#MorganFoundation errors about @nzinitiative’s Health of the State – part 1

The Greens have joined that Morgan Foundation in playing the man rather than the ball on the recently published report of the New Zealand Initiative on sin taxes.  Green Party health spokesperson Kevin Hague said:

The New Zealand Initiative cares more about junk-food barons’ bottom lines than it cares about Kiwis who are getting sick and dying because of obesity-related illnesses

The Morgan Foundation was just as keen to argue that their opponents on sin taxes are both ignorant and steeped in moral turpitude as a way of avoiding substantive argument:

The New Zealand Initiative are not interested in reducing obesity, or preventing the looming diabetes crisis where 1 in 3 Kiwis will have the disease. They make no attempt to understand the causes, and don’t propose any way to deal with these issues…

Is there no room for honest disagreement and different views on the ability of further government intervention to be a net benefit? As Aaron Director said:

Laissez-faire is no more than a slogan in defence of the proposition that every extension of state activity should be examined under the presumption of error.

One of the specific claims by the Morgan Foundation that seems to be in error is:

In fact, the report seems devoid of any research outside a narrow economic focus. The food industry has funded an enormous amount of psychological research on how to influence people to eat more junk food through packaging, advertising, product placement etc, much of which is publicly available, but which the New Zealand Institute has roundly ignored. Ironic, given that they funded by the same organisations that funded this psychological research.

The Food industry’s own research shows our choices are hugely influenced by the environment that surrounds us, but the New Zealand Institute conveniently prefers to cling to the oversimplification that we are all rational economic units – known as homo economicus.

The report of the New Zealand Initiative has a nice discussion of the limitations of rationality which did not weigh as heavily as it should in the critique by the Morgan Foundation part of which is in the snapshot below:

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Source: Jenesa Jeram, The Health of the State, The New Zealand Initiative ( April 2016, p.10).

@GarethMorgannz the universal basic income is inferior to the minimum family tax credit

Gareth Morgan’s universal basic income appears to make everybody better off except those for whom the modern welfare state was established to protect. Examples of these from his online calculator are single mothers and retirees.

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Source: The Big Kahuna – Tax and Welfare.

To stay even just with single mothers blows a good $10 billion hole in the budget deficit according to the online calculator provided by Gareth Morgan. Retirees are still worse off.

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Source: The Big Kahuna – Tax and Welfare.

Central to the package is a comprehensive capital gains tax despite evidence growing with each day that the optimal tax rates on income from capital and on capital gains are zero.

A universal basic income for New Zealand is a long  trip to where we are now. There is already a guaranteed minimum family income in New Zealand.

The minimum family tax credit makes sure that a family’s annual income (net income after tax has been deducted) doesn’t fall below $23,036 a year ($443 per week). To qualify, you must  work for a salary or wage for at least 30 hours each week as a couple, or 20 hours each week as a single parent, and receive a family tax credit.

The Treasury modelled a Guaranteed Minimum income at the request of the Welfare Working Group in 2010. A  guaranteed minimum income  of $300 per week – the mean benefit income among those on benefits – would cost $44.5 billion or $52.6 billion if we extended it to super annuitants as a replacement for NZ Superannuation or old age pension. The former could be covered by a flat personal income tax rate of 45.4%; the latter, 48.6%. Full fiscal neutrality would require tax rates of 50.6% and 54.4%.

The universal basic income seems to be a big day out for Director’s Law of Public Expenditure. Director’s Law is public expenditure is used primary for the benefit of the middle class, and is financed with taxes which are borne in considerable part by the poor and the rich.

The universal basic income and a comprehensive capital gains tax seems to cause a lot of economic upheaval but still struggles to make the worse off groups in society even break-even on this throwing of all the cards in the air. Brian Easton put it well the other day when he said:

Many advocates put the UMI forward without doing the sums. Those who do, find that the required tax rates are horrendous or the minimum income is so low that it is not a viable means of eliminating poverty. Among the latter are New Zealanders Douglas, Gareth Morgan and Keith Rankin.

@donal_curtin @smalltorquer Does competition law in high-tech markets help consumers?

New Zealand has decriminalised cartels. Price fixers cannot be sent to prison but can still be fined. Some agree, some disagree with the wisdom of this move.

Those that agreed with the wisdom of this move were christened cartel apologists by one of those that disagree with the removal of criminal penalties for cartels.

There is an infallible rule in competition law enforcement. It arises mostly crisply in merger law enforcement. If competitors oppose a merger, the merger must be pro-consumer. If the merger is anti-competitive, that merger will increase prices. The competing firms can follow those prices up and profit from the weakening of competition.

Under the collusion hypothesis, rivals of the merging firm benefit since there is a higher probability of successful collusion limits output and raises product prices. The share prices of these rival firms should increase in anticipation of enhanced cartel profits. As Eckbo explains:

Using Stigler (1964) theory of oligopoly, a horizontal merger can reduce the monitoring costs by reducing the number of independent producers in the industry. The fewer the members of the industry the more “visible” are each producers actions, and the higher is the probability of detecting members who try to cheat on the cartel by increasing output.

When was the last time an entrepreneur complained about his rivals putting their prices up? The entrepreneur can either match that price increase or undercut it to win more business. The real reason competitors oppose a merger is the merged firm will have lower costs, making it a fiercer competitor.

If the share prices of competitors fall on news of the merger, they are worse off as a result because they face a fiercer competitor. If their share prices rise, that suggests either that others in the industry are to  benefit from higher prices or rival firms will soon replicate the cost savings discovered in the course of the merger. The latter is the information effect of mergers:

…since the production technologies of close competitors are (by definition) closely related, the news of a proposed efficient merger can also signal opportunities for the rivals to increase their productivity

Mergers are a high-risk way of securing higher prices unless there are offsetting cost saving of combining the two firms. Mergers disturb previously efficient firm sizes and risk diseconomies of scale and a burgeoning corporate hierarchy. A cartel is a safer way to raise prices by jointly agreeing to restrict output.

Cartels have few redeeming features. Cartels are inherently unstable because the history of cartels is the history of double-crossing. The best place in a cartel is to be on the outside undercutting it slightly to sell as you can at inflated cartel price.

The complication with cartels is competitors must sometimes coordinate their activities with their rivals in various ways such as agreeing product standards, undertaking joint ventures or licensing technologies to them.

Criminalisation of cartels may deter these business practices that promote consumer welfare. The process of innovation in new industries in particular often involves successful firms taking over the unsuccessful firms.

Serial competition is common in rapidly innovating industries with one dominant firm making hay for a while then quickly swept away. Merger law enforcement agencies do not handle the wake of creative destruction well.

There is no more cutthroat market than Hollywood. Yet the movie industry is riddled with collusion and joint ventures. Actors and producers can be collaborating on one film and  also be making another film that will be its rival in the box office when released.

The movie industry would not work without this incestuous mix of competition and collaboration. Joint ventures are aplenty between otherwise direct competitors in the film industry. When do these joint ventures become cartels threatened with criminal penalties?

What should be another working rule in competition law enforcement is when there is reasons to stay your hand, that is usually a good idea even if you do not have the reasons worked out yet. When in doubt, stay your hand.

It goes back to that extremely famous 1984 essay by Frank Easterbrook on the limits of anti-trust law. The essay was about errors in competition policy and law enforcement:

  • When a competition law enforcer makes a mistake and closes off an efficiency enhancing practice or stops a pro-consumer merger, there are few mechanisms to correct this mistake; and
  • If a competition law enforcer inadvertently does not stop a anti-competitive merger or lets a collusive or inefficient practice get through, at least there is market processes that will slowly chip away at his mistake.

Easterbrook argued that courts and enforcers should craft liability and procedural rules to minimise the sum of competition law’s error and decision costs:

The legal system should be designed to minimize the total costs of (1) anticompetitive practices that escape condemnation; (2) competitive practices that are condemned or deterred; and (3) the system itself

Competition law enforcers and policymakers made plenty of errors in the past. Chastened by their follies aplenty in the past, competition law policymakers should not approach any issue with overconfidence. They have had a dismal track record in aligning competition law with applied price theory and the basics of the economics of industrial organisation.

That is at best only a good start for the competition law enforcement agencies. This is because the economics of industrial organisation spent a lot of time condemning practices that neither restricted output or increased prices.

It took many decades for consumer welfare to be the exclusive goal of competition. Time and again protecting competitors from competition was the priority of competition law enforcement agencies.

The ICT revolution coincided with a revolution in competition law economics and policy. That revolution consisted of basing competition law on applied price theory and not condemning every novel or as yet unexplained practice.

In the high-tech industries, competition law runs a high risk of chilling innovation. As Joshua Wright said:

Innovation is critical to economic growth. Incentives to innovate are at the heart of the antitrust enterprise in dynamically competitive industries, and, thus, getting antitrust policy right in high-tech markets is an increasingly important component of regulatory policy in the modern economy. While antitrust enforcement activity in high-tech markets in the United States and the rest of the world is ever-increasing, there remain significant disputes as to how to assess intervention in dynamically competitive markets.

The relentless pursuit of Microsoft by the US Department of Justice at the behest of its competitors such as Netscape is notorious example of the chilling of innovation.

You are showing your age if you even remember who Netscape was. Its complaint was that Microsoft by giving away its browser was engaging in predatory competition.

Netscape want to protect consumers from the scourge of lower prices – from not having to pay $49 for the Netscape browser. You are showing your age if you have ever paid to install a browser.

Netscape had the advantage of a senior US senator representing the state where it was based. He happened to sit on the committee overseeing  the budget of the US Anti-trust enforcement agencies.

We are still waiting for the day when Microsoft finishes giving away its browser, excludes competition from the market for browsers, jacks up its price to make up for a good 20 years of giving away its browser and is not immediately threatened by new entry.

The intrepid competition law enforcers of the 1990s did not anticipate a business model where competitors profitably give their product away.

Thankfully, Facebook did not face competitors who charged for their social media. If  Facebook had faced such competition, what would the US Department of Justice thought of this anti-competitive practice of giving social media away. The scourge of lower prices again. That great bugbear of competition law enforcement agencies.

Facebook is doing the exact same thing that Microsoft did when it gave away the Internet Explorer browser. To this day, competition law enforcement agencies including the New Zealand Commerce Commission do not accept lower prices to be lawful in all cases without exception.

A test of how imbibed you are with the fatal conceit about competition law is to cast your mind back as to what your attitude was to the Department of Justice anti-trust lawsuit against Microsoft.

If you thought the anti-trust lawsuit against Microsoft was well-founded, you are an optimist about the efficient scope of competition law. To quote McKenzie and Shughart:

Microsoft’s critics come far closer to the mark when they complain that Microsoft has been “brutally competitive” than when they claim Microsoft is a “monopoly.” From our perspective, it appears that once again the Justice Department is using the antitrust laws to thwart competition by a highly successful American firm. To protect unsuccessful competitors, it is squelching competition.

A long time has passed since that suit. People can reflect upon the extent to which Microsoft have successfully monopolised browsing the Internet. It hasn’t. As Gary Becker said:

Anti trust policy should recognize that dynamic competition is often a powerful force when static competition is weak. The big policy question then is whether it is worthwhile to bring expensive and time consuming anti trust cases against still innovating firms that have considerable profits and monopoly power, given the significant probability that new competitors will before long greatly erode this power through different products? I believe the answer to that is no, and that policy should often rely on dynamic competition, even when that allows dominant firms only temporarily to enjoy economic power.

The law and economics of competition has been a bit of a glass house for the last 50 years. People should be careful about criticising new idea and attempts to be more modest about the positive contribution the competition law makes to society.

Competition law can subvert competition by stymieing the introduction of new goods and the temporary monopoly often necessary to recoup their invention costs and induce innovation. Sam Peltzman, when reflecting on the contributions of Aaron Director to the law and economics of competition said:

There are the myriad of ways in which real world business practices behave differently from the caricaturing in textbooks. Those differences sometimes arouses suspicious responses from economists. Visions of market power and deadweight loss triangles dance their heads, and some of the suspect practices have been constrained by anti-trust policy. Director rejected this kind of intellectual laziness, and he sought, sometimes successfully, to inoculate those around him against it.

Director approached all business practices with the methodology that entailed asking very basic questions and answering them in a rigorous logic that it appealed ultimately to facts. The style was verbal – some combination of Socratic dialogue and Adam Smith. This style had the disadvantage of producing few closed-form solutions. But it had the advantage of permitting analysis of the kind of problems that eluded simple solutions.

Indeed I believe that one reason for Director’s lasting influence he was able to show that simple judgements about business practices often cannot withstand rigorous scrutiny.

Economic theory and empirical evidence are full of examples of business conduct that reduce choice but increase consumer welfare through lower prices, more innovation, or higher quality products and services. Manne and Wright noted in the paper, Innovation and the Limits of Antitrust that:

Both product and business innovations involve novel practices, and such practices generally result in monopoly explanations from the economics profession followed by hostility from the courts (though sometimes in reverse order) and then a subsequent, more nuanced economic understanding of the business practice usually recognizing its pro-competitive virtues.

Competition law enforcement agencies are suing Google because it is anti-competitive. The dead hands of the competitors to Google are buried somewhere in those suits. Is there no learning. There is certainly no modesty about past mistakes about the proper scope of competition law.

Zero hour contracts may be outlawed in New Zealand–updated

In another triumph of the Socialist Left of the National Party, the supposedly centre-right New Zealand government is considering outlawing zero hours contracts:

ONE News can exclusively reveal the Workplace Relations Minister is leaning towards outlawing the contracts and other employment provisions that he sees as unfair…

The Minister of Workplace Relations said the most punitive aspects of zero-hour contracts will be banned:

Mr Woodhouse has previously said a ban of zero-hour contracts would be an overreaction, but signalled the outlawing of aspects including:

•Restraint of trade clauses that stop someone working for a competing business if an employer does not provide the desired hours of work.

•The cancellation of shifts at short or no notice.

One reason for this is to neutralise a wedge issue with the Labour Party. The labour parties in both New Zealand and United Kingdom plan to outlaw zero hours contracts.

The NZ Labour Party’s Certainty at Work private member’s bill would require employment agreements to include an indication of the hours an employee will have to work to complete tasks expected of them.

Aaron Director pointed out that there are many real world business practices that behave differently from the caricatures in textbooks and arouse suspicious responses from economists (as well as from lay observers including lay observers with no ideological agenda).

Director said that visions of market power dance their heads and some of these suspect practices have been regulated for reasons he attributed in a large part to intellectual laziness. Ronald Coase made the same observation about knee-jerk responses to perplexing new business practices:

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation.

And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

Much of the lasting influence of Aaron Director and of Ronald Coase came from their ability to show that simple judgements about business practices often cannot withstand rigorous scrutiny.

The organisation of and the contracting practices in the labour market is not a complicated despite the best efforts of the Left over Left and unions to pretend that it is so, as Richard Epstein explains:

Labour markets are not characterized by tricky externalities. They do not pollute streams or require the creation of public goods.

They are not characterized by genuine breakdowns in information, as workers are in a position to observe the conditions of their employment on a day-to-day basis.

Left to their own devices, without explicit support from union activities, they will be highly competitive, and thus work hard to allocate scarce human capital to its most productive use.

Workers have the option to quit for higher wages, and employers can always seek out low cost techniques to reduce their labour costs. Any short-term dislocation for firms or individuals is more than offset by the overall increase in the system productivity, spurred in part by clear signals that should increase investments in human capital.

In the UK, the Work Foundation found that 80% of those on zero hours contracts are not looking for another job; only 26% wanted longer hours. This implies that 74% were content with their current work times arrangements.

The inherent inequality of bargaining power between employers and workers and the reserve army of the unemployed must not be all that they are cracked up to be these days if low paid workers have to sign legally enforceable restraint of trade agreements, which is a common complaint about zero hours contracts. The worker does not have guaranteed hours but must promise not to work for someone else in the same line of business.

Obviously, the few members of the reserve army of the unemployed lucky enough to have a low pay, insecure job that offers no regular hours have so many other job options that their employers must get them to agree not to quit and job-hop at will. Jobs must be readily available to low paid workers for otherwise why do employers insist on this restraint of trade in employment agreements?

If there is an inherent inequality of bargaining power between the bosses and the workers, why do employers seek restraint of trade agreements against these downtrodden workers who are supposed to have few options but to accept the miserable zero hours job offer before them?

The question that must always be asked is why do people deemed competent to vote and drive cars sign zero hours contract? What is in it for them – for the worker who signs these contracts – especially for workers who already have a job and are switching to a zero hours contract? David Friedman asked this question about the economics of restraint of trade agreements for employees:

…the employer who insists on an employee signing a non- competition agreement will find that he must pay, in additional wages or other terms of employment, the cost that the agreement imposes upon the employee, as measured by the employee and revealed in his actions.

It follows that the employer will insist on such an agreement only if he believes that its value to him is greater than its cost to the employee… The contract is designed, after all, with the objective of getting the other party to sign it.

If I am designing the contract and offering it to many other parties, that may put me in a position to commit myself to insisting on terms that give me a large fraction of the benefit that the contract produces. But it is still in my interest to maximize the size of that net benefit-which I do by only insisting on terms that are worth at least as much to me as they cost the other party.

If zero hours contracts are as bad as the Left over Left claim, the job quit rates for these contracts should be high, and people moving from existing jobs should be under-represented in this section of the labour force. If a worker already has a job, they have few reasons to sign up to such a purportedly poor job offer. Show me the evidence.

Unless we have a good idea about why firms are moving to zero hours contracts, which we don’t, and why employees sign these contracts rather than work for other employers who offer more regular hours of work, meddling in these still novel to the officious observer arrangements is risky.

Aaron Director on the constitutional political economy of laissez-faire

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Aaron Director and the default answer to why hard to understand business practices exist is ‘monopoly’ and the default policy response is ‘call the cops’

There are the myriad of ways in which real world business practices behave differently from the caricaturing in textbooks. Those differences sometimes arouses suspicious responses from economists.

Visions of market power and deadweight loss triangles dance their heads, and some of the suspect practices have been constrained by anti-trust policy. Director rejected this kind of intellectual laziness, and he sought, sometimes successfully, to inoculate those around him against it.

Director approached all business practices with the methodology that entailed asking very basic questions and answering them in a rigorous logic that it appealed ultimately to facts.

The style was verbal – some combination of Socratic dialogue and Adam Smith. This style had the disadvantage of producing few closed-form solutions. But it had the advantage of permitting analysis of the kind of problems that eluded simple solutions.

Indeed I believe that one reason for Director’s lasting influence he was able to show that simple judgements about business practices often cannot withstand rigorous scrutiny.

Sam Peltzman

Milton Friedman explains Director’s Law of of Public Expenditure

A fool-proof test of the competitive impact of a merger

Was it Frank Easterbrook in the 1980s or Aaron Director in the 1950s who said that the clearest evidence of a pro-competitive merger was if the rival firms in the same market asked the competition law enforcement agency to take action against it?

Do the competitors oppose the merger? If they do, the merger must lower prices and put their profits under pressure.

When was the last time a competitor complained about their rivals putting their prices up? Either they hold their prices and take their business or follow their pricing lead: can’t lose.

Business rivals have an interest in higher prices. Consumers seek lower prices. Easterbrook suggested that lower prices should always be lawful under competition law.

The aim of competition law is to increase consumer welfare by preventing restrictions of output that increase prices: prevent “prices that are too high” due to monopoly power.  The merits of that statement is for another blog posting.

George Stigler was blunt on regulating to promote competition:

Regulation and competition are rhetorical friends and deadly enemies: over the doorway of every regulatory agency save two should be carved: “Competition Not Admitted.” The Federal Trade Commission’s doorway should announce, “Competition Admitted in Rear,” and that of the Antitrust Division, “Monopoly Only by Appointment”

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