Thread: How Wal-Mart drives progressives crazy

How Wal-Mart drives progressives crazy

By Nick SchulzUpdated

One reason Wal-Mart is such a fun company to observe is it drives progressives nuts. They have a split personality before the Bentonville behemoth.

One day they hate the retailing giant for undercutting mom-and-pop shops, for contributing to sprawl and all manner of other alleged social ills.

The next minute they love Wal-Mart, even saying it's on the "side of the angels" for fighting banks over the issue of "interchange fees."

For those not familiar with this fight, interchange fees are the charges merchants must pay to banks when customers use payment cards to purchase goods. The fees currently amount to a little under 2% of the cost of the goods purchased.

As part of the recent orgy of financial reforms in Washington, retailers have successfully pushed Congress and the Fed to put price caps on these fees. Unless Congress acts to reverse itself or delay — and it still might — those caps will go into place this summer.

But just as progressives are often off base when attacking the retailer for opening stores in new markets, so too are they wrong to support the regulation of interchange fees.

To understand why, it's important to understand the reason progressives have gone ga-ga for Wal-Mart in the first place on this issue. It's not because of a newfound love for Wal-Mart's considerable virtues. Instead, they say, it's because they say want to help the little guy.

Standard business practice

As Dean Baker, a thoughtful liberal economist put it recently, "The biggest losers in the current system are cash-paying customers … When (retailers) raise their prices to cover the debit card fees, they also must raise prices to customers who pay in cash, who tend to be poorer. So we have a system in which low-income consumers pay higher prices to increase the profits of the big banks and give frequent-flier miles to higher-income consumers."

At first blush, that may seem unfair. But in reality, it's simply a cross-subsidy, and for a very good reason cross-subsidies are standard business practice everywhere in the economy.

As George Mason economist Todd Zywicki has pointed out, when I buy a grande coffee at Starbucks, I am subsidizing those customers who like cream and sugar in theirs. After all, I like mine black and don't need any additives, but we pay the same price. Of course, Starbucks could conceivably eliminate the cross-subsidy by charging a lower price to me for not using the half and half; but for efficiency purposes it doesn't make sense.

The payment card network is a platform technology that is highly complex and extraordinarily technologically sophisticated. It involves a boggling number of merchants and banks and parties in between. It is also extremely capital-intensive and costly to administer.

Do the banks and payment system operators make a profit on these fees? Sure, but every party involved is better off because of the existence and growing capacity of this system — banks, retailers, and customers all.

What of those cash-paying customers, you ask? Even they are better off under the current system. Here's why.

The existence of a payment card network system of this kind — one that is safe, secure, extensive and flexible — is easy to take for granted. But by making possible a massive enlargement of a global market of buyers and sellers, the payment card system is one of the platforms that has powered the revolution in global retailing. It couldn't have happened without it.

In this way, the payment card network benefits all consumers, including those who don't use it, by making available a much wider variety of goods at considerably lower prices for all, even when factoring in the interchange fees.

Danger of price controls

What's most troubling about the caps on interchange fees is they, along with price controls in ObamaCare, mark a return to price regulation, one of the most pernicious kinds of government control imaginable. One reason policymakers turned sharply away from price regulation in the late 1970s and early 1980s — a bipartisan achievement, it's worth noting — was after finding out the hard way that price regulations introduce all manner of unanticipated distortions into the market, often resulting, ironically enough, in higher prices for consumers.

The two most pro-consumer technological revolutions of the past generation have been the rise of big box stores such as Wal-Mart and the maturation of a global payment card system on which Wal-Mart depends. It's a pity that political progressives — claiming to speak for consumers — are on the wrong side of both these revolutions.

Nick Schulz is the DeWitt Wallace Fellow at the American Enterprise Institute and co-author of Invisible Wealth: The Hidden Story of How Markets Work, forthcoming from Encounter.

http://www.usatoday.com/news/opinion/fo ... razy_n.htm

Hey, I thought the progressives loved Wal-Mart-for hiring illegals and advancing forced bilingualism in the U.S.