To borrow from Henry Adams, politics, whatever its professions, is generally the systematic organization of the politically powerful to plunder the politically weak or disorganized.
The eponymous “Durbin Amendment” (named after U.S. Democratic Senator Dick Durbin) to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is emblematic.
The amendment contains a debit card network routing provision that profits merchants at the expense of community banks, credit unions, other financial institutions, and consumers. Before the amendment, card issuers could negotiate exclusive contracts with networks. They differentiated themselves with regard to security, reliability, and card acceptance rates. Consumers shopped among the various cards based on these features of their associated networks.
It speaks volumes that the Durbin Amendment was not fueled by consumer ire or complaints over the existing network arrangements. Consumer welfare is the touchstone fair and enlightened economics. The amendment was born of merchant avarice craving greater profits from debit card transactions. It requires participation of all debit cards in multiple unaffiliated networks; and, it transfers from consumers to merchants the choice of routing network. Merchants predictably select the lowest-cost option even if the choice shortchanges protections against fraud or otherwise foists costs on consumers or card issuers. The Durbin Amendment has thus diminished the incentive to upgrade the quality and security of debit card networks in favor of a bare bones option that many consumers would reject if given the choice.
The consumer unfriendly Durbin Amendment proves the long-headed wisdom of Adam Smith’s observations in Wealth of Nations:
“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
But politicians chronically do what Adam Smith derided as folly and presumptuous because political math is not economic math. Retail merchants outnumber card issuers. Additionally, the gain to each retailer from the Durbin Amendment is sufficient to justify an expensive congressional lobbying effort and campaign contributions. In contrast, the consumer injuries inflicted by the amendment are too fragmented and the individual injury too minor to justify a comparable investment to influence the legislative process. This recurring political dynamic explains the proliferation of consumer unfriendly statutes in the United States Code.
By any sensible economic yardstick, the Durbin Amendment should be repealed in toto. But it will not happen unless consumers and card issuers make their voices louder in the corridors of Congress.