A targeted crackdown on "junk fees" makes a lot of sense
The back-to-basics populism that Democrats need
Joe Biden’s State of the Union address featured the highest-profile version of the administration’s push to tackle a problem they call “junk fees” — basically a consumer protection agenda focused on “those hidden surcharges too many businesses use to make you pay more.”
Biden announced in his address that “we’re cutting credit card late fees by 75%, from $30 to $8” and then expanded:
We’ll ban surprise “resort fees” that hotels tack on to your bill. These fees can cost you up to $90 a night at hotels that aren’t even resorts.
We’ll make cable internet and cellphone companies stop charging you up to $200 or more when you decide to switch to another provider.
We’ll cap service fees on tickets to concerts and sporting events and make companies disclose all fees upfront. And we’ll prohibit airlines from charging up to $50 roundtrip for families just to sit together.
Baggage fees are bad enough – they can’t just treat your child like a piece of luggage.
George Callas, who runs the public finance program at Arnold Ventures and previously worked as a top Paul Ryan advisor, denounced this unprincipled populism as something that would simply push costs around to other consumers.
My read is that the administration has actually been a lot more careful than Callas gives them credit for. They are specifically targeting fees that are pure deception (hotels), an area where there is a strong research base that regulation is welfare-enhancing (credit cards), and an area where imposing a cross-subsidy is broadly justified (family air travel).
This is smart politics and smart policy, which is good because imposing policies that substantively backfire is not a very sound political strategy.
Back in my Slate days, I liked to annoy people by pointing out that a lot of widely complained about airline tactics are actually good. But Callas should pay closer attention here, since the administration isn’t banning the good stuff. To understand why these ideas make sense, though, it’s helpful to start with a defense of the general airline practice of charging fees.
Airline unbundling is good
In the case of commercial air travel, I think the case for unbundling is pretty strong.
It used to be that you could count on a hot meal being served on your domestic plane flight. This cost the airlines money, not everyone ate the food, and not everyone who did eat the food actually enjoyed it. By shifting to a model where food is available for sale but not given away “for free,” the airlines reduce their cost base (less food is consumed) and increase their revenue (some food is sold).
That increases airline profits.
And it’s easy to see why in a market with heavy regulation and little competition, that would be an unappealing proposition for regulators, which I think helps explain why the industry traditionally — in the old days before Jimmy Carter — didn’t work that way.
But in the post-Carter airline industry, with free entry into routes and lots of price competition, the initial boost to profits really just incentivizes airlines to run more flights. After all, airlines run flights to make money. If running flights becomes more profitable, they will do it more. The increase in the number of flights is convenient for passengers. It also tends to increase competition, which tends to bring both fares and profits back down. The end is a situation where not only are fares cheaper, but even fares plus fees are cheaper due to more intense competition.
It would be nice if we could say that this makes literally everyone better off.
Unfortunately, that’s not the case. Even in a more competitive overall airline market, some individual routes still lack competition and are left with a worse product. Perhaps even more important for the discourse, people who travel for work are often in a situation where someone else is paying for the plane ticket. In that case, the more stuff that gets bundled into “the plane ticket,” the better off you are. Fancy people, of course, might get first-class airfare or travel per diems that otherwise take care of this. But for those of us who are accustomed to getting third-party payment for coach airfare, the unbundling is arguably worse, leaving us on the hook for travel meals.
Still, I think it’s pretty clear that on balance, the unbundling of meals is good.
Baggage fees are the same deal. I do understand why people find their rise annoying — nobody likes to be charged for something they are accustomed to getting for free. But carrying bags does cost the airlines money for fuel, staffing, and opportunity cost of carrying cargo. And not everyone brings the same number of bags onto the plane. If airlines start charging for bags, revenue goes up and costs go down. In the short term, that means more profits for airlines. In the longer term, it means more flights, more convenience, and more competition — it’s a good thing. But again, it’s not good for literally everyone; it’s clearly worse for people who travel with lots of bags.
A pro-family rule makes sense
That’s why even though Biden was trying to tap into populist complaints about baggage fees, he’s actually not moving to ban them. Instead, he said that “baggage fees are bad enough” and he’s not going to let airlines upcharge parents to sit with their kids on the plane.
Here’s the issue for those not familiar with it.
In recent years, the airline unbundling trend has led to the creation of “basic economy” fares that don’t come with the right to choose your own seat. If you want to pick a seat, you need to either pay a higher “full economy” fare or else you need to pay a separate seat selection upcharge. The spirit of this, more or less, is that center seats are bad, and if you’re willing to accept one (via random assignment), you should be able to get a cheaper fare — and if you’re determined to avoid one, you should pay more. This is basically the same as the unbundling of bags or meals.
The problem for parents is that random assignment means you might be assigned to a seat that’s separated from your child.
Nine times out of 10, someone will switch seats with you or the gate agent will move your seats. But then there’s the one time out of 10 when people are being uncooperative. There’s also the fact that a lot of people don’t fly that much and may not realize the situation has changed and end up feeling screwed, or may not realize they can probably get the seats changed for free and end up paying an upcharge for something they didn’t really need to.
But the main thing I’d say is that this is where it becomes relevant that even though unbundling is good on average, it’s not good for everyone.
In particular, the unbundling of seat assignments has been bad for parents and children. Your mileage may vary as to whether or not public policy should provide explicit and implicit cross-subsidies for families. If your view is that it shouldn’t and it’s time to start means-testing K-12 public schools, then I think it’s going to take a whole other column to convince you, and I’m not going to try here. But if you’re a normal person who understands that society is an intergenerational compact that relies on parents for its long-term continuation, I think it’s pretty clear that while cross-subsidizing airline food fans or baggage enthusiasts is pointless, there’s a good reason to provide a small cost-subsidy to families flying with children.
This is one of dozens of examples where free market dogmatism is going to deliver anti-family outcomes, and where I think it’s important for progressives to learn to speak some of the conservative language about the importance of family to help illustrate the utility of an active and competent state.
Resort fees are a total scam
In contrast to the somewhat complicated economics of airline unbundling, hotel resort fees are a total scam.
It doesn’t have to be this way. The first time I was ever asked to pay a resort fee, I was at a hotel in Las Vegas that had a big party pool setup and a golf course and other resort amenities. Crucially, I did not pay the resort fee because I was there on a short work trip, I don’t golf, and I was happy to spend my (minimal) downtime playing blackjack. That was a brief, glorious era of resort fees as unbundling. Some hotels that offered genuine resort amenities came up with the idea of charging separately for lodging services and for access to the resort. There are various business model challenges with this, but it’s a perfectly plausible idea for someone to at least try.
But this is not the current situation.
Once resort fees started popping up, hotel managers noticed several advantages that had nothing to do with the economics of unbundling. One was that in online search results ordered by price, you’d get an advantage by shifting money out of the room fee and into the resort fee. Another is that you could arbitrage away from lodging taxes by characterizing some of your revenue as resort fees. That led more and more places to start imposing non-optional resort fees, including at places that had no resort features. This is why if you try to book at the Marriott in downtown Los Angeles now, you’ll find yourself faced with a non-optional $30 “destination amenity fee.” I can’t complain that they’re charging a resort fee with no resort, because it’s not a resort fee — it’s just a fee for the location.
But this is not unbundling at all. The fact that different hotel properties have different “destination amenities” (i.e., they are located in different places) has always been central to the basic lodging service.