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Archive for January, 2010

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Some sense on stimulus and jobs

Posted by Geoffrey Manne on January 29, 2010

Via Ted Frank, I have been perusing e21: Economic Policies for the 21st Century.  It seems to be a site run by some Republican policy wonks, and includes contributions from some excellent academics including Charlie Calomiris, Ed Lazear and Phil Swagel.

A recent posting there on The High Price of Job Creation has some important if scary graphs and offers some enormously important statistics to the ongoing stimulus debate.  As everyone knows, Obama called for more job-creating stimulus in his SOTU, one of the many elements from his SOTU that eerily tracks elements of previous SOTUs from his reviled predecessor.  But even if we accept that a government stimulus package would achieve its intended goals (I know, I know . . . ) what would it need to look like?  Given some seemingly reasonable assumptions about workforce participation, in order to reduce the unemployment rate to 8% (what Obama’s economists claimed the original stimulus package would accomplish) by November (I’m not sure why this date was chosen . . . ) the economy would need to

generate between 1.1 million and 1.9 million net new jobs per month to reach 8% unemployment by November.  Few expect aggregate employment to increase by these amounts over the entire ten month period, let alone each month until then.

The amount of spending required to achieve this objective would be staggering (it took $787 billion to “create or save” an alleged 2 million jobs in a year, recall).  And that’s assuming stimulus would be effective in its intended goal–an extraordinarily dubious assumption (rap video explanation here).  Most important, however, is a clear understanding of where such jobs would be created (or saved), and maybe the scariest graph from the post is this one, looking at public sector versus private sector employment since January 2007:

employpubpriv

Alarming, no?  Of course past performance is no guarantee of future results, but given the political dynamics that shaped the first stimulus, I wouldn’t expect the apple to fall too far from the tree.  Every time partisan hacks like Brad DeLong and Paul Krugman argue that we need stimulus now, and we can worry about managing government costs later, think of this graph, and think about how easy it will be to pare down that bloated, inefficient and growth-curtailing government workforce.

Posted in politics, stimulus debate | Comments Off

Varney Gets It Right on RPM

Posted by Thom Lambert on January 28, 2010

Tomorrow I will be presenting my paper, A Decision-Theoretic Rule of Reason for Minimum Resale Price Maintenance, at the Next Generation of Antitrust Scholarship Conference at NYU Law School. (Kudos to Danny Sokol for co-organizing what promises to be a terrific event!) My paper criticizes four proposed approaches to evaluating RPM post-Leegin, and it sets forth an alternative approach that embodies the sort of error cost analysis Geoff and Josh have embraced in connection with monopolization doctrine. The paper largely builds on my recent William & Mary Law Review article on RPM, expanding the analysis to address recent developments in the caselaw and antitrust scholarship (e.g., I address the pending Babies-R-Us case).

In preparing for the conference, I checked Westlaw to see who (if anyone!) had cited my William & Mary article, and lo and behold, I came across a piece on post-Leegin RPM analysis by Christine Varney herself. Well guess what? It’s really quite good. We here at TOTM have occasionally been critical of Ms. Varney’s interventionist stances on antitrust (most recently here), but we must give credit where credit is due. And Ms. Varney’s article, A Post-Leegin Approach to Resale Price Maintenance Using a Structured Rule of Reason, is creditworthy.

As I do in both my William & Mary article and the paper I’m presenting tomorrow, Ms. Varney argues that plaintiffs challenging instances of RPM should bear the burden of proving that the preconditions for at least one of the theories of RPM-induced anticompetitive harm are satisfied. That may sound like a no-brainer, but it’s signficantly more stringent than any of the other liability rules courts, commentators, and regulators have thus far proposed.

The American Antitrust Institute and the attorneys general of 27 states, for example, would presume the illegality of any instance of RPM that raises consumer prices. That’s ridiculous, of course, for even RPM’s procompetitive potential stems from the fact that it generates output-enhancing services by raising prices and thereby enhancing retailer margins (and retailers’ incentives to promote the brand at issue).

The Babies-R-Us court, following the proposal of economists F.M. Scherer and William Comanor, deems any retailer-initiated RPM to be illegal. That’s troubling because, as I explained in this post, retailers have an incentive (and are particularly well-poised) to seek RPM for procompetitive purposes like avoiding free-riding. Retailer initiation is entirely consistent with procompetitive motivation (and effect), but it’s enough to render RPM per se illegal under the Babies-R-Us approach.

The Areeda treatise would deem illegal any RPM imposed on a homogeneous product that is not sold with services susceptible to free-riding. That’s too restrictive because, as I explain here (and as Josh has explained in a number of articles and posts), RPM has procompetitive uses besides the avoidance of free-riding. Most notably, it can act as an efficient mechanism for inducing dealers to promote a particular brand of even a homogeneous product. Thus, it may be output-enhancing even when applied to products that aren’t sold along with “free-rideable” point of sale services.

Finally, the FTC has taken the position (in deciding Nine West’s motion petition to modify an injunction) that RPM should be presumptively illegal unless the defendant makes a number of difficult showings. That’s inappropriate because theory and evidence suggest that most instances of RPM are procompetitive, and the RPM challenger therefore ought to bear the initial burden of proof.

Compared to these four proposed approaches, Ms. Varney’s proposed approach is a breath of fresh air. It correctly recognizes that anticompetitive uses of RPM are difficult to accomplish, and it properly places the initial burden on an RPM challenger to show that the preconditions for anticompetitive harm exist. (The defendant would then have a rebuttal opportunity, which is proper.) The showings necessary to state a prima facie case of illegality are quite difficult, but that’s entirely appropriate, given that most instances of RPM are procompetitive.

Ms. Varney’s article appears in the Fall 2009 issue of the ABA’s Antitrust Magazine and is available on Westlaw.

Posted in antitrust, federal trade commission | 4 Comments »

You Don't See This Everyday

Posted by Josh Wright on January 28, 2010

From a library bookshelf in Kiev, Ukraine:

Coulter

Posted in musings | 1 Comment »

The SEC gets that old time climate religion. Hallelujah, praise Gore.

Posted by Geoffrey Manne on January 27, 2010

Today the SEC voted 3-2 to approve an interpretive release offering guidance to companies on disclosure obligations as they relate to climate change.  Commissioners Casey and Paredes voted to reject the proposed guidance.

Everyone can agree that companies may have an obligation under Regulation S-K to disclose risks arising from, among other many things, climate change laws and regulations.  But this guidance goes further, urging companies to disclose risks arising from “physical effects of climate change.”  This is nonsense on stilts.  Leave aside the underlying inanity of the larger enterprise built on the premise that rationally-ignorant and rationally-passive individual investors should read, assess and make active investment decisions on the basis of massive amounts of regularly-disclosed information.  Here corporations are asked to disclose “information” about risks to the company posed by future, possible environmental conditions about which the firms know nothing, the science is utterly un-settled and speculative, and the actual physical and economic consequences of which are even less certain.  (I put the word information in scare quotes because nothing so speculative and uncertain can reasonably be called information).  What possible value could there be to investors (assuming there is any value to investors from disclosure of this type of information anyway) from the sorts of disclosures that would reasonably follow?:  “There is somewhere between a 0% and 90% chance that the temperature during either the summer or the winter or maybe-but-not-definitely both will be either warmer or colder by somewhere between 0.01 and 5 degrees sometime within the next 300 years.  This may or may not be bad for our business depending on whether it makes our customers richer or poorer, improves or harms our productivity and helps or harms our competitors by more or less than it helps or harms us.”

At least Troy Paredes isn’t buying it and once again stands nearly alone (Commissioner Casey also voted to reject) for common sense in Washington.  An extended quote from his statement at today’s hearing:

Second, the release states that companies “whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from,” the “physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, the arability of farmland, and water availability and quality.”

The prospect that this guidance will in fact foster confusion and uncertainty about a company’s required disclosures troubles me. What triggers a “reputational damage” or “physical effects” disclosure is far from certain, as is the scope of any such disclosure if and when required. More to the point, reputational damage and the impact on a company of the physical effects of climate change can be quite speculative. There is a notable risk that the interpretive release will encourage disclosures that are unlikely to improve investor decision making and may actually distract investors from focusing on more important information. Here, it is worth recalling that, in rejecting the view that a fact is “material” if an investor “might” find it important, Justice Marshall, writing for the Supreme Court in TSC Industries, warned that “management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking.

Also problematic are the interpretive release’s introductory and background discussions on climate change and its regulation. To me, the effect of the discussions is to find the Commission joining the ongoing debate over climate change by lending support to a particular view of climate change. Although the release does not expressly take sides, the release emphasizes the “concerns” and potential harms of climate change and discusses a range of regulatory and legislative developments, along with international efforts, aimed at regulating and otherwise remedying causes of climate change. In particular, the release highlights new EPA regulations, proposed “cap-and-trade” legislation, the Kyoto Protocol (which the U.S. has not ratified), the European Union Emissions Trading System, and recent discussions at the United Nations Climate Conference in Copenhagen. While the release stresses the risks of climate change and ongoing efforts to regulate greenhouse gas emissions in the U.S. and abroad, the release fails to recognize that the climate change debate remains unsettled and that many have questioned the appropriateness of the regulatory, legislative, and other initiatives aimed at reducing emissions that the release features. In short, I am troubled that the release does not strike a more neutral and balanced tone when it comes to climate change — an area far outside this agency’s expertise.

Finally, given that there are more pressing priorities before the Commission, now is not the time for this agency to consider climate change disclosure.

For these reasons, I am not able to support the release before us. Nonetheless, I would like to thank the staff for their efforts and professionalism.

On the bright side, maybe this means the SEC is qualified to investigate the fraudulent disclosures in the UN IPCC’s Fourth Assessment Report.  On the other hand, the existence of such . . . misstatements in the authoritative global survey of climate change science suggests that, as Troy suggests, this whole endeavor will have few of the intended–and plenty of unintended–consequences.

Posted in business, disclosure regulation, environment, markets, politics, regulation, securities regulation | 1 Comment »

Finally, some real help for California!

Posted by Geoffrey Manne on January 27, 2010

Oregonians, my fellow residents of the Beaver State (and, by the way, the only state in the Union with a different image on each side of its flag), voted yesterday to increase top marginal income tax rates and corporate tax rates, including minimum corporate tax rates and the addition of a tax on gross receipts.  I’m still waiting for Paul Krugman to decry the anti-stimulus measure, but I doubt it will happen (he’s a partisan hack, you know).  But there is a “bright” side: Capital (human and otherwise) flight from Oregon to its neighbors (including income-tax-free Washington to the North and foundering behemoth California to the South) will help those states with their economic troubles!  <sarcasm>And fewer people and less economic activity in Oregon will be good for spotted owl habitat, after all</sarcasm>.  I just hope the local beer industry survives.  I don’t know what I’d do without the ability to drown my sorrows in a few bottles of Terminal Gravity IPA.

Posted in business, markets, personal finance, stimulus debate | 1 Comment »

Varney on the Merger Guidelines

Posted by Geoffrey Manne on January 27, 2010

Yesterday the final Horizontal Merger Guidelines Review workshop was held and, among other antitrust luminaries, our own Josh Wright participated.  We look forward to a report from the front lines.

Meanwhile, Assistant Attorney General Varney’s comments are available on the interwebs.  Overall her remarks seem uncontroversial, especially following on the heels of the agency’s (surprising?) clearance of the Live Nation/Ticketmaster merger with conditions (but see the agency’s challenge of the consummated Dean Foods/Foremost Farms merger, about which I will have more to say in a subsequent post).  But I did find one section quite a bit troubling.  Acknowledging that agency practice did not hew slavishly to the Guidelines’ “five-step analytical process” for assessing markets and market share, Varney noted that:

Implicit in deemphasizing the sequential nature of the Guidelines inquiry is a recognition that defining markets and measuring market shares may not always be the most effective starting point for many types of merger reviews. Remember, the purpose of defining a market and assessing shares is to assess potential harm. When it is clear, for instance, that either certain vulnerable customers are likely to be harmed by a merger, or that certain customers have in fact been harmed by a consummated merger, the need to define a market to assess likely competitive effects is diminished. For instance, the consumer harm that followed from the consummated Evanston hospital transaction lessened the importance of the Commission’s market definition and market share analyses in that matter. Our panelists have largely confirmed the view that market definition should not be an end-all exercise. Rather, it is something to be incorporated in a more integrated, fact-driven analysis directed at competitive effects.

I am among the many commenters who have criticized the Guidelines’ approach to market definition and market share–my submission to the workshops is here.  There has also been a strong movement recently to do away with market definition in some unilateral effects analysis and to replace it with the UPP analysis promoted most recently in the Farrel & Shapiro article (pdf).  Interestingly, while Varney is previously  on record opposing this movement, elsewhere in this speech she seems to endorse it:

There is a growing body of evidence that measures of upward pricing pressure, which focus on diversion ratios, and price-cost margins, can be highly informative in assessing the likelihood of unilateral pricing effects.

But this is in a different section of the speech, UPP remains an analytical approach (as opposed to the class of cases Varney is concerned with here where harm to certain consumers is simply “clear”), and it does not seem to be what she’s talking about in the quote above.  Here she seems to mean something else–and I fear it is something troubling.

Taken literally, what Varney is saying is that an ad hoc (ok, fine–an “integrated, fact-driven”) determination that some customers (“vulnerable” ones, whatever that means) may be made worse off by a merger lessens the need for a more comprehensive assessment of overall competitive dynamics within a relevant market.  But I don’t know what this means, frankly.  In the first place, how is the agency supposed to know that some customers are likely to be harmed if it hasn’t assessed the availability of substitutes and the extent of diversion?  One can certainly criticize the method by which this assessment is made, but a conclusion of harm absent this assessment seems absurd.  Moreover, if Varney really means that all that is required to condemn a merger is that any customers may be harmed, no matter how many are also benefited, at a minimum it sounds like she’s writing the efficiencies defense out of the Guidelines, but she may even be justifying condemnation of any and all mergers–after all, how many actions in the marketplace impose a cost on literally no one?  If, as seems likely, it is inframarginal consumers who are “likely” “vulnerable” to price increases (where “vulnerable” may be a synonym for “having inelastic demand”), then this test is a repudiation of the entire economic edifice of modern merger analysis (parallel to my discussion of the DC Circuit’s Whole Foods decision here).

And Varney’s reference to the FTC’s Evanston Northwestern case is a bit of a sleight of hand.  That was indeed a consummated transaction, where the requisite harm was shown by direct pricing evidence following the merger.  That’s quite a bit different than tossing out the Merger Guidelines in a non-consummated merger case because it is “clear” that “vulnerable” consumers are “likely” to be harmed.  And even the Evanston Northwestern case is not without controversy, precisely because forsaking the Guidelines’ analytical framework also forsook clarity in the analysis (see, for example, the strong criticism of the case here).

According to the Guidelines themselves,

The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time.

The presence of some harm (how much, by the way?) to some consumers does not necessarily equate to market power, unless the definition is simply tautological.  Under the Guidelines approach, this would require a market definition so narrow (defined to include only the harmed customers) that it would be economically meaningless (the classic “red-haired, bearded, one-eyed, man-with-a-limp classification” condemned by Justice Fortas in his Grinnell dissent).  Sidestepping the Guideline’s analytical framework by equating the exercise of market power with a theoretical price increase that wouldn’t be cognizable under the Guidelines (and wouldn’t exist in the real world) is not merely an analytical shortcut, it is a subversion of the whole analysis.  Again, see the fundamental errors of the Whole Foods case.

Now, in the end, all she may be saying is that sometimes there is direct evidence of harm, properly-statistically attributable to the merger, many years after a transaction has been consummated.  Or that the risk of harm is so self-evident that a formal analysis isn’t required–say, when there are simply no other competitors in a relevant geographic area, no timely entry is possible (for some reason . . . ) and a significant number of customers is affected.  I suppose this could happen.  I would expect in such circumstances that the parties wouldn’t even bother attempting the merger, but maybe once in a while the situation could arise.  But I just can’t fathom that this could be a significant enough possibility that it would rise to the level of an important policy speech on the Merger Guidelines by the AAG.

So what is Varney saying?  Anyone?

Posted in antitrust, law and economics, mergers & acquisitions | 9 Comments »

Russian Retail Trade Law and Government Barriers to Entry

Posted by Josh Wright on January 26, 2010

A new Russian retail trade law is scheduled to (at least partially) go into effect on February 1st.  The new retail trade law, with the support of the national antitrust authority and Prime Minister Putin amongst others, has three essential features: (1) limiting the operation of chains to no more than 25 percent of total sales within particular geographic regions, i.e. prohibition on internal expansion or merger, (2) restrictions on the ability of suppliers and retailers to enter into slotting arrangements and other payments for shelf space, and (3) price controls on some subset of “socially-important” goods.

Prime Minister Vladimir Putin has offered his take on the necessity of this law to protect consumers and small retail chains from dominant retailers and “stabilize” trade amongst firms in the food supply chain.  See, for example, this transcript.  Here’s an excerpt (translated):

That is why we should make major amendments in the antimonopoly legislation, and guarantee small outlets and individual traders reliable protection from giant chains abusing their dominant position… . There is another problem: traders’ relations with manufacturers, who only recently were able to dictate their terms to traders. Now, it is the other way round. Major retail chains have an impact on the market.  The most insecure situation is in food retailing, where many Russian suppliers come against major obstacles. That is why the draft law will envisage norms for balanced and mutually lucrative relations in the entire business from the farm to the counter.In particular, we should elaborate a model food supply contract to smooth out wholesale pricing, trade markups, payment deadlines, liability for noncompliance, etc-naturally, without any discriminatory terms.

Recently, I lectured in Moscow and Kiev (where Ukraine may pass a similar law), graciously hosted by the Atlas Foundation and inliberty.ru, on the likely consequences of such a law.  The lectures included discussions with academic economists, antitrust regulators (who support the law) and other government officials, retail trade associations and student groups.  I discussed the antitrust treatment of shelf space arrangements in the United States, as well as much of my own research indicating the consumer benefits that flow from allowing vigorous competition for shelf space between suppliers.

A few observations on the retail antitrust debate in Russia that I found interesting either in their own right or in comparison to the US experience.

The first is that the debate is almost exclusively focused on the exercise of retail market power rather than the possibility of upstream monopolists excluding rivals by purchasing shelf space.  In the US, both concerns are frequently discussed but most of the antitrust cases involve suppliers (Coke, McCormick, RJR, US Tobacco,  etc.).  This is especially interesting since retail chain shares in Russia are, apparently, significantly lower on average than those in the US.

A second interesting difference is how the discussion of slotting fees and payments for shelf space distribution, which are ubiquitous in various retail sectors in economies all over the world, inextricably linked to corruption and bribery.   The roots of this intuition are fairly obvious, for an American economist it was very interesting to hear the debate take place on these terms.  There is a very strong intuitive and moral sense amongst advocates of the retail trade law that payments for shelf space are immoral.  Much of my discussion was aimed at discussing the ubiquity of “competition for distribution,” the prevalent economic forces that lead to such payments in the retail sector around the world, and other forms of “competition for the field” to adopt the Demsetzian term, that are less apparent to the average consumer but still important competitive forces that lower prices and improve quality.

The Russian retail trade law is really quite expansive, and to my knowledge unprecedented, in terms of the combination of restrictions on vertical contracts, sales quotas, and price controls.  The net effect, obviously, will be harm to competition and to Russian consumers.  Some of this law goes into effect on February 1, with other provisions for major chains on July 1.  It is an excellent opportunity for empirical study of the effects of these types of restrictive trade laws and perhaps, to gather evidence that would produce support for amendments that would weaken its effects.

Posted in antitrust | 3 Comments »

Ticketmaster-Live Nation Settles

Posted by Josh Wright on January 25, 2010

Here are the details on the conditions imposed:

Under the conditions set forth by the Justice Department, the merged company would need to sell off a unit that sells tickets to college sporting events, and would need to license its ticketing software to rival concert promoter AEG Live, so that company can launch a competing service.  An AEG spokesman did not have an immediate comment but said the company would have a statement shortly.

Ticketmaster must sell its ticketing company Paciolan Inc. within 60 days to Comcast Corp. subsidiary Comcast-Spectacor, a sports and entertainment company, or another suitable buyer. The department said Comcast-Spectacor already has signed a letter of intent to buy the Paciolan assets.

The company also would be barred from retaliating against venue operators who want to use ticketing services from competitors. For instance, the merged company would be prevented from blocking artists it represents from playing in those venues.

Live Nation stages more concerts and concert tours than any other promoter, and owns or operates 75 major venues in the U.S. Ticketmaster sells tickets for the majority of major sports and entertainment venues in the U.S., and has an artist management division that handles the affairs of hundreds of the biggest acts in pop, rock and country.

Interesting conditions.  More commentary later.   One immediately interesting feature is that the structural fix is coupled with some conduct requirements (i.e. non-retaliation provisions).  This suggests to me a lack of confidence in the structural fix in the first instance.

Posted in antitrust, economics | 2 Comments »

"In the long run, my friend, it's your theory that's dead"

Posted by Geoffrey Manne on January 25, 2010

Russ Roberts’ brilliant and eagerly-awaited Keynes vs. Hayek rap video is here.  It’s the best economics pop music since Merle Hazzard.  Here are the lyrics:

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…

because…

Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score

My General Theory’s made quite an impression
[a revolution] I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Keynes] I made my case, Freddie H
Listen up , Can you hear it?

Hayek sings:

I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation

And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog
Don’t look for cure from the hair of the dog
Real savings come first if you want to invest
The market coordinates time with interest

Your focus on spending is pushing on thread
In the long run, my friend, it’s your theory that’s dead
So sorry there, buddy, if that sounds like invective
Prepared to get schooled in my Austrian perspective

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No it’s the animal spirits

Posted in announcements, economics, financial regulation, music, musings, politics, regulation, stimulus debate | Comments Off

Note to Simon Johnson: I do not think antitrust means what you think it means

Posted by Geoffrey Manne on January 21, 2010

Simon Johnson is at it again, advocating the use of antitrust to break up the banks because they are, you know, big, and antitrust is about busting up big companies, right?

As Josh suggested back in July, the idea is gaining momentum, it seems.  The Financial Times is also pushing the idea.  What’s remarkable about both the FT’s and Simon Johnson’s “analysis” is that it is actually largely devoid of modern antitrust analysis.  It reflects the outdated, non-economic (dare I say anti-economic?) logic of the structure-conduct-performance paradigm of the 1960s.  Here, for example, is the FT:

The issue is not just market share in deposits, which attracts public attention. Many corners of the financial services market with a lower profile are highly concentrated and highly profitable.

Concentrated markets can still be competitive and high profits are not in themselves proof of anti-competitive behaviour. Market concentration is high in many industries – including new areas of the economy such as web search.

Anti-trust investigation would focus only on areas where critics allege anti-competitive behaviour, for example, the puzzle of why investment banks charge standard rates to raise equity capital for businesses. But even where there is no suspicion of collusion, regulators could examine market structures and practices that create barriers to entry.

Or, the administration could simply float the idea of a wide-ranging push on competition in banking and use it to gain leverage over big banks on issues such as regulatory reform and whether or not they pass on the cost of the financial levy to their customers.

So, yes, there is a nod (“concentrated markets can still be competitive . . .”) toward recognition that Demsetz does, indeed, exist and he did write Industry Structure, Market Rivalry, and Public Policy in 1973.  But the thrust is pure SCP.

Here’s Johnson:

There are definite elements of oligopoly in wholesale markets, underwriting new issues, and mergers and acquisitions both in the United States and around the world. This is part of the explanation for very high profits in banks — particularly big banks — over the past decade.

The question becomes: Is there evidence that our leading banks have used their pricing power or other aspects of their market muscle to keep out competition or otherwise distort behavior in very profitable arenas, like over-the-counter derivatives?

I don’t even know what that means:  “pricing power or other aspects of their market muscle to keep out competition?” Huh? It’s just hand waving.  And my favorite part:

We may also need new theories of antitrust.

Sure. Why not? Here “new” seems to mean “old,” but by all means we should launch antitrust investigations with the intention of developing new theories of antitrust that can justify the a priori policy conclusion that banks are violating the antitrust laws.  That’s some sound policy advice from the IMF’s former chief economist.

His “analysis” has not changed, as far as I can tell, since the last time he advocated bank busting, so I can hardly do better than repeat what Josh said back in July:

FWIW, I’m skeptical about the utility of introducing “too big to fail” as an antitrust concept.  Antitrust has come a long way since its economically unprincipled approach several decades ago to its current state.  It has done so largely by staying relatively hinged to microeconomics.  This approach has done antitrust well as evidenced by the evolution of the doctrine over the past 30 or so years.  We now have a substantial body of economic theory and empirical evidence that tells us quite a bit about sensible approaches to at least cartel and merger enforcement that are likely to help rather than harm consumers on net.  Injecting “too big to fail” as an antitrust concept whether under the Clayton Act or otherwise is not a minor tweak to the system.  Too big to fail is not an antitrust concept and attempts to operationalize it within the antitrust framework are likely to cause more harm than good by undermining the progress that has been made by sticking to a disciplined economic approach.  As I commented for a related story in The Deal, and consistent with some of my own research on economic education and complexity in antitrust cases,  “Consumer welfare is complicated enough” for judges and enforcement agencies as is.  But the threat is not just increasing the risk of errors associated with introducing this factor into the antitrust calculus, but also allowing it to substitute for and gradually subsume the economic approach which has served us well.

This kind of hubris–that would throw out restrained and rigorous policy analysis precisely because it is restrained and rigorous and therefore not necessarily supportive of one’s preferred outcomes–is pernicious.  And, unfortunately, endemic.

Posted in antitrust, business, economics, financial regulation, politics, regulation | 1 Comment »

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