[Cross-posted from The AEI Enterprise Blog.]

The staff of the Boston Fed recently released an econometric study, “Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations” (in this context, “cash” includes checks, debit cards, prepaid cards, bills, coins, and an undefined “etc.”), and concluded, according to the press play: “Credit card fees and rewards programs exacerbate income inequality by acting as a transfer of wealth from poor to rich.”

This conclusion is pretty dubious, proving again the dangers of tendentious research. The biggest problem is that the Boston Fed has an oddly crimped view of the world. It seems unaware that creating a system of digital payments is creating nationwide and worldwide markets that put severe pressure on local retailers’ prices, to the benefit of all shoppers, including the poor.

Governments meddle with this growing, and not well-understood, system at their (and our) peril. For example, the Boston Fed is distressed by the fact that retailers do not give discounts to cash purchasers. But retailers could discount for cash; they just choose not to. On the other hand, neither do they give discounts to credit card purchasers, and, arguably, these are the people who have the most alternatives to the local shop, and who might well be able to bargain.

If the Boston Fed’s grasp of the big picture is tenuous, so is its understanding of the details. As noted by blogger Matt Yglesias, the data underlying the study actually supports the conclusion that the situation “appears to be a classic positive sum business interaction. Credit card companies use interchange fees to cut into retailers’ monopoly rents and then rebate a share of the fee to consumers via reward programs, and on net consumers benefit and the median household appears to benefit.”

There are many other questions about the details of the study, since it does not capture all the complexities of the retail ecosystem. For example, the study makes unclear assumptions about transfers from cash purchasers to credit card users; since credit cards are used disproportionally for higher value purchases, which are also those with higher retail margins, why can one assume that cash transactions are affected at all? Retailers may price according to expectations about credit card use. And how can you classify checks, with their high bounce potential, as “cash”? Or ignore the extent to which debit cards and credit cards share common infrastructure?

The real goal of the authors seems to be to justify the conclusion that, “Why, this is a job for big government!”:

Recent U.S. financial reform legislation, motivated by concerns about competition in payment card pricing, gives the Federal Reserve responsibility for regulating interchange fees associated with debit (but not credit) cards. Our analysis provides a different but complementary motivation (income inequality) for policy intervention in the credit card market.

The Boston Fed has a history of this type of thing; its 1992 and 1996 studies of supposed discrimination in mortgage lending were wrong but influential in setting government policy on the road to the later housing market disasters. So the idea that it wants to do the same thing for the electronic payment system is enough to turn one pale. Surely we have had enough ignorant interventions into complicated markets on the basis of simplistic concepts of Rawlsian justice.

As Yglesias says, helping people in the lower income brackets is a worthy goal, but mucking up important and creative institutions is not the way to do it.