06
Jan
10

“Fee? Fie!” Foe

(Sorry; I simply couldn’t resist that title.)

I’ve been thinking a bit about user fees lately.  It started yesterday (dreadfully early) when I checked in for a United flight out of Milwaukee and was charged $20 for my single bag.  Shock!  Outrage!  Furious indignation! How dare this grasping avaricious corporation charge me for something for which they hadn’t charged me before!  But what was I going to do, ship my checked bag USPS?  Not hardly.

Once I got some more caffeine into my system, I thought about it some more, and the baggage fee started to make sense.  To start with, heavier planes consume more fuel.  More bags on the plane naturally make it heavier, so when I check a bag I’m costing United more in fuel costs than I do when I live out of a carry-on.  Next, there’s the cost of handling baggage, which is undertaken (I presume) by both United itself and by the Milwaukee airport (which, if it’s not stupid, folds the cost of baggage handling into the rent it charges the airlines).  And of course there’s the bureaucratic overhead of tracking bags linked to passengers — my flight out of Chicago was delayed by about half an hour when a handful of passengers didn’t make the flight, and their bags had to be extracted from the hold per TSA regs.

So, yes, checking a single piece of luggage costs United noticeably more than traveling without checked bags, and it’s not unreasonable for them to charge for it.  But turn that around — what’s happening on airlines that don’t charge a fee for even the first bag?  How is it that they can avoid these costs, or at least avoid passing them on to J. Random Passenger?

The short version is that they can’t.  Rather than charge checked-bag travelers more, they charge everyone more.  One-checked-bag passengers on those airlines might be subsidized by travelers without checked bags, who’re paying for baggage-handling service they never use.  (Yes, part of the suitcase-slinging bill for your trip to Hawai’i is coming out of the pockets of the student rushing home to visit her suddenly-ill mother.)  Or maybe the airport workers’ pension fund contributions get squeezed a little every time you check a bag and don’t pay for it.  Either way, you’re getting something — baggage handling and transport — without paying for (all of) it.  The bag-check fee internalizes an external cost.

Similar things have been happening with credit cards.  By way of Andrew Sullivan we find this article:

I’m not going to address the “Libertarians hate kittens old people!” argument in the article, because Megan McArdle did a fantastic job already.  But Rortybomb begins with this:

In late November I talked about how credit cards specifically, and the consumer financial system more generally, was fee and ‘trick and traps’ based and how that amounted to a transfer from the poorest to the richest in our country. I found this to be a really bad thing, one that gave terrible incentives to financial firms to find innovations that would make prices and information more opaque and less transparent for consumers.

(Emphasis added.)

Looks like the same thing, right?  United sells me a ticket at $foo, then dings me for an extra $20 when I show up to the airport.  It’s a trap! Similarly, my bank offers me a credit card, and buried in the fine print is a clause that jacks up my interest rates to eleventy billion percent if I’m so much as five seconds overdue on a payment.  It’s a trap!

Well, kind of.  Taking Rortybomb at his word about fees, tricks, and traps, it seems like the CC industry makes a heck of a lot of their money from people who fall for the tricks and step in the traps.  So what happens when those tricks and traps get limited by legislative fiat?  (We’ll be extra charitable — still infected by Christmas, I suppose — and assume that the Credit CARD Act of 2009 really does work to “establish fair and transparent [lending] practices”.)

Yeah.  Those nasty awful banks raked in about $50 billion in “tricks and traps” revenue last year that the government’s making them stop collecting.  But let’s focus on credit cards:

Credit-card issuers collected $22.9 billion in penalty fees—such as those assessed for late payments—in 2009, up from $19 billion in 2008, said Robert Hammer, who runs a credit-card consulting firm in Thousand Oaks, Calif.

Credit-card companies already have been racing to slip new fees and practices into customer contracts ahead of the law. Issuers are closing accounts, switching cards with fixed interest rates to variable rates and introducing cards that have an annual fee.

For example:

Christopher Moss, who regularly shops at sporting-goods chain Gander Mountain, recently was notified that he will be charged a $1 “processing fee” each time he receives a printed statement of his Gander credit-card account rather than an electronic one. The 50-year-old paralegal said he is prepared to cut up the credit card even though he likes the loyalty rewards that come with it.

“It’s not like I can’t afford it, but it’s another little stick in the consumer’s eye,” Mr. Moss said.

So, Mr. Moss used to get a paper statement printed, folded, stuffed, and mailed for no extra cost to himself, and now he’s upset at being asked to carry that cost.  Who paid for it before?  Those poor tricked-and-trapped unfortunates from Rortybomb’s post, I’ll wager.

(Incidentally, I heartily approve of the Pigovian effect of fees for paper statements.  The environmental impact of printing and shipping those few sheets of paper, aggregated over millions of customers, is far greater than the environmental impact of a few SQL queries and HTTP conversations aggregated over those same millions of customers.  Do it for the planet, Mr. Moss!  Mother Gaia wants you to check your fucking credit card online!)

Similarly, Tyler Cowen points out an “everyone is blogging about it” kerfuffle that I’d completely missed:

Everyone is blogging about it, here is the link.  Kevin Drum has one good summary, or here is Yves Smith or Felix Salmon, both of whom are upset.  The upshot is that the supermarket pays Visa a fee if you use a “sign for it” card rather than entering a PIN number for a debit card, though it’s a little more complicated than that.

(Kevin Drum’s summary, incidentally, falls into the “price equals value” trap I’ve ranted about before — which isn’t to detract from its quality as a summary.  I haven’t read the others.)

Where did this sudden reëvaluation of how much Interlink could charge retailers come from?  I imagine it came from Visa trying to claw back revenue lost to the Credit CARD Act of 2009.  Someone sitting at a board-room table probably wondered how much more they could get for point-of-sale fees, and Interlink ran with it.

I’m not going to argue that all — or even many — of these fees correct blatant pricing externalities (although, if you believe that the Credit CARD Act really does work, you have to believe that these fees are more fair than their previous alternatives).  I’m simply claiming that most of the wharrgarbl over “those evil new fees that the cor-puh-ay-shuns are gouging you with” is less a matter of true injustice and more a matter of “How dare you charge me for something you’ve never charged me for until now?”

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6 Responses to ““Fee? Fie!” Foe”


  1. 1 Dan_D
    January 6, 2010 at 16:51

    Interesting side effect of this. My bank will give me a rebate for items placed on my (debit) card when I sign for it as a credit card rather than use a pin. I am not sure how it works exactly, but I believe it has something to do with who pays what fees. Based on what you are saying, what that means is that I am basically getting a kickback for transferring fees from one entity to another. (VISA vs bank? or store vs bank or VISA?)

    For me, it is a win/win because I do not like to use my PIN after some of the hacking that has gone on and I can get some rebate of my expenditures. Not sure who bites the bullet on the other side.

  2. 2 aczarnowski
    January 7, 2010 at 10:44

    Rationally I have to agree with you.

    But I’m irrationally sick and fucking tired of everything being sold with 500 pages of legal contract saying not to taunt the happy fun ball they’re selling. Finding worth while products is mind destroyingly tedious these days, and I’m very quickly coming to the point where it just ain’t worth it to support the economy like a good citizen.

  3. September 8, 2014 at 20:33

    In 1989 Bob Plath said that wheels on the luggage would eliminate the need to lug all those bags and ease the strain on the back.

    What I have learned is that cost is not always an indicator of performance.
    to break their routine and enjoy the freedom of getting away from it all.


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