Archives For economic freedom

Following is the (slightly expanded and edited) text of my remarks from the panel, Antitrust and the Tech Industry: What Is at Stake?, hosted last Thursday by CCIA. Bruce Hoffman (keynote), Bill Kovacic, Nicolas Petit, and Christine Caffarra also spoke. If we’re lucky Bruce will post his remarks on the FTC website; they were very good.

(NB: Some of these comments were adapted (or lifted outright) from a forthcoming Cato Policy Report cover story co-authored with Gus Hurwitz, so Gus shares some of the credit/blame.)

 

The urge to treat antitrust as a legal Swiss Army knife capable of correcting all manner of social and economic ills is apparently difficult for some to resist. Conflating size with market power, and market power with political power, many recent calls for regulation of industry — and the tech industry in particular — are framed in antitrust terms. Take Senator Elizabeth Warren, for example:

[T]oday, in America, competition is dying. Consolidation and concentration are on the rise in sector after sector. Concentration threatens our markets, threatens our economy, and threatens our democracy.

And she is not alone. A growing chorus of advocates are now calling for invasive, “public-utility-style” regulation or even the dissolution of some of the world’s most innovative companies essentially because they are “too big.”

According to critics, these firms impose all manner of alleged harms — from fake news, to the demise of local retail, to low wages, to the veritable destruction of democracy — because of their size. What is needed, they say, is industrial policy that shackles large companies or effectively mandates smaller firms in order to keep their economic and political power in check.

But consider the relationship between firm size and political power and democracy.

Say you’re successful in reducing the size of today’s largest tech firms and in deterring the creation of new, very-large firms: What effect might we expect this to have on their political power and influence?

For the critics, the effect is obvious: A re-balancing of wealth and thus the reduction of political influence away from Silicon Valley oligarchs and toward the middle class — the “rudder that steers American democracy on an even keel.”

But consider a few (and this is by no means all) countervailing points:

To begin, at the margin, if you limit firm growth as a means of competing with rivals, you make correspondingly more important competition through political influence. Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions, and rent-seeking by smaller firms could both be more prevalent, and, paradoxically, ultimately lead to increased concentration.

Next, by imbuing antitrust with an ill-defined set of vague political objectives, you also make antitrust into a sort of “meta-legislation.” As a result, the return on influencing a handful of government appointments with authority over antitrust becomes huge — increasing the ability and the incentive to do so.

And finally, if the underlying basis for antitrust enforcement is extended beyond economic welfare effects, how long can we expect to resist calls to restrain enforcement precisely to further those goals? All of a sudden the effort and ability to get exemptions will be massively increased as the persuasiveness of the claimed justifications for those exemptions, which already encompass non-economic goals, will be greatly enhanced. We might even find, again, that we end up with even more concentration because the exceptions could subsume the rules.

All of which of course highlights the fundamental, underlying problem: If you make antitrust more political, you’ll get less democratic, more politically determined, results — precisely the opposite of what proponents claim to want.

Then there’s democracy, and calls to break up tech in order to save it. Calls to do so are often made with reference to the original intent of the Sherman Act and Louis Brandeis and his “curse of bigness.” But intentional or not, these are rallying cries for the assertion, not the restraint, of political power.

The Sherman Act’s origin was ambivalent: although it was intended to proscribe business practices that harmed consumers, it was also intended to allow politically-preferred firms to maintain high prices in the face of competition from politically-disfavored businesses.

The years leading up to the adoption of the Sherman Act in 1890 were characterized by dramatic growth in the efficiency-enhancing, high-tech industries of the day. For many, the purpose of the Sherman Act was to stem this growth: to prevent low prices — and, yes, large firms — from “driving out of business the small dealers and worthy men whose lives have been spent therein,” in the words of Trans-Missouri Freight, one of the early Supreme Court decisions applying the Act.

Left to the courts, however, the Sherman Act didn’t quite do the trick. By 1911 (in Standard Oil and American Tobacco) — and reflecting consumers’ preferences for low prices over smaller firms — only “unreasonable” conduct was actionable under the Act. As one of the prime intellectual engineers behind the Clayton Antitrust Act and the Federal Trade Commission in 1914, Brandeis played a significant role in the (partial) legislative and administrative overriding of the judiciary’s excessive support for economic efficiency.

Brandeis was motivated by the belief that firms could become large only by illegitimate means and by deceiving consumers. But Brandeis was no advocate for consumer sovereignty. In fact, consumers, in Brandeis’ view, needed to be saved from themselves because they were, at root, “servile, self-indulgent, indolent, ignorant.”

There’s a lot that today we (many of us, at least) would find anti-democratic in the underpinnings of progressivism in US history: anti-consumerism; racism; elitism; a belief in centrally planned, technocratic oversight of the economy; promotion of social engineering, including through eugenics; etc. The aim of limiting economic power was manifestly about stemming the threat it posed to powerful people’s conception of what political power could do: to mold and shape the country in their image — what economist Thomas Sowell calls “the vision of the anointed.”

That may sound great when it’s your vision being implemented, but today’s populist antitrust resurgence comes while Trump is in the White House. It’s baffling to me that so many would expand and then hand over the means to design the economy and society in their image to antitrust enforcers in the executive branch and presidentially appointed technocrats.

Throughout US history, it is the courts that have often been the bulwark against excessive politicization of the economy, and it was the courts that shepherded the evolution of antitrust away from its politicized roots toward rigorous, economically grounded policy. And it was progressives like Brandeis who worked to take antitrust away from the courts. Now, with efforts like Senator Klobuchar’s merger bill, the “New Brandeisians” want to rein in the courts again — to get them out of the way of efforts to implement their “big is bad” vision.

But the evidence that big is actually bad, least of all on those non-economic dimensions, is thin and contested.

While Zuckerberg is grilled in Congress over perceived, endemic privacy problems, politician after politician and news article after news article rushes to assert that the real problem is Facebook’s size. Yet there is no convincing analysis (maybe no analysis of any sort) that connects its size with the problem, or that evaluates whether the asserted problem would actually be cured by breaking up Facebook.

Barry Lynn claims that the origins of antitrust are in the checks and balances of the Constitution, extended to economic power. But if that’s right, then the consumer welfare standard and the courts are the only things actually restraining the disruption of that order. If there may be gains to be had from tweaking the minutiae of the process of antitrust enforcement and adjudication, by all means we should have a careful, lengthy discussion about those tweaks.

But throwing the whole apparatus under the bus for the sake of an unsubstantiated, neo-Brandeisian conception of what the economy should look like is a terrible idea.

The terms of the United Kingdom’s (UK) exit from the European Union (EU) – “Brexit” – are of great significance not just to UK and EU citizens, but for those in the United States and around the world who value economic liberty (see my Heritage Foundation memorandum giving the reasons why, here).

If Brexit is to promote economic freedom and enhanced economic welfare, Brexit negotiations between the UK and the EU must not limit the ability of the United Kingdom to pursue (1) efficiency-enhancing regulatory reform and (2) trade liberalizing agreements with non-EU nations.  These points are expounded upon in a recent economic study (The Brexit Inflection Point) by the non-profit UK think tank the Legatum Institute, which has produced an impressive body of research on the benefits of Brexit, if implemented in a procompetitive, economically desirable fashion.  (As a matter of full disclosure, I am a member of Legatum’s “Special Trade Commission,” which “seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path.”  Members of the Special Trade Commission are unpaid – they serve on a voluntary pro bono basis.)

Unfortunately, however, leading UK press commentators have urged the UK Government to accede to a full harmonization of UK domestic regulations and trade policy with the EU.  Such a deal would be disastrous.  It would prevent the UK from entering into mutually beneficial trade liberalization pacts with other nations or groups of nations (e.g., with the U.S. and with the members of the Transpacific Partnership (TPP) trade agreement), because such arrangements by necessity would lead to a divergence with EU trade strictures.  It would also preclude the UK from unilaterally reducing harmful regulatory burdens that are a byproduct of economically inefficient and excessive EU rules.  In short, it would be antithetical to economic freedom and economic welfare.

Notably, in a November 30 article (Six Impossible Notions About “Global Britain”), a well-known business journalist, Martin Wolf of the Financial Times, sharply criticized The Brexit Inflection Point’s recommendation that the UK should pursue trade and regulatory policies that would diverge from EU standards.  Notably, Wolf characterized as an “impossible thing” Legatum’s point that the UK should not “’allow itself to be bound by the EU’s negotiating mandate.’  We all now know this is infeasible.  The EU holds the cards and it knows it holds the cards. The Legatum authors still do not.”

Shanker Singham, Director of Economic Policy and Prosperity Studies at Legatum, brilliantly responded to Wolf’s critique in a December 4 article (published online by CAPX) entitled A Narrow-Minded Brexit Is Doomed to Fail.  Singham’s trenchant analysis merits being set forth in its entirety (by permission of the author):

“Last week, the Financial Times’s chief economics commentator, Martin Wolf, dedicated his column to criticising The Brexit Inflection Point, a report for the Legatum Institute in which Victoria Hewson, Radomir Tylecote and I discuss what would constitute a good end state for the UK as it seeks to exercise an independent trade and regulatory policy post Brexit, and how we get from here to there.

We write these reports to advance ideas that we think will help policymakers as they tackle the single biggest challenge this country has faced since the Second World War. We believe in a market place of ideas, and we welcome challenge. . . .

[W]e are thankful that Martin Wolf, an eminent economist, has chosen to engage with the substance of our arguments. However, his article misunderstands the nature of modern international trade negotiations, as well as the reality of the European Union’s regulatory system – and so his claim that, like the White Queen, we “believe in impossible things” simply doesn’t stack up.

Mr Wolf claims there are six impossible things that we argue. We will address his rebuttals in turn.

But first, in discussions about the UK’s trade policy, it is important to bear in mind that the British government is currently discussing the manner in which it will retake its independent WTO membership. This includes agricultural import quotas, and its WTO rectification processes with other WTO members.

If other countries believe that the UK will adopt the position of maintaining regulatory alignment with the EU, as advocated by Mr Wolf and others, the UK’s negotiating strategy would be substantially weaker. It would quite wrongly suggest that the UK will be unable to lower trade barriers and offer the kind of liberalisation that our trading partners seek and that would work best for the UK economy. This could negatively impact both the UK and the EU’s ongoing discussions in the WTO.

Has the EU’s trading system constrained growth in the World?

The first impossible thing Mr Wolf claims we argue is that the EU system of protectionism and harmonised regulation has constrained economic growth for Britain and the world. He is right to point out that the volume of world trade has increased, and the UK has, of course, experienced GDP growth while a member of the EU.

However, as our report points out, the EU’s prescriptive approach to regulation, especially in the recent past (for example, its approach on data protection, audio-visual regulation, the restrictive application of the precautionary principle, REACH chemicals regulation, and financial services regulations to name just a few) has led to an increase in anti-competitive regulation and market distortions that are wealth destructive.

As the OECD notes in various reports on regulatory reform, regulation can act as a behind-the-border barrier to trade and impede market openness for trade and investment. Inefficient regulation imposes unnecessary burdens on firms, increases barriers to entry, impacts on competition and incentives for innovation, and ultimately hurts productivity. The General Data Protection Regulation (GDPR) is an example of regulation that is disproportionate to its objectives; it is highly prescriptive and imposes substantial compliance costs for business that want to use data to innovate.

Rapid growth during the post-war period is in part thanks to the progressive elimination of border trade barriers. But, in terms of wealth creation, we are no longer growing at that rate. Since before the financial crisis, measures of actual wealth creation (not GDP which includes consumer and government spending) such as industrial output have stalled, and the number of behind-the-border regulatory barriers has been increasing.

The global trading system is in difficulty. The lack of negotiation of a global trade round since the Uruguay Round, the lack of serious services liberalisation in either the built-in agenda of the WTO or sectorally following on from the Basic Telecoms Agreement and its Reference Paper on Competition Safeguards in 1997 has led to an increase in behind-the-border barriers and anti-competitive distortions and regulation all over the world. This stasis in international trade negotiations is an important contributory factor to what many economists have talked about as a “new normal” of limited growth, and a global decline in innovation.

Meanwhile the EU has sought to force its regulatory system on the rest of the world (the GDPR is an example of this). If it succeeds, the result would be the kind of wealth destruction that pushes more people into poverty. It is against this backdrop that the UK is negotiating with both the EU and the rest of the world.

The question is whether an independent UK, the world’s sixth biggest economy and second biggest exporter of services, is able to contribute to improving the dynamics of the global economic architecture, which means further trade liberalisation. The EU is protectionist against outside countries, which is antithetical to the overall objectives of the WTO. This is true in agriculture and beyond. For example, the EU imposes tariffs on cars at four times the rate applied by the US, while another large auto manufacturing country, Japan, has unilaterally removed its auto tariffs.

In addition, the EU27 represents a declining share of UK exports, which is rather counter-intuitive for a Customs Union and single market. In 1999, the EU represented 55 per cent of UK exports, and by 2016, this was 43 per cent. That said, the EU will remain an important, albeit declining, market for the UK, which is why we advocate a comprehensive free trade agreement with it.

Can the UK secure meaningful regulatory recognition from the EU without being identical to it?

Second, Mr Wolf suggests that regulatory recognition between the UK and EU is possible only if there is harmonisation or identical regulation between the UK and EU.

This is at odds with WTO practice, stretching back to its rules on domestic laws and regulation as encapsulated in Article III of the GATT and Article VI of the GATS, and as expressed in the Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) agreements.

This is the critical issue. The direction of travel of international trade thinking is towards countries recognising each other’s regulatory systems if they achieve the same ultimate goal of regulation, even if the underlying regulation differs, and to regulate in ways that are least distortive to international trade and competition. There will be areas where this level of recognition will not be possible, in which case UK exports into the EU will of course have to satisfy the standards of the EU. But even here we can mitigate the trade costs to some extent by Mutual Recognition Agreements on conformity assessment and market surveillance.

Had the US taken the view that it would not receive regulatory recognition unless their regulatory systems were the same, the recent agreement on prudential measures in insurance and reinsurance services between the EU and US would not exist. In fact this point highlights the crucial issue which the UK must successfully negotiate, and one in which its interests are aligned with other countries and with the direction of travel of the WTO itself. The TBT and SPS agreements broadly provide that mutual recognition should not be denied where regulatory goals are aligned but technical regulation differs.

Global trade and regulatory policy increasingly looks for regulation that promotes competition. The EU is on a different track, as the GDPR demonstrates. This is the reason that both the Canada-EU agreement (CETA) and the EU offer in the Trade in Services agreement (TiSA) does not include new services. If GDPR were to become the global standard, trade in data would be severely constrained, slowing the development of big data solutions, the fourth industrial revolution, and new services trade generally.

As many firms recognise, this would be extremely damaging to global prosperity. In arguing that regulatory recognition is only available if the UK is fully harmonised with the EU, Mr Wolf may be in harmony with the EU approach to regulation. But that is exactly the approach that is damaging the global trading environment.

Can the UK exercise trade policy leadership?

Third, Mr Wolf suggests that other countries do not, and will not, look to the UK for trade leadership. He cites the US’s withdrawal from the trade negotiating space as an example. But surely the absence of the world’s biggest services exporter means that the world’s second biggest exporter of services will be expected to advocate for its own interests, and argue for greater services liberalisation.

Mr Wolf believes that the UK is a second-rank power in decline. We take a different view of the world’s sixth biggest economy, the financial capital of the world and the second biggest exporter of services. As former New Zealand High Commissioner, Sir Lockwood Smith, has said, the rest of the world does not see the UK as the UK too often seems to see itself.

The global companies that have their headquarters in the UK do not see things the same way as Mr Wolf. In fact, the lack of trade leadership since 1997 means that a country with significant services exports would be expected to show some leadership.

Mr Wolf’s point is that far from seeking to grandiosely lead global trade negotiations, the UK should stick to its current knitting, which consists of its WTO rectification, and includes the negotiation of its agricultural import quotas and production subsidies in agriculture. This is perhaps the most concerning part of his argument. Yes, the UK must rectify its tariff schedules, but for that process to be successful, especially on agricultural import quotas, it must be able to demonstrate to its partners that it will be able to grant further liberalisation in the near term future. If it can’t, then its trading partners will have no choice but to demand as much liberalisation as they can secure right now in the rectification process.

This will complicate that process, and cause damage to the UK as it takes up its independent WTO membership. Those WTO partners who see the UK as vulnerable on this point will no doubt see validation in Mr Wolf’s article and assume it means that no real liberalisation will be possible from the UK. The EU should note that complicating this process for the UK will not help the EU in its own WTO processes, where it is vulnerable.

Trade negotiations are dynamic not static and the UK must act quickly

Fourth, Mr Wolf suggests that the UK is not under time pressure to “escape from the EU”.  This statement does not account for how international trade negotiations work in practice. In order for countries to cooperate with the UK on its WTO rectification, and its TRQ negotiations, as well to seriously negotiate with it, they have to believe that the UK will have control over tariff schedules and regulatory autonomy from day one of Brexit (even if we may choose not to make changes to it for an implementation period).

If non-EU countries think that the UK will not be able to exercise its freedom for several years, they will simply demand their pound of flesh in the negotiations now, and get on with the rest of their trade policy agenda. Trade negotiations are not static. The US executive could lose trade-negotiating authority in the summer of next year if the NAFTA renegotiation is not going well. Other countries will seek to accede to the Trans Pacific Partnership (TPP). China is moving forward with its Regional Cooperation and Economic Partnership, which does not meaningfully touch on domestic regulatory barriers. Much as we might criticise Donald Trump, his administration has expressed strong political will for a UK-US agreement, and in that regard has broken with traditional US trade policy thinking. The UK has an opportunity to strike and must take it.

The UK should prevail on the EU to allow Customs Agencies to be inter-operable from day one

Fifth, with respect to the challenges raised on customs agencies working together, our report argued that UK customs and the customs agencies of the EU member states should discuss customs arrangements at a practical and technical level now. What stands in the way of this is the EU’s stubbornness. Customs agencies are in regular contact on a business-as-usual basis, so the inability of UK and member-state customs agencies to talk to each other about the critical issue of new arrangements would seem to border on negligence. Of course, the EU should allow member states to have these critical conversations now.  Given the importance of customs agencies interoperating smoothly from day one, the UK Government must press its case with the European Commission to allow such conversations to start happening as a matter of urgency.

Does the EU hold all the cards?

Sixth, Mr Wolf argues that the EU holds all the cards and knows it holds all the cards, and therefore disagrees with our claim that the the UK should “not allow itself to be bound by the EU’s negotiating mandate”. As with his other claims, Mr Wolf finds himself agreeing with the EU’s negotiators. But that does not make him right.

While absence of a trade deal will of course damage UK industries, the cost to EU industries is also very significant. Beef and dairy in Ireland, cars and dairy in Bavaria, cars in Catalonia, textiles and dairy in Northern Italy – all over Europe (and in politically sensitive areas), industries stands to lose billions of Euros and thousands of jobs. This is without considering the impact of no financial services deal, which would increase the cost of capital in the EU, aborting corporate transactions and raising the cost of the supply chain. The EU has chosen a mandate that risks neither party getting what it wants.

The notion that the EU is a masterful negotiator, while the UK’s negotiators are hopeless is not the global view of the EU and the UK. Far from it. The EU in international trade negotiations has a reputation for being slow moving, lacking in creative vision, and unable to conclude agreements. Indeed, others have generally gone to the UK when they have been met with intransigence in Brussels.

What do we do now?

Mr Wolf’s argument amounts to a claim that the UK is not capable of the kind of further and deeper liberalisation that its economy would suggest is both possible and highly desirable both for the UK and the rest of the world. According to Mr Wolf, the UK can only consign itself to a highly aligned regulatory orbit around the EU, unable to realise any other agreements, and unable to influence the regulatory system around which it revolves, even as that system becomes ever more prescriptive and anti-competitive. Such a position is at odds with the facts and would guarantee a poor result for the UK and also cause opportunities to be lost for the rest of the world.

In all of our [Legatum Brexit-related] papers, we have started from the assumption that the British people have voted to leave the EU, and the government is implementing that outcome. We have then sought to produce policy recommendations based on what would constitute a good outcome as a result of that decision. This can be achieved only if we maximise the opportunities and minimise the disruptions.

We all recognise that the UK has embarked on a very difficult process. But there is a difference between difficult and impossible. There is also a difference between tasks that must be done and take time, and genuine negotiation points. We welcome the debate that comes from constructive challenge of our proposals; and we ask in turn that those who criticise us suggest alternative plans that might achieve positive outcomes. We look forward to the opportunity of a broader debate so that collectively the country can find the best path forward.”

 

The latest rankings of trade freedom around the world will be set forth and assessed in the 24th annual edition of the Heritage Foundation annual Index of Economic Freedom (Index), which will be published in January 2018.  Today Heritage published a sneak preview of the 2018 Index’s analysis of freedom to trade, which merits public attention.  First, though, a bit of background on the Index’s philosophy and methodology is appropriate.

The nature and measurement of economic freedom are explained in the 2017 Index:

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself. . . .  

[The Freedom Index] measure[s] economic freedom based on 12 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom:

  1. Rule of Law (property rights, government integrity, judicial effectiveness)
  2. Government Size (government spending, tax burden, fiscal health)
  3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
  4. Open Markets (trade freedom, investment freedom, financial freedom)

Each of the twelve economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these twelve economic freedoms, with equal weight being given to each. More information on the grading and methodology can be found in the appendix.

As was the case in previous versions, the 2018 Index explores various aspects of economic freedom in several essays that accompany its rankings.  In particular, with respect to international trade, the 2018 Index demonstrates that citizens of countries that embrace free trade are better off than those in countries that do not.  The data show a strong correlation between trade freedom and a variety of positive indicators, including economic prosperity, unpolluted environments, food security, gross national income per capita, and the absence of politically motivated violence or unrest.  Reducing trade barriers remains a proven recipe for prosperity that a majority of Americans support.

The 2018 Index’s three key trade-related takeaways are:

  1. A comparison of economic performance and trade scores in the 2018 Index shows how trade freedom increases prosperity and overall well-being.
  2. Countries with the most trade freedom have much higher per capita incomes, greater food security, cleaner environments, and less politically motivated violence.
  3. Free trade policies also encourage freedom in general. Most Americans support free trade, and believe its benefits outweigh any disadvantages.

Follow this space for further updates on the 2018 Index.