Category Archives: Economics

New Anti-Merger Bill Not Indexed for Inflation

Yesterday, I wrote about four problems with Sen. Elizabeth Warren (D-MA) and Rep. Mondaire Jones (D-NY)’s new antitrust bill, the Prohibiting Anti-Competitive Mergers Act. There is a fifth problem: Its $5 billion threshold for automatically rejecting mergers is not indexed for inflation.

That is important. If inflation continues at its current 7.9 percent annual rate, the $5 billion threshold would fall to $4.6 billion in current dollars after just one year. Even if inflation gets back under control relatively quickly, this “bracket creep” effect would, after a few years, increasingly affect mergers outside of Sen. Warren and Rep. James’ big tech targets. Maybe this is by design, and maybe it isn’t. Either way, it’s bad policy.

Mission creep is a serious problem in antitrust policy, as I also pointed out earlier this week in a letter to a conservative state attorney general who wants to use antitrust enforcement to punish progressive political advocacy. Antitrust policy is supposed to be about competition.

The neo-Brandeisian movement that inspired the Warren-Jones bill also wants to expand antitrust regulation. Its advocates see it as a way to address economic inequality, democracy, and climate change, among other competition-unrelated issues.

This new bill, advertised at targeting big tech companies, would, after a few years of even moderate inflation, make that kind of mission creep inevitable. It would affect industries with low levels of market concentration and little to do with today’s tech bugbears. And it would have a chilling effect across the economy on new innovations and new ways to find lower prices for consumers.

New Antitrust Merger Bill Is Fatally Flawed

There is yet another antitrust bill in Congress. The Prohibiting Anticompetitive Mergers Act, sponsored by Sen. Elizabeth Warren (D-MA) and Rep. Mondaire Jones (D-NY), seeks to prevent big tech mergers larger than $5 billion. While companies could appeal this automatic denial in court, they would have to prove the Federal Trade Commission, the Justice Department, or both acted in an “arbitrary and capricious” manner in denying a merger. That is an uphill climb that stacks the deck against companies, and may dissuade many from even trying.

Additionally, it would empower regulators to retroactively undo completed mergers if they result in the merged entity having a market share over 50 percent at some point in the future.

There are several problems with the bill. First, it might not stay on the books for long if it passes, because the U.S. Constitution prohibits ex post facto laws. Unwinding past mergers that were legal at the time they were approved almost certainly qualifies as ex post facto, and courts are unlikely to look favorably on any unwinding attempts if they are met with legal challenges.

Second, the 50 percent market share threshold for enforcement is arbitrary. Fifty percent of which market? Regulators are free to define that as narrowly as they choose. As I’ve noted before, any market can be a monopoly if you define it narrowly enough. The relevant market fallacy is already too common in antitrust. This bill would be an open invitation for regulators to abuse it even further. This is another area where regulators frequently run into trouble in court.

Third, good policy is predictable and stable. The Prohibiting Anticompetitive Mergers Act would be neither. Companies and investors need to be able to plan ahead to bring new innovations or pursue new ways to lower prices. If they try something only to have it undone by regulators after the fact, why even bother? This chilling effect is one of antitrust policy’s most significant costs, and it is often unseen.

Fourth, not everything is an antitrust issue. There is a reason so many startups seek to be acquired by big tech companies: overly burdensome financial regulations. The Sarbanes-Oxley and Dodd-Frank laws make it difficult for growing companies to raise capital on their own or go public. It is often easier for a startup to sell out to a bigger company that already has those resources in-house. If Sen. Warren and Rep. Jones want fewer big tech acquisitions, they should make financial regulations more reasonable, so smaller firms can get the capital they need while staying independent.

Those are just the start of the Prohibiting Anticompetitive Mergers Act’s problems. It is unlikely to pass, since Sen. Amy Klobuchar (D-MN) and Rep. David Cicilline (D-RI), two of Congress’ most powerful antitrust voices, conspicuously declined to support it. Even if it is more of a statement bill than a serious proposal, it is still important to nip it in the bud. There are better ways to make the economy more competitive.

In Order to Counter Inflation, Federal Reserve Should End Bond Buying Spree

This press release was originally posted at cei.org.

The Federal Reserve announced today it would raise benchmark interest rates by a quarter percentage point with the aim of counteracting the effects of inflation.

CEI Senior Fellow Ryan Young said:

“Inflation happens when the money supply grows faster than real economic output. The wider the gap, the higher the inflation rate. The Fed has by far the most control over the money supply, so fighting inflation is on its shoulders far more than on Congress or President Biden’s.

“The Fed should have started acting months ago to stem inflation. And it needs to take more action than raising the federal funds rate by a quarter of a percentage point. Its massive bond buying program is finally due to wind down this month, which has directly added several trillion dollars to the money supply. This has had more impact than its interest rate policy, which affects the money supply only indirectly.

“The Fed can ease fears of further inflation by credibly committing not to embark on another bond-buying spree, and continuing to raise the federal funds rate throughout the year. Inflation expectations play a role in how companies set their prices, so easing these fears by itself can help keep prices in check. Congress and President Biden can also help fight inflation by spending less. This would make life easier for both the Fed and taxpayers.”

Related:

Correcting a Couple of Inflation Whoppers

Over at National Review’s Capital Matters site, I have a piece pointing out that today’s high gas prices aren’t caused by inflation. They’re caused by a supply shock due largely to Putin’s unprovoked war with Ukraine. The reason is that inflation has to do with money supply, and supply shocks do not:

The increase in gasoline prices far exceeded the overall inflation rate. According to the St. Louis Federal Reserve’s FRED database, the average nationwide gas price was $3.37 per gallon at the end of January. On March 7, it was $4.10—a 22 percent increase. In February, the consumer price index for all goods, which includes gasoline, increased by 0.8 percent.

While the Fed can control the money supply, it cannot do anything about supply shocks. But that isn’t the only whopper making the rounds right now. Gas prices did not, as widely reported, set new record highs last week:

GasBuddy said on March 7 that gas prices would likely set an all-time high on March 8, but did not adjust for inflation. Students know to do this, but some professionals apparently do not. CNBC and The Hillreported GasBuddy’s numbers without pointing this out. USA Today mentions the error, but then carries on as if it didn’t matter. It does.

Going back to the FRED database, before now, the highest recorded nominal (not inflation-adjusted) gas price was $4.12 per gallon, in July 2008. Using the Minneapolis Fed’s handy inflation calculator, that would be $5.19 in 2021 dollars. With the inflation observed so far in 2022, it would be equivalent to $5.23 today.

Read the whole piece here.

Antitrust Is Political

Antitrust regulation is just as politicized as other forms of regulation. Arizona attorney general Mark Brnovich’s just-announced investigation into investors whose politics he doesn’t like is just the latest example, as I point out in a letter that ran in yesterday’s Wall Street Journal:

Arizona Attorney General Mark Brnovich has opened an antitrust investigation into investment funds centered around environmental, social and governance (ESG) goals. He argues that they are financing a coordinated political agenda (“ESG May Be an Antitrust Violation,” op-ed, March 7). First Amendment concerns and the heavy legal lift of proving collusion aside, this investigation is wrongheaded for two reasons.

First, two wrongs don’t make a right. Mr. Brnovich is right that many ESG funds are politicized. But the remedy is not antitrust enforcement, which itself is politicized—not to mention slow, ineffective, and prone to regulatory capture.

Second, it is unwise to give new ideas to the Federal Trade Commission’s Lina Khan, Sens. Josh Hawley and Amy Klobuchar, and others looking to expand antitrust regulation. Antitrust mission creep has already crept too far.

Ryan Young

Competitive Enterprise Institute

Washington

The letter is here. Brnovich’s original column is here.

Inflation Sets Another 40-Year High: Relief Is in Sight, with Caveats

Inflation set a new 40-year high in February. The Consumer Price Index (CPI) increased by 0.8 percent in February, which annualizes to 7.9 percent. This is up from January’s 7.5 percent, compared to the Fed’s 2 percent target. That was roughly what was expected. The Fed made no policy changes in February and the U.S. economy stayed on the same trajectory, while Vladimir Putin’s unprovoked Ukraine invasion of Ukraine sent oil prices skyrocketing. That alone counts for about a third of the increase.

That said, there are two bits of good news—kind of. The first is that in March, the Fed is finally expected to end its bond-buying program and begin raising the federal funds rate. They should have done that months ago, but better late than never. Once taken, these actions will slow money supply growth—especially ending the bond-buying program, which intentionally creates new money out of thin air. Since the Fed’s expected actions will take time to work through the economy, they will probably not show up very much in March’s numbers when those come out on April 12. There are other factors in inflation, but the Fed policy component is by far the biggest, and it is likely about to turn the corner.

The second bit of kind-of-good news is that part of the CPI’s February increase isn’t actually from inflation. Putin’s war has caused oil prices to skyrocket, and energy accounts for 7.5 percent of the CPI. The spike is enough to account for a third of the February CPI’s increase from January. Supply shocks are not inflation, since they have nothing to do with the money supply. Inflation happens when the money supply grows faster than real economic output. The current price spike, which is hopefully temporary, doesn’t have a thing to do with the amount of currency floating around. It isn’t inflation.

This non-inflation noise from supply shocks is one reason why the Fed stopped using CPI years ago. It instead uses the Personal Consumption Expenditure (PCE) index. The media continues to mostly use CPI, possibly because it typically comes in at a higher number and is more volatile, thus allowing for juicier news stories. Lawyers continue to use CPI in most contracts that contain inflation adjustments, as do government agencies when indexing salaries and penalties, which is why the Fed continues to calculate CPI.

Another way to adjust for supply shock effects is to use the Core CPI statistic, which removes volatile energy and food prices from the CPI basket of goods, but is otherwise identical. This less volatile number better captures how much prices increases are due to inflation, rather than to changes in supply and demand. These are very different things, though it can be difficult to tell which is which.

Going forward, the Fed should concentrate on getting the money supply back in sync with economic output. It should ignore the oil price shock, which is out of its control. Congress and President Biden can help reduce oil prices by repealing the Jones Act, which makes shipping domestic oil more expensive, and by removing obstacles to increasing the domestic supply. Russia accounts for about 1/30th of U.S. oil imports, which isn’t nothing, but also isn’t decisive. More liberal policies can help absorb some of the shock. But politically tempting illiberal policies, such as price controls and antitrust actions against energy producers, will only make things worse.

The New Office Normal

What is the best workplace model for employers to follow as COVID-19 (hopefully) continues to wind down? In an Inside Sources op-ed currently being syndicated, I argue that there isn’t a single best model. Employers and regulators both need to be ready to continuously adapt:

Moreover, people’s needs for flexibility will outlast COVID. Someone with small children or who is caring for elderly family members might be unable to work traditional office hours. But they can do gig work on a flexible schedule if they want to.

But it’s not all upside. We found out the hard way that remote education works poorly. Many jobs can only be done on-site, from manufacturing to haircutting. For much of the economy, the traditional commuting model isn’t changing anytime soon.

What should policymakers do? Be as flexible as possible. Let workers experiment. Let employers make mistakes and learn from them, at their own expense. Loosen burdensome zoning and occupational licensing rules. Avoid policies like California’s gig worker law, which put thousands of independent contractors out of work before the major parts of the measure were repealed via ballot initiative.

Read the whole thing here.

Tradeoffs Are Everywhere, Even in Recording Studios

Early in his career as a mixing engineer, Dave Pensado discovered a version of Nobel laureate economist Kenneth Arrow’s impossibility theorem. As he puts it in his co-authored book with his Pensado’s Place co-host Herb Trawick, The Pensado Papers: The Rise of the Visionary Sensation:

“I learned very early on, even before I came to L.A., that no one ever hired me again because I did something cheap or fast. That doesn’t happen in my profession. The triangle has cheap at the top, fast on one corner, and good on the other. pick two. That’s pretty much what you have to do.”

Yet another example that good economic thinking doesn’t always come from economists.

U.S. Economy Adds 678,000 Jobs in February, but Inflation, Russia, Government Mandates Remain a Problem

This press statement was originally posted on cei.org.

The U.S. economy added 678,000 jobs in February, according to newly released government figures. CEI economic and labor policy experts praised the good news and cautioned against government spending and regulations that will hinder the recovery.

Ryan Young, CEI Senior Fellow:

“Once again, economic news has moved in step with the virus. Case counts and severity have been going down for weeks, so people are opening up more. And now authorities are loosening mask mandates and other measures. No wonder more people are going back to work. The virus is now on the edge of no longer being the most important economic indicator, barring any new variants.

“There are challenges ahead from inflation and from Russia’s invasion of Ukraine.

“The Fed will likely soon raise the federal funds rate and end its bond-buying program in order to fight inflation. Employers might react to this by decreasing hiring and investment somewhat until things stabilize. But the long-run benefits of stable prices will be more than worth it. 

“Vladimir Putin’s hubris will cause oil prices to rise for some time, but Congress and President Biden can help by repealing the Jones Act, which raises domestic shipping prices so much that it is often cheaper for refiners near coasts to turn to foreign oil instead, often Russian.”

Sean Higgins, CEI Research Fellow:

 “The continued decline in the employment rate, which fell to 3.8 percent in February, is further proof that the best remedy is to roll back the Covid pandemic restrictions and allow the economy to heal itself. The Labor Department reported Friday that only 4.2 million people were unable to work in February because their employer was closed or lost business due to the pandemic. That was down from 6 million who faced the same problem in January. That 1.8 million worker shift more than accounts for February’s overall gains of 678,000 jobs.

“New federal spending programs, minimum wage regulations, other government mandates aren’t needed to get us the rest of the way back to where we were in February 2020. We just need to put the pandemic behind us.”

One Way to Block Reforms: Capture the Lawyers

From p. 23 of Richard McGregor’s 2010 book The Party: The Secret World of China’s Communist Rulers:

“About one-third, or 45,000, of the 150,000 registered lawyers in China as of May 2009, were party members. Nearly all law firms, about 95 percent, had party committees, which assessed lawyers’ pay not just according to their legal work, but to their party loyalty as well. Far from being a weakness, the Party considers its penetration of the legal system to be a core strength.”

Economists often write of regulatory capture, in which regulated industries capture the agencies that regulate them, and use that relationship to feather their each other’s nests. It turns out this can also happen in the opposite direction, and governments can capture industries.