Author: Ramsi Woodcock

Categories
Philoeconomica Regulation World

Magic Markets: Looking Down on China for the Wrong Reasons Edition

Foreign Policy’s normally pretty good China Brief has this bit of magical thinking about markets today:

But clashing economic and governmental incentives, not generator capacity, are causing the problems [with China’s electricity supply]. Fifty-six percent of China’s power comes from coal, and thermal coal prices have more than doubled around the world after the initial shock of the pandemic. . . . In most countries, these prices would be passed on to consumers, but Beijing tightly limits the maximum price of electricity—causing generators to reduce their supply or shut down rather than lose money.

Palmer J., China Faces an Electricity Crisis. Foreign Policy. September 30, 2021.

Um, if there’s not enough low-cost electricity capacity in China then there’s not enough low-cost electricity capacity in China. Raising prices won’t make the blackouts stop, unless you happen to consider “blackout” too ugly a term to use for having your electricity cut off because you missed your payment. All raising prices will do is ensure that the rich get more of a limited electricity supply, and the poor less. But you don’t need to take my word for it. Just ask Texas.

It’s hard to believe that in 2021 Foreign Policy is still trying to teach China lessons about the virtues of unregulated markets. I mean, this is a country that went from nothing in 1980 to having an economy that’s 20% larger than ours today by purchasing power parity, nationwide blackouts due to the country’s resource poverty notwithstanding. It might be time for us to learn a thing or two from China about how to handle resource constraints equitably.

Or at least to put down our market fetish and actually study a bit of basic economics.

Categories
Civilization World

Defeat as Model

America rested its policy toward China in the crucial decades of the 1990s and 2000s on the notion that China did not aspire to become a great power but only a wealthy and free one, and so America encouraged Chinese development at every turn. America’s model, oddly enough, was Europe. She looked at Britain, France, and Germany—all wealthy, free, and perfectly happy to submit to American greatness—and she supposed that was all that China wanted. America did not stop to consider why Britain, France, and Germany so happily lacked ambition.

The answer was that all three were defeated powers.

France exhausted herself mentally on the battlefields of the First World War and thereafter, as A.J.P. Taylor has noted, came to fear war more than she feared defeat, a sure sign of the demise of a great power. Britain exhausted herself mentally on the battlefields of the Second World War. And Germany was physically defeated. (Not twice—1918 left the state intact—but once in the Second World War.) It is defeat, mental and physical, that explains the docility of Europe in our age.

It was pure folly for America to suppose that China—or, indeed, Russia, which America viewed through the same lens during this period—would aspire to defeat. China was, of course, defeated in the 19th century and again in the early 20th. But that was the old China. As a modern power, she has never been defeated; why would she not aspire to greatness? Similarly, Russia, so far from being exhausted by the Second World War, went on to enjoy decades of superpower status from which she fell not through defeat by an outside power (no, America did not spend Russia into collapse—how characteristic of a business culture to imagine death by spending) but through internal upheaval. Why should she not continue to aspire too once she had reestablished internal stability?

Europe’s docility, and the international order that it exudes, reminds us that order in human affairs—within countries as much as between them—is always the child of defeat. Great nations of law-abiding citizens are themselves nothing but concentrations of hunter-gatherers whose will to live independent of the state has been crushed so completely that they have forgotten that they ever had one. The really extraordinary thing about American policy during those crucial decades was that America looked at order in Europe and saw not defeat but kumbaya.

Order requires defeat and defeat requires: defeat. Not physical, necessarily, but, certainly, mental. How will we get it over the next few decades, and who will suffer it?

One wonders.

Categories
Antitrust Monopolization Regulation

Biden Antitrust Policy and the Fall of Kabul

The election of a longtime Washington insider to the presidency was, if anything, supposed to mark a return to competent, reality-based government. The astonishing failure of the administration to predict—or adequately plan for—the rapid collapse of the Afghan government this summer is hinting that the new administration is not all that much more competent than the last.

There are warning signs in Biden’s antitrust policy as well. His executive order on competition, for example, misleadingly cited as authority academic sources that either didn’t support the order, or suggested it would fail. And now we learn that the administration actually thinks it can use antitrust action to reduce inflation caused by pandemic-induced supply chain disruption. Oh my.

Antitrust won’t stop inflation caused by supply chain disruption because the profits that firms generate from supply chain disruptions are scarcity profits, not monopoly profits. They are the product of actual scarcity, not the artificial scarcity that antitrust can alleviate by promoting more competition. Only an administration that doesn’t know its Antitrust 101 would miss this.

Indeed, competent progressivism doesn’t make these kinds of mistakes. Take John Maynard Keynes. He was all for killing off the rentier—the earner of the kind of economic profits that supply-chain-induced inflation is dealing to many corporations these days—but he never thought antitrust would do the trick.

Because, like most progressives of his generation—and the competent progressives in ours—he understood that rent is a problem of competition, not monopoly.

The rentier doesn’t need to smash his competitors; he just lies on his fainting couch and watches the numbers tick up in his bank account because he happens to own a uniquely productive resource, one that competitors can’t beat, even if competitors are allowed to try their hardest.

Similarly, the big corporations charging high prices today don’t need to smash their competitors to charge those prices, because their competitors don’t have access to better sources of supply either. No matter how hard these firms compete with each other, there is just not enough production capacity in the supply chain to enable them to ramp up output and therefore no firm has an incentive to reduce prices and increase profits through increased market share.

That is not to say that these corporations are not earning rents, meaning profits in excess of what they need to be ready, willing, and able to produce and sell their wares on the market. They are. Rental car companies, for example, are charging multiples of what they used to charge for a car, while at the same time facing much lower costs than they ever did, because they are unable to expand their fleets. It follows that the price premia rental companies are charging are pure profits that the rental companies do not strictly need in order to remain in business.

But the profits are not a result of anticompetitive conduct. They are due, instead, to shortage. The rental car companies are not expanding their fleets, because a microchip shortage means there aren’t any cars available for them to buy. So, while they wait, the companies ration access to the cars that they do have by charging high prices for them, ensuring that those consumers with the largest pocketbooks get access to cars, and those with less means have to sit on the sidelines and wait for the shortage to end.

Unless it is reformed to adopt pricing remedies—and there is no indication the Biden Administration is seeking to do that—Antitrust has nothing to bring to this situation but trouble. To the extent that Biden’s antitrust initiatives translate into actual cases and the imposition of actual antitrust remedies, we can expect costs that will be passed on to consumers in every competitive market that the Administration mistakenly targets. The costs will be legal costs and also those associated with unnecessary remedies—the firm that actually worked better when it was whole hacked to peaces to please the angry antitrust god.

But the biggest danger posed by the use of antitrust to deal with supply chain disruption is that antitrust will be completely ineffective at actually getting prices down.

Smash three big rental car companies into twenty small ones, but you still won’t increase the number of available cars, and so you won’t, actually, increase competition, or bring prices down. Each of the smaller companies will know that it can raise prices without losing market share to the other nineteen, because the other nineteen don’t have any additional cars to rent out to customers either.

Failing to get prices down would be bad, however, because prices can and should be made to come down. For, as noted above, the fact that prices are currently high due to shortage does not imply that they must be high in order to induce firms to continue to compete and produce as best they can. The rental car companies could just as easily cover their costs by charging the rock bottom prices they charged last summer because the companies are, after all, still fielding the same fleets they fielded last summer. They are charging higher prices because the shortage (but not their own anticompetitive conduct) shields them from additional competition.

How, then to get prices down without antitrust? Keynes’s elegant solution was the euthanasia of the rentier. This was understood by Keynes to mean that the central bank could use monetary policy to drive down interest rates, thereby depriving the rentier of the ability to earn a fat return on his investments.

But the euthanasia of the rentier actually has a deeper meaning. For an actual rentier could always respond to low interest rates in financial markets by using his money to invest directly in actual businesses, especially businesses earning large rents due to shortages. What makes this impossible, and really does euthanize the rentier, is that the lower interest rates created by monetary policy induce large numbers of businesspeople to borrow money and invest it in new businesses, and this investment ultimately eliminates shortages across the economy, driving rents down and killing off the rentier.

But it takes time for money invested in new businesses to eliminate shortages and drive prices down. To get prices down now, before supply-chain disruptions can be eliminated, there are two other options.

The first is direct price regulation. Government could impose price controls in industries subject to pandemic-driven supply chain disruptions. President Biden could order rental car companies to revert to charging their low summer 2020 prices, for example. President Nixon imposed price controls in the 1970s; it can be done.

The second is taxation. Congress could vote a special corporate tax aimed at hoovering up the rents generated by firms enjoying pandemic-driven shortages. That would not bring respite directly to consumers, who would continue to pay high prices, but Congress could vote to redistribute the proceeds of the tax to deserving groups, or spend the money on projects like infrastructure that benefit everyone, rather than leaving it to firms to pay the proceeds out to wealthy shareholders to stimulate the market for yachts.

I am having trouble deciding whether the Biden Administration’s obsession with antitrust as cure-all is the legacy of President Biden’s long career as a centrist Democrat or a result of the meathead radicalism that the Trump Administration inspired in some progressives.

Either way, like relying on the Afghan government to defend Kabul, he can’t say no one warned him it wasn’t going to work.

Categories
Meta Miscellany

Doubt

Suppose that we happen to live in a universe in which magic is real, but only if everyone believes in it. It would follow that with the birth of the first scientist magic would shut down, and that scientist would be unable to find evidence of magic’s existence, other than in the accounts of those who had once experienced it first hand, which the scientist would of course attribute to delusion or hunger or psychotropic substance.

Of course, the consequences of magic would still exist in the world. If Merlin had indeed levitated that boulder and placed it over there, the boulder would still, of course, be over there. But the scientist would find other plausible explanations for the boulder’s location. The data supporting these other plausible explanations would be subject to omitted variable bias, with the omitted variable being, of course, magic. But the only way to test the influence of that variable on the boulder’s location would be to measure the historical incidence of magic. And that would be impossible because, again, in this universe as soon as even one person stops believing in magic, magic ceases there to be. There would be nothing to measure.

One might, of course, use proxy variables to try to measure historical magic—to measure historical magic by measuring its historical effects—but there would always be some other, non-magic variable that could be used to explain such effects, just as Ptolemaic geocentrism did a tolerably good job of predicting the planets’ positions in the sky despite being wrong. And, unlike magic, that variable would be measurable, and so would be more likely to convince science.

There being no way, therefore, to determine empirically whether we live in a universe in which there never was magic or in a universe in which there was magic but is none anymore, we are free to read the ancients, who tell us over and again about the interventions of the gods, as describing not delusion but a magic that really, actually was.

So, Greg Anderson, we need not merely pretend that what the ancients believed was real in order to understand them, we can also plausibly accept that the ancients were right.

Categories
Regulation

The Airplane Seat as Liberal Dilemma

People are fighting on airplanes because seats are too small.

The seats are not too small because airlines are forcing passengers to fly on small seats.

They are too small because most passengers do not insist on larger seats—they are willing to fly without them—but at the same time most passengers find the way they are packed into airplanes intolerable.

What gives?

There can be two explanations. The first is that passengers are in denial about their own preferences. They say they hate being packed in, but they still fly packed in, which means they can’t really hate it that much.

The second is that people don’t do a good job of protecting their own dignity. They would never, ever, let a guy come up to them on the street and rub their forearm and thigh for two hours. But it turns out that’s just because they don’t get anything out of the bargain. When that visit to grandma is at stake, by contrast, they acquiesce. People make deals with the devil all the time. They indenture themselves. They abase, and grovel, and beg, and they do it all for things, like getting home for the holidays.

The question is, then: should we respect them when they don’t respect themselves?

The airline seat size question gets to the heart of consumer sovereigntist market ideology.

What could possibly be wrong about letting consumers decide for themselves what they want out of air travel?

That was the question that destroyed the Civil Aeronautics Board, the federal agency that once ran the American airline industry, dictating the number of airlines in the market, the prices that airlines could charge, and, indirectly, the quality of service that they could provide. Before the Carter Administration killed the CAB, it was piano bars all the way up.

In the small seat you have your answer to the question.

The mob voted, overwhelmingly, for cheap at any cost, including to their own dignity.

In a world in which the only value is the democratic value, in which all that matters is what the people want, you are stuck here. You must leave the airlines to torture their passengers; they accept abuse.

If instead you believe in your heart that government should do something about it, that there should be a federally-mandated larger minimum seat size, then you must accept that you are not, in fact a democrat. Not really.

Passengers have voted, already. They prefer cheap. And they have voted far, far more directly than they will have if some elected representative, who ran on a dozen other issues not involving airlines, happens to vote in their name for a larger minimum. Whatever minimum is imposed will drive up the price of a seat, and whether passengers pay the higher prices or not (I think they will), four decades of consumer voting in deregulated airline markets says that they do not actually prefer to pay it.

If you want to impose a minimum seat size, you must accept that you worship at a different altar from that of democracy. Perhaps you worship at the altar of human dignity—of the human form divine. But you must accept what that makes you: a paternalist, a scold, a schoolmarm.

Do not tell me that you think we need minimum seat sizes to forestall violence, that the skies have become a battleground and that is unsafe. For anyone who has suffered through two hours in a packed plane knows just what primeval brain centers are thereby stimulated. But they fly anyway, and when they do, they always go for the cheapest tickets! They accept the risk.

One way out of this cul-de-sac is to say that there is not, in fact, any tradeoff between price and seat size: passengers want bigger seats at the same prices (who wouldn’t?) and airlines could give them to passengers, but they don’t because they have monopoly power.

This helps because it means that passengers aren’t choosing smaller seats—smaller seats are being forced on them.

It follows immediately that if someone is going to do some forcing, it might as well be the government, which can act as medium, divine what consumers would want (larger seats), and dictate them.

While there is almost certainly some power there, seat size hasn’t fallen by half since deregulation, whereas prices have. That’s hard to square with a narrative of oppression.

And anyway, even a monopolist can’t make a passenger accept a smaller seat if the passenger won’t accept a smaller seat; the problem here is that consumer demand is extraordinarily inelastic in price—inelastic unto indignity.

In other words, the demand curve, of a self-respecting public, for today’s super small economy class airplane seats should look like this:

Self-respecting consumers should have perfectly elastic demand at a price equal to zero for very small airplane seats. That would prevent airlines from turning a profit on these seats, forcing airlines to offer bigger economy class seats.

Instead, it looks like this:

Consumers actually have relatively inelastic demand for very small economy class seats (that is, their demand line is relatively steep). To the extent that airlines have monopoly power, it is the inelasticity of consumer demand for these seats that allows airlines to use their power to charge high prices for these seats and thereby to generate monopoly profits on them. The inelasticity of consumer demand here is an embarrassing measure of consumers’ tolerance for indignity.

It is sometimes said that flying was better under regulation because, by setting fares, the CAB forced airlines to compete on quality. But that absolves the passenger of too much. It would be better to say that in setting fares, the CAB prevented consumers from cheerfully trading away their dignity for a discount.

Passengers want lower fares; airlines need to pack in more seats to provide them (whether that need is driven by a need to earn a monopoly profit or not); and airlines oblige.

Should the airlines not offer passengers this devil’s bargain? We have told them: serve you.

And they do.

In the old days, prices were higher, fewer people flew, and flying was dignified.

That was not a democratic world.

But it was better.

Categories
Antitrust

Real Progressive Antitrust

Notice what’s missing from the agenda of the only self-described democratic socialist in the U.S. Senate:

Detail from photo accompanying Maureen Dowd, The Ascension of Bernie Sanders, N.Y. Times (Jul. 10, 2021).

Everything on the Sanders agenda is about spending (read transfers), to be paid for with progressive taxation. Scattershot interpersonal redistribution via competition? Not so much.

The contrast with President Biden and his 72-point competition cure-all couldn’t be starker.

Categories
Antitrust Monopolization Regulation

The Executive Order on Promoting Competition That Isn’t

President Biden’s Executive Order on Promoting Competition in the American Economy does a great job of targeting a range of business practices across the economy that harm workers and consumers.

But the order—and the fact sheet accompanying it—also highlight how much wishful thinking is currently going into the contemporary progressive romance with competition as an economic cure-all.

The fact sheet declares that economists have found a link between competition and inequality, even though whether a link exists remains the most important open question in antitrust economics today and the subject of much ongoing debate. And despite the competition rhetoric, most of the order is actually about consumer protection or price regulation by other means, not competition.

Wishful Thinking about Competition and Inequality

Anyone who has been following the unresolved debate over the existence of a link between competition and inequality is going to be surprised to learn from President Biden’s fact sheet that “[e]conomists find that as competition declines . . . income [and] wealth inequality widen.”

The surprised might include Thomas Piketty, the dean of the contemporary economic study of wealth inequality, who has observed that the fundamental cause of inequality “has nothing to do with market imperfections and will not disappear as markets become freer and more competitive.”

But it might also be news to the authors cited by the fact sheet itself.

Follow the first of the quoted links and you get to a paper that connects the decline in labor’s share of GDP (a proxy for inequality) to rising markups (firms charging higher prices relative to their costs), but not to a decline in competition.

The author is careful not to link rising markups to a decline in competition because increases in markups have two potential causes, not one: monopoly power and scarcity power—as I have highlighted in a recent paper.

That is, firms can obtain the power to jack up prices by excluding competitors and achieving monopoly power, or they can do it by making better products than everyone else (or the same products at lower cost), in which case even the price prevailing in a perfectly competitive market will represent a markup over cost.

The great open question of contemporary antitrust economics is whether the evidence of an increase in markups in recent years is evidence of monopoly markups or scarcity markups. As Amit Zac has pointed out to me, this is the essence of the disagreement between the work of De Loecker et al. (monopoly markups) on the one hand and the work of Autor et al. (scarcity markups) on the other.

The point is: this is an unresolved question. Economists haven’t “found” a connection between declining competition and contemporary increases in inequality. They haven’t even found a connection between declining competition and contemporary increases in markups. They’re still looking.

But you wouldn’t know that from the fact sheet.

Follow the second of those links and the support is equally weak. The title of the cited article, “Inequality: A Hidden Cost of Market Power,” would no doubt appeal to a fact sheet writer fishing Google for quick cites. But the paper itself could not be more timid about its conclusions, telling readers that it does no more than to “illustrate[] a mechanism by which market power can contribute to unequal economic outcomes” and warning that “[a]lternative models and assumptions may yield different results.”

The authors have good reason to be timid, because the paper’s attempt to distinguish between monopoly markups and scarcity markups extends no further than this: “we attempt to compare actual mark-ups with the lowest sector specific mark-ups observed across countries, in order to estimate an unexplained or excess mark-up.”

So: find the lowest markups in an industry, assume they are scarcity markups, and attribute any markups you find that exceed them to monopoly.

Not exactly convincing, as the authors themselves seem to telegraph—which is why the character of the higher markups we are observing today very much remains an open question.

Highlighting Antimonopolism’s Intellectual Deficit

The last revolution in antitrust policy happened in the 1970s, and however one might feel about the path it beat toward less antitrust enforcement, there is one thing one must grant: it carried the day as an intellectual matter.

You can’t read the book of papers produced by the epochal Airlie House conference and not get the impression that the Chicago Schoolers really got the best of the old antitrust establishment on the plane of ideas. I once asked Mike Scherer, who carried the banner for the old pro-enforcement establishment more than anyone at that conference, why he comes across as so timid in the dialogues reproduced in that book.

His answer: Chicago had convinced him, too.

The current inflection point in antitrust has not been built on anything like that level of intellectual consensus. I have argued elsewhere that this is because the current movement didn’t need to win the academy to achieve liftoff, as Chicago did. The current movement got its thrust instead from a highly sympathetic press, which has a competitive interest in unleashing a reinvigorated antitrust on its nemeses, the Tech Giants.

It is a symptom of contemporary antimonopolism’s intellectual deficit that our new, self-consciously reality-based administration can go to war against monopoly only by passing off economic conjecture as economic fact.

Did Golden-Age Antitrust Drive Postwar Economic Growth and Save Consumers “Billions”?

Before moving on from the order’s wishful thinking, I can’t help but also mention the fact sheet’s claim that mid-20th-century antitrust “saved consumers billions in today’s dollars and helped unleash decades of sustained, inclusive economic growth.”

Was mid-20th-century antitrust enforcer Thurman Arnold responsible for America’s 2% annual growth rate from the 1950s to the 1970s?

The press release doesn’t cite any economic study taking that position—because there is none. But there are plenty that think those twenty years of 2% growth had something to do with the nation’s return to the peacetime production possibilities frontier after nearly two decades of depression and war.

And did mid-20th century antitrust really save consumers “billions?” You might be forgiven for thinking that link leads to a recent economic study. Instead, it is to a set of figures, released by Thurman Arnold himself, that are cited by legal historian Spencer Weber Waller as possible exaggerations. For example, Waller: “[Arnold’s] case against the milk industry in Chicago supposedly produced $10,000,000 a year in consumer savings” (emphasis mine).

All the figures cited by Waller do probably add up to billions in today’s dollars. But Waller cited them as evidence that Arnold knew how to use hyperbole to win political support for his antitrust campaigns.

Not that the Biden Administration would be doing the same thing.

Competition as Price Regulation by Other Means

But what about the order itself? Here’s where things really get interesting. For despite the rhetoric little of it is actually about competition: it is, amazingly, largely about price regulation and consumer protection instead.

Why? Because the competition business and the inequality business are two very different things; and no matter how hard you tell yourself you are doing competition policy, if you’re trying to equalize wealth, you’re going to end up doing something else.

To see why the order is mostly about price regulation, consider that competition really has two virtues, one more important than the other. The smaller virtue is that competition can reduce prices. The greater virtue is that competition promotes innovation, which is the principal driver of economic growth and benefits to workers and consumers alike.

The reason competition’s effect on prices is a lesser virtue is that competition is wasteful. It means duplication of management and often diseconomies of scale. As I have argued at length elsewhere, if you want to get price down it’s far less expensive simply to order lower prices than to try to jerryrig markets into producing them through unregulated competition.

Antitrust gets this, and so it does not actually prohibit the charging of high prices. Antitrust is much more interested in prohibiting conduct aimed at excluding competitors from markets, because this keeps out the sort of innovative challengers that are responsible for the link between competition and innovation.

The striking thing about Biden’s order is that it is mostly aimed at promoting the first kind of competition—competition meant to lower prices—rather than the second.

Which makes it price regulation by other means. Let’s consider some of the initiatives contained in the order.

Canadian Drugs

The order calls for lowering prescription drug prices by importing drugs from Canada. The thing is: the drugs imported from Canada will be the same as drugs sold in America, only cheaper, which means that the only competition this will create will be between the same products sold at different prices on different sides of the border.

Promoting competition between iterations of the same product produced by a single producer isn’t going to promote innovation. It’s just price regulation by other means.

And wasteful means at that. There’s a reason why Canada has lower drug prices than the U.S., and it’s not because there’s more competition in Canada—a lot of Canadian drugs come from America in the first place. It’s because Canada regulates drug prices directly.

So why can’t we just do that, too, instead of sending American drugs north to be price regulated so that we can bring them back down south at lower prices?

Because, I guess, that wouldn’t sound like a competition policy solution, and progressives today are convinced that competition cures all.

Generic Drugs

The order also simultaneously calls for more antitrust enforcement against “pay-for-delay” drug patent settlements and “more support for generic and biosimilar drugs.”

As in the case of drugs from Canada, competition from generic drugs doesn’t promote innovation. Generics are, by definition, copies of preexisting drugs; generic drug companies don’t invent new drugs, they just strive to bring old ones to market at low prices. So generic competition is just price regulation by other means, and particularly futile and inefficient means at that.

For branded drug companies use pay-for-delay settlements to undermine generic competition, and enforcers have wasted untold hours litigating to stop them, to only modest effect. Plus, forty years after Congress embraced generic competition with the Hatch-Waxman Act, we still have a drug price problem.

That makes an order telling the agencies to stop pay-for-delay and to promote generic competition at the same time more than a little odd. It is like telling a fireman to pump harder and stop more leaks. It might be time to find a different hose.

If Congress wants to get drug prices down, the easiest way to do it would be to follow the Canadians and, you know, order drug prices down, rather than trying to manage the Herculean task of creating and maintaining a competitive generic drug market. The Biden Administration should call for that.

But competition cures all.

The Right to Repair

The order also calls for protecting the right of buyers to repair a host of items from cell phones to tractors.

Now, one can imagine that competition between repair shops might lead to innovation. But it will be innovation in repairs, which is not going to do much to raise living standards. The innovation that matters is not in repairs but in the design of the products being repaired.

Opening products up to third-party repairs isn’t really about competition at all, therefore, but about price regulation by other means.

And not regulation of the price of repairs, but rather of the price of the product to be repaired. The Biden Administration probably believes that making products reparable will drive down the all-in price that buyers pay for the products, because buyers will be able to avoid paying high repair fees to manufacturers, or will be able to go for a longer period before having to replace the item with a new one.

But if manufacturers are able to extract extra revenues from their buyers by charging them for repairs today, what’s to stop them from simply raising their up-front prices to compensate for lower revenues on repairs tomorrow?

If the Biden Administration thinks cell phones and tractors are too expensive, a better way to actually reduce the amount people pay for these products would be to order manufacturers to charge lower all-in prices for them.

But competition cures all.

Small Business Procurement

The fact sheet says that the order will “[i]ncrease opportunities for small businesses by directing all federal agencies to promote greater competition through their procurement and spending decisions.”

But “competition” here means the opposite of what we normally mean. It means that the firm offering the best products at the lowest prices shouldn’t get the contract; the smallest firm should get it instead, even if it offers shoddy products at high prices.

This is regulation of the price paid by government for goods and services by other, deeply inefficient means.

Here’s a better way to redistribute wealth from taxpayers to small businesses that can’t make it in the market: just write their owners checks to stay home. That way the (presumably) poor get their money without the federal government having buy anything but the best.

But competition—or its semblance—cures all.

Protecting Third-Party Sellers on Amazon

The order also directs the FTC to create rules for “internet marketplaces” and the fact sheet suggests that the rules should prevent Amazon from copying the products of third-party sellers.

As the use of generic competition to tame drug prices suggests, the sort of competition that comes from copying is primarily about getting prices down, rather than innovation. If Amazon wanted to beat its third-party sellers by innovating, it wouldn’t create close matches of their products, but rather something new. By selling an identical product, Amazon instead places all the competitive pressure on price.

So we can understand rules preventing Amazon from copying as attempts to drive the price of goods sold on Amazon’s ecommerce platform up, presumably to redistribute wealth from consumers to third-party sellers. Such rules are, in other words, price regulation by other means.

Because the rules would drive prices up, they are the least consumer-friendly initiative described in the fact sheet (unless one expects Amazon to respond by competing more with its third-party sellers based on innovation).

But precisely because the rules seek to drive prices up rather than down—to squelch duplicative and wasteful competition between Amazon and third-party sellers rather than to promote it—they are also the order’s least inefficient example of price regulation by other means.

But they represent price regulation by other means all the same.

Non-Competes

According to the fact sheet, the order “encourages the FTC to ban or limit non-compete agreements.”

Non-compete agreements in high-skilled jobs are associated with higher wages, suggesting that at the high end they help firms invest in their employees, and that investment, in leading to new skills and abilities, counts as a kind of innovation in human resources.

But the fact sheet is interested in the application of non-competes at the low end: to “tens of millions of [presumably ordinary] Americans—including those working in construction and retail . . . .” Here, the evidence suggests that non-competes don’t induce firms to invest more in their employees; they just prevent employees from using outside options to bid up their pay.

A ban on non-competes for ordinary Americans would therefore not have any effect on innovation in worker training, but it would raise wages, making it price regulation by other means.

If we really want to get wages up, of course, the way to do it is to order them up, through initiatives like an increase in the minimum wage. And I get that the Biden Administration indeed also wants to raise the minimum wage.

But that doesn’t make banning non-competes any less price regulation by other means.

Direct Price Regulation

To President Biden’s credit, the order also calls for plenty of direct, and therefore more efficient, price regulation. The remarkable thing is that he does this in a competition order.

The Federal Maritime Commission is to protect American exporters from “exhorbitant” shipping charges. Railroads are to “treat . . . freight companies fairly,” which means charging them lower prices for access to track. The USDA is to “stop[] chicken processors from . . . underpaying chicken farmers.” The FCC is to “limit excessive early termination fees” for internet service. And airlines are to refund fees for wifi or inflight entertainment when the systems are broken—a regulation of the all-in price of a flight.

(Ok, the reason the order doesn’t do more direct price regulation might be that the requisite statutory authority to act in other areas is lacking. But I’m not aware of any Administration calls for Congress to pass new price regulatory legislation, apart from raising the minimum wage and adopting reference pricing in drugs, which latter would apply only to Medicare.)

Consumer Protection

The amount of price regulation—of both the wasteful, competition-mediated sort and of the direct sort—in this order is rivaled only by the amount of consumer protection.

Hospital price transparency is to be fostered, surprise billing condemned. Airline baggage and cancellation fees are to be clearly disclosed. The options in the National Health Insurance Marketplace are to be standardized to facilitate comparison shopping. So too broadband prices.

The common thread to all of these initiatives is that they correct cognitive limitations of consumers that make it difficult for them to find the best, lowest price options on the market, and so leave them poorer. That’s why I class them as consumer protection initiatives, and why they are a good thing.

Consumer protection is competition-adjacent policy—competition does work better, and firms may be more likely to innovate, when consumers have good information about the products offered by competing firms. But the main focus of these initiatives is on empowering consumers to avoid paying out more cash than necessary for goods and services.

Like the price regulation initiatives, it’s directed, ultimately, at the distribution of wealth, not competition. Which is why it is surprising to find so much consumer protection in a competition order.

Unions and Occupational Licensing

The focus on price regulation and consumer protection are a welcome surprise. But the dangers for progressives of confusing these things with competition policy are also on display, for competition is just as likely to be the enemy of equality as it is to be its friend, and it is very easy to lose sight of this when pursuing an equality agenda in competition terms.

Thus in a press release that is already pretty deaf to irony, this takes the cake: “the President encourages the FTC to ban unnecessary occupational licensing restrictions [and] call[s] for Congress to . . . ensure workers have a free and fair choice to join a union . . . .”

Here’s a secret about those “unnecessary licensing restrictions”: they’re state-created unions. The only difference between them and actual unions is that they operate by restricting labor supply, and thereby driving up wages, whereas unions operate by driving wages up, and thereby restricting labor demand. If you’re against occupational licensing because it makes it hard to get a job, you should be against unions, and if you’re in favor of unions because they drive up wages, then you should be in favor of occupational licensing.

The way to minimize mistakes in fighting inequality is to focus on fighting inequality.

Indeed, one cannot help but feel that this order, despite being well-intentioned and expansive, is a sideshow to the real work of fighting inequality that the Administration has undertaken on the tax side. Given the breadth of applicability of the corporate tax—all industries are swept in at once—and the power of the corporate tax to target the proceeds of excessive pricing directly, last week’s agreement of 130 nations to a global minimum corporate tax will likely do far more to divest firms of their markups than anything in today’s order—even were it all implemented as direct price regulation.

Categories
Miscellany

How Very Magical and Unlike Furniture Are the Dead Building Blocks of Life

What makes it so hard to understand, as an intuitive matter, how life would evolve out of the primordial soup is that the molecular building blocks of life, the organic compounds from which cells form, do not behave at all like the objects we encounter in daily life.

If we take a bunch of junk from our everyday lives—some china, a bike or two, some furniture, some clothes, and so on—and throw it together in a vast cauldron and shake it up, nothing much is going to happen, apart from some shattering, even if we shake it for a very long time.

What makes the molecular building blocks of life different is that they react with each other, they stick and unstick and pass energy through each other and spontaneously fold up or unfold. My bike and my desk don’t do that.

To imagine equivalents of these molecular building blocks in our world, we would need to think of physical objects that, while still dead and mechanistic in their nature, would have fairy-like qualities to them. My bike might normally be inert, for example, except when it comes into contact with styrofoam, in which case the wheel would spin like crazy, shredding the styrofoam to pieces. My desk would need to have a tendency to lose its legs when it comes into contact with my china, after which it would need to have a tendency to stick to any car tires into which it comes into contact, but not before. And so on.

My things would, in other words, need to act a bit like windup toys, bumping around in mechanistic ways, but also managing to get wound and rewound through mechanical encounters with each other and with the environment.

(Of course, the physical things I encounter in my lived experience are just themselves agglomerations of molecules, so in a sense there is not really a difference in kind between the molecular world and the world of my lived experience. But the physical things I encounter in my world are generally great big uniform clumps of certain molecules—they are lots of steel or lots of plastic—rather than mixes of molecules that are likely to react with each other. Indeed, the molecular components of my things are specifically chosen not to react with other things. If my desk were capable of quickly changing its chemical composition when it comes into contact with oxygen, as the molecules involved in life sometimes do, then I wouldn’t consider it a very good desk. And so if we look to these physical things for intuition regarding the inevitability of life, we come up empty.)

Categories
Antitrust Monopolization

Using Intellectual Property Rights in Social Media Innovations to Diagnose Kill Zones

The most important charge against the Tech Giants is that they are creating kill zones: no one wants to create new online functionality that Google or Facebook in particular might easily copy. Whether kill zones exist remains a subject of debate, but that hasn’t stopped antimonopolists from wanting to respond anyway by breaking up the Tech Giants.

But there’s a treatment that is more likely to cure the disease without killing the patient—one which has the added benefit of helping us determine whether there actually is a disease to begin with.

But first, let’s consider why kill zones would be a problem if they really do exist.

If kill zones exist, then startups won’t introduce innovative social media functionality into the market because they will know that if Google or Facebook copy it, consumers will prefer the Google or Facebook versions—because those versions will be integrated seamlessly into the rest of the functionality those companies offer—and so the startups will lose out in the market. But because the startups won’t introduce the new functionality, Google and Facebook will feel no need to introduce it either, and so the functionality never makes it into our online lives.

The saga of Vine, Twitter’s erstwhile video sharing service, provides a nice illustration of the kill zone argument. Vine pioneered the video sharing format, but just as it looked poised to take off, Facebook introduced essentially the same functionality in Instagram, and because Instagram was already much bigger, social media users found it easier to embrace the format in Instagram than by migrating over to Vine. The lesson of that episode for someone with a bright idea for the next big thing in social media is: don’t waste your time. So long as it’s something that the Tech Giants can copy, they will, and they’ll win.

To be sure, TikTok shows us that innovation is still commercially viable in social media, the Tech Giants notwithstanding. But the key to TikTok’s success is the algorithms it uses to target videos to users, and those are not easy for the Tech Giants to copy. That means that major, irreproducible innovation is still possible in this space.

But not all good ideas that make our lives better are necessarily major, irreproducible technological steps. If there hadn’t been a Vine, video sharing might have taken a lot longer to invade social media, and that would have been a loss to users, many of whom love the format.

So what to do about kill zones?

I am often struck in reading Nick Lane’s excellent books on biochemistry (Power, Sex, Suicide, and The Vital Question are my favorites) by how much more careful biochemists seem to be in diagnosing problems and sussing out solutions than we are in antitrust. All the more struck, in fact, because biochemistry is a more mechanistic, indeed, easy, field than is antitrust.

In biochemistry, the basic repertoire of behaviors of the smallest units of analysis—molecules—is known with absolute certainty, thanks to the laws of chemistry and quantum physics. If molecule A hits molecule B, we know exactly what will happen. And hypotheses in biochemistry are often testable: you can find a thousand or ten thousand living human bodies in which to observe the biochemical behaviors that interest you.

By contrast, in antitrust, the basic repertoire of behaviors of the smallest units of analysis—human beings—is almost infinite and the subject of perennial debate. We like to assume rational, profit maximizing behavior, but we know, thanks to decades of behavioral economics, that actual behavior is much, much more complex and varied. And hypotheses in antitrust are almost impossible to test on the scales required to produce real knowledge: where do you find ten thousand similar markets to deconcentrate in order to determine whether breakup actually works?

You would expect, then, that antitrusters would be even more careful in diagnosing problems and sussing out solutions than are biochemists. But instead the sheer complexity of the problem seems to impel us in the other direction. It tempts us to boil away the complexity and then find clarity in a residue that bears little resemblance to actual markets. (For the record, I am as guilty of doing this as the next antitrust scholar.)

We should take a page from biochemistry and recognize that while kill zones sound plausible, plausibility is not reality, and so any solution to the kill zone problem must include, as a precondition, some attempt to determine whether there really is a problem. We need to diagnose.

Simply breaking up the Tech Giants doesn’t do that. It’s a bit like the antioxidant craze Nick Lane critiques in his books. It was certainly plausible that free radicals, which do destroy cells, might be the cause of disease, and so molecules that neutralize the free radicals—antioxidants—would be conducive to health. But when biochemists looked closer, they discovered—at least according to Lane—that free radicals are an integral part of the process by which cells regulate the amount of energy that they generate. They’re not all bad, in other words, and so mitigating the harm they do is not as simple as just getting rid of them through the use of antioxidants.

Similarly, a closer look at Google and Facebook’s behavior might reveal something more complex at work than the mere crushing of competitors, and smashing these big companies might, then, not be the solution.

One way to try to determine whether kill zones really are a problem, and, as an added bonus, potentially to treat any problem that does exist at the same time, would be to provide something like intellectual property protection for social media innovations.

Let’s look first at how this works as treatment. By giving startups the right to charge Google and Facebook for any new social media functionality that Google and Facebook appropriate from them, an intellectual property regime would restore the incentive for startups to enter and innovate, regardless whether Google and Facebook use their technology or not. If the new technology is successful, either the startup profits by succeeding independently in the market or by generating licensing income from Google and Facebook if those companies choose to license the technology. The heart of the kill zone fear is that Google and Facebook can take ideas, and the markets that go with them, without paying compensation: this solves that problem.

To return to our example, if Vine had had a right to demand compensation for Instagram’s embrace of video sharing, then Vine might not have become a business failure after all, and the lesson of Vine for social media entrepreneurs today would be that innovation does pay after all, the power of the Tech Giants notwithstanding.

Indeed, intellectual property rights in social media methods would not only encourage innovation, but would also likely lead to the incorporation into Google and Facebook of any successful new social media technologies, guaranteeing that the economies of scale that only these companies can bring to social media technologies would be realized. Google and Facebook would be forced to license any new social media innovations that meet with success in order to prevent their own platforms from sinking into irrelevance, so they would both pay a reward to innovators and incorporate the new innovations, giving them the greatest possible reach. You would get the benefits of size without the costs to innovation.

That would be a big improvement over breakup, which would lead to smaller and hence, for users, less valuable, social media platforms, at least until a new dominant platform could emerge, as one surely would given the value of size to any social network. But with the return of a dominant platform, the kill zone would presumably reappear and the rate of innovation would fall again. Thus in a breakup scenario, unlike in an intellectual property scenario, one cannot both have economies of scale and innovation at the same time.

Of course, any intellectual property rights regime comes with its own bureaucratic costs: someone must decide what really is a protectable social media innovation. And there is the possibility of holdup. There is never a guarantee that any two parties bargaining over a license fee will actually reach agreement, and if they don’t then the technology will not propagate. But holdup, at least, can be solved by a regime of compulsory licensing at regulated rates. (If it seems like a lot to ask a regulator to decide on a license fee, shouldn’t it seem like quite a bit more to ask a regulator to decide precisely how Facebook or Google should be broken up?)

But the really nice thing about an intellectual-property-based approach to kill zones is that it is also a diagnostic tool that can be applied in advance of taking any difficulty-to-reverse actions. We would be able to diagnose the existence of kill zones if, in response to the creation of intellectual property rights, startups were to appear and Google or Facebook were to license the startups’ technology. The fact that Google and Facebook would choose to license the technology would tell us that these big companies view the technology as a competitive threat, and that would in turn tell us that in the absence of the intellectual property rights they would have simply copied the functionality and run the startups out of business. If, on the other hand, startups do not appear or Google and Facebook do not license their technologies, we could conclude that there are no kill zones and phase out the intellectual property rights.

By contrast, under the breakup approach, there would be no way to know whether there was kill zone until after breakup, because only then could we see whether innovation had increased in response. And if there were no increase in innovation, suggesting that there had not actually been kill zones, we would need to wait for the smashed bits of the Tech Giants to knit themselves back together before we could reacquire the benefits of large networks that we currently enjoy.

Indeed, even those who remain committed to the breakup remedy ought to support the imposition of some sort of intellectual property rights regime first, purely as a diagnostic tool. Introducing intellectual property rights and seeing what happens would tell us more about whether there really is a kill zone than any economic study to which an antimonopolist might appeal for diagnostic support today, because any economic study is necessarily counterfactual: the economist can only draw on data about the industry as it is now, or about other industries, to decide whether there would be more innovation in the event that Google and Facebook were to change their behavior.

By contrast, introducing intellectual property rights has the character of an experiment designed to elicit a response (licensing of new startup innovations) that can exist only if the underlying kill zone disease is present.

Would Google and Facebook try to game the diagnosis, by avoiding licensing any technology under a temporary, diagnostic intellectual property regime in order to avoid sending the signal that there is a kill zone? I think not, because doing that would be their loss. If Google and Facebook don’t license successful new technologies, competitors will grow at Google and Facebook’s expense, and they won’t enjoy a dominant position anymore—in which case we would end up with more long-term competition in the market, which is what antimonopolists hope for anyway.

Of course, such a diagnostic experiment would hardly be the sort of large-scale, controlled undertaking one needs for scientific certainty. But it would be a start, and perhaps inch antitrust in the direction of the level of respect for the complexity of its subject that is characteristic of a science.

Categories
Miscellany Monopolization Uncategorized

Don’t Cancel Student Debt; Redistribute It

A culture that does not understand, let alone value the innerness of things is going to have an ambivalent relationship with learning, especially elite learning. For such a culture—our culture—the question what is it for? will forever trouble the educator’s sleep, or, more to the point, the sleep of government officials who are asked to allocate funding for higher education and the voters who are asked to vote for those government officials.

Add into the mix the fact that the politics of the academy are not broadly shared by the electorate at large, and I see in fully-government-funded higher education nothing but: danger. The danger that America’s great system of higher education will starve and wither.

Fortunately, and no doubt because of our cultural ambivalence to education, the funding system we currently have in place provides some protection. The student loan system taxes those who have actually worshipped at the altar of education to pay for its survival. It is, in a sense, a regime of forced alumni giving, with schools asking students to borrow against the future cash flows that become student loan payments so that schools can take this giving up front in lump sums.

The effect is to tell those who wonder what is it for?: we don’t need you. We will pay for this system ourselves.

To be sure, it is not really the students who are saying this, at least not entirely. It is the schools that have been able to decide, within certain limits, just how much funding they receive, because schools have a great deal of market power with respect to students.

Part of that power (this part not, technically, market power, but rather scarcity power) is due to students’ fairly inelastic demand for education: they rightly place great value on education, and are willing to pay a lot for it. But lots of the schools’ power is also due to students’ lack of understanding of the meaning of the large amounts of debt they take on, allowing schools to raise tuition levels without fear of alienating their clients. And more power still comes from schools’ reputations, which are so strong that many schools can raise tuition levels without losing even those students who understand the meaning of long-term indebtedness.

Insidious, perhaps.

But it is thanks to this power of schools to choose their own funding levels that America has the greatest, wealthiest system of higher education in the world. I do not think that an America in which student debt were cancelled, and the student loan funding system for higher education replaced by one of full government funding for higher education, would be anywhere near so wealthy, or so excellent.

It is easy for a graduate pushing for debt cancellation to forget that 60% of Americans do not have a college degree. And many more Americans who do are still troubled by the question what for? Why should they be expected to vote the levels of funding that schools have been able to arrogate to themselves through the current student loan system? The answer is, they won’t.

True, other developed countries that have a public funding model still manage to funnel a lot of cash to schools. But America is different. Remember: each and every developed country in Europe and Asia has a concept of culture.

We have no such thing here in the United States.

Each of those European and Asian countries descends from kingdoms and empires that claimed power by divine right, which is to say, claimed to have a direct connection to the innerness of things. Though many have mellowed and democratized, or at least acknowledged the moral superiority of democracy, they all retain the notion that the state has inner meaning. The expression of the state’s inner meaning is culture, and culture is realized through elite education. The notion that the state should pay for education is not, therefore, subject to question in those countries in the way that it is here, where the state’s only meaning is out-in-the-world practical: to make us happy.

All this is not to say that the student loan system doesn’t need reform. It does. If we correctly understand the system to be a tax on the educated, then we should reasonably ask that it be progressive: that the rich should subsidize the poor.

The current system does that, but only very little. At present, borrowers can sign up for income-based repayment, which uses the federal government’s general tax revenues to reduce the student debt burden of poor students who end up earning less after graduation. To the extent that federal taxation is mildly progressive, income-based repayment is itself mildly progressive.

But real progressivity in the student loan system would mean something different entirely. What we should demand is that rich students—or those who go on to become rich—subsidize poor students and those who go on to be poor. Thus the redistribution associated with progressivity should remain “in the family” of the educated, and be much more extreme than it is today.

Today, those from rich families pay the sticker price for tuition up front and then are free of any further payment obligations to schools, no matter what heights their incomes happen to reach. By contrast, poor students fund themselves through loans, and unless they do well enough after graduation to pay off their loans in full, they go on income-based repayment and their repayment burden varies with income. If they make more, their payments go up, if less, they go down. Thus today, the student-loan system is progressive only with respect to poor students who don’t do well after graduation! The rich, by contrast, pay the equivalent of a flat tax. That’s not progressive.

Instead, we need all students, including the rich, to make payments to fund education over their entire working lives, and those payments need to be adjusted based on income, to the end of redistributing wealth from the most successful to the least.

One way to do that would be vastly to increase tuition bills, so that even rich students must take out loans to fund their education. Then all students would go on income-based repayment after graduation, and the income-based repayment schedules could be used massively to redistribute from the most successful of the educated to the least. The poorest, least successful graduates would end up with very low monthly payments, or immediate debt forgiveness, and the richest and most successful would end up with very high monthly payments—right into the millions of dollars per month, if necessary. Think of it, again, as forced alumni giving, in which those who can give more, do.

The introduction of increasingly generous income-based repayment terms over the past couple of decades signals that the student loan system is already moving slowly in this direction.

Instead of calling for student debt cancellation, and placing politically-vulnerable, inescapably elitist institutions at the mercy of democratic majorities that are not sure they want them, let’s keep education in the family—but make sure that anyone who wants to join, can join, and that the richest graduates pay their way.

[Note: Given that the New York Times doesn’t have to disclose its interest in smashing Google or Facebook whenever it writes about the antitrust cases against them, maybe I don’t need to disclose my own competitive interests when I write about them. But I am an educator.]