Category Archives: Economics

Herbert Simon on the REINS Act

Most regulations are issued by the executive branch, not Congress. This limits their accountability to elected officials. Bills such as the REINS Act seek to address this by requiring Congress to vote on major new agency regulations (see my 2016 paper on REINS). One objection to REINS is that it would require an additional 40 to 50 congressional votes per year; Congress often has too much on its plate as it is. Herbert A. Simon foresaw that objection several decades ago on p. 65 of the 4th edition (1997) of 1947’s Administrative Behavior (emphasis in original):

Second, the fact that pressure of legislative work forbids the review of more than a few administrative decisions does not destroy the usefulness of sanctions that permit the legislative body to hold the administrator answerable for any of his decisions.

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Blocking the T-Mobile-Sprint Merger: Competition, Rent-Seeking, and Uncertainty

Nationwide 5G networks are coming. They will expand possibilities for everything from smartphone applications to GPS to streaming video, and will enable new technologies that have not yet been invented. President Trump wants the U.S. to be a world leader in 5G adoption. But his Justice Department’s antitrust division might hinder that goal by blocking the proposed merger between Sprint and T-Mobile.

The antitrust division’s rationale is that the deal would decrease the number of major wireless carriers from four to three. But my colleague Jessica Melugin argues that without the merger, the number of carriers might actually be two: “T-Mobile and Sprint will [need to] be able to combine their resources [in order to] stay competitive with Verizon and AT&T, and hopefully help the mobile communications industry in the United States win the race to build the first 5G network.” Together, they might survive. Apart, both might go under.

On the other hand, the rule of thumb is that 90 percent of mergers are failures, remember. This could well be the next AOL-Time Warner. Nobody knows how Sprint-T-Mobile would turn out, including the Justice Department, as well as the companies themselves. But unlike antitrust regulators, Sprint and T-Mobile have skin in the game, and thus a stronger incentive to make the right decision.

Then there is the rent-seeking angle. As my colleague Wayne Crews notes: “It’s also important to note that invoking antitrust laws in this case is de facto corporate welfare for Verizon and AT&T. It means they can stand pat rather than reacting to dynamic changes to the marketplace.”

Third, there is the uncertainty angle. There are no set criteria for what makes a merger legal or illegal. Regulators decide at their own discretion—and politics are often involved, as with President Trump’s recent unsuccessful attempt to block the AT&T-Time Warner merger (Time Warner owns CNN, which is often critical of Trump).

There are ways to measure market concentration, such as the Herfindahl-Hirschman Index. But its numbers are easy to manipulate to reach any conclusion—just define the relevant market however narrowly or broadly you want, and you can generate a number showing any desired degree of market concentration. The Federal Trade Commission has a set of merger guidelines, but they are not binding and can easily be ignored if politics or other merit-unrelated factors are more important at the moment.

This regulatory uncertainty has costs far beyond whatever happens with the Sprint-T-Mobile deal. Even if the merger goes through, and a merged T-Mobile-Sprint proves a viable 5G-era competitor, the fact that mergers are approved or denied at a whim will continue to have its chilling effect on companies far outside of technology or communications. For some companies, the upside is not worth the cost in legal fees, political engagement, and potential bad publicity. This is consumers’ loss, not just entrepreneurs’ and investors’.

For more reasons to be skeptical not just of the move to stop the Sprint-T-Mobile merger, but of antitrust regulation in general, see Wayne Crews’ and my just-released paper, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.”

Richard Thaler – Misbehaving: The Making of Behavioral Economics

Richard Thaler – Misbehaving: The Making of Behavioral Economics

Part Thaler’s career autobiography, and part biography of the field of behavioral economics. Thaler is coauthor of Nudge with Cass Sunstein, and won the 2017 economics Nobel. He is also an excellent popular writer, which the profession could use more of. His tone is friendly and conversational, he uses frequent humor, and he explains concepts in an engaging way, while also giving plenty of attention to the sometimes quirky personalities behind those ideas.

While I do recommend this book, behavioral economics is not nearly as radical or subversive as Thaler sells it to be. Nor do his normative conclusions entirely hold up. Adam Smith himself rejected the Homo economicus model, and Frank Knight’s 1921 landmark Risk, Uncertainty, and Profit is essentially a sustained debunking of the standard model that runs for 375 pages. Hayek and Keynes, for all their disagreements, were united in having little use for the perfect competition model. Hayek’s spontaneous order is about flexibility, adaptation, and imperfect knowledge –all of which the perfect competition model denies. Keynes’ phrase “animal spirits” perfectly captures an important factor in economic life, and is similarly incompatible with perfect competition.

Thaler also clearly takes umbrage at the most common criticism of his nudging proposals. It runs as follows:

  1. People are not fully rational.
  2. People designing nudges are people.
  3. Nudgers are not fully rational.
  4. Therefore nor are their nudges.

Thaler does not substantively address this criticism, but he does flash some temper. It clearly strikes a nerve. He also reacts precisely as he accuses his opponents of doing to his arguments—dismissing it with a “wave of the invisible hand,” as he terms it. This refusal to engage a major criticism is the book’s biggest flaw.

Economists and policymakers would do well to listen to Thaler and other behavioral economists’ insights on psychology and human behavior. They should also keep in mind that nudgers are just as fallible as the people they hope to nudge. A large top-down error is hard to undo; millions of smaller bottom-up errors by individuals tend to cancel out by dint of their large number. Even the largest on-the-ground individual error is positively benign compared to what a politician or an agency error could impose on millions of individuals.

In short: Thaler’s work is valuable for the is, but likely more harmful than helpful when it gets to the ought phase. His ideas are very much worth engaging, and this book delivers them superbly.

CEI Makes the Case against the Use of Antitrust Law

This is a CEI press release for Wayne Crews’ and my new paper on antitrust reform, cross-posted from CEI.org

The Competitive Enterprise Institute today released a report making the case that government use of antitrust law to break up big companies has a chilling effect on long-term investment and innovation and harms competition and consumers.

In “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era,” co-authors Ryan Young and Wayne Crews argue that the renewed call for use of antitrust law by policymakers on both sides of the aisle is dangerous for both consumers and producers. Young and Crews make the case that antitrust provisions of law should be repealed.

“While advocates of antitrust enforcement believe its use will bolster competition, the facts show the mere threat of antitrust penalties have a chilling effect on entrepreneurs and their ability to innovate,” warned Ryan Young, CEI senior fellow and report co-author. “Repealing antitrust laws in favor of a market-based approach to competition would reduce regulatory uncertainties for businesses and foster an environment where companies and entrepreneurs can innovate, which only benefits consumers.”

The antitrust issue has taken on greater urgency as politicians – both Republicans and Democrats – push for more aggressive antitrust enforcement. Policymakers in both the United States and the European Union have expressed an interest in using antitrust law to break up big technology companies like Facebook, Apple, Amazon, Netflix, and Google.

“Despite the calls for more antitrust regulation from Washington, the best outcome for consumers and a competitive marketplace would be to repeal antitrust laws and regulations entirely,” said Wayne Crews, CEI Vice President for Policy and report co-author. “Subjecting our dynamic economy to the policies of the smokestack era would be devastating for the many types of innovation we are seeing in the modern, diverse marketplace. Consumers benefit from competition and innovation, not heavy-handed government intervention and regulation.”

The report makes several key recommendations, including:

  • Repeal the Sherman Act of 1890. If a company is making extraordinary monopoly profits, the only way it can keep competitors at bay is to use government to protect its position from competitors. The solution is taking away the government’s power to protect such companies from competition.
  • Stop equating mergers with monopoly. Horizontal mergers – between companies competing in the same market – reduce the number of competitors in a given market while increasing their average size and are a red flag for antitrust regulators. But size or market concentration of an entity or industry should not be an antitrust offense, far from it. In an era in which it is readily apparent and agreed-upon that we need larger-scale infrastructure, and further expect novel ventures like commercial space travel, some firms and industries of the future need to be far larger than what we see today. Laws and regulators should not be concerned with size but whether the company attains its size through competition or from government favors.
  • Stop worrying about “predatory pricing.” Antitrust regulators can punish a company if it charges lower prices than its competitor, under the guise of predatory pricing. The idea is that a company can sell its wares at a loss in order to gain market share, perhaps even causing competitors to go bankrupt. But the only way for a “predator” undercutting its “prey” to keep a permanent monopoly is to permanently sell at a loss. That results in bankruptcy, not monopoly.
  • Repeal the Robinson-Patman Act. Price discrimination is selling goods to different people at different prices and is regulated by the Robinson-Patman Act. Common examples of price discrimination include putting products temporarily on sale, giving bulk discounts for large quantity orders, or membership programs. There is much uncertainty around what is permissible and what is illegal price discrimination, making the Robinson-Patman Act unworkable and unenforced. Repealing it would take away needless uncertainty and give consumers and businesses peace of mind.

View the report and the rest of its recommendations, The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era by Ryan Young and Wayne Crews.

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New Study: The Case against Antitrust Law

Antitrust regulation is a complex, multifaceted issue. It brings together insights from law, economics, political science, history, philosophy, and other disciplines. Right now both political parties are ramping up their antitrust rhetoric, and it will likely be a live issue throughout the 2020 election cycle. A working understanding of how antitrust regulation works is important for understanding why it works so poorly, and should ultimately be abolished. To that end, Wayne Crews and I have a new study out, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.”

If you prefer the short version, here is a press release. We will also be running a series of blog posts hitting the main arguments. Often, a frequent drips-and-drabs approach to learning an issue is as effective as one intensive sitting. The initial posts will sketch out broader themes of antitrust regulation and the main sides of the debate. After that, we will go through the items on our “Terrible Ten” list of failed antitrust policies that should be abolished.

For additional CEI antitrust resources, we also have a dedicated landing page at antitrust.cei.org. Wayne’s and my full study is here.

Amity Shlaes – The Forgotten Man: A New History of the Great Depression

Amity Shlaes – The Forgotten Man: A New History of the Great Depression

It’s in part about FDR’s presidency, but more about the country and the times than the man himself. William Graham Sumner first coined the term “The forgotten man” in 1876 to describe people who neither voted for nor benefited from spending programs, but paid for them anyway. FDR later used the term in a very different way, to describe people who were hurting during the Depression and not getting the help they needed. This sharp change in direction is a theme of the times, and of Shlaes’ book.

FDR wasn’t particularly ideological, and as a result many New Deal policies were scattershot and worked against each other, rather than with each other. The result was absurdities such as crops being plowed under to raise food prices for farmers, even as people were hungry and cash-poor.

Despite their contradictions, many New Deal policies have common themes. They tend to increase federal power relative to state and local power; they grow government on net far more often than they shrink it; and they emphasize top-down direction rather than bottom-up adaptation. This even led to officially sanctioned cartels, after forty years of antitrust policy enforcement intended to break them up. This cartel approach was openly acknowledged to have been inspired by Mussolini.

But there is far more to the story of the Depression than FDR. Just as he gets more praise than he deserves, so too does he get more criticism than he deserved. The single biggest cause of the Depression was a one-third contraction in the money supply during the 1920s. The resulting deflation led prices to change for reasons completely unrelated to supply and demand, and led to all kinds of mistaken financial decisions and investments. The 1930 Smoot-Hawley tariffs, passed shortly after the stock market crash, killed international trade and raised international tensions at the worst possible time. President Herbert Hoover, usually remembered as a free market supporter, doubled federal spending in real terms in just four years.

All this happened before FDR took office. He and his brain trust inherited an amazing mess, which might partially explain their general ethos of throwing spaghetti at the wall until something sticks. They had no precedent to work from, people were scared, and nobody knew what to do.

Politics also played a role, and in the usual negative way. For example, demographers knew from the start that the 1935 Social Security Act would create a program that was not sustainable in the long run.  The worker-to-retiree ratio would lower over time, and would cause massive structural deficits for future generations. FDR acknowledged this in writing, dismissing it for the same reason President Trump waves off deficit concerns today: he’ll be out of office by the time it becomes a problem.We are that future generation, and Social Security’s present value deficit is measured well into the tens of trillions of dollars—in part because a presidential election was coming up more than 80 years ago.

Herbert Spencer – Social Statics

Herbert Spencer – Social Statics: The Conditions Essential to Human Happiness Specified, and The First of Them Developed

Spencer was only about 30 when he wrote this 1851 book. Frankly, it shows. His thoughts on land and property rights are a muddled mess, which was common in those days, though his system stands out even among that disappointing lot. Spencer’s overall thought is much better. In a nutshell, it is classical liberalism heavily influenced by the natural sciences and especially evolution. It is full of nuances and subtleties that are easy to miss or misinterpret—something many of his critics almost seem to have done intentionally.

At this early point in his career, Spencer didn’t quite have the full command of the implications of his own philosophy, nor had he developed the ability to phrase them tactfully. He also shared some sloppy intellectual tendencies common to Victorian Britain, for example thinking of many nationalities or races as groups rather than individuals. All Native Americans, for example, apparently have hot tempers, according to Spencer. Though he rightly complained about being misunderstood, there are places where Spencer dug his own grave.

Despite these cringe-worthy moments, Spencer was a very much a liberal, especially by the stuffy standards of his time. He favored equal rights for all individuals of all races (even ones with hot tempers), and for all women. This consistent liberalism was as rare as it is consistent, even in the age of John Stuart Mill.

He opposed colonization and empire, was an ardent abolitionist, and believed deeply in poverty relief, even as he thought government incapable of handling the task competently or fairly. While Spencer distinguished between the deserving poor and the undeserving poor, he still advocated helping even the people he tactlessly calls undeserving. They are individuals, and all individuals have the same rights. Spencer is nothing if not consistent and, in a weird and off-putting way, compassionate.

Despite his heavy reliance evolutionary thought, Spencer also opposed eugenics programs to improve the species. This means Spencer opposed the very thing he is most criticized for supporting. Eugenics would instead become popular among progressives a generation or so later. The idea would persist long enough that Gunnar Myrdal’s advocacy, for example, led to 60,000 of his fellow Swedes being sterilized, and he pushed for similar policies for African-Americans. Myrdal would co-win the economics Nobel—in 1974. Spencer’s reputation as a social Darwinist turns out to be untrue, something I was unsure of when I picked up the book, and was relieved to discover. Some of his ideological opponents turned out to be less innocent.

The confusion likely results in part from Spencer’s stated belief in evolutionary progress towards perfection, an idea that seems to me influenced by Condorcet’s exaggerated Enlightenment-style belief in progress leading inevitably to perfection, and a prefiguring of economic equilibrium theory along the lines of what Walras would popularize during Spencer’s lifetime. The fact that Social Statics pre-dates Darwin means that few people had a sophisticated understanding of how natural selection works, let alone the ability to apply it to social processes, such as customs and norms. Spencer would have greatly profited from having access to the works not just of Darwin and Huxley, but later thinkers such as Sagan, Dennett, or Dawkins.

Spencer also used the term “fitness” not as a positive or negative value judgment, but as a descriptor. An herbivore with flat teeth is more fit to its plant-based diet than one with sharp teeth. Regardless of one’s personal opinion on the matter, this will show in their survival rates. One type of business or person is not inherently better than another, according to Spencer. But a business with lower prices will attract more customers in world where that’s what customers prefer. A person who works hard is more fit to a society that rewards hard work, and poorly fitted to one that punishes it. This will be true regardless of whether one thinks this a good thing or a bad thing. It’s a little bit like how many people struggle to tell the difference between a fact an opinion.

Another is a confusion between thinking in terms of groups versus thinking in terms of individuals. Spencer does seem to have believed in inherent racial differences. Such groups share common characteristics. I do not share this belief, nor do most people today. Despite this group-thinking, Spencer’s entire system is based on individual rights. Regardless of what group a person comes from, an individual has the same rights as all other individuals, and deserves to have those rights respected. But even where Spencer is flat-out wrong in his group-thinking, he remains an individualist. Spencer could have avoided this trap by simply taking the modern view that every individual is different regardless of what socially constructed group they belong to. But at least he believed in everyone’s individual rights.

I’ve only read selections of Spencer’s later works. Time permitting, I look forward to finding out if his thought, ahem, evolved out of its immature aspects and Victorian conventions in Social Statics, or if I will continue to roll my eyes at some parts while being moved in others by his compassion and drive to make things better for as many people as possible, regardless of race or gender.