rates." This isn't true, because the Fed doesn't just do this. However, it does try to make or break credit conditions based on its macroeconomic goals. There are many things the Fed has to do for Congress, but one of them is to "promote" price stability.

This is because inflation has been going up and breaking long-term records for the past few months. This also made the Fed do something. There was a good chance that the Fed would soon raise its target interest rates because of the rising price of food and other goods. It's still interesting when people talk about the Fed's congressional mandate.

The mandate is called the "dual mandate" because it says the Fed must keep prices stable and make sure everyone has a job. There are more than two variables in this expression, but it doesn't mean that there are only two. In other words, the mandate isn't very clear, and it gives the Fed so much power that it's hard for Congress to hold the Fed accountable.

Over time, the Fed thinks that price stability is when the rate of inflation averages two percent, but it won't say how it comes up with that figure. Is it 2% over the last six months? The last twelve? Is it two percent over some time? "Yeah, if we say so." That's what the Fed says under its "flexible form of average inflation targeting."

The mandate gives the Fed even more leeway to interpret its job goals, but the fact that job goals are in the mandate is even more of a problem for them. "Most economists would agree with the chair of the Federal Reserve that the level of employment is largely determined by factors that are not controlled by the Fed." This isn't a crazy idea, and other central banks often talk about it.

Either way, many economists have called for some kind of policy rule to make sure the Fed does what it's supposed to do. Others, including the Fed, have said that these efforts are too restrictive and make it hard for the Fed to do what it needs to do. So the Fed has to be able to change its policies, they say.

It's true that there is a policy option that would keep us from having to deal with so many unknowns, but there is another option. It could also be done by making a policy rule to do it. Congress could change the mandate that the Fed has to keep the economy growing at a reasonable pace of total nominal spending. This mandate could be changed by Congress.

Many people will think of this mandate as one that tells the Fed to keep an eye on "real gross domestic product" (NGDP). NGDP targeting has a lot of good things. It avoids, for example, making the Fed predict how much GDP will grow. It also frees the Fed from having to figure out what full employment might be. Instead, the Fed needs to keep the monetary conditions that lead to full employment.

An NGDP-targeting rule would also allow the Fed to deal with inflation, but in a much better way than they would be able to now. As a result, the Fed could act when there is too much spending growth, but not when there is an increase in the amount of money in the economy.

This would come in handy right now.

A war or a government shutdown because of a pandemic can't be fixed with money. These shocks cut down on the amount of goods in the economy, which makes prices go up. As a result, people will not be able to get the goods and services they need, and they will have even less money to buy what is available.

Current inflation is caused by both supply shocks and rising demand. It's hard to figure out how much of the rise in prices is caused by each of these things (in real time, at least). If you want to avoid this problem, you can try to keep your total nominal spending in check.

In order to keep nominal spending at the level that the Fed wants, the Fed only needs to change its policy.

They say that NGDP targeting is like central planning for people who love the free market NGDP targeting, on the other hand, does not require the Fed to set a target for the real level of goods and services in the economy. This is what they don't understand, though. To put it another way, the goal isn't to make sure people make a lot of different kinds of things like computers and cars.

Instead, the goal is to focus on how much we value those things. Importantly, the goal is to keep that nominal value in mind while letting prices move up or down, even if that causes inflation to fall below zero. This way, monetary policy doesn't hurt the economy as much as possible. (Monetary policy would be a neutral thing.)

Another good thing about NGDP targeting is that it would let prices fall when productivity rises, so people would be able to get more out of a growing economy more quickly. A rising price level is not, in fact, necessary for an economy to grow.

A quick count shows that NGDP targeting doesn't have a lot of policy unknowns, which makes it easier to do effective monetary policy. NGDP targeting also prevents the government from reacting to both negative and positive supply shocks in the wrong way. And it doesn't ask the Fed to set goals for things that it can't control or measure, like maximum employment or potential GDP. It would make the central bank less active, so it would be able to do a lot less to mess with the economy through money.

Members of Congress should ask Fed chair Powell about the benefits of NGDP targeting. Debating whether the Fed should raise its target rate for the next two months or three would be of no use at all. Instead, let's talk about how much the Fed should raise its rate.

-----

Related Video: