The bad news it that HR 5546 which exempts merchants from the antitrust laws so that they can set up a cartel to negotiate lower interchange fees squeaked through the House Judiciary Committee with a 19-16 vote. The goods news is that it seems to in enough of shambles that few think it will ever land on President Bush’s desk. Here’s why our next President—be he McCain or Obama—should press Congress to drop this and refuse to sign it if this insane bill ever lands on their desks.

We’ve already seen this move in Australia. Interchange fees got halved as a result of merchant complaints and the Australian regulators establish cost-based interchange fee caps. Cardholders pay higher fees and merchants pocket much of the difference. See The Effect of Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping in Australia.

Here’s the other side’s counterargument to this. Facts be damned—these changes in interchange fees are so small we could never really detect the cost reductions from merchants. We know from basic microeconomics that with competition cost reductions get passed fully on to consumers. So in theory consumers will benefit from lower interchange fees in the form of lower prices. People who make this claim presumably got A’s in introductory microeconomics but never took graduate micro or ever actually read the voluminous empirical literature in economics on what, in fact, happens as a result of cost reductions.

First, most industries don’t have the perfect competition that makes this argument work in theory. So only a portion of the cost savings would be passed on even in theory. Given that everyone missed this for Australia is remarkable since such a large portions of the Australian retail sector is largely controlled by a couple of firms—not exactly textbook competition.

Second, there’s a lot of empirical evidence in economics that while firms pass on a substantial portion of cost increases to consumers they tend not to pass on much of cost decreases to consumers. Economists say that prices are “sticky” downwards. There are all sorts of reasons for this when you think about it. But the important point is that if we’re living in the land of fact rather than theory one wouldn’t expect that merchants would pass along the interchange fee reductions in the form of lower prices to consumers.

What is absolutely stunning is that 19 Members of Congress could vote for HR 5546 despite decisive evidence from other countries—Spain in addition to Australia—has done precisely what the merchants have asked for. One can be dead certain that if HR 5546 ever got enacted, consumers would end up paying more and merchants would be taking in bigger profits. I’m all for business but I hope would-be Presidents McCain and Obama resist handing the entire retail sector an exemption from the antitrust laws that would allow merchants to take money out of the consumer’s pocket and put it in theirs’.