One of OCPA’s core principles is “Free Enterprise.” Free enterprise—also referred to as free markets—is a term that gets thrown around a lot, and I fear it is often misunderstood. For some, a transaction is “free market” if the government is not a party to the transaction. But free market means something much more than that—it is a marketplace where products, services, and prices are decided by individuals rather than government. Therefore, any transaction where an exchange is either prohibited or mandated by the government (or really any third-party intervenor) cannot be said to be a free-market transaction.

When the coercion to engage or refrain from a transaction deals with the terms of the transaction, that is said to be a price control. Price controls distort markets, lead to shortages (in the case of price ceilings) or surpluses (in the case of a price floor), and decrease consumer satisfaction as fewer individuals can exchange at mutually agreeable prices. 

Arguably, the most common price floor is the minimum wage. When the minimum wage is effective (meaning it’s above the going wage for a particular job), it creates a surplus of available labor as more and more people seek employment but fewer employers are willing to hire at the minimum wage. 

This legislative session, a price ceiling was introduced in the credit/debit card space. The bill in question would prohibit charging interchange and network fees—commonly referred to as swipe fees. These are fees charged by banks and networks (like Visa and Mastercard) on every transaction that utilizes a credit or debit card. These fees are used to fund security protocols that protect the transaction and consumer data, fraud protection, and inevitable defaults by borrowers that banks write off as bad debt. Not to mention the sweet perks and benefits that come with many credit cards.

In a totally free market, credit card transactions would not take place unless everyone benefits. As it stands, banking is one of the most regulated industries in the United States. Despite this significant market distortion, it’s true that all parties benefit from transactions that incur swipe fees. Consumers benefit from the convenience of cards and the perks those cards provide. Banks benefit from receiving a small cut of the overall transaction. And merchants benefit from increased sales, especially as card usage increases.

Last year, Illinois passed a law similar to that being contemplated here. It prohibits swipe fees on tips, and sales tax. This policy results in massive market-distorting spending on how merchants and banks comply. The most likely scenario is significant upgrades to point-of-sale systems which will result in rising costs to merchants—the very people this law is designed to help—with the biggest hit coming to small businesses. 

These interventionist policies don’t just affect individual businesses or industries. They have massive implications for state economic growth and development. A study by the Common Sense Institute estimated that a similar policy in Colorado would result in a decrease in GDP by almost one billion dollars in five years. Lawmakers must consider the unintended consequences of market distortions brought about by price controls.

Price controls in the financial sector are not limited to the states. In fact, the swipe fees mentioned above are already limited by federal law that was passed after the 2008 financial crisis. That regulation forced many banks to eliminate perks like free checking accounts and cash-back debit cards. More recently, there has been a bipartisan effort in Congress to cap interest rates on credit cards. David Bahnsen—who is the keynote speaker at OCPA’s Citizenship Award Dinner next month—recently broke down why this well-intentioned policy is just another example of price fixing that conservatives (and frankly, everyone) should oppose.

When individuals are left to decide for themselves which transactions to enter into and to define the terms of those transactions, more individual wants are satisfied. Government cannot make these decisions for us because it lacks the value scales of each individual. Furthermore, government tends, as the policies above describe, to ignore the unintended consequences that follow government intervention. The free market works. Let it.