Category Archives: Economics

From the Archives: Peter Navarro on China Trade

Posted on June 27, 2019 | Comments Off on From the Archives: Peter Navarro on China Trade

Trump trade advisor Peter Navarro is part of the travel team for upcoming U.S.-China trade negotiations. For an idea of what he will add to the discussion, see his book The Coming China Wars. I have also written about some of his economic ideas in the past:

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Posted in Economics, International, Trade, Uncategorized

Antitrust Basics: The Relevant Market Fallacy

Posted on June 24, 2019 | Comments Off on Antitrust Basics: The Relevant Market Fallacy

This is the second entry in the “Antitrust Basics” series. See below for previous posts.

If a firm is charged with having market power, the question naturally arises: in which market? Does Facebook have a monopoly over social networking, especially now that it owns additional networks such as Instagram and WhatsApp? Or does Facebook compete with other uses of leisure time such as movies, television, books, sports, concerts, and countless other ways people can spend their time? Which is the more relevant market? The answer is subjective—a significant problem for a legal case with multi-billion dollar stakes.

Antitrust regulators often try to make their case appear stronger by using an unrealistically narrow definition of a company’s relevant market. I call this tactic the relevant market fallacy. The relevant market fallacy is one of the easiest mistakes to make in all of antitrust analysis. It is also one of the easiest to avoid. Thinking along the different parts of a spectrum illustrates why.

At one end of the spectrum, every individual product can be seen as its own relevant market. A sandwich at one restaurant is different from a similar sandwich sold at another restaurant next door, even if they are the same price. One restaurant might offer better service, better ambience, or some other nonprice characteristic that differentiates it from its competitor. In that sense, there are two different products operating in different markets appealing to different sets of consumer preferences.

At the other end of the spectrum, the only relevant market is as big as the entire global economy. That sandwich also competes against all other types of food in a global supply chain—and any non-food item a person might spend their money on instead. Whichever point on the spectrum an analyst decides is right for a given case is an arbitrary decision. It is largely a matter of semantics, and often analytically useless in determining consumer benefits.

As with most things in the real world, most relevant markets fall somewhere in between these two extremes. Amazon controls roughly half of online retail, but a much smaller fraction of total retail. Which is the proper relevant market? Amazon’s success with online retail has also caused traditional retailers such as Walmart and Target to massively change their business strategies to match consumer desires. The relevant market is not only debatable in size and scope, but it is constantly changing shape. And that change is happening far faster than the speed of litigation.

When satellite radio companies Sirius and XM merged, critics argued that the combined firm would have a monopoly on satellite radio, and the merger should have been blocked. Once again, they defined the relevant market too small. Satellite radio competes with terrestrial radio, streaming radio, on-demand music streaming, podcasts, audio books, and more.

As political candidates, pundits, and activists tout statistics for this or that company’s market dominance, keep in mind they are often committing the relevant market fallacy. It doesn’t take long to check, and it’s well worth the small effort.

For more, see Wayne Crews’ and my study, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at antitrust.cei.org.

Previous posts in Ryan Young’s “Antitrust Basics” series:

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Posted in Antitrust, Economics, Law

Where Does Progress Come From?

Posted on June 22, 2019 | Comments Off on Where Does Progress Come From?

According to economic historian Joel Mokyr, progress comes from technological change–which can’t happen without pro-technology and pro-change cultural values. Science is necessary but not sufficient; same with culture. It takes both. Societies with one but not the other have their merits, but ultimately fail to progress. New advances will either fail to stick, or will be repressed. While respect for tradition is a normal and good thing, most cultures throughout history have gone too far with it and become outright neophobic.

Cultural rejection of progress goes at least as far back as the Greek poet Hesiod, who lived between 800-700 B.C. He described history as a continuous process of decay. The initial Golden Age of the gods degrades down to a still-divine Silver Age, then a Bronze Age. This is followed by a Heroic Age (think mortal half-gods such as Perseus and Heracles). History finally reaches the dull, rusting Iron Age where people now live. This is a rather different worldview than one finds in Enlightenment thinking or, say, Wired magazine.

More recently, China showed a spark of valuing progress during the Song dynasty, which lasted from 960-1279 AD. But the succeeding Ming dynasty shut the experiment down by destroying trading ships devaluing innovation, raising up values such as security and tradition instead.

Joel Mokyr, on p. 248 of his 2016 book A Culture of Growth: The Origins of the Modern Economy, offers that a rebellious youthful streak can in fact be a good thing in the long run:

The idea of progress is logically equivalent to an implied disrespect of previous generations.

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Posted in Books, Economics, History, Uncategorized

Herbert A. Simon – Administrative Behavior, 4th Edition: A Study of Decision-Making Processes in Administrative Organisations

Posted on June 21, 2019 | Comments Off on Herbert A. Simon – Administrative Behavior, 4th Edition: A Study of Decision-Making Processes in Administrative Organisations

Herbert A. Simon – Administrative Behavior, 4th Edition: A Study of Decision-Making Processes in Administrative Organisations

Realistic, subjective, and humble—probably a reflection of Simon’s time at the University of Chicago. Rather than the typical snake-oil management guru who pretends to know everything, Simon that there is no perfect structure for an organization. Every possibility has at least some drawbacks. Simon instead emphasizes the need to treat organizational structure as an ongoing process, rather than a finished product. Often personnel will dictate what structures work best, and personnel change over time. Technology has its own impacts, and Simon even in 1947 saw that computers would have significant effects on the workplace. Part of trial is error, and wise managers will accept this as part of the process. The trick is being humble enough to admit mistakes and being flexible enough to try different approaches with more promise.

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Posted in Books, Economics, Law, Political Animals, regulation, Uncategorized

Randall G. Holcombe – Political Capitalism: How Political Influence Is Made and Maintained

Posted on June 20, 2019 | Comments Off on Randall G. Holcombe – Political Capitalism: How Political Influence Is Made and Maintained

Randall G. Holcombe – Political Capitalism: How Political Influence Is Made and Maintained

Excellent, though probably a difficult read for a layman. Most people have a two-axis view of politics—most countries are some blend of capitalism and socialism. Holcombe argues that there is a distinct third system, which he calls political capitalism. It has characteristics of market capitalism, such as private property and usually democratic political institutions. But political capitalism also features heavy control by elites. Because votes count for very little in any decent-sized election and because voters typically have low information, it is naturally easier for elites to control public policies with relatively little public accountability.

An underappreciated key point, first made by Mancur Olson, is that small groups have lower transaction costs than larger groups. A small group is easier to form, and it is easier to monitor members so they don’t shirk on the rest of the group.

Another point is that principled legislators have almost no chance of being influential under political capitalism. If a politician is known for sticking to their principles, other legislators will not bother trying to win their vote on bills. If they support a bill, they’ll vote for it no matter what. If they oppose it, their support cannot be bought, so it’s not worth spending resources on.

That means principled legislators aren’t offered choice committee assignments, fundraising assistance, or get introduced to powerful social connections. Principled legislators are doomed to ineffectiveness.

It is well known that political office naturally attracts certain undesirable personality types. Holcombe demonstrates that institutional structures actually reward them, so there is a natural selection process to put the worst on top.

Holcombe also makes several valuable contributions to the theory of rent-seeking. I wish I had known about these when Fred Smith and I were working on our 2015 rent-seeking paper, which would have greatly benefited from his insights. I will definitely be citing this book in the future.

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Posted in Books, Economics, Political Animals, Public Choice, Uncategorized

Peter Wallison – Judicial Fortitude: The Last Chance to Rein In the Administrative State

Posted on June 19, 2019 | Comments Off on Peter Wallison – Judicial Fortitude: The Last Chance to Rein In the Administrative State

Peter Wallison – Judicial Fortitude: The Last Chance to Rein In the Administrative State

The main insight I took from this book is probably not the one Wallison intended, though it is one he makes several times. America’s founders did not foresee the rise of political parties, and this was their biggest mistake. They set up the federal government with checks and balances so that the different branches would compete against each other, not different parties. Having distinct federal and state levels of government provided an additional level of non-party competition.

This system does not work so well when powerful political parties exist. If one party controls both Congress and the presidency, those two branches do not compete with each other, they collude.

The first-past-the-post electoral system the founders established is also naturally conducive to a two-party system—and the two parties which usually oppose each other will cooperate to prevent rule changes that would allow additional competing parties.

This probably doesn’t matter so much; Europe’s experience with proportional representation has shown that most people coalesce around two polar ideologies, and most political parties represent various points on the spectrum between those two poles—meaning proportional representation doesn’t differ much from the U.S. system in terms of policy outcomes, muting its appeal. It merely has higher transaction costs for building coalitions, a separate issue well outside of Wallison’s subject matter. In the U.S. case, the dominant parties oppose proportional systems for their own organizations’ sake, rather than to promote conservative or progressive values.

The primary point Wallison does make is also compelling—judicial restraint and judicial activism are both ineffective safeguards against a regulatory state that lacks transparency and democratic accountability. A passive judiciary lets Congress and the executive make and enforce all sorts of crazy laws and regulations. This is a rather obvious problem. Legislation from the bench is also a problem; besides offending democratic sensibilities, repeal of judicial policy mistakes is extremely difficult.

Wallison instead prefers a judiciary with the fortitude to tell Congress what’s what when it passes unconstitutional legislation. More importantly, executive branch agencies issue thousands of regulations, guidance documents, and other regulatory “dark matter” outside of required legal processes. These policies lack transparency, democratic accountability, and in many cases are unconstitutional. The judiciary needs to gain the fortitude to strike such policies down when cases present the opportunity. Wallison also draws heavily on my colleague Wayne Crews’ research in developing this argument, which is a plus.

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Posted in Books, Economics, Law, regulation, Uncategorized

Manu Saadia – Trekonomics: The Economics of Star Trek

Posted on June 18, 2019 | Comments Off on Manu Saadia – Trekonomics: The Economics of Star Trek

Manu Saadia – Trekonomics: The Economics of Star Trek

Saadia wrestles with some interesting questions, such as how people would behave in a world without scarcity, how an economy could work without currency, and more. But he comes up a little short, both in terms of economic analysis and some ideological narrowmindedness.

Even in a superabundant world like Star Trek with replicators, teleporters, and the like, scarcity still exists. Even if people enjoy a place high atop the pyramid of Maslow’s hierarchy of needs, they will still find things to want and aspire to. One of the first things economics students are taught is the non-satiation principle. This opens the door to a fruitful discussion of relative versus absolute abundance, and all the implications that has for social stability, the reason technological progress continues, and more. Saadia instead focuses more on making ideological arguments in favor of flat income distributions—focusing on ratios, rather than people (see Iain Murray’s and my 2016 paper, “People, Not Ratios,” for a more constructive view on the subject).

As for currency, it tends to spontaneously emerge. It cannot be successfully abolished. The transaction cost savings of using currency are too great for people to pass it up—especially since even in Star Trek’s mostly moneyless universe, people are well aware of the concept. Whether gold, paper, cowrie shells, cigarettes, credit, or digital data, currency’s superiority over barter holds, even in Star Trek’s world of superabundance.

This opens the door to a discussion of spontaneous order and how that works, but Saadia again declines the invitation. That said, he offers some interesting discussions of the money that does eventually appear in the Star Trek: Deep Space Nine series in the form of gold-pressed latinum, as well as the Ferengi merchant race that is the rare example of greed and commerce in the series. Regrettably, they are sometimes also a thinly-veiled Jewish stereotype, though some episodes give the characters some depth and empathy.

There is still a lot to like in here. Just don’t expect it to have the depth that the best of science fiction and of economic thought have to offer.

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Posted in Books, Economics, Uncategorized

Introducing Antitrust Basics

Posted on June 17, 2019 | Comments Off on Introducing Antitrust Basics

Often, a drips-and-drabs approach to learning an issue over a period of time is as effective as a single intense cram session. To that end, this post inaugurates a series to familiarize readers over time with the basics of antitrust regulation. This is important because the current antitrust revival is reaching a fever pitch. This could have multi-billion dollar consequences in the next few years for everything from the future of 5G networks to online retail to the structure of social networks.

The Justice Department and the Federal Trade Commission recently carved out their respective turf for upcoming investigations of tech companies. Justice will handle Google and Apple, and the FTC will handle Amazon and Facebook. Congress is also launching its own investigation. At the state level, somewhere from 12 to 20 state attorneys general are mulling their own joint investigation. Other industries from hospitals to concert tickets are also on some target lists.

Progressives have spent years advocating a neo-Brandeisian approach of more active antitrust enforcement. Now they are gaining unexpected conservative allies in President Trump and a newly visible right-wing populist movement. There has not been a major antitrust case since the late-1990s Microsoft case, but given current political winds, that may soon change.

Oscar Wilde observed that “The emotions of man are stirred more quickly than man’s intelligence.” Fortunately, it will likely be more than a year before any of the just-announced investigations result in court cases—if they do at all. That will hopefully be enough time for passions to cool, and more reasoned analysis to prevail. Part of that process is taking some time to study the main principles, history, and applications of antitrust policy.

To that end, Wayne Crews and I recently wrote a paper, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Our colleagues Jessica Melugin and Iain Murray are offering regular antitrust analysis as well. CEI also maintains a microsite, antitrust.cei.org, that collects our antitrust scholarship in one place.

This series will start with the big picture and progressively narrow down to more specific issues. Initial posts will sketch out broader themes of antitrust regulation and the main sides of the debate. After that, the series will go through a “Terrible Ten” list of failed antitrust policies that should be abolished.

Larger themes in upcoming posts include the relevant market fallacy; the importance of treating competition as a spectrum rather than an on/off switch; regulatory uncertainty; the Brandeis-era big-is-bad standard vs. the consumer welfare standard; and antitrust enforcement’s tendency to entrench incumbent companies and increase rent-seeking; and the importance of thinking long-term.

From there, we will apply those themes and principles to specific policy areas that Congress and regulators should reform. In case after case, antitrust regulation protects incumbent companies from competition, encourages rent-seeking, erodes the rule of law, and slows innovation. This is a high price to pay for a policy that also works against its advocates’ goals regarding concentrated power, economic inequality, democracy, and other values.

Given antitrust regulation’s lack of redeeming qualities, we favor abolishing it outright. Short of that, regulators and courts should defend the consumer welfare standard against neo-Brandeisian and Trumpian populism. In the current political climate, preserving the consumer welfare standard may be the best possible near-term outcome.

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Posted in Antitrust, Economics, regulation, Uncategorized

Vernon Smith and Bart Wilson – Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century

Posted on June 14, 2019 | Comments Off on Vernon Smith and Bart Wilson – Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century

Vernon Smith and Bart Wilson – Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century

This is on my shortlist of best books of the year. Smith and Wilson combine insights from their experimental economics research with Adam Smith’s Wealth of Nations and especially his 1759 book The Theory of Moral Sentiments. Not only are the two systems compatible, they make each other stronger. Adam Smith’s insights into how empathy drives human behavior turn out to be confirmed by empirical lab experiments. Neither Adam nor Vernon Smith nor Wilson) is much on the fictional hyper-rational Homo economicus who lives in textbook perfect competition models. They are more interested in Homo sapiens, a much more subtle and demanding subject.

This book isn’t the easiest read for a layman. While Smith and Wilson do provide some brief explanations, a working knowledge of the more common game theory games is helpful, especially the Prisoner’s Dilemma and the Ultimatum and Dictator games. What the lab experiments find is that people, as they actually are, tend to be both happier and wealthier when they can make their own plans, rather than when they attempt to fulfill other people’s plans from above.

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Posted in Books, Economics

Trump Threatens up to 25 Percent Tariff on Mexican Goods, Jeopardizes NAFTA/USMCA

Posted on May 31, 2019 | Comments Off on Trump Threatens up to 25 Percent Tariff on Mexican Goods, Jeopardizes NAFTA/USMCA

Things have been moving quickly on President Trump’s top legislative priority, the NAFTA/USMCA trade agreement. The key was rescinding steel and aluminum tariffs against Canada and Mexico. On Wednesday, Canadian Prime Minister Justin Trudeau moved to introduce the agreement to Canada’s legislature for ratification, prompting a Thursday visit from Vice President Mike Pence. Also on Thursday, Mexican President Andres Manuel Lopez Obrador introduced NAFTA/USMCA in Mexico’s Senate. He is requesting that the body, on recess until September, hold a special session to ratify it.

Within hours of Lopez Obrador’s announcement, President Trump may have torpedoed his own agreement. Shortly after markets closed, he threatened, via Twitter, a new tariff against Mexico that would dwarf the steel and aluminum tariffs:

1/2: On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..

2/2:….at which time the Tariffs will be removed. Details from the White House to follow.

On July 1, the 5 percent tariff would rise to 10 percent. It would then rise by an additional 5 percent at the beginning of each month until reaching 25 percent on October 1. It would remain there until President Trump is satisfied with Mexico’s immigration policies. He did not set specific criteria for Mexico to meet. And as mentioned earlier, Mexico’s Senate is out of session until September. But the administration’s statement indicates that this threat isn’t entirely about immigration (capitalization of “tariff” and typewriter-era extra spacing between sentences in original):

If Mexico fails to act, Tariffs will remain at the high level, and companies located in Mexico may start moving back to the United States to make their products and goods.  Companies that relocate to the United States will not pay the Tariffs or be affected in any way.

By way of context, this tariff would be nearly twice as large as the recent 25 percent tariff on $200 billion of Chinese goods. Mexico annually exports roughly $346.5 billion of goods to the United States.

NAFTA and the NAFTA 2.0/USMCA both require near-zero tariffs among the three member countries. Trump has invoked the Jimmy Carter-era 1977 International Emergency Economic Powers Act as legal authority for the tariffs, claiming that that bill’s emergency powers supersede possible NAFTA violations.

As I’ve mentioned before, Trump has a habit of using dramatic last-minute threats as a negotiating tactic. Sometimes he follows through, as with the recent 25 percent tariff on $200 billion of Chinese goods. Sometimes he withdraws, as he did with a threat to close the entire U.S.-Mexican border, and an April threat of a 25 percent tariff on Mexican-assembled automobiles—which are often made largely of U.S.-made parts.

For obvious reasons, a new tariff against Mexico will not make its government more likely to ratify NAFTA/USMCA. Tariffs are usually met with retaliatory tariffs, not the policy action Trump wants. The U.S. economy is risking yet another instance of double damage from President Trump’s announcement—once from his tariffs, and again from retaliatory tariffs.

Further complicating matters, Mexican President Lopez Obrador largely shares Trump’s negative view of free trade. His support of NAFTA/USMCA is not deeply held. His going along with the agreement is largely a kindness to his predecessor, Enrique Peña-Nieto, who negotiated the agreement and signed it on his final day in office. Lopez Obrador’s NAFTA/USMCA support is easily lost, and this tariff gives him an easy out.

The tariff also complicates matters in America. Also on Thursday, President Trump issued a Statement of Administrative Action. This opens a 30-day waiting period, after which Trump can send NAFTA/USMCA to Congress at any time for a mandatory ratification vote within a set period (Politico has a handy timeline). Members from both parties opposed the steel and aluminum tariffs, and they will likely oppose the new tariff, which is potentially much larger. If Congress is required to vote, it may well vote no due to the new Mexico tariffs.

Democrats already hold the upper hand in negotiations due to the administration’s high prioritization of a low-stakes agreement; USMCA contains no major changes to trade policy. Even without Trump’s tariff threat, they could hold up the agreement to add trade-unrelated provisions to benefit favored labor and environmental constituencies. Or they could condition ratification on a more important matter, such as must-pass appropriations bills or other Democratic policy priorities such as health care or the minimum wage.

A new tariff is Trump giving Democrats free ammunition to hold up not just NAFTA/USMCA, but other administration priorities as well.

We’ll find out by June 10th if Trump walks back a major economic and political mistake, or goes through with it.

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Posted in Economics, Immigration, Trade, Uncategorized