Easy Money


"I don't think it's right for a business to charge money for a service it provides." So says "Theresa Bossy, student," in the online publication The Onion.

It so happens that The Onion is a satirical effort, so the "news" it publishes is merely farce. No such excuse is available to residents of San Francisco and Santa Monica, California. They and their elected officials live the Bossy mantra to its utmost. Last fall San Franciscans approved an initiative outlawing automatic teller machine fees for access to cash. In Santa Monica, the popular city council passed a law to the same effect.

That voters and elected officials may decide the appropriate market price for a service is a charming affectation in the nation's trendiest precincts. I know the reasoning well. Since first writing about the ATM fee controversy a couple of years back, I have received a stream of e-mails from disgruntled bank customers. Here's the standard take: "As a staunch capitalist, I oppose any attempt by the government to regulate private business activity. But ATMs save the bank money, because it doesn't have to pay a teller to deal with my transaction. To take advantage of the fact that I'm not able to go to my bank and have to withdraw cash elsewhere is just a consumer ripoff."

Embedded in this plea for help is what we shall call the Fallacy of the Movable Object. Just because Item X has certain properties at Point A doesn't mean that all those same properties remain at Point B. A corollary: location, location, location.

Where the consumer really does choose straight up between the ATM transaction and the teller interface–at the bank's own branch–the ATM operates for free (and, typically, more quickly and pleasantly). So the "ripoff" is literally somewhere else–between a bank teller and a remote ATM location. But now the situation is complicated, not least of all by the fact that keeping ready cash in convenient remote locations is both costly to the bank and valuable to customers.

The powers that be in San Francisco and Santa Monica disagreed, and staged rebellions to prove their point. Immediately, California's two largest banks, Wells Fargo and Bank of America, staged a revolt of their own and axed remote ATM network access. Class, can anyone explain why at a price of $0, quantity supplied is nil?

Some Santa Monicans, at least, know the answer. Consider George Safaris, an S.M. resident who talked with The New York Times. He didn't have a problem with the $1.50 the banks charged for producing cash on demand. In fact, his troubles began only when the price for cash money was ruled illegal–and his service disappeared. "I'm happy to pay the small fee for convenience," he fumed. "You spend $5 just to park your vehicle."

Of course, one can look about the economy and see pricing patterns which seem odd. Airlines use complex revenue optimization programs, attempting to fill every seat at the maximum price possible. Although the cost of providing service is identical across all customers in the same class of service, everyone pays differently. How wide can the spread get? If you have the stomach for it, ask your seatmates how much they shelled out for the ride the next time you reach cruising altitude.

What is puzzling is how docile voters are when victimized by true rate gouging. Consider plain old telephone service. For decades, regulators have set the price of local telephone service artificially low. This is especially true in fancy suburban neighborhoods or far-out rural communities, where low population density makes systems expensive to build. To pay for this, regulators have imposed a system of artificially high long-distance and business charges. (You may have noticed that if you install a "residential" line in your house, it will cost something like $20 a month, while the same exact "business" line costs $40.)

The policy is perverse. While failing to noticeably increase telephone penetration (steady at about 95 percent of U.S. homes for decades now), it has driven long-distance charges much higher, hurting low-income people, who tend to spend a fairly large percentage of total income on long-distance or international calling. It has also stymied competition for residential telephone service (why compete where prices are already below cost?) and deprived customers of advanced services that such competition would bring. And businesses, which pay more in telephone charges, stick consumers with higher prices.

This public policy debauchery was actually juiced up in the Telecommunications Act of 1996, a bipartisan piece of legislation. Meanwhile, banks investing millions in new ATM networks for customers feel the anger of customers in San Francisco and Santa Monica, who can only get increasingly surly. After all, now they're driving around all day trying to score some cash.