Truth on the Market

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Archive for January, 2009

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Seriously, Alpha = 0? Have You Read the Bill?

Posted by Josh Wright on January 28, 2009

Not to harp on the same point over and over, but can anybody look at this list from the stimulus package with a straight face and claim that the absence of inefficient government spending (HT: Peter Klein)?

  • $1 billion for Amtrak
  • $2 billion for child-care subsidies
  • $50 million for the National Endowment for the Arts
  • $400 million for global-warming research
  • $2.4 billion for carbon-capture demonstration projects
  • $650 million for digital TV conversion coupons
  • $8 billion for renewable energy funding
  • $6 billion for mass transit
  • $600 million for the federal government to buy new cars
  • $7 billion for modernizing federal buildings and facilities (including $150 million for the Smithsonian)
  • $252 billion is for income-transfer payments ($81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don’t pay income tax)
  • $66 billion for education

No inefficiency there, huh? And of course, let the rent-seeking begin:

The magnitude of the spending bill, and its urgency, drew a swarm of lobbyists seeking money and tax breaks. The concrete and asphalt industries battled over how the government should spend billions proposed for road and bridge repairs, while dairy and beef cattle producers butted heads over talk that the government might buy up dairy cattle for slaughter to drive up depressed milk prices. Unions backed infrastructure spending. States sought budget bailouts.

How could anybody look at what is actually in the stimulus package and conclude that the “Alpha” is zero? Maybe Geoff is right. I’m probably just taking Brad DeLong too seriously. More from Arnold Kling.

Posted in business, economics, markets | 2 Comments »

Stop Brad DeLong!

Posted by Geoffrey Manne on January 27, 2009

Few people in my small sphere of the world are taken as seriously as Brad DeLong, while still being as much of an ass as he is.  The latest stems from his juvenile criticism of this masterful analysis of the stimulus situation by John Cochrane.  Brad’s juvenile criticism is here.  The thing is, it sounds so plausible (if childish in its name-calling and patronizing tone).  But Brad’s fundamental error–and it is a huge one–was succinctly pointed out by one of his commenters with a single sentence:

Isn’t the “end of story” in the first scenario rather arbitrary?

OK–You need a bit more background.  Cochrane makes the claim that borrowing (or taxing or inflating) to pay for stimulus doesn’t create wealth, it only redistributes it (Sounds familiar).  DeLong claims that this disregards the concept of velocity of money, and says this (in his un-charmingly petulant way):

Let us take this slowly.

Suppose that we have four agents: Alice, Beverly, Carol, and Deborah.

Suppose that Beverly has $500 in cash that she owes Carol, due in two months. Suppose that Alice and Carol are both unemployed and idle.

In one scenario in two months Beverly goes to Carol and pays her the $500. End of story.

In a second scenario Beverly says to Alice: “I have a house. Why don’t you build a deck–I will pay you $500 after the work is done. Here is the contract.” Alice takes the contract and goes to Carol. She shows the contract to Carol and says: “See. I will be good for the debt. Cook me meals so I will have the strength to build the deck–here’s another contract in which I promise to pay you $500 within 90 days if you cook for me.” Carol agrees.

Two months pass. Carol cooks and feeds Alice. Alice goes and builds the deck.

Alice then asks Beverly for payment. Beverly says: “Wait a minute.” She goes to Carol and says: “Here is the the $500 cash I owe you.” Beverly pays the money to Carol. Beverly then says: “But now could I borrow the cash back by offering you a long-term mortgage at an attractive interest rate secured with an interest in my newly more-valuable house?” Carol says: “Sure.” Beverly files an amended deed showing Carol’s mortgage lien with the town office. Carol gives Beverly back the $500. Beverly then goes to Alice and pays her the $500. Alice then goes to Carol and pays her the $500.

The net result? (a) Alice who would otherwise have been idle has been employed–has traded her labor for meals. (b) Carol who would otherwise have been idle has been employed–has traded her labor for a secured lien on Beverly’s house. (c) Beverly has taken out a mortgage on her house and in exchange has gotten a deck built. (d) Carol has the $500 cash that Beverly owed her in the first place.

Alice has more income and consumption expenditure than if she hadn’t taken Beverly’s job offer. Carol has more income and saving than if she hadn’t cooked for Alice and then invested her earnings with Beverly. Beverly has an extra capital asset (the deck) and an extra financial liability (the mortgage) than if she had never offered to hire Alice.

A deck has gotten built. Meals have been cooked and eaten. Two women have been employed. And all this has happened without printing any extra money.

John Cochrane would say that this is impossible. John Cochrane would say:

[I]f money is not going to be printed, it has to come from somewhere. If Beverly borrows a dollar from Carol, that is a dollar that Carol does not spend, or does not lend to Deborah to spend on new investment. Every dollar of increased Beverly spending must correspond to one less dollar of Carol or Deborah spending.  Alice’s job created by Beverly spending is offset by a job lost from the decline in Carol or Deborah spending. We can build decks instead of fountains, but Beverly stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”…

John Cochrane is wrong.

But actually it is Brad DeLong who is wrong.  As the commenter pointed out–what happens after the money is paid in Brad’s first scenario? Does Carol stuff it under a mattress? Or does she invest it, spend it on something (say, a new deck) or lend it (put it in the bank)? Unless Brad can exaplin why the order of events matters to his analysis, his analysis is worthless and wrong.  It is not a criticism of Cochrane but a childish attempt to demean someone with whom he disagrees–pretty much Brad’s M.O.  In fact, over the long or medium run, Cochrane is precisely corect–and Brad’s second scenario is equivalent to his first.  The question is whether we gain anything by forcibly re-ordering the events and injecting government inefficiency and rent seeking into the mix.  Brad doesn’t bother to see this, because it doesn’t further his aims–instead he essentially picks arbitrary facts and an arbitrary cut off point, completely disregarding the essential elements of the analysis that are not in plain view.

What I like best about this fundamental move of Brad’s is that it typifies the hubris with which Brad and his political allies operate: They frequently don’t see (or at least acknowledge) the unseen, they don’t account for the unintended consequences and they believe alpha = 0!!!!!!! Why does anyone take Brad DeLong seriously anymore?

Posted in economics, politics | 7 Comments »

Is the Stimulus Package Obama’s Patriot Act?

Posted by Thom Lambert on January 26, 2009

Why are the proponents of the stimulus package so reluctant to have a serious, non ad hominem-laden debate about whether it will, in fact, stimulate the economy? Because that’s not really its point. As Steve Horwitz explains:

Bottom line: the more that those of us who are skeptical continue to even refer to this as a “stimulus” plan, the more we play into the other side’s hands. This isn’t a stimulus package, it’s a whole bunch of programs designed to extend the state’s role in the economy and in our personal lives, and to do so at enormous cost to us, and to our children and grandchildren. Let’s challenge the rhetoric of fear and crisis and name this for what it is: the current majority’s attempt to do exactly what the Bush Administration did post-9/11, which is to use fear and crisis to pass programs that will impoverish us and curtail our freedoms, and to do so with the minimum of serious debate possible.

Go read the whole thing.

Posted in musings, politics | 1 Comment »

Alpha = 0?

Posted by Josh Wright on January 26, 2009

Geoff’s post about Kevin Murphy’s recent slides and analytical framework for thinking about the stimulus are worth reading and if you haven’t yet. Here’s a link to the video. Here’s Murphy’s analysis in a nutshell for those who haven’t:

A Framework for Thinking about the Stimulus Package

  • Let G = increase in government spending
  • 1-a= value of a dollar of government spending (? measures the inefficiency of government)
  • Let f equal the fraction of the output produced using “idle” resources
  • Let L be the relative value of “idle” resources
  • Let d be the deadweight cost per dollar of revenue from the taxation required to pay for the spending

When Will the Stimulus Add Value?

  • The net gain is the value of the output produced less the costs of the inputs and the deadweight loss
  • In terms of the previous notation we have: Net Gain = (1-a)G –[(1-f)G + ?fG] –dG
  • Net gain = (f(1-L) –a–d)G
  • A positive net gain requires that: f(1-L) > a+d
  • Difference of opinion comes from different assumptions about f, a, L, and d

My View * a likely to be large * Government in general is inefficient * The need to act quickly will make it more inefficient * The desire to spend a lot in a short period of time will make it more inefficient * Trying to be both stimulus and investment will make it even more inefficient * 1-f likely to be positive and may be large * With a large fraction of resources employed (roughly 93%) much will be drawn from other activities rather than “idle” resources * Ricardian equivalence implies that people will save to pay for future taxes reducing private spending * L is non-zero and likely to be substantial * People place positive value on their time * Unemployed resources produce value through relocation (e.g. mobility & job search) * d is likely to be significant * Wide range of estimates of d * Estimates based on the analysis of taxable income imply d?0.8 * With these parameters the stimulus package is likely to be a bad idea

Brad DeLong calls this the best anti-stimulus argument he’s seen and suggests that perhaps the evidence would switch Murphy’s ideological priors:

As I read it, Kevin thinks ? = 1/2, f = 1/2, ? = 1/2, d = 0.8, and gets 0.25 > 1.3. I would say that a = 0 (increasing income inequality and starvation of the non-health non-military public sector over the past generation have left a bunch of low hanging fruit), f = 1.5 (there are multipliers out there, and markets work if there is sufficient demand: as long as there are idle resources people will use them first as long as demand is available), L = 1/5 (the cyclically unemployed are not having much fun), and d = 1/3. So I get 1.2 > 0.33.

More interesting, I think, is that there is an unemployment rate at which Kevin Murphy’s priors would switch and he would become a stimulus advocate. What is it?

Alpha = 0!? Huh? I just noticed that Geoff picks up on this in the update to his post. Oh well, I’m too bothered by this to delete the post now (Tom Smith thinks Alpha > 1). Is it even possible for Alpha to be zero unless we assume away not only government inefficiency but also public choice problems? Perhaps the interesting question here is not so much about Murphy’s priors’ sensitivity to the unemployment rate but DeLong’s sensitivity to evidence on Alpha? I’d like to see evidence suggesting that Alpha is anywhere close to zero. Like Murphy, my prior is that Alpha is likely to be non-trivial and certainly greater than zero. But let me join Geoff in appreciating the fact that DeLong is acknowledging that there may well be some logical economic arguments to be made against the stimulus and discussing priors as to parameters rather than just name-calling. A discussion of the economics and evidence certainly beats this. Or this. What Nobel Laureate Paul Krugman has done with his epithets and attacks is both intellectually dishonest and bad for the profession. But at least he’s consistent, sparing no highly respected economists whom dares to publicly express skepticism about the stimulus, ranging from Robert Barro and Greg Mankiw to John Cochrane, Eugene Fama and Gary Becker. As Tyler suggests, a far more productive path to proceed under the presumption that “there aren’t any boneheads in the room.”

Posted in economics, markets, regulation | Comments Off

The Know Betters’ Stimulus Plan

Posted by Thom Lambert on January 26, 2009

National Economic Council Chairman Larry Summers was on Meet the Press yesterday defending President Obama’s proposed fiscal stimulus plan, which is heavily weighted toward government spending and away from tax cuts (and, to the extent it reduces taxes, does so via tax credits without cutting marginal rates). He started by emphasizing the magnitude of the massive stimulus plan:

David, this is the largest stimulus plan in the country’s history. It’s the largest investment in the backbone of our economy since the interstate—since the interstate highway system. It’s going to double renewable energy. And it is only one phase of the approach that the President is taking. The President has made clear that there will be strong action to address the terrible problems in our housing sector, that he will be using additional funds for a substantial financial recovery plan to get the flow of credit going. This is one component of our strategy to bring about expansion. And the President has also made clear that going forward we’re going to be leaning forward and that he is prepared to do what is necessary.

Host David Gregory then referred to some of the specifics of the spending bill — $4 billion to localities to pay for police, $16 billion in Pell Grants for college students, $2.1 billion for Head Start, $50 million for the National Endowment for the Arts — and he asked Mr. Summers about the possibility of cuts in tax rates. Remember, the Obama tax cuts don’t change tax rates; they’re simply tax credits. (Well, sorta…. They’re available for people who don’t pay income taxes but not for taxpayers earning above certain levels.) Mr. Gregory said: “Specifically, there’s a question about the Bush tax cuts which, of course, expire next year. Does the President want to actually repeal those tax cuts this calendar year?”

Mr. Summers’ answer was odd: “I don’t think there’s any question they have to be repealed. The country can’t afford them for the long run. … [T]hey expire, expire at the end of next year, and they have to be allowed to expire.”

So let me get this straight. We can afford to spend $550 billion on things like Head Start and the National Endowment for the Arts, but we can’t afford to keep current tax rates where they are on our nation’s most productive individuals and the millions of small businesses that get taxed as sole proprietorships? Isn’t it a bit odd, all of a sudden, to start worrying about the bill?

It’s pretty clear what’s going on here. Messrs Summers, Obama, et al. know better than do wealthy people and small business owners — those whose marginal tax rates will rise when the Bush tax cuts expire — how to allocate resources so as to generate societal wealth. Expenditures on more policemen, early childhood education, tuition subsidies, and the arts are good uses of resources, proper allocations of capital. Who knows what all those money-grubbing wealthy people and small business owners would do if they were allowed to keep more of the wealth they create?

If the know betters in the political class get to decide how society’s productive resources get allocated, they can make sure all sorts of desirable ends are achieved. Not only can they ensure that the most economically valuable projects are undertaken, they can also guarantee that resources are divvied up equitably. Consider Obama adviser Robert Reich’s recent comments to Congress on the spending stimulus:

It seems to me that infrastructure spending is a very important and good way to stimulate the economy. The challenge will be to do it quickly, to find projects that can be done that have a high social return, that also can be done with the greatest speed possible. I am concerned, as I’m sure many of you are, that these jobs not simply go to high skilled people who are already professionals or to white male construction workers. … I have nothing against white male construction workers, I’m just saying that there are a lot of other people who have needs as well, and therefore in my remarks I have suggested to you, and I’m certainly happy to talk about it more, ways in which the money can be–criteria can be set so that the money does go to others — the long-term unemployed, minorities, women, people who are not necessarily construction workers or high-skilled professionals.

[NOTE: Mr. Reich made similar comments on his blog. In a recent post entitled The Stimulus: How to Create Jobs Without Them All Going to Skilled Professionals and White Male Construction Workers, Mr. Reich wrote:

I'd suggest that all contracts entered into with stimulus funds require contractors to provide at least 20 percent of jobs to the long-term unemployed and to people with incomes at or below 200 percent of the federal poverty level. And at least 2 percent of project funds should be allocated to such training. In addition, advantage should be taken of buildings trades apprenticeships -- wich [sic] must be fully available to women and minorities.]

The know betters’ plan, then, is to take taxpayer dollars and allocate them so that they are most economically fruitful and most equitably distributed.

But there are a couple of problems with this approach.

First, the know betters don’t. As I’ve stressed repeatedly on this blog, no centralized bureaucrat is privy to the time- and space-specific information (particularly information about individual consumer preferences) needed to allocate productive resources to their highest and best ends. As Hayek put it, “the knowledge of the circumstances of which we must make use [in order to allocate productive resources efficiently] never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” If government officials channel productive resources by fiat, they’re highly likely to push them in the wrong direction — i.e., away from the uses to which they could be best applied. Consider, for example, John Huizinga’s speculation about all these massive construction projects the stimulus plan would fund (the quote is at minute 15 of this terrific video):

If you want to have a fiscal stimulus policy and put people back to work, you’re going to put construction workers back to work, because there are a lot of them that are unemployed. My guess is that we had way too many construction workers. We had a residential housing boom that was not sustainable. I don’t think we want to go back to the level of residential construction that we had in the past. And if our job is fiscal stimulus and put[ting] these people back to work, I think we’re working exactly in the opposite way of … allocating our labor in the way that’s really productive.

A second problem with the know betters’ plan is that it’s politically naive to think we can cut back on all this spending once the recession has ended. Perhaps the feds can eventually eliminate the additional $50 million allocated to the National Endowment for the Arts. Middle America has long been (rightly) skeptical of that subsidy to the wealthy. But what about the $2.1 billion for Head Start? That’ll be tougher. The $16 billion for Pell Grants? Tougher still. The $40 billion for local police? Fuhgeddaboudit.

The fact is, targeted expenditures create constituencies. Those constituencies have every incentive to lobby long and hard to keep their government goodies. Taxpayers as a whole, on the other hand, have little incentive to lobby against any individual line item, for each taxpayer’s share of the expenditure at issue is so tiny that the fight’s not worth the effort. We thus end up with the sort of “concentrated benefits/diffuse costs” situation that enables particular expenditures to persist. Anyone who thinks we can shrink our government spending back to pre-stimulus levels following this recession either hasn’t been around much or is on glue.

Let’s hope there are still some folks in Congress who recognize government’s limitations and have the courage to stick to their principles.

Posted in economics, musings, politics | 1 Comment »

"I Pledge to Be a Servant to Our President"

Posted by Thom Lambert on January 23, 2009

I’m sorry, but this is just plain creepy. (Watch to the end.)

It’s one thing to respect the President, to give him the benefit of the doubt, and to support him when he does the right thing. Hollywood would do well to do more of those things, and I will certainly do them for President Obama. It’s another thing entirely, though, to “pledge to be a servant” to the leader of the state, the institution in society with a monopoly on the legitimate use of force. That, I won’t do.

Blind devotion is a scary thing — almost as scary as Jason Bateman’s bathroom habits.

Posted in musings, politics | 1 Comment »

Varney Instead of Elhauge at DOJ?

Posted by Josh Wright on January 22, 2009

So says Bloomberg.

UPDATE: More from DOJ:

The White House is expected to nominate Christine Varney, a former Federal Trade Commission member and Internet-law expert, as Justice Department antitrust chief, people briefed on the move said.  Jon Leibowitz, a current FTC member, is the leading candidate for commission chairman, but the decision isn’t final, these people said.  Both are known to favor aggressive enforcement and would mark a change from the Bush administration, which pursued scores of price-fixing cases but challenged few mergers and rarely acted against alleged monopoly conduct.

Posted in antitrust, politics | 2 Comments »

Bork and the Antitrust Paradox Revisited

Posted by Josh Wright on January 22, 2009

The Harvard Journal on Law and Public Policy recently published a symposium on the contributions of Judge Robert Bork. Readers of TOTM might be interested in three essays on Bork’s enduring contributions to antitrust law from Judge Frank Easterbrook, Judge Douglas Ginsburg, and Professor George Priest.  The following excerpt from Easterbrook’s essay, I thought, was particularly insightful:

I think it likely that the future will be like the past: the ability of judges and other regulators to second-guess markets has not improved. Economic models may have improved, but it is real world performance that matters. If “choose better regulators” or “educate the judges” has not been a successful prescription for the last 116 years, it will not become a good prescription tomorrow. This is not a matter of “faith in markets” or some other quasi-religious creed but of evidence. We want to look for suits actually filed that nailed bad practices (successes) or banned good ones (false positives), plus suits not filed where it turned out that exclusion occurred (false negatives). Only if the gains from the successful suits exceed the losses from the false positives can we say that litigation about exclusionary practices has been a success. And aside from pointing to the AT&T divestiture in 1982—something that likely was inevitable because of technological change, independent of antitrust—few people claim to identify even one success in this line of work.

In other words, judges and enforcers must be wary of claims that take the form: “Here is a model in which bad results can happen; let’s use the legal system to find out whether they happen.” That approach assumes away the costs of false positives. Because these costs are high (that’s what errors over the last century tell us), we should not seek to test theory in the halls of government, where mistakes may be inflicted on the populace. Test models the professional way, by gathering data, running regressions, and publishing in professional journals. Before predicting that the future will be unlike the past—that is, before predicting that judges and juries will acquire a comparative advantage at identifying practices that are bound to reduce welfare in the future—one must do empirical testing. Government fared poorly between 1890 and 2006, even when the rules were simple. Why should we think that regulators (including judges) will do well when the rules become complex, when strategies are designed to conceal relevant costs, and so on? If the strategies conceal matters from competitors, then they conceal from judges and other regulators too.

Posted in antitrust, scholarship | Comments Off

Likely Monopolization Suit Targets

Posted by Josh Wright on January 21, 2009

I’ve written previously about the upcoming surge in monopolization enforcement deriving from a “perfect storm” of sorts, including: (1) an incoming administration dedicated to “reinvigorate antitrust enforcement,” (2) an outgoing administration heavily and publicly criticized for lack of monopolization enforcement, and (3) interjurisdictional competition between the US and EU as the world’s primary antitrust enforcer which is likely to result is some “convergence” in the US toward EU style monopolization enforcement (in my view, a troublesome development). I predicted that:

The place where all the action is, I think, is monopolization. The Obama camp is not going to want to be perceived as creating job losses. I think that is most likely to be the case in attacking mergers between firms in a financial nose dive. But attacking the big bad monopolist is different. Monopolists are not perceived to be in dire financial straits (even when they are). They have deep pockets. They are Microsoft. Single firm conduct can be sold to the public as exploitative and coercive and maybe even linked to the sort of anti-corporate sentiment that has been generated in fraud and corruption cases. On top of this, with the FTC v. DOJ split on monopolization which is likely to be resolved in favor of the dissenting FTC Commissioners, the promise to return to Clinton administration like monopolization enforcement numbers, this is a bad time to be a firm with a dominant position — especially in highly visible industries (Pharma, health care, and tech come to mind).

Well, the EU’s opening move the new but classic Microsoft IE suit. What’s going to be first for the FTC or DOJ in terms of a big name monopolization suit under the Obama/ Elhauge/ Leibowitz antitrust regime? Maybe a new Microsoft suit? Will the FTC pursue a case against Intel? More patent holdup cases? The AAI, which I believe has ties to and the ear of the current administration, suggests IBM — which is also the subject of an abuse of dominance complaint in the EU for tying its mainframe hardware to its operating system. Such a case would fitt the profile of what I’ve predicted. Here’s an excerpt from the press release:

High-tech markets can be particularly vulnerable to anticompetitive actions. Their complexity, reliance on interoperability and standardization, system switching costs, the presence of extreme economies of scale and the multiplying power of network effects give dominant firms increased incentive to engage in actions that harm competition, stall innovation and limit consumer choice. The coming of a new US administration that understands the importance of credible antitrust enforcement portends well for competition and innovation in all sectors of the economy, especially in cutting edge industries. President Obama indicated in his statement to AAI that he would make bringing more antitrust cases a priority, specifically in regards to actions against monopolists, an area that received virtually no attention from the DOJ during the last administration. Having the DOJ or FTC investigate this case would be an important way for the new technology-savvy Obama administration to show its commitment to the consumer-oriented principles the President espoused during the recent campaign. However, this remains just one example of the many economic sectors that deserve heightened scrutiny after 8 years of relative neglect under the Bush administration.

I’m skeptical about including “demonstration of tech-savvyness” as a factor in the decision whether to investigate or prosecute. With respect to network effects and switching costs I wonder what the folks at AAI think about this?  But that’s besides the point. Who do you think are the most likely first monopolization targets of the Obama antitrust regime?

Posted in antitrust | Comments Off

More on Error Costs

Posted by Josh Wright on January 20, 2009

Speaking of error cost analysis, this paper from a trio of lawyers in the General Counsel’s Policy Studies’ group at the FTC has a section entitled “Error Costs: The False Positive/ Negative Debate.” A frustration for me in discussing the error cost issue with respect to antitrust policy is that many people do not seem to understand that it is error costs and not just errors that we are concerned with. A common refrain is: show me a false positive monopolization case! We bring so few, we don’t have to worry about false positives anymore. QED. Of course that is wrong. The social costs of false positives are not about the single business practice that is condemned by an antitrust judgment. The real costs are the chilling of pro-competitive behavior by other firms in response to the expectation of the same type of judgment against them. You cannot just count cases. Those aren’t where the costs are! Not to mention much of the expectation of liability from pro-competitive behavior is to do with the threat of settlements. Oh, and you want a false positive? Here’s one.

Much of the confusion surrounding this basic point of the error-cost approach to antitrust rules can be read in the hearings on the Section 2 Report with proponents of more interventionist antitrust policy constantly invoking the mantra that we just don’t see that many false positives in the cases as evidence in favor of the lack of error costs. Some go so far as to argue that the social costs of a false negative in the context of monopolization is likely to outweigh the costs of a false positive. While monopolization can have the same economic impact as cartel behavior, of course, economic theory tells us that there are some offsetting forces to correct market failure in the case of false negatives but none for false positives. This was one of Easterbrook’s key points in the Limits of Antitrust. The other key point, which is not as well appreciated, is that errors are more likely when we do not have a good basis for identifying anticompetitive conduct. This is nowhere more true than in the case of monopolization. In this era of no monopolization enforcement, there ought to be bundles of empirical examples abound documenting exclusionary distribution contracts with convincing statistical evidence. The literature isn’t there. So I’m not sure exactly how one would identify the false negative if they saw it. On the other hand, the bulk of the literature on vertical restraints and single firm conduct suggests that the conduct is pro-consumer most of the time. Another point in favor of fearing false positives instead of negatives.

Anyway, back to the paper. Its generally very good in framing the debate and pointing out what Section hearing panelists had to say on the issue. It doesn’t quite, at least to my tastes, separate out the issue of errors versus error costs nor the theoretical underpinnings of the error-cost approach sufficiently. Still, its good and better than most on this issue. And they do cite Easterbrook’s argument with respect to higher social costs for false positives relative to negatives. However, it wraps up the discussion with a little bit of a tone of “some say false positives, some say false negatives, lets ignore both of them because there is no evidence.” For example, on this issue it includes the following paragraphs:

This debate reflects both the potential promise of decision theory as an analytical framework and its current limits as a calibrated tool. While decision theory provides “a way to organize our thinking about legal standards,” the lack of reliable data limits its ability to identify optimal rules.186 As one panelist observed, “[F]alse positives [and] false negatives” should be considered “on the basis of empirical data and not on theoretical assumptions.”187 Yet the hearings suggested no basis for reliably quantifying the likelihood and magnitude of false positives and negatives under potential liability rules.

When evidence is limited, decision theory primarily provides general directions and broad insights, leading courts and enforcers to identify circumstances in which concerns regarding either false positives or false negatives are likely to be especially significant, and where greater tolerance or heightened vigilance may be appropriate.188 The Supreme Court’s application of decision theory in antitrust cases has reflected these limitations, identifying two areas—predatory pricing and predatory buying—in which concerns regarding false positives warrant the use of a specially-designed test.189

The conclusion here on the error cost debate seems to be that the error-cost framework (and the decision-theory that necessarily goes with it) is less useful when we do not have empirical data on the likelihood and magnitude of false positives and negatives. Perhaps no data came out of the hearings on these issues, but there is a substantial economic literature on single firm practices ranging from RPM to exclusive dealing to tying. See, e.g. this recent survey of that literature by colleagues of these FTC authors over in the Bureau of Economics. There are authors surveys as well. E.g., Lafontaine & Slade.

Here’s a quote from the first linked survey piece by Luke Froeb, James Cooper, Dan O’Brien and Michael Vita summing up the state of play:

Empirical analyses of vertical integration and control have failed to find compelling evidence that these practices have harmed competition, and numerous studies find otherwise. Some studies find evidence consistent with both pro- and anticompetitive effects; but virtually no studies can claim to have identified instances where vertical practices were likely to have harmed competition.

The error cost approach allows one to focus on an evidence-based antitrust policy. And frankly, at least in the monopolization area, the empirical basis for a more aggressive policy just isn’t there no matters. Assertions about the rarity of judicial errors in favor of plaintiffs in antitrust cases do not change that given the current state of our empirical knowledge.

Posted in antitrust, economics, federal trade commission, regulation | Comments Off

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