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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.”

Charles Dickens – A Tale of Two Cities

Charles Dickens – A Tale of Two Cities

Those two cities being London and Paris. Their differences in character were put in stark contrast by the French Revolution; cool London and hot France could not be more different. Dickens’ characters find themselves in the middle of all kinds of duality. Not just Revolution and ancien regime, but rich and poor, young and old, and past and future all come into play. Dickens, while occasionally sappy, conventional, and a little too PG-rated to give a truly vivid picture of the times, still manages to convey good insight about the value of keeping a level head during turbulent times, even as his characters tend to be studies of contrast rather than nuance.

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.

Amity Shlaes – Coolidge

Amity Shlaes – Coolidge

Presidents are often unremarkable people. They also often make for uninteresting biographies–Robert Caro’s series on Lyndon Johnson being a notable exception. Biographers also tend to glorify presidents who are in office during wars or economic disasters; most presidential rankings reliably improve when reversed. The best presidents are the ones who do little, and thus do little harm. They help quiet and stable times stay that way. They are also often forgotten—as, frankly, presidents should be. The executive branch has long been too powerful and too glorified.

That is precisely why Coolidge makes an interesting subject, and Shlaes does a good job with the material. Lyndon Johnson had a president’s typical bad qualities almost to the point of caricature; Coolidge’s quiet and calm make him come across as the anti-LBJ.  He almost comes across as though he did not want to be there. Yet he still willingly climbed the ladder: Massachusetts State Representative, Mayor, State Senator (and President of the State Senate), Lieutenant Governor, Governor, Vice President, and President. Pretensions to the contrary, he was a career politician. Part of his reputation comes from the fact that he first became President accidentally, when President Warren G. Harding died unexpectedly in 1923. Coolidge ran for and won his own full term on purpose, though he declined to run for a second.

That contradiction–that “I don’t want to be here, but I made it my life’s work to be here”–is a source of unresolved tension. Coolidge is a bit of a sphinx, and not necessarily in the Silent Cal way he was remembered. Shlaes’ biography focuses more on politics than personality, which suits her subject’s personality. But it would have benefited from more analysis of this part of Coolidge’s character.

Coolidge was also surprisingly tech-savvy. Shlaes notes that not only was Coolidge the first president to give a public address on radio, it was not a one-time experiment. He gave more than 500 radio speeches during his presidency, or roughly two per week, which is quite loquacious for a man nicknamed Silent Cal.

Coolidge was also not the free-market hero some libertarians have made him out to be in recent years. Shlaes is quite plain about this, yet has been accused of writing a free-market hagiography. This made me reluctant to pick up her book, and I’m glad I was not ultimately dissuaded. Coolidge, despite his penny-pinching reputation, did not shrink the federal government. It merely grew more slowly under his watch than under Woodrow Wilson or Herbert Hoover’s. If Coolidge was laissez-faire, it was in comparative terms, not absolute terms. He was also no free trader. He used powers granted him under the 1922 Fordney-McCumber tariff bill, which passed when he was vice president, to raise trade barriers. In proportional terms, Fordney-McCumber was an even larger tariff increase than the more famous 1930 Smoot-Hawley tariff.

To Coolidge’s credit, he was progressive on racial issues by the standard of his time, intentionally declining to nominate known Ku Klux Klan members to any position in his government. Though Coolidge was not particularly vocal on racial issues, that was seen as a deliberate statement at the time.

Coolidge also gave his activist Commerce Secretary, Herbert Hoover, a long enough leash to enact a host of interventionist measures. These presaged Hoover’s doubling of real federal spending, one-third money supply contraction (and accompanying rapid deflation), and Smoot-Hawley that would follow when Hoover succeeded Coolidge.

Outside of politics, Coolidge seems to have been a decent man. This is also rare among presidents. He was a loyal husband, and did not mix very well with the philandering Harding. He was also a caring father, and he lost a son, age 11, while in office. The boy cut himself while playing outside on the White House grounds and the resulting infection, easily curable today with penicillin, was mortal. Coolidge mourned deeply, well beyond what the stoic standards of the time allowed. He never seemed quite the same after the loss. The happiest moment of his presidency seems to have been a family vacation he took out West, far removed from day-to-day affairs. His retirement was similarly slow-paced, though rather lucrative, with several board memberships and a weekly column paying for an upscale home. He would live there until his 1933 death, four years after leaving office.

This Week in Ridiculous Regulations

In a remarkable human achievement, scientists took the first-ever image of a black hole. The effort took eight telescopes on five continents, five petabytes of data, and an algorithm designed by a team led by MIT grad student Katie Bouman. On a smaller scale, a forthcoming executive order could help rein in “regulatory dark matter,” a cosmological term CEI’s Wayne Crews borrowed to describe regulations that “require compliance without ever having been subject to a period of public comment and review.” Meanwhile, rulemaking agencies issued new regulations ranging from model airplanes to the FBI’s environmental footprint.

On to the data:

  • Last week, 66 new final regulations were published in the Federal Register, after 83 the previous week.
  • That’s the equivalent of a new regulation every two hours and 33 minutes.
  • Federal agencies have issued 703 final regulations in 2019. At that pace, there will be 2,476 new final regulations. Last year’s total was 3,367 regulations.
  • Last week, agencies published 455 notices, for a total of 5,758 in 2019. At that pace, there will be 20,275 new notices this year. Last year’s total was 22,205.
  • Last week, 1,286 new pages were added to the Federal Register, after 1,745 pages the previous week.
  • The 2019 Federal Register totals 15,082 pages. It is on pace for 53,106 pages. The 2018 total was 68,082 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. One such rule has been published this year. Six such rules were published in 2018.
  • The running compliance cost tally for 2019’s economically significant regulations currently ranges from $139.1 million to $175.8 million. The 2018 total ranges from $220.1 million to $2.54 billion, depending on discount rates and other assumptions.
  • Agencies have published 24 final rules meeting the broader definition of “significant” so far this year. 2018’s total was 108 significant final rules.
  • So far in 2019, 129 new rules affect small businesses; 9 of them are classified as significant. 2018’s totals were 660 rules affecting small businesses, with 29 of them significant.

Highlights from last week’s new final regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

A Bit of Good News

Nothing earth-shattering, but CEI recently named me a senior fellow. I need to order new business cards, but other than that, not much will change as far as day-to-day policy analysis. CEI is a principled organization as well as a great place to work, and I am grateful that they have put up with me for more than a decade so far.

Nathan H. Lents – Human Errors: A Panorama of Our Glitches, from Pointless Bones to Broken Genes

Nathan H. Lents – Human Errors: A Panorama of Our Glitches, from Pointless Bones to Broken Genes

A book that can be amusing, but also points out the limitations of design without a designer. That said, organisms as they are almost certainly far better off than if they were the products of design with a designer. Well worth a read for that reason, but mostly because it’s fun to know about bodily quirks and maladies we all share for no apparent reason. Part of reading this book is taking a bit of delight in our own misfortunes.

We humans are doomed to have bad knees and back problems because the human body is not fully adapted to bipedalism. Our lack of a protruding snout (facial prognathism), such as most other animals have, dooms us to endless colds and sinus infections. We have the same piping back there as other animals, but in us it is compressed and shifted around in ways no plumber would design. This evolutionary quirk is why we get sick so often, even as our household cats and dogs rarely do.

One minor, Seinfeld-esque example I found personally relevant is that some people have the ability to voluntarily control a small muscle near the ear drum, causing a low rumbling sound kind of like muffled thunder. I am one of those people. The weird part is because it’s just a small muscle flexing inside one’s head, nobody else can hear the rumbling, even though to the hearer it can be loud enough to drown out conversation. It also has an involuntary component, in my case triggered by yawning, sneezing, and bright lights–those mouth and eye movements also work the muscle in question. I’ve silently wondered since childhood what causes this; it’s apparently just a random mutation some people have. Other readers will likely have similar “oh, that’s what that is!” moments.

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.

Unintended Consequences of Voting

From p. 92 of Randall Holcombe’s 2018 book Political Capitalism: How Political Influence Is Made and Maintained:

Voting is the best way, from the elite’s standpoint, for the masses to participate, because each individual vote has essentially no impact on the outcome of an election, so voters are provided with the illusion that their participation determines the election outcome, which reinforces the perceived legitimacy of government.

Voting has practically no impact on policy outcomes. Even small local elections rarely have one-vote margins where a given person’s vote would be decisive. It’s so rare that it makes the news when it does happen. Voting’s instrumental value requires many decimal places to accurately express. But voting does have significant expressive value.

People genuinely feel good about participating in democracy, and get value from signaling their participation to others. Some people also get value from shaming people who do not vote. There is nothing wrong with most of that. But most people would benefit from a more accurate understanding of how much a person’s vote impacts election and policy outcomes. As Holcombe points out, this would make people less easily mollified by reform agendas that end at lip service.

The Trouble with Bureaucracies Isn’t Recklessness

A brilliant observation from p. 359 of Frank Knight’s 1921 book Risk, Profit, and Uncertainty:

The real trouble with bureaucracies is not that they are rash, but the opposite. When not actually rotten with dishonesty and corruption they universally show a tendency to “play safe” and become hopelessly conservative. The great danger to be feared from a political control of economic life under ordinary conditions is not a reckless dissipation of the social resources so much as the arrest of progress and the vegetation of life.

The last century or so has proven Knight correct, on everything from the precautionary principle being applied to chemical and environmental regulations, to risk assessment of new products, to much of what OSHA and CPSC do, to government dietary guidelines, to the larger nanny state movement.