When thinking of tech antitrust, the Biden administration’s quixotic campaign against the likes of Meta, Google, and Amazon probably comes to mind. But in addition to suits against big-name Internet platforms, the Justice Department filed an antitrust case this fall against a decidedly more retro network: Visa.

According to the September 24, 2024 complaint, Visa’s debit card network being “everywhere you want to be” is cause for concern because, the DOJ alleges, the company maintains its US market leadership (over 60 percent of debit payments) through anti-competitive contracts with banks, merchants, and fintech companies. In the words of the DOJ, Visa “uses its dominance to limit the growth of existing competitors and to deter others from developing new and innovative alternatives.”

Sorry, but paeans to the virtues of competition and innovation in payment technology are rich coming from the federal government. This same government has all-too-merrily erected and aggressively enforced its own barriers to payment alternatives. What’s more, the government’s own misguided interventions in the debit card market are arguably at the root of the alleged activity it now complains about.

The course of the DOJ’s case remains to be seen. But regardless of its outcome, the federal government’s approach to competition in payments requires significant course correction. If the government truly wants to unleash payment competition and fintech innovation in the United States, it should start by rolling back its campaign against both.

The Debit Card Market

The DOJ’s first broad claim is that Visa hampers competition from other debit card providers through exclusionary contracts with issuing banks (who issue debit cards on Visa’s network) and acquirers (who accept payments for merchants). Yet even if one took the DOJ’s allegations at face value, the federal government’s distortionary policy interventions likely would be an underlying cause.

Indeed, the DOJ argues that Visa’s alleged contracting practices are a response to a portion of Dodd-Frank known as the Durbin Amendment. The Durbin Amendment, along with its implementing regulation from the Federal Reserve (Regulation II), is perhaps best known for capping the processing fees (interchange fees) that debit card-issuing banks can charge to merchants/​acquirers accepting debit payments. In addition to fee caps, the Durbin Amendment also requires debit cards to support payments routed over at least two different networks. (The Credit Card Competition Act—a new bill by Senator Durbin (D‑IL)—would apply similar requirements to the credit card industry.)

To understand the Durbin Amendment’s routing requirement, it helps to look at a physical debit card. In addition to your bank’s (or credit union’s) logo, the front of your debit card will likely have the logo of the payment card network (e.g., Visa or Mastercard) that your bank contracts with to exchange transaction information with your merchant’s bank. Following the Durbin Amendment, your debit card also would be required to support payments over an additional network that’s unaffiliated with the primary “front-of-card” provider. If you flip over your debit card, you may see the logo of one of these additional networks (e.g., STAR, Pulse, NYCE, etc.).

According to the DOJ, Visa consigns these “back-of-card” networks to a less-than-second-class status by writing contracts with issuers and acquirers that restrict and disincentivize routing more than a de minimis portion of transactions through the alternatives.

At first glance, the Durbin Amendment’s back-of-card network requirement may appear to be a pro-competitive policy. But good intentions notwithstanding, the policy does little to improve (and likely harms) consumer welfare due to its fundamental misunderstanding of the nature of the payment card market.

A payment card network is what’s known as a two-sided market. This means that for a network to be useful, it must have a critical mass of two types of users: consumers and merchants. Without enough of either, the network is far less valuable to the other: think Uber with either too few drivers or riders. As the Supreme Court put it—when finding in favor of American Express in a 2018 antitrust case—a payment card is “more valuable to cardholders when more merchants accept it, and is more valuable to merchants when more cardholders use it.”

Achieving that critical mass of consumers and merchants is no small feat. It involves investing in secure and effective technology, as well as marketing to reach users on both sides of the market. The problem with the Durbin Amendment’s mandate is that it allows the back-of-card network to freeride on the investments and brand equity of the front-of-card network.

For example, a front-of-card network may earn its place on the card in a consumer’s wallet through various features (like robust security) that won the trust of the consumer’s bank, which, in turn, won the trust of the consumer. That network will seek to recoup the cost of those features with a commensurate merchant/​acquirer fee model. Under the Durbin Amendment’s vision, however, a back-of-card network could get the benefit of being in the consumer’s wallet—the chance to win a merchant’s routing business—without necessarily offering the same features as the front-of-card network. Indeed, if the back-of-card network wants that routing business, there’s a good chance it may try to undercut the front-of-card network with a different strategy, such as fewer features but lower merchant/​acquirer fees. 

There’d be nothing wrong about that tradeoff if that’s what the consumer and her bank had freely chosen. But the Durbin Amendment ignores the full weight of their actual choice by mandating that a second-choice network (at best) gets to ride alongside the consumer’s first-choice network in her wallet. Carrying second-place competitors to unearned first-place finishes by fiat is an inferior substitute for real competition.

What’s more, the Durbin Amendment appears to be an overall policy failure, resulting in additional bank fees for consumers. As Ronald Bird writes in Regulation:

The preponderance of the post-regulation literature suggests that the 2011 regulation did not achieve its goals of lowering merchant fees and increasing debit card usage. Instead, the regulation increased checking account fees, increased minimum deposit requirements for free checking, increased ATM fees, reduced or even eliminated consumer rewards programs, and reduced the overall level and growth trend of debit card use.

While much of this counterproductive result is attributable to the Durbin Amendment’s interchange fee caps, as Julian Morris and Todd Zywicki point out, similar effects also stem from back-of-card network mandates. Examining data from credit unions and community banks that were subject to back-of-card mandates but not fee caps, Morris and Zywicki conclude that “the Durbin Amendment’s routing requirements have reduced interchange-fee income and raised costs for exempt banks and credit unions, which have responded by increasing fees and reducing benefits (such as debit-card rewards).”

There’s a reasonable argument, therefore, that a payment card network finding a workaround to the poor policy prescriptions and distortionary interventions of the Durbin Amendment would be, on net, consumer welfare enhancing.

Fintech Competition

The DOJ’s second broad claim against Visa is that it suppresses competition from fintech alternatives (like Apple Pay, Cash App, and PayPal) by conditioning those apps’ compatibility with Visa cards on the providers limiting their use and development of non-Visa payment rails.

Ironically, in this domain, the government’s argument recognizes the value of networks and nature of two-sided markets. Specifically, the DOJ contemplates how fintech providers could leverage their established relationships with consumers and merchants to attempt to scale their own interbank payment arrangement that disintermediates Visa.

This wouldn’t be the first time the government has been able to grok payment market fundamentals when convenient to its own arguments. For example, in 1998, the Federal Reserve published a report concluding that the Fed should remain a provider of check processing and automated clearinghouse (ACH) services. At the time, the Fed itself, which competed with private ACH providers, handled 80 percent of commercial interbank ACH transactions. In the Fed’s view, however, its dominant market position was not a cause for concern because “with or without the Federal Reserve, the [ACH] industry is likely to be dominated by one or two large players, much like the market for credit card processing” (emphasis added).

The Fed had a point that ACH and payment card markets, with relatively high fixed costs and low marginal costs, will tend to have fewer, larger providers—but query why 80 percent market share should be no cause for concern when the Fed has it, but 60+ percent is alarming in the case of Visa?

Moreover, the government putting on its concerned face when it comes to alleged impediments to fintech alternatives takes a lot of chutzpah. The government itself is the undisputed titleholder in impeding fintech alternatives. In just the past few years, the federal government has sought to impose new compliance burdens on fintech providers without a risk-based justification, ramped up enforcement actions targeting fintech-bank relationships, denied state-chartered depository institutions lawful access to Federal Reserve master accounts, waged a relentless campaign of regulation by enforcement against crypto projects, and driven banks serving crypto clients into corners and out of business—to name just a few of its barriers to payment innovation.

One of the richest government hypocrisies can be seen in light of the DOJ’s concern that we’re missing out on fintech alternatives from big tech companies like Apple. Because when Facebook, now Meta, sought to participate in the development of a payment stablecoin (Libra, later Diem) accessible via a digital wallet linked to Facebook’s and WhatsApp’s user networks (among other wallets), the government lost its mind. Against that backdrop, the Biden Administration put forward a proposal to restrict stablecoin issuance to insured depository institutions (i.e., banks) and, thus, take it out of the hands of non-bank tech platforms.

If our government wants to identify obstacles to new payment tools, it should first look in the mirror.

Conclusion

The federal government is a massive bureaucracy with many, many departments—each with a different mandate and agenda. Yet the federal government’s overall resistance to payment alternatives has been such that when any federal agency claims to be defending fintech innovation, the appropriate rejoinder is “Yeah, if only.” Hauling leading private payment providers like Visa into court may garner headlines. But if the government is serious about payment alternatives it should first get to work removing all of the stumbling blocks—from regulation by enforcement to discretionary pressure campaigns—that Washington places in their way.

For most goods and services, governments leave the production, distribution, sale, and consumption decisions to private individuals or groups.

For gambling, however, US states are schizophrenic. Historically, state governments banned gambling of all kinds. In 1931, however, Nevada re-legalized casinos, leading to the return of parimutuel horse betting and casinos in some states. In 1964, New Hampshire authorized the first state-run lottery, and 44 more states eventually followed suit. Following the 2018 Supreme Court ruling in Murphy v. NCAA, 38 states legalized sports betting.

Thus many kinds of gambling are now legal (casinos, sports betting, horse races, and more), yet private lotteries are not legal in the United States. Some states have transferred day-to-day operations to private companies. But these lotteries are still under government control, and private companies cannot enter the market. The government profits off this monopoly, raising $24.4 billion of revenue from the 49 percent of Americans who participate.

The inconsistent treatment makes no sense; the right policy is for governments to impose no limits on the private provision of gambling activities, while itself exiting the gambling business.

The argument for legalization is standard: prohibition drives markets underground, leading to violence and other adverse effects. For example, when gambling was illegal in New York in the 1920s, the practice remained widespread in underground markets.

The argument against government provision of lotteries is also standard: government provision addresses no plausible externality or market failure; if anything, it encourages participation in an activity that some regard as immoral or addictive. Libertarians discount this last risk, but they still argue against government provision.

The argument that lotteries raise revenue is misguided. Operating lotteries seems like a “free” way to raise revenue because participants choose to buy lottery tickets. But governments can tax private gambling in the same way as any other activity.

This article appeared on Substack on November 22, 2024. Amelia Heller, a student at Harvard College, co-wrote this post.

President-elect Donald Trump has signaled an appetite for change with his new Department of Government Efficiency and various cabinet picks. While many federal programs and regulations need an overhaul, childcare policy is an overlooked area that is ripe for a new approach.

For parents of young children who utilize formal childcare, childcare is one of the most significant child-rearing costs. At the high end, annual infant care costs are quoted at an eye-popping $24,243 in Washington, DC, and $20,913 in Massachusetts. Historically, federal policymakers have tried to solve childcare affordability issues by doubling down and expanding childcare subsidies. Recently they have dug their heels in on this approach.

This fall, Representative Ro Khanna (D‑CA) proposed a bill capping childcare costs at $10 per day for all families earning less than $250,000 annually. Over the summer, Senators Tim Kaine (D‑VA) and Katie Britt (R‑AL) proposed expanding various existing childcare subsidies, including the Child and Dependent Care Tax Credit (CDCTC).

Meanwhile, the Biden administration unsuccessfully proposed fully subsidizing some families’ childcare and capping other families’ childcare costs at 7 percent of income. Biden’s plan would have the government subsidizing childcare demand and supply (although the American Families Plan failed, some of the childcare ideas were rolled into a subsequent Biden executive order).

Proposals like these are enormously costly, raise the market price of care, and favor working families that use childcare over working families that don’t, like families with stay-at-home parents. Government policy should be neutral regarding family work-life decisions rather than favoring the dual-earner model.

The new administration would be smart to take a different approach and refocus on the root cause of high costs and waiting lists. A significant portion of access and affordability issues in the childcare sector are driven by restrictive local regulations, sometimes encouraged by federal policy. A variety of regulations are undoubtedly to blame, but research indicates that educational requirements for staff and staff-to-child ratios are especially important.

A simple comparison of state regulation and cost data supports this idea. For instance, as educational requirements increase for daycare center directors, the average cost of care nearly doubles. The average cost of infant care is $10,018 in states with no or minimal educational requirements, while the average cost is $19,354 for states that require a bachelor’s degree for daycare center directors.

The cost of childcare is also higher in states with restrictive educational requirements for daycare center teachers. The average cost of infant care in states without educational requirements is $9,586, and the average cost grows to $18,285 in states that require an associate’s degree for center teachers.

Just as greater educational requirements for would-be carers limit the supply of childcare staff, restrictive child-to-staff ratios and maximum group sizes limit the supply of “seats” at childcare centers. Data also support a link between these regulations and costs: the average cost of care nearly doubles as the child-to-staff requirement moves from 5 children per staffer to 3 children per staffer.

Regulators claim that these and other childcare regulations increase the quality of care. For instance, when Washington, DC, recently implemented a rule requiring that childcare providers have a college degree, supporters and officials argued that it would benefit DC’s disadvantaged children and that educational requirements would increase staff pay.

But increasing requirements so that some staffers lose their jobs is an ill-considered strategy for “raising” staff pay. More importantly, research indicates that regulating daycare reduces options for low-income families, who respond by sending their children to lower-quality home-based care. 

Rather than doubling down on failed policy, the incoming administration should focus on rolling back costly regulations that limit supply and access. It can revoke Biden’s childcare EO and use its influence to refocus the conversation on local government policy. 

For its part, Congress should eliminate federal laws that worsen credentialism in the childcare sector. It can start by removing the requirement that Early Head Start staff have a CDA and be trained in child development and that half of Head Start teachers have at least an associate’s degree in early childhood education or a related area. Local policymakers have admitted that federal policies like this have encouraged them to implement more restrictive childcare regulations locally. 

These reforms would constitute a radical change in the direction of childcare policy, and paired with serious efforts to reform local regulation, they would make a difference. 

Full Republican control of Washington creates an opportunity to repeal many of the previous administration’s most costly laws and regulations. The misleadingly named Inflation Reduction Act (IRA) should be at the top of the list, not only because it is a disastrous environmental policy but also because it will be a necessary offset for a fiscally responsible extension of the expiring 2017 tax cuts.

The energy and climate provisions of the IRA are already burning through taxpayer dollars at rates much higher than initially projected. These subsidies will likely cost over $1 trillion by 2032 and as much as $4 trillion by 2050, and some of the most lucrative tax credits have no expiration date.

If Republicans are serious about ending federal intervention in energy markets, repealing the entire IRA energy subsidy framework—including for existing projects—is the only way forward. Full, retroactive repeal will make it harder for future federal subsidy schemes to take root. On the other hand, partial repeal will leave the IRA framework in place for a future Congress to pick up where the Biden administration left off.

The 119th Congress has a fleeting opportunity to dismantle the IRA’s energy infrastructure and level the playing field so that consumers, not bureaucrats, can drive future energy innovation. Anything short of full IRA repeal should be seen as a failure. Like extricating a cancer, leaving portions of the law behind will only temporarily halt its infectious growth.

Full IRA Repeal Will be Painful for Rent-Seekers—Good

Reformers will face significant opposition to a full IRA repeal, from industry groups and environmentalists and within their own ranks. Earlier this year, 18 House Republicans wrote to support the IRA tax credits, arguing they are critical to “ensuring certainty for industry and the energy sector.” Industry lobbyists have repeated the talking point that much of the IRA-related spending is occurring in many conservative districts of IRA critics.

This is by design. The flood of taxpayer money into new projects across the country obscures the real costs of tying American jobs to federal subsidies while ignoring the hidden burdens placed on businesses and taxpayers.

But repeal should be a bipartisan priority because IRA-induced investment and new jobs are a mirage. Since the original flurry of announced new manufacturing projects in the year after Joe Biden’s industrial and climate policies were passed, the Financial Times reports that over 40 percent of them have been delayed, paused, or canceled. And the jobs that have been created cost taxpayers an estimated $2 million to $7 million each.

If the subsidies aren’t ending up in workers’ pockets, where are they going? Corporate owners and executives—not taxpayers or workers—are the primary beneficiaries of federal favoritism. Politically connected corporations like NextEra Energy and First Solar, Inc. have received billions at taxpayers’ expense. Additionally, more than $1 billion of Biden’s IRA subsidies are also going to Trina Solar, China’s largest solar manufacturer.

Rent-seekers will fight hard against the full repeal of the IRA. But why would the 119th Congress want to ensure certainty and stability for the failed investments flowing to foreign companies at American taxpayer expense? Lasting reform requires the opposite. It requires a decisive shift away from politically directed energy investments. 

Subsidies don’t just incinerate taxpayer dollars; they incentivize private investment to shift toward politically popular energy sectors and away from cost-effective and reliable ways to supply energy to American consumers. Attempts to centrally plan markets through subsidies or other industrial policies will stifle true innovation and limit prosperity because many productive entrepreneurs will become subsidy harvesters.

Repealing all IRA energy subsidies—including for existing projects—may be painful for well-connected firms that have decided to build their businesses on the backs of American taxpayers. This is not an argument for palliative “certainty” for existing subsidized industries. Subsidy-dependent industries should get the clear message that the taxpayer-funded gravy train is over. Ripping out subsidies root and branch will clearly signal that, in America, markets will drive the energy sector forward.

The short-term project disruptions will be far less damaging than continued and never-ending market interventionism through government subsidies and favoritism. If this malignancy isn’t cut out now, the rent-seeking enabled by the IRA will continue to infect healthy markets, weakening the American energy sector for decades.

As one IRA supporter recently wrote, “Clean energy is now big business, and influential companies stand to lose billions if the Inflation Reduction Act is repealed.” Yes, and these big businesses deserve to lose the billions of taxpayer dollars they hoped to gain from the IRA—it was never their money to begin with.

The Path Forward

Free and competitive energy markets that allow for innovation and entrepreneurship have been and always will be the best path forward for energy security, reliability, and cost-effectiveness. Government subsidies like the IRA increase inefficiencies and result in cronyism among businesses and government leadership.

No Republicans voted for the IRA in 2022. Rather than take a scalpel to the law, Congress has a rare opportunity to undo all of it. A weak, partial repeal of the IRA will only perpetuate interventionist policies for years to come. The IRA is a watered-down Green New Deal, and the response can’t be further dilution—it needs to be a full rejection.

The window for Democrats in Congress to pass the partisan IRA two years ago was narrow and fleeting. The window to undo this poorly conceived legislation through full repeal is just as narrow. The new Congress should waste no time in rejecting the Green New Deal-lite.

In September 2023, a Food and Drug Administration (FDA) advisory panel informed the agency that, 50 years after the FDA certified phenylephrine hydrochloride as a safe and effective oral decongestant, the evidence suggests it works no better than a placebo. The advisory report came several years after a couple of academic pharmacists had reviewed the research behind the 1970s FDA claims and determined the evidence of efficacy sorely lacking. As I wrote in a blog post that month and a month later in a USA Today column, stomach and intestinal juices break down ingested phenylephrine, rendering it inactive. I hypothesized that, despite the pharmacists’ warnings, the FDA dragged its feet reviewing phenylephrine’s efficacy because it didn’t want to undermine another federal agency’s efforts to wage war on methamphetamines.

When the Combat Methamphetamine Epidemic Act went into effect in 2006, the Drug Enforcement Administration (DEA) ordered all oral decongestants containing pseudoephedrine removed from pharmacy shelves and placed behind the pharmacist’s counter. The DEA also required pharmacists to register customers who bought pseudoephedrine so that law enforcement could monitor their purchases. Furthermore, the DEA put strict limits on the amount of pseudoephedrine a customer could purchase during a 30-day period. This was because many meth dealers at the time were converting pseudoephedrine products they legally purchased into methamphetamine in clandestine labs.

The DEA moves chilled customers who ordinarily purchase products containing pseudoephedrine, which remains an effective decongestant when taken orally. Drugmakers began offering consumers oral decongestants that substituted phenylephrine for pseudoephedrine to help them avoid the queues, surveillance, and stigma of buying pseudoephedrine at the pharmacy counter. More than half of American households trusted and used oral phenylephrine, accounting for an estimated $1.76 billion in sales in 2022.

Of course, we all know what happened next: Mexican drug cartels got into the meth-making business and found more cost-effective ingredients, such as phenyl-2-propanone or P2P, and meth-related deaths soared a whopping 1,400 percent from 2006 to 2020, proving once again that prosecuting the war on drugs is like playing a game of whack-a-mole.

The FDA remained silent when the advisory panel announced its findings 14 months ago. Today, it finally responded. It announced a proposal to order phenylephrine removed from the market as an active ingredient in oral decongestants once it concludes a request for comment period. That period runs from November 8, 2024, until May 7, 2025.

The private sector has been much more agile, as usual. Within a month of the advisory panel’s report, the CVS pharmacy chain announced it was taking oral phenylephrine decongestants off its shelves and would no longer sell them.

CVS, a private company, didn’t want to risk its reputation by keeping customers in the dark about the money they were wasting on oral phenylephrine products. In contrast, the FDA remains in no hurry to inform the public.

Libertarians believe that drug prohibition is costly and ineffective. Prohibition encourages violence, since participants in banned activities cannot use legal, peaceful means to resolve disputes. Moreover, people who transact drugs are already hiding from authorities and thus are less concerned about employing violence. Underground markets also increase overdoses and poisonings since quality control is difficult. Prohibition reduces respect for the law, inhibits medicinal use of various drugs, promotes racial profiling and infringements on civil liberties, and spreads violence and corruption both domestically and in source countries.

In 2020, Oregon decriminalized possession of small amounts of hard drugs such as fentanyl, heroin, cocaine, and methamphetamine. Earlier this year, however, Oregon recriminalized drugs in response to high rates of overdose deaths and open-air drug use. Free-market skeptics claim the state’s unsuccessful policy experiment is evidence supporting prohibition.

This view is incorrect. First, recent research found that fentanyl saturated Oregon’s illegal drug market around the same time that decriminalization went into effect. The study found that this spread of fentanyl caused the increase in deaths, which would have happened regardless of decriminalization.

Second, Oregon’s policy failed not because it legalized possession but because it failed to legalize supply. Under decriminalization, drug users must still buy from the underground market. This leaves the negatives of prohibition in place, including the incentive for suppliers to lace drugs with fentanyl to minimize the volume of contraband.

Decriminalization reduces penalties for use, which is presumably good for drug users, but this may exacerbate the negatives of prohibition because reduced penalties for possession might increase demand for drugs, implying a larger underground market and more of the attendant ills. Thus, if policymakers legalize only one side of the market, the right approach is to legalize supply rather than demand. This would reduce violence in the underground drug market and allow consumers to protect themselves against laced substances through legal channels.

Indeed, successful decriminalization experiments like Portugal’s relaxed supply-side enforcement. Since 2010, the proportion of people serving sentences for drug offenses has fallen, and the number of heroin and cocaine seizures has declined despite rising throughout Europe. Penalties for trafficking and dealing drugs have also lessened. At the same time, the crime and homicide rates have dropped by 1.13 per 100,000 people since 2000, suggesting that their policy changes reduced supply-side violence.

Beyond these points, effective legalization must repeal federal prohibition. While state-by-state legalization is valuable, in part because it signals popular opposition to prohibition, state legalizations leave many issues in legal limbo. Many banks refuse to work in the marijuana industry, leaving cash-only dispensaries vulnerable to theft while complicating their transactions. Moreover, the federal tax code bars dispensaries from deducting typical business expenses from gross profits. Until federal prohibition ends, the clash between state and federal regulations will prevent the marijuana industry—and society at large—from reaping the full benefits of legalization.

This article appeared on Substack on November 6, 2024. Jonah Karafiol, a student at Harvard University, assisted with the production of this post.