Some spheres of activity like defense and law enforcement are naturally provided by the state. They’re public goods. Most goods and services, however, are best supplied by the private sector.

Payment systems like Visa, Mastercard, American Express, PayPal, Discover, Zelle, Cash App, Swift, Fedwire, and cash are essential for commerce, indeed for modern life. People take them for granted. They can be operated by government, the private sector, or both.

The US payment system is mixed. Retail, person-to-person, and bill payment systems are run by the private sector. The Fed plays an important albeit less visible role serving banks.  It operates interbank payment systems such as ACH and Fedwire, which compete with banks’ cooperative processor The Clearing House, which, ironically, is regulated and supervised by the Fed. It also issues cash (Federal Reserve Notes) distributed by commercial banks.

In 2023 the U.S. central bank will launch an instant-payments system FedNow, which will compete with TCH’s RTP, Visa, Mastercard, Zelle, Fiserv, FIS, and Discover. The Fed’s offering banks up to 2,500 fee-free payments per month to incent use. The Monetary Control Act requires the Fed to recover its costs “over the long run,” but the long run is whatever the Fed decides it is. While the Fed has typically measured long-run cost recovery for mature services to be over ten years, it declared “it expects FedNow “to achieve its first instance of long run cost recover” beyond 10 years.  Private capital doesn’t enjoy that kind of luxury.

If a private-sector payment system offered free payments to build network critical mass, all well and good. However, unlike private payment networks the Fed enjoys unlimited resources and can’t become insolvent.

Nobody assumes government should make wine, mobile phones, airplanes, or movies, or run restaurants, gyms, and hotels. While a case can be made for it to operate payment systems, the bar should be set high. The Fed should only play roles that the private sector cannot, and it shouldn’t be permitted to use unlimited government resources to unfairly subsidize its offerings in competition with the private sector.

Concerns over national security, systemic importance to the financial system and economy, efficiency, or needs the private sector can’t address, might be used to justify government running payment systems.

No government wants to rely on payment systems subject to control by potentially hostile powers. Governments may, therefore, operate critical payment networks, insist they’re run by national players, or if they’re foreign networks, that they process in-country.

After Putin’s 2014 Ukraine invasion, Russia was subjected to limited financial sanctions including US-domiciled Mastercard, Visa, and PayPal cutting off Crimea, but not Russia. Reminded of its vulnerability Moscow mandated foreign networks process domestic payments in-country and its central bank launched a national card network Mir.

China and India mandate foreign payment systems process in-country. China’s payment policies are baldly autarkic.  Notwithstanding Beijing’s 2001 WTO commitment to open up its domestic payments market by 2006, the Middle Kingdom’s prevented global networks like Mastercard and Visa from competing in its domestic market. While Delhi favors national players, its payments market is open and competitive.

Greater efficiency may be an excuse for a public payments utility. The idea a single well-designed state system would be more efficient than multiple competing private-sector systems with redundant costs is superficially appealing. Policymakers are more likely to argue greater efficiency justifies a single government or regulated private payment-system for core infrastructure. Even core payments infrastructure, however narrowly defined, benefits from competition-driven innovation and market discipline and intelligence.

Central planners can’t match the market’s vast dynamic distributed intelligence. Competing systems’ inherent dynamism, innovation, and continuous reallocation of resources to players delivering better value, have enormous benefits.

A monopoly card network or digital wallet run by the post office or the Fed wouldn’t deliver better value, be more innovative and accountable to customers than Visa, Mastercard, American Express, Discover, PayPal, Apple Pay, or Google Pay.  The market is the most ruthless regulator of value, not enlightened government bureaucrats superintending payment systems.

Where scale advantages are significant, markets will naturally consolidate. A monopoly, however, is never optimal. But, private-sector monopolies are rarely if ever sustainable unless privileged by the state.

The contention some payment systems are so systemically important government must run them doesn’t bear scrutiny. Critical national payments infrastructure owned and operated by the private sector can be regulated as such, subject to prudential reviews of capital adequacy, ownership, and management. Bank-owned The Clearing House, operates an ACH system, an interbank large0value funds transfer system, CHIPS, and an instant-payment system RTP. The Clearing House is regulated as a systemically-important financial market utility.

Central banks’ contention only they can deliver certain payment systems should be viewed through the lens of Nobel Laureate James Buchanan’s Public Choice Theory which holds self-interested public bureaucrats act to maximize their own utility, prestige, and power. They are rarely the indispensable actor.

The Fed insists only it can and will equitably serve all banks. The ECB on its own prerogative decided to build an instant-payment system TIPS, on the premise only it could adequately provide instant payments across the euro-area. And Brazil’s central bank contended only it could provide instant-payments ubiquity. Yet the private sector provides instant payments in the US, EU, and Brazil.

The Fed regulates and supervises TCH and also competes with it. The EU central bank oversees EBA Clearing’s shareholding banks and payment systems like RT1 with which it competes.

Central banks aren’t subject to the same financial constraints and often can use regulation to privilege themselves.

Brazil’s central bank used its authority to kneecap a competitor. Facebook has roughly 147 million WhatsApp users in Brazil.  In June, 2020 it launched WhatsApp Pay. It was fee-free for P2P payments and charged merchants 3.99%. The central bank put the kibosh on it. And, Brazil’s antitrust regulator Cade blocked WhatsApp’s partnership with processor Cielo because of competitive concerns.

Lo, in November, 2020 Brazil’s central bank launched its instant-payments system Pix. It mandated that large payment service providers participate, a prerogative for building network critical mass and therefore value and relevance that no private-sector payment system enjoys.

In less than two years Pix enrolled 126 million individuals and 11 million businesses, and surpassed the number of debit-card transactions.

After Pix had picked up a head of steam, in March, 2021 the central bank greenlighted WhatsApp Pay, but only for P2P not retail payments.

The central bank competing with the payments industry (and further regulating and supervising that very same industry) is a bald conflict of interest and a deterrent to private-sector investment. Nobody wants to compete with their regulator or a central bank with unlimited resources.

The National Payments Corporation of India, owned by state and private-sector banks, and guided by the central bank, operates a national card network Rupay and the major national interbank payment systems including real-time payment systems IMPS and UPS.

China’s central bank (PBOC) forced private payment systems like Alipay and WeChat Pay to use its clearing system Netsunion. Protected monopoly card network UnionPay is owned by state and commercial banks, run by PBOC alumni, and takes direction from the central bank.

Payment systems run by the Fed, ECB, Banco Central do Brasil, and PBOC aren’t subject to the same financial constraints as even private-sector titans, which can fail and go bankrupt. Central banks print money and can’t become insolvent.

Central banks’ electronic payment systems could be spun off with regulatory guardrails.

Private-sector payment systems have enormous advantages.

While individual players may disappoint, private sector payments systems must ultimately satisfy the market to remain in business. And even if individual players fail, the self-correcting private payment system continuously improves.

The payments industry is more adaptive than public utilities. The most brilliant central planners can’t design a perfect payment system, much less adapt it to changing conditions.

There’s no payments infrastructure that wouldn’t benefit from genuine competition, and ruthless regulation by the market rather than by the administrative state or politicians.

Private-sector systems dynamically self-correct.

In competitive free markets incumbents and challengers vie for share by trying to deliver better payments. The market continually votes on what’s better. Resources are allocated away from payments enterprises that don’t satisfy or delight their users, to those that do.

Payment systems run by central banks, no matter how thoughtfully-engineered and successful out of the gate, aren’t subject to the same market discipline, nor enjoy private systems’ innovative vigor. Underperforming government systems often get more resources.

Most payments innovation comes from the private sector, which invented cash, checks, interbank clearing, credit cards, global bankcard networks, electronic bill and P2P payment systems, e-wallets, and digital currencies.

In the 9^th century Chinese merchants invented paper money. In the 19^th century Scottish banks created two-sided banknotes.

In 1950 NYC financier Frank McNamara invented the general-purpose payment card Diners Club. US banks created global bankcard networks Mastercard and Visa. In 1981 fitness club operator Pete Kight launched what became America’s leading electronic bill payment system Checkfree. In 1998 Peter Thiel started PayPal. In 1999 radio DJ Steve Streit created the first general-purpose prepaid card.

Computer scientist David Chaum invented the first digital currency Digicash. Entrepreneurs Jeremy Allaire and Sean Neville with Circle and Brock Pierce and Craig Sellars with Tether, were stablecoin pioneers.

Pony Ma’s Tencent developed digital currency Q Coin and WeChat Pay. Jack Ma’s Alibaba created Alipay. Competing against stodgy state banks and state-protected monopoly card network China UnionPay, given latitude by Chinese regulators, such as liberalizer PBOC governor Zhou Xiaochuan, Tencent and Alibaba revolutionized payments in China. While the Sino-liberalization window is closed, Alipay and WeChat Pay are well-established and many outside China seek to emulate their “super-app” model.

It’s assumed central banks issuing cash is the natural state of affairs, notwithstanding historically in many countries competing commercial banks issued banknotes (cash). While cash issuance could be returned to commercial banks, in most countries it would be politically difficult.

Digital fiat currencies bring the issue of state versus private-sector payment systems to the fore. More than a hundred central banks are working on digital currencies. Central banks are predisposed to issue CBDCs, have vast resources, and often regulate potential private-sector issuers of digital cash.

There’s a danger central bank digital currencies will stifle development of and innovation in private digital currencies by banks and fintechs.  A Fed digital dollar would reduce if not eliminate banks’ and fintechs’ appetite for issuing and innovating in stablecoins – effectively digital banknotes.

New government payment systems should bear a high burden of proof. Existing state-run payment systems should be privatized, unless there’s a compelling national interest not to.

 

 

Ronald Reagan said “There are no limits to growth and human progress when men and women are free to follow their dreams.” In Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet the Cato Institute’s Marian Tupy and Brigham Young professor Gale Pooley make a cogent, empirically-grounded case for Reagan’s full-throated optimism.

For the last several centuries affluence and lifespans have been increasing. The authors enthuse “we have accumulated a store of knowledge that has allowed us to reach escape velocity from scarcity to abundance somewhere toward the end of the 18^th century.” In the 20^th century with a massive increase in population, abundance has exploded worldwide.

Yet notwithstanding mankind’s enormous and continued progress, an almost religious pessimism persists.

In “Essay on the Principle of Population”, Malthus argued resources were finite, and, consequently, population growth would bring ruin on mankind. The Club of Rome’s  The Limits to Growth and Paul and Anne Ehrlich’s The Population Bomb, picked up the doomsaying baton. Their contention that limited natural resources meant more people were an existential threat to humanity today holds sway among the Davos set.

In the 1970s grim Malthusianism informed Communist China’s brutal program of one-child-per-family and forced abortions. The authors persuasively assert China would be massively more prosperous today with 400 million more “somewhat free” people. Faced with a demographic crisis of its own making, the CCP has reversed course and relaxed restrictions on having children.

Many Western elites still view people as a liability rather than as an asset. Climate-change and Malthusian apocalyptists thunder more people will exhaust limited resources and attendant economic activity increasing atmospheric CO2 will cause climate catastrophes.

Yet more affluent societies are better able to deal with Mother Nature. Since 1920, with higher atmospheric CO2 levels from increased fossil-fuel use, climate-related disaster deaths have plummeted by 98%.  Pious Greens virtue-signal by not having children. While not having children is a choice couples are free to make, it won’t help humanity.

Tupy and Pooley persuasively contend knowledge not physical stuff drives ever-increasing abundance. People free to innovate and increase the stock of knowledge are, therefore, an asset.

Natural physical resources haven’t limited growth.  “The Earth’s atoms may be fixed, but the possible combinations of those atoms are infinite.”   What matters isn’t our planet’s physical limits but rather people’s freedom to experiment, reimagine, and improve use of existing resources.  More knowledge and people beget more knowledge, producing ever-greater abundance.

Economist Tom Sowell observed cavemen had the same natural resources as 21^st-century men. Greater knowledge is why we enjoy more prosperous and longer high-quality lives than cavemen.

When resources increase faster than population, it’s “superabundance.”  Viewed through the lens of “time prices” the world is enjoying an era of superabundance.

Tupy and Pooley use time prices rather than the more familiar measures of real GDP and PPP per capita, to document global superabundance. Time prices calculate the hours and minutes needed to earn the money to buy goods and services. They’re universal true prices.

The time price to acquire rice as food for a day in India dropped from about seven hours in 1960 to under an hour today. The time price of wheat for a day in Indiana dropped from an hour to 7.5 minutes. The Indian has gained 6 hours and 2 minutes and the Hoosier 52 minutes.

From 1850 to 2018 US blue-collar workers’ average nominal hourly compensation rose from $.06 to $32.06. Using nominal prices, the average time price of 26 commodities like sugar, nickel, corn, steel, and coal, fell by a whopping 98.3%. “Personal resource abundance” (PRA) measures how much people can buy in time prices. The average PRA increased by 5,762% during this 168-year period.

Between 1919 and 2019 US blue-collar workers’ average nominal hourly compensation rate rose from $.43 to $32.36 while the time price of 42 food items fell 91.2%. The average PRA increased by 1,032%.

Turning to information processing, the authors calculate for the same amount of work a blue-collar worker had to do in 1969 to perform a slide-rule-based calculation, using an iPhone12 in 2020 he could buy 1.574 trillion calculations.

Superabundance can and should continue indefinitely. Reversing course would be a choice, a choice for malaise over a world of plenty.

The limits to human flourishing are self-imposed anti-growth policies whether animated by millenarian climate-change apocalyptists or imposed by oppressive regimes like North Korea and Venezuela.

Innovation relies on population growth and the freedom to exchange goods and ideas. The larger the population, the larger the market and the more specialized people can become. In the book’s forward futurologist George Gilder rhapsodizes “everywhere entrepreneurs are free to create and market their inventions, time prices fall.”

“Economics prosper to the extent that knowledge, intrinsically dispersed through the system in the minds of individuals, is complemented by a similar dispersion of power.” Combinations of government and business frustrate it.

Prices guide capital – human, intellectual, financial, social, cultural, and physical, to address problems and opportunities. Doomsayers underestimate or ignore motivated men’s capacity to solve problems and improve the human condition.

Superabundance is an eminently-readable antidote to dour Malthusian and Green-fundamentalist dogma. The bigger and freer the global network of people, the greater superabundance.

Inflation is scourging the land. In January it hit 7.5%, a forty-year high. The Fed is failing in its mandate to maintain “stable prices” and suffers the dangerous conceit enlightened central bankers can direct the economy better than the market. President Biden’s Fed appointees aren’t the cavalry, far from it.

Many Americans are too young to have experienced the scourge of inflation that roiled the country in the seventies. Inflation is too much money chasing too few goods. Thanks to Washington’s binge of money-printing and spending, suffocating regulation suppressing production, and Fed complacency, inflation is back. It’s a stealth tax punishing saving, creditors, and the working poor, and rewarding debtors, the biggest of whom is Uncle Sam.

Congress and the administration look to the Fed to bail them out of destructive fiscal and regulatory policies. Many at the Fed believe they can and should manage the economy. That’s beyond its ken. The Fed does, however, have tools to rein in inflation. That’s what it should focus on. The FOMC needs to find its inner Paul Volcker. If it hikes interest rates and reduces its bloated balance sheet sufficiently, it will curb inflation.

But Biden’s Fed appointees won’t bring a hawkish voice or narrow its focus. They’ll expand and further politicize the central bank and paramount financial-system regulator’s role, raise the fossil-fuel industry’s cost of capital, and racialize credit.

Biden renominated Jay Powell Chairman and nominated Governor Lael Brainard Vice Chairman, law professor and former governor Sarah Bloom Raskin Vice Chair of Supervision, and economists Lisa Cook and Philip Jefferson governors.

Powell has been a dove’s dove and willfully blind to the looming threat of inflation, which were preconditions to Biden reappointing him. On his watch, gorging on Treasuries and mortgage-backed securities, the Fed’s balance sheet doubled, and the money supply increased 403%. When the Fed buys assets it creates money, suppresses interest rates, and, thereby, fuels inflation.

In January yoy gas was up 40% and used cars 40.5%. In 2021 the median existing-home price rose 15.8%. As inflation picked up a head of steam, the Fed played make-believe, stubbornly maintaining it was “transitory.” Joe and Sally Sixpack are paying dearly for the Fed’s dereliction of duty.

Brainard is just as dovish as Powell, supports more punitive bank regulation endearing her to progressive heartthrob and financial-industry foe Senator Elizabeth Warren, and is socializing introducing climate-change considerations into the Fed’s prudential regulation, setting the stage to punish banks financing oil, gas, and coal producers.

Raskin is a climate-change fundamentalist. In “Why Is the Fed Spending So Much Money on a Dying Industry?” she trumpeted her Green faith and desire to preference credit for job-intensive – i.e. less productive, renewables over fossil fuels, decried “surging carbon dioxide,” and warned of the looming “catastrophe of an unlivably hot planet.”

Fossil fuels provide 79% of America’s energy. If the Biden Fed starves the fossil-fuel industry of capital, it will increase energy costs, making consumers poorer and businesses less competitive. Even if it wasn’t horrendous policy, it isn’t the Fed’s place to decide to engage in a Green holy war against fossil fuels. That folly is the politically-accountable Congress’s prerogative.

Cook served in the Obama White House, has a NYT guest column, contributes to CNBC, MSNBC, and NPR, served on the Biden-Harris financial-regulator-agency-review-transition team, and supports “reparations” for black Americans. Cook was nominated not because she’s an estimable monetary economist but rather because she’s a she, she’s black, and she’s a brass-collar Democrat, none of which is a good reason.

By reputation economist Philip Anderson is apolitical. Preternaturally sunny Hoover economist, National Review contributor, and former Trump adviser Kevin Hassett sings his laurels declaring he’s the kind of economist he would’ve been happy with and President Trump could’ve appointed. That may be naïve. Anderson’s commentaries in PBS NewsHour, NPR, CNBC, and Bloomberg Radio suggest comfort in the establishment left. The Biden administration wouldn’t knowingly nominate a man Hassett would be comfortable with.

The Fed’s statutory monetary mandate is stable prices, i.e. zero inflation, maximum employment, and moderate long-term interest rates. Stable prices support maximum sustainable long-term employment and wealth creation.

The central bank takes an expansive view of its remit. In 2012 the Fed on its own prerogative declared it would target 2% inflation, prices doubling every 35 years. While lawless, there was nary a peep of protest from Congress. In 2020 the Fed went a step further, announcing it would inflation-average,” allow inflation higher than 2% to catch up for prior inflation below its target.

Interest rates are the economy’s most important price, the price of present versus future consumption and investment. The Fed influences them. Its real benchmark interest rate is now a mind-boggling negative 7.5%. Keeping interest rates artificially low causes systemic malinvestment and risk.

Milton Friedman warned concentrated power, no matter how well-intentioned, is dangerous. The Fed embodies unchecked concentrated power at the heart of the financial system.

Who’s on the Fed board matters so much because of the enormous power it wields and license it takes. Until Congress circumscribes its mission, the Senate must be extra-vigilant ensuring hawks with a narrow view of its role, run the central bank, rather than partisans keen to use the Fed’s monetary, regulatory, and operating powers to try to manage the economy, preference credit for favored sectors, and advance a political agenda.

If Apple’s mobile wallet Apple Pay is successful banks will be the big losers.pdf

Discusses Apple Pay’s prospects and impact on players across the payments value chain and contends to the extent Apple Pay is successful it will capture additional economics from bank issuers and diminish their payments customer relationships.