Category Archives: Public Choice

Antitrust Basics: Corruption and Rent-Seeking

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

Rent-seeking is economics jargon for chasing after unfair special favors from government. Businesses and individuals have a large menu of rent-seeking options to choose from, and antitrust regulations are one of the items. Licensing regulations and other restrictions can make it harder for startups to enter a market, favoring incumbent businesses. Bailouts, such as General Motors and several large financial firms have received in recent years, are another form of rent-seeking. Cash subsidies, such as many green energy producers receive, are rent-seeking examples. Special financing, as through agencies like the Export-Import Bank or the Overseas Private Investment Bank, enable rent-seeking by Boeing and many farm and construction equipment manufacturers such as John Deere and General Electric.

All told, it is a minor miracle that corporate welfare is only about a $100 billion problem. Standard economic theory predicts that it should be much larger. Competitive Enterprise Institute founder Fred Smith and I wrote a paper arguing that virtue is an important limiting factor, though incomplete. Antitrust regulation provides another temptation to seek unfair rents, and would not improve the business world’s moral climate.

Neo-Brandeisians and other progressives rightfully oppose rent-seeking, but err when they propose increased antitrust policies as a solution.Tim Wu, a prominent neo-Brandeisian analyst, correctly points out how numerous companies game government policies to reduce competition, but then goes on to advocate for more government power as the solution. Even now, in a relatively restrained antitrust environment, roughly 95 percent of antitrust lawsuits are brought privately by competitors, not by the Justice Department or Federal Trade Commission. Repealing antitrust regulation would not eliminate rent-seeking—there are many other avenues rent-seekers can take—but it would reduce it.

Neo-Brandeisians advocating antitrust regulation as a way to promote virtue have a common misunderstanding of how governments work in practice. Government employees do not operate with only the public interest in mind. They are human beings, with the same incentives, flaws, and self-interested tendencies as other human beings.

Agency employees want to increase their budgets and power, and often enjoy the publicity that accompanies big cases. Regulators are also vulnerable to what is known as a Baptist-and-bootlegger dynamic. In Clemson University economist Bruce Yandle’s classic example, a moralizing Baptist and a profit-seeking bootlegger will both favor a law requiring liquor stores to close on Sundays, though for different reasons. A morally-motivated Baptist does not want people drinking on Sundays and a bootlegger would gain a lucrative monopoly every Sunday. They may find themselves strange bedfellows, and bootleggers may even hide themselves in Baptist clothing.

Applying this dynamic to antitrust regulation, a true-believing “Baptist” in Congress or at the Justice Department or the FTC would be inclined to listen seriously to the entreaties of corporate “bootleggers” who can come up with virtuous-sounding reasons for why regulators should give their businesses special favorable treatment.

Oracle, one of Microsoft’s rivals, ran its own independent Microsoft investigation during that company’s antitrust case, for what it alleged were Baptist-style reasons. “All we did is try to take information that was hidden and bring it to light,” said Oracle CEO Larry Ellison. “I don’t think that was arrogance. I think it was a public service.” Former Sen. Orrin Hatch (R-UT), who counted Oracle among his constituents, was one of the loudest anti-Microsoft voices in Congress. Around that time, he also received $17,500 donations from executives at Netscape, AOL, and Sun Microsystems.

Perhaps heeding Hatch’s admonition that, “If you want to get involved in business, you should get involved in politics,” Microsoft expanded its presence in Washington from a small outpost at a Bethesda, Maryland, sales office to a large downtown Washington office with a full-time staff, plus multiple outside lobbyists. Microsoft quickly went from a virtual non-entity in Washington to the 10th largest corporate soft money campaign donor by the 1997-1998 election cycle. Sen. Hatch’s campaign was among the beneficiaries.

The lines between Baptist and bootlegger can be blurry, and some actors play both parts. But such ethical dynamics are an integral part of antitrust regulation in practice.

The best way to reduce rent-seeking and regulatory capture is to have a system of government with few rents that can be sought, and fewer regulations that can be captured. Neo-Brandeisians, just like the rest of us, have to deal with the government we have, rather than an idealized abstraction. A more aggressive antitrust policy would increase rent-seeking, and should not be put forward as a solution to the problem.

For more, see Wayne Crews’ and my paper, “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 blog posts in the Antitrust Basics series:

Advertisements

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.

Boeing Pushes 100 Percent Tariffs on Airbus

Boeing, fresh off a victory in restoring the Export-Import Bank’s full lending authority, is floating the idea of a 100 percent tariff on Airbus aircraft and parts. Airbus is Boeing’s largest competitor. There are four factors in play here. The first three are public relations, the opportunity costs of cronyism, and how best to pursue a level playing field in the global economy. The fourth is the likely retaliation such a move would spark.

From a PR standpoint, Boeing wants to move public attention away from its safety issues with the Boeing 737 MAX aircraft. Most of the press Boeing gets for Ex-Im and Airbus tariffs will be negative, and the company knows this. It would still likely prefer that people be upset about those than about its safety problems, which are an existential threat to more than just airline passengers.

To that point, Boeing arguing for an Airbus tariff right now is almost perfect news cycle timing. The China trade dispute and NAFTA/USMCA are hot stories. Just today, President Trump announced a six-month delay on a possible European auto tariff, which will both keep that story alive for a while and give Boeing time to fold an Airbus tariff into a possible action.

Boeing also has a Baptists-and-bootleggers story at the ready. The World Trade Organization ruled, correctly, that Airbus received unfair government subsidies when it launched its A350 and A380 aircraft. Under WTO rules, the U.S. is entitled to retaliate. But just because it can, doesn’t mean it should. An Airbus tariff is highly unlikely to spur needed reform.

This ties into the opportunity costs of cronyism. Boeing puts significant resources into lobbying for Export-Import Bank support, Airbus tariffs, and other preferential policies. All of those resources are not being used to address the 737 MAX safety issues. This might improve a decimal point somewhere in a quarterly earnings report in the short term. But Boeing’s misplaced priorities could cause long-term harm to both aviation safety and Boeing’s own competitiveness. Competing in Washington is not the same thing as competing in the marketplace. Boeing’s investors should be upset at the company’s behavior.

Companies that engage in heavy rent-seeking are less profitable than more market-oriented companies. Even in Boeing’s case, the most profitable years in company history happened when Ex-Im was unable to offer its usual financing.

Which brings up the third point: It is not enough to have a level playing field. That level must be raised, not lowered. Boeing is right that Airbus’ massive government subsidies are unfair. But the way to address the problem is not to copy Europe’s policy mistakes. Don’t sink down to their level, raise them up to ours—though, admittedly, our own level of cronyism has much room for improvement. But reformers must start somewhere.

If anything, Boeing might have an interest in further tying up Airbus in webs of subsidies and favorable regulations—though I would strongly disagree with this strategy. Government protection tends to cause sclerosis in its beneficiaries, and Boeing should be pleased at the long-term implications of Airbus’ comfort. I am not a fan of this zero-sum thinking, but Boeing might be. Even from their self-interested perspective, an Airbus tariff is a bad idea.

Finally, as I pointed out yesterday, tariffs are nearly always met with retaliation, not cooperation. The European Union almost certainly will not change its tune on Airbus subsidies in response to a U.S. tariff—especially in a global market with many non-U.S. customers. Europe will harden its stance, likely at Boeing’s expense.

Given how tense global trade relations currently are, even if Boeing is just blowing PR smoke, this is a bad time to do it. Better for the company to refocus on making safe, innovative products than spending its resources on a political game with no winners.

See also relevant CEI scholarship on trade, the Ex-Im Bank, and the ethics of rent-seeking.

Institutional Economics in a Nutshell

Long-term structures matter more for policy outcomes than electing a preferred candidate.

Or as Geoffrey Brennan and James Buchanan put it in the closing paragraph of The Reason of Rules: Constitutional Political Economy, p. 167:

Good games depends on good rules more than they depend on good players.

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.”

Alan Stern and David Grinspoon – Chasing New Horizons: Inside the Epic First Mission to Pluto

Alan Stern and David Grinspoon – Chasing New Horizons: Inside the Epic First Mission to Pluto

An inside history of the New Horizons mission, which sent a satellite past Pluto. Stern is the Principle Investigator (head honcho) for the mission, and Grinspoon assisted with PR as well as some of the mission science. The photographs are beautiful, the science is awe-inspiring, and the amount of work the team put in is admirable.

I was especially struck by the amount of politicking, bureaucratic infighting, turf wars among contractors, and backroom-dealing that went into the mission, delayed it for years, and almost killed it altogether. I found a similar theme in Steve Squyres’ book about the Spirit and Opportunity Mars rovers (Squyres was the PI for that mission).

Public choice theorists will find a vindication of Gordon Tullock’s The Organization of Inquiry, which is an economics-based analysis of how scientists behave.

James M. Buchanan – Ideas, Persons, & Events: The Collected Works of James M. Buchanan, Volume 19

James M. Buchanan – Ideas, Persons, & Events: The Collected Works of James M. Buchanan, Volume 19

An essay collection that shows Buchanan’s wide range of interests. Most economists stick to their discipline, rarely wandering outside its comfortable enclosure. Buchanan thought, read, and wrote on a much bigger scale, incorporating political science, philosophy, history, literature, and more into his work. About the only thing Buchanan wasn’t interested in was agrarian poetry, a bizarre allegation of some of his critics. And he was delighted to be at least as influenced by his colleagues as they were by him. Those aspects of this book, and Buchanan’s larger research program, are as valuable as its contents.