Tag Archives: economics

The Durbin Amendment and Price Fixing

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Senator Dick Durbin (D, IL) added to Dodd-Frank an amendment that mandated the maximum price large banks could charge merchants who process debit-card payments.  The House’s Financial Services Committee, in marking up Chairman Jeb Hensarling’s Financial Choice Act, included repeal of the Durbin Amendment.

Naturally, Durbin has demurred, and he did so, among other place, in a Letter to the Editor of The Wall Street Journal.

It’s no secret that Wall Street hates the swipe-fee law that I authored in 2010. This law finally reined in the debit swipe-fee price-fixing that Visa and MasterCard were doing on behalf of banks. The old rigged system permitted Visa and MasterCard to fix the same fees for all card-issuing banks, and without competition the fees always went up. It was a market failure and merchants and their customers ended up paying for it.

And

The 2010 reform law said that if the nation’s top 1% of biggest banks are going to let Visa and MasterCard price-fix their swipe fees, then the fees must be reasonable and proportional to the cost of conducting the transaction.

Wow.  Price fixing is OK as long as it’s Big Government doing to fixing, says the Progressive-Democrat from Illinois.  No.  There exist, already, laws against such collusion; all that’s necessary, were the banks actually colluding as Durbin claims, is to enforce existing law.  There is neither need nor excuse to expand Government by writing a new law to fix a failure from enforcing existing law.

Market failure?  Again, no.  Not every burble, bubble, or dislocation represents a market failure; indeed, they’re the normal volatility of a thriving free market.  Or they would be with less government interference so we actually had a free market.  Far from a market failure, this failure is another failure of Big Government’s central planning for our market.  It’s time—long past time—to dump the Durbin amendment.

It’s time—long past time—for competition to reenter the credit and debit card free market niche and to let the free market “fix” the prices.  It’s time—long past time—for Big Government to leave the market.

Puerto Rico’s Bankruptcy

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Andrew Scurria and Heather Gillers have a piece in The Wall Street Journal that discusses various considerations now that the story of Puerto Rico’s bankruptcy is “just beginning for investors.”  One remark in particular caught my eye.

Complicating matters, Puerto Rico hasn’t yet decided which creditors have priority in a restructuring.

This lack of forethought, even of understanding, is illustrative of how Puerto Rico got into this mess in the first place.

The question shouldn’t center on creditors; the order of priority of debt type should be the primary criterion, with creditors within each type treated equally.  This prioritization should have been defined long ago, too.

Ideally, these failures will be redressed coming out of the present proceedings.

Long Maturity Debt Instruments

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Treasury Secretary Steven Mnuchin is kicking around the idea of instituting long-maturity debt instruments, specifically, 50-year and 100-year US bonds.

Treasury’s Borrowing Advisory Committee, though, demurs.  This committee, made of movers and shakers of financial institutions that are themselves movers and shakers in the bond market,

does not see evidence of strong or sustainable demand for maturities beyond 30 years.

They ask a not unreasonable question, too:

what types of investors would buy ultralong bonds….

On that, the US has tried long(er) maturity bonds before—50-year instruments to finance the Panama Canal and 40-year instruments in the Eisenhower and Kennedy administrations to, in Eisenhower’s words, stretch out the national debt, for instance.

Over the years, however, the Treasury concluded it could most efficiently finance large amounts of debt through regular auctions of 30-year bonds.

That’s not the only possible market for Treasury ultra-long bonds, though.  Just one venue might include investors, especially institutional investors, looking for ways to hedge really long-term risk.  Government ultra-longs might be one way.  The question, from Government’s perspective, thus is irrelevant.

Any lack of demand for such long maturities—in any venue—simply means that such debt instruments wouldn’t be bought.  That should be a market decision, made by American individual investors, not a centrally controlled market decision made by Government.

It’s also a cheap experiment to run: it would cost Government nothing to offer to borrow at such lengths when no one would lend at such lengths.

Little Compelling Evidence?

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Greg Ip, in his Monday Wall Street Journal piece on the matter of corporate tax cuts, says that

most of the US’ largest trading partners cut their corporate rates. But their experience offers a reality check. There is little compelling evidence any enjoyed substantially faster growth as a result, and certainly not on the scale of Mr Trump’s ambitions….

He offered some examples:

Britain reduced its corporate rate from 30% in 2007 to 19% now. A 2013 study by the British Treasury predicted the tax cuts since 2010 would eventually boost the level of gross domestic product by 0.6%. That is certainly worth having, but spread out over, say, six years, would boost the growth rate by a barely noticeable 0.1 percentage point.

British investment as a share of GDP is actually lower than before 2007….

But the EU, which included a full-throated Great Britain at the time, suffered even more deeply from the Panic of 2008 than the US, and its “recovery” has been even poorer than ours, albeit Great Britain was one of the nominal leaders of that sham recovery.  Not many of the EU member nations have recovered to their pre-Panic levels.

And

Canada cut its corporate rate from 28% in 2000 to 21% in 2004. While growth from 2000 to 2004 was about half a percentage point faster than the prior decade, it has since slowed.

A couple of other things contaminate Ip’s thesis that “[t]here is little compelling evidence” that corporate tax rates actually stimulate economic growth. In Great Britain’s and Canada’s cases in particular, and in the EU generally, the presence of VAT taxes (20% for Great Britain, 13% for Canada, similarly high rates for the continental nations of the EU) vastly dilute the impact of a mere corporate income tax cut.

Also, the existence of régimes of heavy regulation in Great Britain, Canada, and in continental EU add costs that heavily dampen the favorable impact of corporate tax cuts.

The small bumps in economic growth that followed those corporate tax cuts came despite those road blocks.

“We pay a lot to feed the civil servants”

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That’s what Zhou Dewen, Zhejiang Private Investment Enterprise Association Director, a business lobbying group in the People’s Republic of China has said.  He, like business representatives anywhere—including here in the US—is right to be concerned.  That concern is compounded by President Donald Trump’s tax proposal.

Now, Chinese officials and executives worry that the tax proposal Mr Trump announced last week will set back China’s global competitiveness and spur companies to invest in America instead of China.

Which is one of the points of Trump’s proposal that, among other things, seeks to drastically lower our usurious business tax rates.

Trump’s proposal also is a much more intelligent, much more moral, response to American companies moving overseas than the iron curtain that ex-President Barack Obama (D) and his Treasury Secretary Jack Lew (D) tried to erect with their punishing (in every sense) taxes that they tried to impose on companies in order to trap them here.  If we’ve got one of the lowest tax rates going, it no longer would make business sense to relocate out of the US.  And, such a decision would be that of the companies’ owners; it would not be driven by Government watchdogs.

Speaking of relocating businesses for tax-based reasons,

Chinese windshield maker Fuyao Glass opened a $600 million factory last October near Dayton, Ohio, and plans other facilities in Illinois and Michigan, creating 4,500 jobs. CEO Cao Dewang caused a stir in December when he told a reporter the decision was driven by tax differences: “Overall taxation for manufacturers in China is 35% higher than that in the US.”

The PRC government is getting involved, too.

In anticipation of the US tax move, the State Council, China’s cabinet, said earlier this month the government will reduce corporate taxes by over $55 billion to “improve business conditions.” The Communist Party’s newspaper, People’s Daily, warned on Friday that the new US plan could trigger a “tax war” if countries start competing to offer the lowest rates.

Such a race to the lowest tax rates would benefit the folks of all nations involved.  Pop Quiz: which type of economy will prosper the most from such a contest?

“We pay a lot to feed the civil servants.”  Don’t we all.