Category Archives: Economics

Who Bears the Burden of Proof in Justifying Regulations?

John Stuart Mill gave his answer on p. 938 of the Liberty Fund edition of his Principles of Political Economy, in volume 3 of his collected works:

“[T]he onus of making out a case always lies on the defenders of legal prohibitions.”

The modern legal scholar Randy Barnett calls this the presumption of liberty. People are presumed to be free to act. If a third party wants to intervene, the burden is on them to prove why they should be allowed to.

Abraham Lincoln on the Separation of Campaigning and Legislating

Abraham Lincoln, when he was a member of the House of Representatives from the Whig party, supported Zachary Taylor’s 1848 presidential candidacy. This was in part because he thought Taylor would be a weak executive. As David Herbert Donald writes on p. 127 of his 1994 biography Lincoln:

The proper Whig policy ought to be one of “making Presidential elections, and the legislation of the country, distinct matters; so that the people can elect whom they please, and afterwards, legislate just as they please, without any hindrance [from the Chief Executive], save only so much as may guard against infractions of the Constitution, undue haste, and want of consideration.”

Lincoln would change his tune when he became president himself. There is also more to successful executive restraint than this. And there is need for stricter legislative restraints, too. But on the whole, this is a healthier vision of executive power and the president’s proper role than what we have endured over the last few decades.

Why Facebook’s Antitrust Cases Should Be Dropped

Facebook filed today to dismiss antitrust lawsuits against it today by the Federal Trade Commission (FTC) and several state attorneys general. One of the reasons they should be dismissed is that both cases rely on a textbook example of defining a company’s relevant market artificially narrowly in order to make the company look more dominant than it is.

In its Facebook complaint, the FTC argues that Facebook dominates the market for “personal social networking services.” The states’ case uses the same term. They made it up just for this case. Its specialized definition omits competitors such as TikTok and Twitter. It also omits emerging competitors such as Discord and Clubhouse, and more like them that are sprouting up all over the Internet, a point that will only grow more important as the Facebook case proceeds.

Of course Facebook dominates a market definition that intentionally leaves out most of the competition! Arguments this weak have no place in a courtroom. Any of these competitors could take away Facebook’s market share the same way Facebook supplanted MySpace.

Even this is not the full extent of Facebook’s relevant market. Facebook competes for consumers’ attention against other uses of people’s leisure time, such as Netflix, podcasts, and even in-person socializing. As more people get vaccinated, restaurants, sporting events, movie theaters, and other activities will resume competing against Facebook for peoples’ attention.

Facebook also competes in the advertising market. A common test for market power is whether a company can jack up prices while restricting supply. Facebook does not have market power in the advertising market. Digital ad prices went down by half between 2009 and 2019. Over that same period, print ad prices doubled. In fact, the antitrust complaints argue that Facebook executives worried in internal correspondence that Instagram and WhatsApp would drive down ad prices even farther or faster. Due to the evidence they provide in their own complaints, the FTC and the states will have a difficult time arguing that Facebook had the market power to raise ad prices. In soccer, this is called an own-goal.

Apple and Google, for example, are Facebook’s largest competitors in the ad market. They are both in the process of changing their privacy policies to differentiate themselves from Facebook’s approach, in the hope of luring consumers and ad buyers away from Facebook. Meanwhile, other websites and apps, as well as real-life entertainment options, will never stop competing with Facebook for consumer attention.

In a competitive market like this, Facebook does not have the power to control its fate—consumers do. Facebook and its competitors are engaged in an ongoing discovery process to see what appeals to their customers.

The market process resembles a moving picture that is constantly changing and evolving. Antitrust cases are more like still images of a single frame. A decade ago, critics complained that MySpace was a natural monopoly that could drive out all competition. Now people are making similar arguments against one of those competitors, Facebook. A decade from now, Facebook might still be the largest social network company. Or it might not. Either way, it will not be the same product it is today. It must either continue to adapt its privacy, content moderation, and newsfeed algorithms in ways that people like, or it will lose its dominance. If it stays on top, it is because people like its product. Either way, consumers are in charge. To claim otherwise is unrealistic.

Whether it’s in “personal social networking services,” or an arbitrarily narrow definition of the advertising market, Facebook does not have monopoly power. Nor is there proof of consumer harm. One reason Facebook’s user services are free is because users would flee to other free sites if Facebook were to begin charging them.

Facebook is also unable to stop ad prices from declining. With the ad market essentially on a permanent 50 percent off sale compared to when Facebook became big, the company clearly does not have the ability to set a floor on ad prices. Even if it were to try, prices would continue to fall through their floor because of the competitiveness of the market.

The FTC and the states are unlikely to win on the merits, so they are instead turning to semantic arguments. The FTC and the states should drop their cases. If they don’t, courts should dismiss them.

For more, see a statement from CEI experts, my earlier blog post, Iain Murray’s Fortune article, Wayne Crews’s and my paper “The Case against Antitrust Law,” and CEI’s dedicated antitrust website, antitrust.cei.org.

CEI Experts: Courts Should Dismiss Antitrust Lawsuits against Facebook

This press release was originally posted at cei.org.

Facebook today asked courts to dismiss antitrust lawsuits brought by the Federal Trade Commission and state attorneys general, an outcome supported by the Competitive Enterprise Institute for legal and consumer freedom reasons.

Statement by Kent Lassman, CEI President:

“When neither the facts nor the law are on your side, the only thing left is political muscle. The lawsuits by the FTC and state attorneys general are dangerous political posturing, unrooted in economics or law. They fail on economics because there is no demonstrated consumer harm. They fail on the law because the acquisitions were previously approved and remedies are only available for ongoing, not previous, conduct. Crucially, they fail the test of common sense. Consumers continue to benefit from investment, innovation, and new entrants into the marketplace. Americans have had enough of power poses and posturing. Dismissal of these cases would help renew confidence in free enterprise and the rule of law.”

Statement by Jessica Melugin, Director of CEI’s Center for Technology & Innovation:

“The only question worth asking about Facebook’s acquisitions of Instagram and WhatsApp is: how did consumers fare? U.S antitrust law is based on consumer harm, and there’s none of that to be found in the lawsuits brought by Federal Trade Commission or state attorneys general against the social media giant. Facebook made WhatsApp free and improved the Instagram app to the tune of a billion satisfied users. No prices have been raised, no output has been restricted, and no consumer has been harmed by these acquisitions. Both lawsuits should be dismissed.”

Statement by Ryan Young, CEI Senior Fellow:

“The Facebook case is a classic example of the relevant market fallacy. The FTC made up its own boutique term for Facebook’s market, ‘personal social networking services,’ which excludes Twitter, TikTok, and other competitors, as well as emerging competitors like Discord and Clubhouse. Of course Facebook dominates a market definition that intentionally leaves out most of the competition! But any of them could take away Facebook’s market share, like Facebook did with MySpace.”

Related analysis:

Commentary: Antitrust Litigation Usually Causes More Harm Than Good. Big Tech Is No Different

Statements: State AG and FTC Antitrust Actions against Facebook Fail to Prove Consumer Harm or Anticompetitive Behavior

Report: U.S. Antitrust’s Greatest Misses

The Case For Repealing Antitrust Law by Fred L. Smith, Jr. (1999)

Some Good Tariff News

I’ve written before about the 17-year-long dispute between the United States and the European Union over Boeing and Airbus subsidies. Each jurisdiction has placed tariffs against the other until they drop the subsidies, which, given political realities, will not happen. As a result, tariffs intended to spur reforms are not going to work, but were going to stay in place anyway, and with the World Trade Organization’s blessing.

There is good news to report. Those tariffs will now be suspended for four months, on both sides. In a phone call, President Biden and European Commission President Ursula von der Leyen agreed to the suspension to give them time to negotiate further.

The negotiations will likely be unproductive, but the tariffs should still not come back. They affect everything from French wine to American motorcycles—industries that have nothing to do with aerospace, and have done nothing wrong to deserve being hit with tariffs.

Both governments are wrong for subsidizing private businesses like Boeing and Airbus. But neither wants to fix it unless the other side does first. The scene is reminiscent of the Dr. Seuss story “The Zax,” in which two Zax, who only walk forward, both refuse take a step to the side and let the other one by when they come face to face, even though both would benefit.

Most of the Biden administration’s actions so far have indicated that it will keep most of President Trump’s trade barriers, while adding a few of its own with green branding, but this is one area where the administration has taken a step in the right direction.

For more ideas on positive trade policy, see the trade chapter in CEI’s soon-to-be released Agenda for Congress, and CEI’s upcoming event celebrating its release, as well as Iain Murray’s and my paper “Traders of the Lost Ark.”

Federal Minimum Wage Hike will Force Cuts Elsewhere

This is a CEI press statement from February 26, 2021.

With the Democrat-controlled Congress aiming to imminently pass a plan to increase the federally-mandated minimum wage from $7.25 to $15 per hour nationwide as part of a $1.9 trillion Covid-related spending bill, CEI experts warn that foisting that labor cost increase on employers will force them to make painful cuts elsewhere.

Statement by Sean Higgins, CEI Research Fellow

The Raise the Wage Act will make the federal minimum wage $15 an hour because “fight for 15” is a catchy slogan, not because there is definitive economic research saying that is the optimal level to help the working poor. The best the legislation’s fans can say is that they don’t think $15 will hurt that much — evidence contradicted by the Congressional Budget Office report that the legislation will eliminate 1.4 million jobs. The workers who do keep their jobs would likely get fewer hours and benefits and face higher prices as employers adjust. Congress could do better if it asked, “How do we help ensure an economy that creates jobs paying more than the minimum wage?”

Statement by Ryan Young, CEI Senior Fellow

Congress should keep two things in mind about raising the federal minimum wage: regional differences and tradeoffs. Midtown Manhattan and rural Kansas have different costs of living. They should not have the same minimum wage. Second, the tradeoffs to minimum wages go beyond job losses. Workers also make non-wage pay, which employers will cut to offset some of the wage increase. That includes things like insurance, free food or parking, paid time off, and other perks. These non-wage cuts will reduce the impact of any wage increase.

Related:

Minimum Wages Have Tradeoffs: Unintended Consequences of the Fight for 15

The problem with a one-size-fits-all federal minimum wage hike

The Regional Differences Argument against a $15 Minimum Wage

The strongest political argument against increasing the federal minimum wage is the regional differences argument. Basically, while a $15 minimum wage might not be a big deal in an expensive place like New York or San Francisco, the tradeoffs would be much steeper in lower-cost places like small towns and rural areas. That tends to matter to politicians more than the usual economic arguments. Over in The Hill, I explain why the regional differences argument means there should be no federal minimum wage.

House members often represent heavily urban or heavily rural districts, so they don’t have to worry much about regional differences. Senators do, because they represent entire states. They have constituents in expensive big cities and constituents in lower-cost small towns. Something barely felt in downtown Chicago might not play as well in Peoria. This is one reason why minimum wage bills such as the Raise the Wage Act routinely pass the House yet stall in the Senate.

Regional differences are also why President Biden, whose constituency is the entire country, said that it “Doesn’t look like we can do it” about including a $15 minimum wage in the next COVID-19 spending bill.

The regional differences argument is in addition to the other problems with minimum wages. The tradeoff of higher wages is lower no-wage compensation, which includes cheaper insurance, fewer breaks, less vacation time, fewer resources put into better working conditions, and more.

Big companies such as Amazon and Costco already pay $15 minimum wages to their workers, yet favor it for their competitors, too. This is rent-seeking by using government to raise smaller competitors’ costs and lock in their own dominance. Minimum wages often act as a tax increase on lower-income workers. Their total compensation shifts toward higher taxable wages and lower untaxed benefits and perks. Even if their total compensation remains roughly unchanged, those extra taxes can mean a cut in take-home pay.

Read the whole thing here. For more arguments against minimum wage legislation, see my paper “Minimum Wages Have Tradeoffs.”

Marginal Thinking about Theories

Some wise advice from p. 26 of Armen Alchian and William Allen’s superb economics textbook Universal Economics (free PDF):

Don’t make the intellectual mistake of asking whether the theory (the set of principles) is “true.” No theory is perfect. Ask instead, “Is it useful and reliable enough for my purposes? That is, will it lead to generally correct implications and guidance at sufficiently low cost without intolerable error?” That’s the question to ask in every discipline, whether Chemistry, Physics, Biology, or Economics.

Besides being good common sense, this is an excellent example of thinking at the margin.

Upcoming CEI Event: Bart Wilson on The Property Species

At noon ET on Thursday, February 11, CEI is hosting an event with the experimental economist Bart Wilson, author of The Property Species: Mine, Yours, and the Human Mind. He is also a frequent collaborator with former CEI Julian Simon Award winner Vernon Smith.

Near the end of The Property Species, on p. 194, Wilson shows how the custom of property is essential for natural conservation efforts (footnotes omitted):

When some people are allowed to say, “This elephant is mine,” they defend attacks against the elephant like they defend against attacks against their own person. In contrast, when government agents are tasked with defending elephants against attacks, they are not as effective—the evidence strongly suggests—in protecting elephants about which they cannot say, “These are mine.” Think about it natural-historically: Isn’t it astonishing that people who can say, “This elephant is mine” will protect and defend the life of a distantly related fellow mammal against members of their own species who wish that distant relative harm? Isn’t it furthermore prudent for such people to do so? And isn’t it then morally incumbent upon us to consider the possibility that property can save elephants from extinction? Consider, for the moment, the beautiful and humane thoughts made possible by mine.

CEI has a long history of supporting private conservation, and here Wilson makes a powerful point in its favor.

Wilson also discusses other concepts in the book, such as his view that property is not a right; it is a custom. This view avoids some of the problems of rights theory while emphasizing property’s inherently social and cooperative nature.

Property, Wilson argues, is not just the ability to say “this is mine.” Any dog with a bone thinks that. Property is the ability to also say “that is yours.” Dogs do not have that ability. Only humans have made this cognitive leap. Property is unique to us. It is also universal among us. Every society on Earth, without exception, has social customs that involve notions of both “this is mine” and “that is yours.” This human universal is what makes non-violent trade possible. Property is what lets people act on Adam Smith’s natural propensity to truck, barter, and exchange.

As Wilson argues on p. 179, “we have to be open to the possibility that commerce may be an integral part of that socializing and ethicizing process.” Property is a fundamental concept in designing sound public policy, and in enabling virtuous and prosperous societies to emerge. There is much more to property than armchair philosophizing.

There is also more to property than commerce. The custom of property gives a convincing answer to the question that all social scientists seek to answer: how people find ways to get along with each other. Many people view property as an exclusionary, anti-social concept. This is a mistake. It requires multiple people for the concept of property to even exist. And those people must cooperate with each other for it to work. It does no good to say “this is mine” if other people do not agree to respect that, and expect to have their own claims respected.

Property is an ongoing dialogue between people. it requires listening, not just speaking. There is a reason why economics and related disciplines–nearly all of which Wilson draws from in the book–are called social sciences.

Wilson, of course, has much more to say on the matter. Click here to register for the February 11 event. The book is here. I highly recommend both.

Proposed European Tech Regulations Will Backfire, Badly

The European Union recently proposed two major tech regulation bills aimed at America’s tech industry, the Digital Markets Act (DMA) and the Digital Services Act (DSA). While American antitrust law is flawed, European competition policy is arguably more so. On purpose or not, DMA/DSA would add trade barriers in a world that already has too many. They are costly. And they won’t increase competition. In fact, they would help to lock in the big U.S. companies’ dominance.

How would they do this? They would block self-preferencing, such as Amazon promoting self-branded products in its search results, or Google and Apple giving their own apps special treatment in their app stores. Retailers and grocery stores already have been doing this for the last century or so, and those markets are highly competitive. It is no different when a company does the same thing online.

Companies would face stricter content moderation policies. If the EU says to take down certain content, companies would have a short time frame to either remove it or be fined. European companies would not face these same compliance costs, presumably giving them a leg up, though without improving their products.

Tech platforms would be liable for user-posted content, rather than the users themselves. This essentially copies President Trump’s position in the Section 230 controversy. Besides chilling speech, this would give popular services a reason to avoid the European market. It would also lock in dominant players. Facebook can afford to hire armies of content moderators, but startup competitors cannot. Repeat offenders risk fines of up to 10 percent of global revenue.

Breaking up companies is another option, though the practical politics of the EU breaking up a U.S.-based company likely make this unrealistic.

Unlike most legislation, DMA/DSA would not apply to everyone. They would only apply to “gatekeepers,” a new term defined in just such a way that it applies only to a handful of major U.S. tech companies. In practice, DMA/DSA is simple extraction from successful companies, without proof of consumer harm.

Swiss competition commissioner Henrique Schneider argues in a recent Competitive Enterprise Institute paper that, even if that EU officials understand basic economics—no sure thing—they “choose to disregard it in order to advance two political aims—protectionism and consumer welfare (as they conceive the latter).” And, as he predicted, things are getting worse.

Beyond Spotify, it is hard to even name a major European tech company. This is not for a lack of talent and good ideas in Europe. It is because of a broken regulatory culture that prefers tearing down over building up. Taking foreigners down a notch is very different from allowing homegrown entrepreneurs to build and innovate.

DMA/DSA is trade protectionism under another name. U.S.-EU trade relations are already strained because of President Trump’s misguided trade war, Europe’s equally misguided retaliation, and a long-running dispute over subsidies to Boeing and Airbus. President Biden is likely to further raise trade barriers, as my colleague Iain Murray points out. Some kind of major U.S.-EU trade agreement is likely necessary in the next few years as a diplomatic and economic counterweight against China. DMA/DSA would aggravate tensions between allies at precisely a point when they can be somewhat smoothed.

Finally, DSA/DMA wouldn’t actually take down the big American companies, but lock in their dominance. They can afford massive fines and compliance costs; smaller startups can’t. And if a smaller competitor nears the threshold of becoming a “gatekeeper,” it may decide to stay small on purpose, leaving most of the market to big incumbents. This would harm consumers, who would pay more to have fewer choices and lower-quality services.

If the DMA/DSA bills are enacted—no sure thing—it will be a long process. According to CNBC, Margrethe Vestager, the EU’s top competition policy official wants them enacted “as fast as possible,” meaning about two years. More realistically, the process will be delayed by tech company lobbying efforts and squabbles between Brussels and the EU’s 27 national governments. By then, the tech market will likely look very different.

If the Digital Markets Act and the Digital Services Act are accurate statements of where EU regulators stand on tech policy and innovation, then Europe’s tech sector will remain second-class. Along the way EU regulators would make global trade less free, help to lock in today’s big tech companies’ dominance, and harm consumers around the world.