Thursday, November 19, 2009

More on Consumer Protection from Costco Connection

Every month Costco publishes a magazine called Costco Connection. Each issue contains a debate between to experts on some topic of general interest. Most are dull--should kids be spanked, do timesaving devices really save time, etc. Some topics are interesting, however. For example, I commented on an illuminating debate over farm subsidies (it was illuminating primarily because it made it crystal clear how disingenuous the agricultural lobby is).

This month the topic is "Should We Have a Consumer Financial Protection Agency?" The supporter of such an agency makes a bizarre argument: Regulation failed to protect consumers from predatory lending, so we should use regulation to protect consumers from future predatory lending. Why does Ira Rheingold think that future regulatory agencies will be free from the political pressures that caused them to fail last time? He doesn't say. If consumers were genuinely defrauded by lenders, perhaps we should look at their civil law alternatives. Is there something wrong with tort or contract law that has prevented them from suing? Lawyers can take cases on contingency; it can't be a matter of consumer budget constraints. The guy on the other side of the debate, Chris Stinebert, doesn't really make any impressive counterarguments, but he does point out that better-educated and better-informed consumers might help. If there is a role for regulation here, I would say that it is at most that of mandating and standardizing information disclosure.

I'll give quick answers to some other Costco Connection questions. Last month the topic in Costco Connection was "Should We Rely More on Wind Energy?" The entire debate was silly; the answer is quite simple: We can't know until we get the prices right. That means taxing polluting forms of energy, and letting the various forms of alternative energy sink or swim. A policy that consists of picking winners according to political influence, and then subsidizing them, is sure to get the answer wrong.

The topic in August was "Should Mail Delivery Be Cut to Five Days a Week?" Let's end the postal monopoly on first-class letter mail and see what happens. If people had a choice of who they wanted to deliver their mail--much like their email--maybe they would choose a company that delivers five days a week. Maybe they would choose one that delivers six days a week. Maybe some people would choose one, and some would choose the other. Maybe the post office would go out of business. Let competition work and we'll see what happens.

In July it was "Should the U.S. Develop High-Speed Rail Lines?" We've massively subsidized the car with (mostly) zero-price roads. Should we subsidize high-speed trains, too? Why not just stop subsidizing the car instead, and see if trains can compete? We used to have a vigorous private passenger rail system in the U.S. prior to the highway system. Seizing private land for train tracks is one of the least-upsetting uses of eminent domain, since that's the sort of thing for which it was originally intended (not railroads specifically, but canals, roads, and transportation in general). I can imagine a future U.S. in which train travel makes sense, if we give it a chance. The key here is to let different forms of transportation compete on even footing, without encouraging or discouraging them, rather than subsidizing some or all of them.

Consumer Reports Lectures Me on Credit Card Regulation

I have a subscription to the Consumer Reports website because of the wealth of product information it contains. Occasionally, however, Consumer Reports takes positions on policies, and I nearly always disagree with them (another example: Consumers Union supports higher CAFE standards; I do not, as a higher gasoline tax would be far more effective). I received an email from Consumer Reports today regarding credit card legislation. I was encouraged to go here and support immediate regulation of credit card fees by Congress. I responded with the following.

Dear Consumer Reports,

I have a better idea. Rather than relying on government regulation to set prices, interest rates, and fees, let's lower barriers to entry into the credit card market to encourage competition. I trust a competitive market process to protect consumers much more than I trust a government to do so.

Consumer Reports's naive view of regulation and wrongheaded policy advocacy is almost annoying enough to make me want to cancel my subscription, but your valuable product information is sufficient to change my mind. If only I could get one without supporting the other.
Mike Hammock
Two things may deserve more explanation.
1) Why does competition protect consumers?
Because firms that are afraid of losing customers to competitors have an incentive to keep those customers happy. If that means keeping fees low, that's what they'll do. DVD players didn't go from $200 to $30 because Sony and Philips and Samsung like their customers; they got cheaper because these companies are trying to beat the hell out of each other in a competitive market. There are only five credit cards in common use: Mastercard, Visa, American Express, Discover, and Visa. Discover was the last new major card, and it was introduced back in 1985! Before the government starts trying to set prices and fees, it would make more sense to eliminate whatever barriers to entry exist in this market. I'm guessing they are primarily regulatory. There are probably some network effect problems (getting retailers to accept a new card may be difficult), but those shouldn't be insurmountable--especially if the new card charges lower fees to retailers than existing cards.
2) Why not just let government set all fees and prices?
Because it won't get them right. Prices can be too high, in the case of insufficient competition, but they can also be too low, resulting in shortages. In the credit card market, this would mean denial of credit to some consumers.

This has implications for other policy debates, too. If we want to make something cheaper--like, say, health care--we should look first to the way the market is structured, and look for a market mechanism that can push prices down.

Monday, November 02, 2009

Does This Seem Familiar to Anyone?

HT to Marginal Revolution for this:





Art Carden and I did basically this exact same thing at Rhodes College for the last three years, making the exact same point regarding lobbying. I'm sure Art's still doing it there now.