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Another Profit Opportunity Mysteriously Going Unseized!

This Vox report (or some variation on it) was sent to me by three different people, each of whom had the good sense to understand that something about it is fishy.

Ms. T__:

Thanks for sending this Vox report on Aaron Klein’s ‘theory’ that credit-card rewards points are a scheme through which poor people are unwittingly lured to subsidize the consumption of rich people. Here’s the key paragraph of the report:

Every time a credit card is swiped, the bank charges a fee. It seems trivial, but those fees add up – enough to help pay for rewards like points-funded hotel rooms and cash back. To compensate, businesses raise prices, and so cash users (who tend to be poorer) are often subsidizing the perks going to credit card users (who tend to be richer). And the higher the rewards, the bigger the cost to the unsuspecting people paying for it.

This alleged problem is phony.

If poor people truly are being overcharged because merchants must raise the prices of goods and services in order to cover credit-card fees, there are profits to be made by running more businesses on a cash-only basis.

Aaron Klein should lead the way. He can quit his job at Brookings and set up shop as a retailer selling items only for cash. If his theory about credit cards is correct, his retail shop, with its lower prices, will attract all the business of poor people. Mr. Klein would make a mint while simultaneously helping the poor.

But the fact that Mr. Klein merely scribbles about the problem rather than personally puts his money where his mouth is to solve it is solid evidence that he either doesn’t understand what he alleges or that he doesn’t really believe it. (I suspect it’s the former.) And the fact that few actual merchants are moving to cash-only operations only further testifies that his ‘theory’ is baloney.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030