An Economic Case against Public Banking, and a Case for It

In this article, we examine the economics of public consumer banking in the United States. Public expenditures on consumer banking can take the form of price subsidies or direct provision. The economic case for price subsidies is weak because the evidence suggests most unbanked consumers would prefer a cash grant. The economic case for public provision is also weak because the existing market failures in banking are better remedied by regulation. The exceptions to this rule are check cashing and related payment services, which could be supplied by the US Postal Service (USPS) at a lower cost than private providers. On the other hand, economic arguments for the superiority of cash transfers presume that the institutional infrastructure exists to deliver them. But an effective infrastructure for public transfers does not exist in the United States and is only possible with universal ownership of payment accounts, which in turn requires some form of public subsidy or provision. We suggest one path forward: expand the financial services currently offered to federal beneficiaries—such as Social Security recipients—by the Treasury.