Who Gets the Credit?

Sen. Jake Garn, the new chairman of the Senate Banking Committee, recently confronted the siren call of political hypocrisy on a piece of legislation. He succumbed to the temptation.

Throughout his six years in the Senate, the Utah Republican has always railed against regulation of business. But when a federal law prohibiting retail merchants from imposing a surcharge on credit-card purchases was about to expire recently, what did Jake Garn, the arch-foe of regulation, do? He lobbied with all his might and got the Senate to extend the prohibition. Which is exactly what the major credit card companies like Ameri­can Express, Visa, Master Card and others wanted him to do.

These companies do not want consum­ers to use cash more often than credit cards. So they demanded a law protecting them from that competition.

A little history will explain this illustra­tion of businesses demanding government regulation to avoid the rigors of the marketplace. About 11 years ago, major credit card companies forced participating merchants to agree in writing not to sell goods or services to cash-paying custom­ers at a lower price than to credit card users. Some merchants, it seems, were getting the idea that since they had to give up about five percent of credit-card pur­chases to the credit company, a cash dis­count to their customers would make more money for them and their custom­ers.

After a successful lawsuit against this anticompetitive requirement, Congress outlawed it entirely in 1974. However, in 1976 Congress moved to prohibit credit-card surcharges. This law, in effect, com­pelled merchants to advertise and tag their products at the credit-card price. A mer­chant who attracts cash customers based on the posted credit-card price is unlikely to offer a cash discount. A two-tier pricing system is unlikely to emerge so long as surcharges are prohibited.

If surcharges were permitted, mer­chants would be able to advertise the lower cash prices, which would provide a strong incentive to switch to a two-tier system. In fact, when the Federal Trade Commission, in enforcing the credit-card companies’ law, found merchants impos­ing surcharges and told them it was unlawful, the merchants responded by abandoning the surcharge without institu­ting cash discounts.

The ban on surcharges, which would reflect the full cost of the merchant fee to the credit card companies, has another effect. Since consumers are unaware of the size of merchant fees imposed by various credit card companies, they have no incentive to use credit cards with smaller fees.

When Jake Garn pushed for a three-year extension of the surcharge prohibi­tion, consumer organizations, retail mer­chants and federal banking agencies fought him. So did Sens. William Prox­mire and John Glenn. But they secured only 41 votes for their side, while the victors, including many alleged free-en­terprisers, voted for the prohibition against workable marketplace competi­tion. The credit card giants had won again.

Garn tried to justify the surcharge ban as a consumer protection measure, even though all consumer groups testifying before his committee had opposed the bill. What an inverted twist for a senator whose anti-consumer voting record in vote after vote (with the notable exception of a pro-air bag vote) is one of the very worst in the entire Congress.

Not long ago, a member of Congress said, “I have had a belly full of the answer being: ‘Let’s push through an­other law in the name of consumerism,’ and the consumer is getting ripped off by it.” He added, “Businessmen come in and they yell and scream for the free enterprise system and yet they want it at the same time they’ve got their hand
out….”

That legislator was Sen. Jake Garn. He pushed through a law in the name of consumerism that cheats consumers and he has given those hypocritical businessmen the handout they came to his office to get.