Cards Versus Cash
I found this New York Times article on “The Damage of Card Rewards” to be rather interesting. Basically, to pay for reward programs aimed at getting the better-off to spend more, credit card companies charge merchants more, and merchants reflect these costs in their prices—but everyone pays the same prices, while only the users of reward programs get offsetting benefits.
The article essentially concludes that there is no solution to this problem—and, unless I missed something, doesn’t address regulation. I’m not necessarily advocating regulation here—it’s likely the banks would simply use it to enrich themselves further somehow, although that’s a practical political problem rather than a theoretical economic one—but I do think it’s odd to set up a problem like this, that seems like it could obviously be tackled using an approach of tweaking market rules, while barely mentioning that approach at all.
29 Jan 2010 at 16:13
I have been and continue to be a staunch advocate of credit cards. Despite the scaling back of “rewards” programs, credit cards are unquestionably a better deal for individual consumers if used correctly. The dilemma here is somewhat like the free rider problem— at what point does the cost of credit card use to retailers lead to inflation? Clearly, if everybody used cards, the resulting fall in retail margins would necessitate a price increase, canceling out the advantage to consumers. In fact, credit cards remain advantageous so long as a certain percentage of consumers relies on cash— in effect, cash users are subsidizing credit card users. Which side do you want to be on?
18 Jan 2011 at 22:41
A year later, and I’m now on the side of the credit card users, having made a major shift from cash in order to gain what is effectively a reverse sales tax on my purchases. I’m still slightly conflicted ethically, but don’t see how being on the wrong side actually helps anything (it offers false moral savings, in other words).