Left’s Pandemic Response: Politics As Usual

17 Tuesday Mar 2020

Posted by pnuetz in Health Care, Pandemic, Regulation

Tags

Biodefense, Breitbart.com, CDC, Centers for Disease Control, Coronavirus, ebola, FDA, Glenn Reynolds, Infectious Diseases, John Bolton, Legal Insurrection, Leslie Eastman, Nancy Pelosi, National Biodefense Strategy, National Security Council, NSC, Pandemic Response Team, Richard Goldberg, Ronald Bailey, Ronna McDaniel, Tim Morrison

The Left asserts that President Trump dismissed and dismantled the nation’s Pandemic Response Team. That’s bullshit. So is the claim that the CDC was defunded. The news media and certain pundits have helped to feed this narrative. Or, as Glenn Reynolds calls those pundits, “Democrat operatives with bylines”.

First of all, the team in question was not at the CDC, a fact that hasn’t always been clear from the commentary on this issue. It was a team of White House overseers at the National Security Council’s “Directorate for Global Health Security and Biodefense”. What happened was this: the senior director of that team resigned after John Bolton was appointed to head the NSC. Bolton might have wanted him out, but what we know is the director resigned. Subsequently, that team was folded into another directorate as part of an long-overdue consolidation. Health experts from the team remain on the NSC staff today. Yet Sen. Sherrod Brown (D-OH)—and many others since—had the temerity to charge that Trump had fired “the entire Whilte House pandemic team”. Well, at least he didn’t imply that it was the CDC.

Tim Morrison wrote the following in the Washington Post yesterday:

“Because I led the very directorate assigned that mission, the counterproliferation and biodefense office, for a year and then handed it off to another official who still holds the post, I know the charge is specious. …

When I joined the National Security Council staff in 2018, I inherited a strong and skilled staff in the counterproliferation and biodefense directorate. This team of national experts together drafted the National Biodefense Strategy of 2018 and an accompanying national security presidential memorandum to implement it; an executive order to modernize influenza vaccines; and coordinated the United States’ response to the Ebola epidemic in Congo, which was ultimately defeated in 2020.”

This assessment at Brietbart.com quotes former senior NSC official Richard Goldberg:

“Weird. A year later I was inside the NSC working with talented global health/biodefense professionals who coordinated an incredibly effective response to Ebola. They’re still there. Working hard. On #Covid_19.”

It’s true that Bolton sought to eliminate red tape, duplication, and bureaucracy within the NSC, and that was wholly justified. According to Morrison, the NSC staff quadrupled from the 1990s through the second Obama term. Pandemics are supposed to be the CDC’s purview, but the proliferation of administrative layers is what happens as government grows uncontrollably. Leslie Eastman at Legal Insurrection questions whether the U.S. needs a permanent “Pandemic Response Team” in the White House. She quotes GOP Chairwoman Ronna McDaniel:

“JAN 7: CDC established a coronavirus incident management system, two days before China announced the outbreak. … Pelosi began Week 3 of withholding her sham impeachment articles.

JAN 21: The CDC activated its emergency operations center to provide ongoing support to confront coronavirus. …What were Congressional Democrats focused on? Writing their opening arguments for their bogus impeachment trial.”

Well, bully for the CDC. As for “defunding the CDC”, the facts are this: the proposed budget submitted to Congress by the Trump Administration in February, but never passed, did indeed include cuts to the CDC’s budget, which has grown over the years as it expanded its mission from fighting infectious diseases to matters like obesity, racism, and questions of social justice. The cuts proposed by Trump, however, were primarily to state grants. Actually, the proposal called for increased CDC staffing, and it funded all programs related to infectious diseases. But no matter, because that proposal is unlikely to become part of any appropriations bill that would pass Congress.

True to form, the Left plays politics in the middle of a national crisis. When the Trump Administration told airlines that it was considering banning flights from China in late January, it was called racist. Now, of course, he hasn’t done enough. A huge irony, however, is that Trump’s biggest mistake was in trusting the FDA and the CDC’s authority to develop and regulate testing for the coronavirus. They botched it. In a classic case of over-regulation, they prohibited hospitals and labs from conducting tests developed privately or by academic researchers, insisting that everyone wait for the “approved” test to be distributed. Then, the test they released in early February was flawed, costing additional weeks before testing was available.

EPA Concedes Puddles, Ditches to Owners

30 Thursday Jan 2020

Posted by pnuetz in Environment, Federalism, Regulation

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Anthony K Francois, Christian Britschgi, Clean Water Act, Environmental Protection Agency, EPA, Federalism, Interstate Waters, Jonathan Adler, Navigable Waters Protection Rule, Obama administration, Property and Environment Research Center, Reason.com, Trump Administration, Waters of the United States, WOTUS

Those who like their government served-up intrusive are reacting hysterically to the Environmental Protection Agency’s new Navigable Waters Protection Rule, which forbids the federal government from regulating waters that are not interstate waters or waters that aren’t or cannot be used in any way related to interstate commerce. The federal government will no longer have jurisdiction over normally dry, “ephemeral” creek beds, private lakes and ponds unconnected to interstate waters, and most ground areas where rainwater pools, such as ditches on private property. This is a very good thing!

The emphasis of the new rule on interstate waters hews more closely to the constitutional limits of federal power than did the rescinded rule that had been imposed by the Obama Administration in 2015, which some called the Waters of the United States (WOTUS) rule (really an interpretation of “navigable waters”, or WOTUS as defined by the 1972 Clean Water Act). Christian Britschgi writes at Reason.com:

“The Obama-era rule was controversial from the get-go, with multiple Red states filing legal challenges claiming it exceeded the federal government’s authority to regulate water pollution. A slew of federal court rulings stayed the implementation of the rule in over half the states.”

Some of the straightforward differences between the new rule and WOTUS were mentioned above, but Anthony K. Francois of the Property and Environment Research Center gets into a bit more detail in his nice summary of these changes in federal authority.

In many cases, state and local governments already have regulatory authority over waters placed off-limits to the EPA. In fact, as Jonathan Adler wrote last summer, some of those state regulations are more stringent than the federal oversight now rescinded. That flies in the face of assertions by activists that states will be patsies in their dealings with property owners (the activists would call them “polluters”). So those who claim that the new rule will cause damage to the environment are really saying they only trust the EPA’s authority in these matters. They are also saying that no private citizen who owns property should be presumed to have rights over the industrial, commercial, or residential use of that property without review by the federal government. Under WOTUS, this represented such a severe abrogation of rights that it interfered with both productive activity and private enjoyment, not to mention the considerable confusion and costly litigation it prompted.

Weighing the costs and benefits of regulatory actions is a difficult undertaking. However, it is far too easy for regulators, with an imbalance of coercive power in their favor, to impose costly standards in locales where there may be little or no net benefit, and where individual property owners have no recourse. Regulators get no reward for protecting individual liberty and property rights, which skews their view of the tradeoff against potential environmental damage. Federal regulatory power is best kept within strict limits. The same goes for state and local regulatory power, but authority at those levels is at least more accountable to local interests on behalf of consumer, business and environmental concerns.

Regulation, Crowding Out, and Malformed Capital

19 Saturday Oct 2019

Posted by pnuetz in Big Government, Regulation

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Bentley Coffey, Compliance Costs, Congressional Budget Office, Consumer Financial Protection Bureau, Conversable Economist, crowding out, Gold Plating, James Whitford, Kieth Carlson, Mandated Investment, Mercatus Center, Patrick A. McLaughlin, Pietro Peretto, Real Clear Markets, Regulatory Burden, Regulatory State, Return on Capital, Robert Higgs, Roger Spencer, Susan E. Dudley, Timothy Taylor, Tyler Richards, Wayne Brough, Zero-Sum Economics

Expanding regulation of the private sector is perhaps the most pernicious manifestation of “crowding out”, a euphemism for the displacement of private activity by government activity. The idea that government “crowds out” private action, or that government budget deficits “crowd out” private investment, has been debated for many years: government borrowing competes with private demand to fund investment projects, bidding interest rates and the cost of capital upward, thus reducing business investment, capital intensity, and the economy’s productive capacity. Taxes certainly discourage capital investment as well. That is the traditional fiscal analysis of the problem.

The more fundamental point is that as government competes for resources and absorbs more resources, whether financed by borrowing or taxation, fewer resources remain available for private activity, particularly if government is less price-sensitive than private-sector buyers.

Is It In the Data?

Is crowding out really an issue? Private net fixed investment spending, which represents the dollar value of additions to the physical stock of private capital (and excludes investments that merely replace worn out capital), has declined relative to GDP over many decades, as the first chart below shows. The second chart shows that meanwhile, the share of GDP dedicated to government spending (at all levels) has grown, but with less consistency: it backtracked in the 1990s, rebounded during the early years of the Bush Administration, and jumped significantly during the Great Recession before settling at roughly the highs of the 1980s and early 1990s. The short term fluctuations in both of these series can be described as cyclical, but there is certainly an inverse association in both the short-term fluctuations and the long-term trends in the two charts. That is suggestive but far from dispositive.

Timothy Taylor noted several years ago that the magnitude of crowding out from budget deficits could be substantial, based on a report from the Congressional Budget Office. That is consistent with many of the short-term and long-term co-movements in the charts above, but the explanation may be incomplete.

Regulatory Crowding Out

Regulatory dislocation is not the mechanism traditionally discussed in the context of crowding out, but it probably exacerbates the phenomenon and changes its complexion. To the extent that growth in government is associated with increased regulation, this form of crowding out discourages private capital formation for wholly different reasons than in the traditional analysis. It also encourages malformation — either non-productive or misallocated capital deployment.

I acknowledge that regulation may be necessary in some areas, and it is reasonable to assert that voters demand regulation of certain activities. However, the regulatory state has assumed such huge proportions that it often seems beyond the reach of higher authorities within the executive branch, not to mention other branches of government. Regulations typically grow well beyond their original legislative mandates, and challenges by parties to regulatory actions are handled in a separate judicial system by administrative law judges employed by the very regulatory agencies under challenge!

Measures of regulation and the regulatory burden have generally increased over the years with few interruptions. As a budgetary matter, regulation itself is costly. Robert Higgs says that not only has regulation been expanding for many years, the growth of government spending and regulation have frequently had common drivers, such as major wars, the Great Depression of the 1930s, and the financial crisis and Great Recession of the 2000s. In all of these cases, the size of government ratcheted upward in tandem with major new regulatory programs, but the regulatory programs never seem to ratchet downward.

While government competes with the private sector for financial capital, its regulatory actions reduce the expected rewards associated with private investment projects. In other words, intrusive regulation may reduce the private demand for financial capital. Assuming there is no change in the taxation of suppliers of financing, we have a “coincidence” between an increase in the demand for capital by government and a decrease in the demand for capital by business owing to regulatory intrusions. The impact on interest rates is ambiguous, but the long-run impact on the economy’s growth is negative, as in the traditional case. In addition, there may be a reallocation of the capital remaining available from more regulated to less regulated firms.

The Costs of Regulation

Regulation imposes all sorts of compliance costs on consumers and businesses, infringing on many erstwhile private areas of decision-making. The Mercatus Center, a think tank on regulatory matters based at George Mason University, issued a 2016 report on “The Cumulative Cost of Regulations“, by Bentley Coffey, Patrick A. McLaughlin, and Pietro Peretto. It concluded in part:

“… the effect of government intervention on economic growth is not simply the sum of static costs associated with individual interventions. Instead, the deterrent effect that intervention can have on knowledge growth and accumulation can induce considerable deceleration to an economy’s growth rate. Our results suggest that regulation has been a considerable drag on economic growth in the United States, on the order of 0.8 percentage points per year. Our counterfactual simulation predicts that the economy would have been about 25 percent larger than it was in 2012 if regulations had been frozen at levels observed in 1980. The difference between observed and counterfactually simulated GDP in 2012 is about $4 trillion, or $13,000 per capita.”

In another Mercatus Center post, Tyler Richards discusses the link between declining “business dynamism” and growth in regulation and lobbying activity. Richards measures dynamism by the rate of entry into industries with relatively high profit potential. This is consistent with the notion that regulation diminishes the rewards and demand for private capital, thus crowding out productive investment.

Regulation, Rent Seeking, and Misallocation

Some forms of regulation entail mandates or incentives for more private investment in specific forms of physical capital. Of course, that’s no consolation if those investments happen to be less productive than projects that would have been chosen freely in the pursuit of profit. This often characterizes mandates for alternative energy sources, for example, and mandated investments in worker safety that deliver negligible reductions in workplace injuries. Some forms of regulation attempt to assure a particular rate of return to the regulated firm, but this may encourage non-productive investment by incenting managers to “gold plate” facilities to capture additional cash flows.

Regulations may, of course, benefit the regulated in certain ways, such as burdening weaker competitors. If this makes the economy less competitive by driving weak firms out of existence, surviving firms may have less incentive to invest in their physical capital. But far worse is the incentive created by the regulatory state to invest in political and administrative influence. That’s the thrust of an essay by Wayne Brough in Real Clear Markets: “Political Entrepreneurs Are Crowding Out the Entrepreneurs“. The possibility of garnering regulations favorable to a firm reinforces the destructive focus on zero-sum outcomes, as I’ve gone to pains to point out on this blog.

Crowding out takes still other forms: the growth of the welfare state and regulatory burdens tend to displace private institutions traditionally seeking to improve the lives of the poor and disenfranchised. It also disrupts incentives to work and to seek help through those private aid organizations. That is a subject addressed by James Whitford in “Crowding Out Compassion“.

Just Stop It!

President Trump has made some progress in slowing the regulatory trend. One example of the Administration’s efforts is the two-year-old Trump executive order demanding that two regulatory rules be eliminated for each new rule. Thus far, many of the discarded regulations had become obsolete for one reason or another, so this is a clean-up long overdue. Other inventive efforts at reform include moving certain agency offices out of the Washington DC area to locales more central to their “constituencies”, which inevitably would mean attrition from the ranks of agency employees and with any luck, less rule-making. The judicial branch may also play a role in defanging the bureaucracy, like this case involving the Consumer Financial Protection Bureau now before the Supreme Court. Unfortunately, tariffs represent taxation of consumers and firms who use foreign goods as inputs, so Trump’s actions on the regulatory front aren’t all positive.

Conclusion

The traditional macroeconomic view of crowding out involves competition for funds between government and private borrowers, higher borrowing costs, and reduced private investment in productive capital. The phenomenon can be couched more broadly in terms of competition for a wide variety of goods and services, including labor, leaving less available for private production and consumption. The growth of the regulatory state provides another piece of the crowding-out puzzle. Regulation imposes significant costs on private parties, including small businesses that can ill-afford compliance. The web of rules and reporting requirements can destroy the return on private capital investment. To the extent that regulation reduces the demand for financing, interest rates might not come under much upward pressure, as the traditional view would hold. But either way, it’s bad news, especially when the regulatory state seems increasingly unaccountable to the normal checks and balances enshrined in our Constitution.

Amazon, Happy Users Face Lust for Antitrust

02 Thursday May 2019

Posted by pnuetz in Antitrust, Capitalism, Regulation

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Amazon, Amazon Marketplace, Apple, e-Commerce, eBay, Elizabeth Warren, Home Depot, Jeff Bezos, Lina M. Kahn, Market Concentration, monopoly, Monopsony, Predatory Pricing, QVC, Was Mart, Wayfair

It’s almost always best to resist the temptation to “fix” perceived market failures, perceptions that are often incorrect to begin with. An equivalent truism is that government intervention in any market will almost always damage outcomes for consumers and producers alike. So it is with ill-advised calls to bring antitrust action against Amazon. Elizabeth Warren is a prominent voice among the would-be meddlers. She tells the story of a hypothetical pillow manufacturer reliant on sales through Amazon’s platform. But alas, the small company is squeezed out of its market because Amazon gives its own brand of pillows superior placement and pricing. Is this a clear case of anti-competitive behavior? And if so, what’s to be done?

In this Yale Law Journal article Lina M. Kahn asserts that there is an antitrust case against Amazon. From the abstract:

“We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.”

A basic argument against anti-trust action is that the retail market and e-commerce market are not as concentrated as Kahn and Warren suggest. Amazon’s share of U.S. retail sales was an estimated 5% in 2018, but its share of e-commerce is the more worrisome to modern-day trust busters: Amazon is estimated to have controlled about 49% of U.S. online sales in 2018.

Obviously 49% is not close to monopolization, but the company is far ahead of other on-line rivals: eBay’s share was slightly less than 7%; Apple and Walmart each had less than 4%, and an assortment of sellers such as Home Depot, QVC and Wayfair, had shares of 1.5% share or less. The point is, however, that there are prominent rivals, some with aggressive plans to compete in the space. For example, apart from its traditional auction model, eBay is instituting a number of changes to its platform and offerings that it hopes will help it to compete with Amazon, some of which are very much like the practices for which Amazon is now criticized, such as preferential placement for big advertisers. Wal Mart is investing heavily in an effort to expand its online sales.

Companies like these rivals have the resources and access to capital to pose a legitimate threat to Amazon’s online dominance. That sort of competitive pressure, or even its mere possibility, imposes a far more effective form of market discipline than government regulators can hope to achieve, assuming they wouldn’t break the market. The governance imposed by the market itself keeps the focus squarely on bringing value to customers, which for Amazon means both buyers and third-party sellers. And while Amazon’s business model and platform are highly successful, no one, including Amazon management, can anticipate the shape of new technological developments that could lead to the next revolution in retail. Again, there are potent incentives for those who might be in a position to foment such a revolution.

But what about those sellers who rely so heavily on Amazon’s platform? Does Amazon exercise monopsony power to the detriment of these sellers, as Kahn and Warren contend? Again, sellers have alternatives. While it might be a burden for the smallest startups to compete on several different platforms, they do have choices. Therefore, the monopsony story just doesn’t hold up. Amazon has a large marketplace precisely because so many third-party sellers have chosen to compete there. But they can compete elsewhere.

If barriers to entry are created by Amazon’s platform management, it would involve a loss of revenue earned from hosting third-party sellers and create market opportunities for competitive platforms. The same can be said of “predatory placement” of Amazon’s own first-party product offerings. This practice bears a similarity to grocery stores giving preferred placement to certain brands in exchange for fees, which allow grocers to offer those products at lower prices. Indeed, few if any grocery stores carry all national brands, but those brands are usually available at competing stores. If anything, it would seem that getting a product listed on an online platform is relatively easy compared to getting space on grocery shelves, though like grocery brands, preferred placement is another matter. Building a brand has never been easy, and it may be necessary for less established products to be marketed on multiple platforms, including platforms based on auction models.

It would be very difficult to prove that Amazon engages in predatory pricing of their own offerings (also see here). That involves pricing below cost (including the loss of revenue from third-party sellers). Amazon might practice what has been described as loss leadership: offering products below cost from time-to-time in oder to spur sales of other products, which is a time-honored marketing tradition. The following quote, taken from the first link in this paragraph, is from a judge in a recent price fixing case involving Apple and Amazon:

“… the Complaint asserts that Amazon’s e-books business was ‘consistently profitable.’ Moreover, to hold a competitor liable for predatory pricing under the Sherman Act, one must prove more than simply pricing ‘below an appropriate measure of . . . costs.’ There must also be a ‘dangerous probability’ that the alleged predator will ‘recoup its investment in below-cost prices’ in the future. None of the comments demonstrate that either condition for predatory pricing by Amazon existed or will likely exist. Indeed, while the comments complain that Amazon’s $9.99 price for newly-released and bestselling e-books was ‘predatory,’ none of them attempts to show that Amazon’s e-book prices as a whole were below its marginal costs.”

The basic considerations discussed above are couched in terms of traditional anti-trust thinking: monopoly, concentration, competitive threats, and predatory pricing. However, there is another, more fundamental point to be made: Amazon’s massive success is due precisely to the popularity of their platform as well as service to consumers and third-party sellers. That’s capitalism, baby! Does Amazon extract a price from users? Yes, it engages in mutually beneficial trade! If it tries to extract too much, it will suffer at its own hands by creating market opportunities for others. It is Amazon’s platform, asset, and private property. The Amazon Marketplace belongs to Amazon, and the company is free to manage it as shareholders allow. There is no social value in interfering with private property and voluntary arrangements that bring unambiguous benefits to customers on both sides of the transactions sponsored on the platform. Such interference would diminish those benefits and destroy private value belonging to Amazon shareholders.

Jeff Bezos’ recent letter to Amazon shareholders tells of third-party sellers “kicking our first-part butt.” Amazon’s total sales have grown fast over the past two decades, and while its sales in first-party transactions have grown at a robust 20% a year, third-party sales on the platform have grown at a rate of 52%! The last link provides this Bezos quote:

“Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization? There isn’t one answer, but we do know one extremely important part of the answer: We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.”

Bezos also tells of the heavy investments Amazon makes in efforts to improve its platform, which have brought tremendous successes and a few noteworthy failures. His letter is obviously self-serving, both as an effort to engage shareholders and as an implicit appeal against anti-trust action. Nevertheless, it is hard to deny the company’s outstanding performance, the benefits it brings to the consuming public, and the opportunities it creates for enterprising sellers and entrepreneurs. The unfortunate fact is we must always be vigilant for the itchy fingers of leftists grasping for the value created by private effort.

Closing “Nonessential” Government

19 Saturday Jan 2019

Posted by pnuetz in Big Government, Regulation, Uncategorized

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Adam Brandon, Border Wall, Council of Economic Advisors, Deep State, Federal Compensation, Government Output, Government Shutdown, John Tamny, Matthew Walther, Nonessential Functions, Reductions in Force

Contrary to the cartoon above, it’s not back up and running, though tax withholding and the impacts of regulatory rules continue unabated, and almost assuredly surveillance as well. After all (!), the federal government shutdown affects only “nonessential” activities of the federal government. Federal workers who are furloughed will receive back pay when the partial shutdown ends, but for now, federal spending is down roughly 25%.

The very real inconveniences for furloughed workers are regrettable. TSA employees continue to work while their paychecks are deferred indefinitely, though rates of absenteeism are high. So, we have slowdowns in security lines at airports, a lack of services at national parks (at least those not managed by private firms collecting revenue from visitors on-site), and a variety of other disruptions. For the time being, however, the lives of most Americans are largely unaffected. Except for the news coverage, my life hasn’t changed in any way, though I haven’t traveled during the shutdown.

Unfounded rumors about the shutdown have been rampant. For instance, I’ve heard that Social Security checks and weather forecasts would be suspended. Nancy Pelosi said the Secret Service would be unable to protect the President at the State of the Union address in the House chamber, a statement which the Department of Homeland Security promptly refuted. Many of the federal agencies with the highest shares of furloughed employees are regulators whose services are arguably counter-productive.

The White House Council of Economic Advisors (CEA) estimates that each additional week of the shutdown will reduce first quarter GDP growth by 0.13%. That means the interruption would take about 0.5% off first quarter growth if it lasts through January (say, from an annual rate of 2.5% to 2.0%). To the extent that people view the shutdown as temporary, and most do, the so-called “multiplier effects” of the shutdown should be relatively minor.

GDP is intended to measure of the value of the economy’s physical output. It is calculated in two independent ways based on 1) all income earned, and 2) the total of all spending on final (not intermediate) goods and services. Most components of final spending are well defined by the values assigned to goods and services traded in markets. Likewise, most incomes are based on the value assigned by labor markets to a given productive effort. Government “output”, however, is rather suspect as a component of spending because it is generally not subject to a market test of value. On the income side of the ledger, do government workers produce actual outputs? Some do, of course, but those outputs cannot be measured except by assigning a value based on what the workers are paid, and the payer is spending other peoples’ money! It’s not too speculative to suggest that the government’s output is a fraction of its spending. If that’s the case, the actual reduction in output caused by the shutdown is much smaller than the measured reduction in GDP. Therefore, the CEA’s estimates are a fiction.

To put an even finer point on it, many nonessential functions absorb resources while contributing very little to the nation’s wealth. Adam Brandon and John Tamny assert that private economic growth gives us the luxury of a large government sector, not the other way around. Government absorbs resources when it spends, but only by virtue of the taxes it imposes on private activity that is otherwise more highly productive. In the long run, as Brandon and Tamny argue, a smaller government (given a permanent shutdown of certain functions) might well yield greater economic output, not less.

Read this interesting essay for a discussion of the wasted, even counterproductive, utilization of human resources in government:

“They do nothing that warrants punishment and nothing of external value. That is their workday: errands for the sake of errands — administering, refining, following and collaborating on process. ‘Process is your friend’ is what delusional civil servants tell themselves. Even senior officials must gain approval from every rank across their department, other agencies and work units for basic administrative chores.

Process is what we serve, process keeps us safe, process is our core value. It takes a lot of people to maintain the process. Process provides jobs. In fact, there are process experts and certified process managers who protect the process. Then there are the 5 percent with moxie (career managers).

Again, many and perhaps most Americans view the shutdown itself with a certain degree of cynicism. In “America’s shutdown indifference“, Matthew Walther recalls this entertaining aspect of the last shutdown under President Obama:

“…of barriers being erected around various D.C.-area landmarks, including open-air war memorials. To this day I cannot think of any good reason for this save sheer caprice. If the idea was that 550-foot obelisks made of granite simply could not be meaningfully serviced during those lean two weeks in 2013, then who was responsible for putting up the rent-a-fence barricades around them? Civic-minded volunteers? The U.S. Marine Corps? Barack Obama himself? It was beautifully cynical, and I congratulate whoever came up with it.”

Both sides of the aisle play politics at the expense of the federal workforce. I certainly don’t wish to denigrate all federal workers. They perform varied functions and many are hard-working individuals. But still, it’s hard to feel very sorry for them given that they out-earn their private sector counterparts at almost every education level. Again, here’s Walther:

“Government employees, at both the state and federal level, are among the only workers in the United States who continue to be represented by powerful unions, despite the fact that by definition they’re not bargaining against capital but against their fellow citizens.”

I haven’t even mentioned the debate over open borders and the proposed wall, but that’s not my purpose here. All parties to that debate seem to think the shutdown is unlikely to harm their side politically. That’s either because the shutdown isn’t perceived as very impactful, or the “other” side can be blamed. One theory making the rounds is that the shutdown is part of a larger plan to institute permanent Reductions in Force (RIFs) at federal agencies, which are permissible after a furlough of 30 days or more (by January 19th). The argument plausibly suggests that some federal agencies might operate more effectively once the bureaucracy is pruned back via furloughs and/or RIFs. That’s especially true if “deep-state” sabotage of efforts to roll-back regulations are as common as the author asserts. Is the shutdown therefore a trap for unsuspecting congressional Democrats? Who knows, but to my way of thinking, government RIFs might even be worth the trouble of building a wall!

Liz Warren Pitches Another Goofball

23 Thursday Aug 2018

Posted by pnuetz in Central Planning, Property Rights, Regulation

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Accountable Capitalism Act, Board Activism, Don Boudreaux, Elizabeth Warren, Fifth Amendment, Kevin Williamson, Matt Yglesias, Richard Epstein, Unconstitutional Conditions

Elizabeth Warren wants to nationalize all private businesses with more than $1 billion in annual revenue. She plans to introduce legislation called the “Accountable Capitalism Act” that would, if enacted, authorize an outright theft of private property from the owners of these companies. Among other things, her plan would require large companies to obtain a federal charter and set aside 40% of their board seats for members to be elected by employees. In addition, henceforth these businesses would be answerable not merely to shareholders, but to employees along with a limitless array of other “stakeholders”. That’s because under their federal charters, firms would have a duty to create a “general public benefit”. The operative assumption here is that merely creating a product or service does not produce adequate value for society, regardless of the benefits to buyers, income to employees and suppliers, taxes paid, and the returns earned by millions of working people who have invested in these companies via pension and 401(k) plans.

In the very first place, Warren’s bill is unconstitutional, as Richard Epstein points out. Owning a business is protected as a property right under several amendments to the U.S. Constitution, but particularly the Fifth Amendment. Warren would place unconstitutional conditions on this right via the requirements for a federal charter and the so-called public benefit. If enacted, her bill would quite likely be ruled unconstitutional by the courts. But if it stood, capital would quickly take flight from the U.S., depressing asset values.

Don Boudreaux notes that absent ownership, vaguely-defined “stakeholders” have risked nothing in the success of the company. Shareholders bear the financial risk that the company will fail to produce adequate earnings, lose value, or fail. Management has a fiduciary duty to protect the funds that shareholders invest in the firm, including a duty to protect the firm’s ability to acquire credit. Warren’s legislation would compromise these duties by elevating the objectives of non-owners to the same or greater status than those who have provided the equity capital. Again, this would happen in at least two ways: required representation of employee-elected board members, and the vague public-benefit mandate under the firm’s federal charter.

Significant employee representation on the board is likely to distort decisions about labor compensation and virtually any decision affecting employment. While 40% is short of a board majority, union pension funds already purchase shares in companies both as investments and as a way of driving labor issues before shareholders and into boardrooms. Those votes, along with the 40% board representation and oversight from federal bureaucrats, would give additional leverage to labor in influencing the firm’s decision-making. To take the simplest case, economic efficiency requires that the rate of labor compensation be the same as the marginal value of labor productivity. Warren’s proposal would surely result in wage payments exceeding this threshold, diminishing the economic value of the firm and its ability to raise capital. And by reducing the efficiency of the production process, it would raise costs to consumers and/or business customers.

There any number of other worker demands that would gain viability. For example, extended break times or extra paid-time-off would certainly raise costs, and such demands from a plurality of the board would be unrestrained by the need to negotiate other terms. Or how about a plant-closing decision? The upshot is that mandated board representation for labor would create instability and lead to a decline in the firm’s performance, competitiveness, and attractiveness to suppliers of capital. Ultimately, the very jobs on which labor depends would be threatened.

Further dilution of business objectives would arise from the requirement under the federal charter to produce a “public benefit”. Serving customers is not enough, but what will satisfy federal overseers that the firm has fulfilled its social obligations? And what are the limits of those social obligations? Again, these amorphous requirements would constitute a theft of resources from the business owners, requiring the payment of alms in order to produce something of value. There is already evidence that board activism in pursuit of non-business, social objectives destroys business value:

“Labor-affiliated pensions regularly file shareholder proposals, usually involving social and political concerns. Those social and political shareholder-proposal campaigns are associated with lower shareholder value. These labor investors also tend to attack companies facing ongoing union-organizing campaigns, as well as companies with political action committees that support Republicans.”

In time, the dilution of objectives undermines a firm’s viability, its health of its suppliers, and its ability to employ workers and hire other resources. Many of the suppliers hurt by Warren’s proposal would be smaller firms. It would ripple through the ranks of consultants, repair shops, electricians, plumbers, accounting firms, janitorial services, and any number of other businesses. But even before that, Warren’s proposal would send capital scrambling overseas.

I share Don Boudreaux’s astonishment that writers such as Matt Yglesias in Vox can assert that the Warren plan would have no costs. It might or might not have an impact on the federal budget, but the cost of destroyed economic value in the business sector would be massive, not to mention the jobs that ultimately would be lost in the process. It’s also astonishing that proponents can pretend that Warren’s bill would “save capitalism” when in fact it would do great harm.

Finally, here is Kevin Williamson expressing his disdain for Warren’s true intent in putting her bill forward:

“Warren’s proposal is dishonestly called the ‘Accountable Capitalism Act.’ Accountable to whom? you might ask. That’s a reasonable question. The answer is — as it always is — accountable to politicians, who desire to put the assets and productivity of private businesses under political discipline for their own selfish ends. It is remarkable that people who are most keenly attuned to the self-interest of CEOs and shareholders and the ways in which that self-interest influences their decisions apparently believe that members of the House, senators, presidents, regulators, Cabinet secretaries, and agency chiefs somehow are liberated from self-interest when they take office through some kind of miracle of transcendence.”

Pruitt Out At EPA; So Is Eco-Absolutism

13 Friday Jul 2018

Posted by pnuetz in Environment, Regulation

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Andrew Wheeler, Clean Air Act, Clean Power Plan, Clean Water Act, Compliance Costs, Endangerment Finding, Environmental Justice, Environmental Protection Agency, EPA, Ledyard King, Navigable Waters, Paris Climate Accord, Scott Pruitt, Social Cost of Carbon, Sue and Settle, Superfund, Transparent Science

Green munchkins celebrated the fall of a house of cronyism earlier this month when it crashed right on top of EPA chief Scott Pruitt. Not that the Environmental Protection Agency has ever been free of cronyism and wicked warlocks, but Pruitt stumbled into an awkward appearance of coziness with industry representatives and was seemingly too fond of his expense account. The munchkins, however, will be sorely disappointed to learn that Andrew Wheeler, Pruitt’s replacement on at least an interim basis, will press forward with the same deregulatory agenda. They might imagine Wheeler as the surviving Warlock of the West, but the munchkins are incapable of understanding the deeper nature of wickedness at the EPA.

The agency took an expansive role during the Obama Administration (see this note on “environmental justice”, and this on the use of the “social cost of carbon” in rulemaking, and this on water regulation). Aggressive action was directed at emissions of carbon, a trace greenhouse gas (four parts per 10,000), but one that is necessary for life. In 2009, the EPA reached its “endangerment finding” that greenhouse gases, including carbon, pose a threat to humanity that must be addressed under the powers conferred upon the agency by the Clean Air Act. The Obama Administration viewed this finding as a regulatory carte blanche, ushering in a series of draconian, high-cost measures to reduce U.S. carbon emissions. Unfortunately, the environmental lobby is notorious for its inability to see beyond first-order effects. It cannot come to grips with the fact that green policies often waste more resources than they save, undermine the economy, infringe on liberty, and have their greatest negative impact on the poor.

President Obama also pushed for American participation in the Paris Climate Accord, which would have required transfers of billions of dollars of wealth to the often-corrupt governments of less developed countries for alternative energy projects. Beyond green energy objectives, this was presumably restitution for our past carbon sins. Whatever shortcomings Pruitt might have had, I valued his leadership in opposition to the Paris Accord and his role in dismantling the EPA’s overzealous regulatory model.

Pruitt might have earned praise from the green lobby in at least one area. He placed particular emphasis on streamlining Superfund site remediation, including a radioactive waste site in the St. Louis area. It is one of the so-called “top-10” sites that have been given high priority by the EPA. But there are 1,300 Superfund sites across the country, so Andrew Wheeler will have to be creative to succeed with more than just a few of these cleanups.

Ledyard King discusses the likely course of Scott Pruitt’s legacy under Wheeler, including continued opposition to the Paris Accord, reversing or deemphasizing renewable power mandates, reduced staffing and fewer enforcement actions. The Clean Power Plan is slated for replacement with rules that are not prohibitive to coal-fired power. Emissions from coal-burning are already heavily regulated, and CO2 and its unproven harms do not offer a valid pretext for a wholesale shutdown of the coal industry. Actions under the endangerment finding, if there are any, are likely to be more circumspect going forward. However, there are disconcerting reports that the Trump Administration may seek to subsidize or protect coal interests from more cost-effective alternatives, like natural gas.

According to King, Wheeler will continue Pruitt’s effort to balance representation on EPA advisory boards between academicians and business and state interests, include more geographic diversity on these boards, and end grant awards to members. Wheeler will continue to push for EPA rule-making based on fully-transparent science, rather than studies relying on private data. There are also likely to be efforts to stop “sue-and-settle” actions used by partisans to gain court-ordered consent decrees, which subvert public participation in the regulatory process.

The endangerment finding combined with the dubious and notoriously uncertain “social cost of carbon” gave EPA regulators almost unbridled power to control private activity. This ranged from questionable efficiency standards, uneconomic mandates on energy sources, and prohibitive emissions standards. The EPA also promulgated an expansive definition of “navigable waters” as an excuse to regulate virtually any puddle, or sometimes puddle, as wetland under the Clean Water Act. This overzealousness is a consequence of over-application of the precautionary principle, under which any prospective risk to humanity or the environment provides a rationale for regulation, taxation, or prohibition of an activity. It is also a consequence of refusing to recognize that government regulation, when it offers any benefit, has diminishing returns. The compliance costs of EPA regulations have been estimated to exceed $350 billion annually, a substantial impediment to economic growth that imposes cruel penalties on business, workers, and consumers. It is all the worse that these effects are strongly regressive in their impacts across income levels. Scott Pruitt may have been his own worst enemy, but his departure at this point might well advance the much-needed deregulatory agenda, as it is now that it is in the competent hands of Andrew Wheeler.

Inferior Schools, Venom For Reformers

28 Monday May 2018

Posted by pnuetz in Regulation, School Choice, Socialism, Uncategorized

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Betsy DeVos, charter schools, Common Core, Corey A. DeAngelis, Disparate impact, Don Boudreaux, Education Week, Educational Equity, Every Student Succeeds Act, Henry Brown, Horace Mann, John Stossel, Kevin Currie-Knight, monopoly, Nancy Thorner, No Child Left Behind Act, Public Schools, Robert P. Murphy, School Choice

We all want better K-12 education in the U.S., which has an extremely uneven — even dismal — record of student outcomes. The U.S. ranks below the OECD average in both math and science scores, despite spending 35% more per student than the OECD average. Yet there is a faction that leaps to the defense of the status quo with such viciousness that its members deride sensible reform proposals as classist and racist. Then, of course, they call for additional spending! These antics reveal their self-interest in doubling down on the status quo.

An obvious starting point for reform, and one that would save taxpayers roughly $40 billion (K-12), is to dismantle a federal education bureaucracy that adds little value to educational outcomes. Another element is expanding the set of alternatives available to parents over the way their children are educated. Betsy DeVos, President Trump’s Secretary of Education, favors both of these steps as general principles, though she lacks direct control over either, especially school choice.

Both of these steps are fiercely resisted by the public educational establishment and teachers unions. And no wonder! Who wants to lose their privileged monopoly power over a local market? The public school establishment does not wish to be troubled by demands that schools respond to competitive forces, that teachers be rewarded based on performance, or that schools should be answerable to parents and taxpayers. As for the federal role, the public school cartel seems to welcome federal money, even if it means that the feds impose control in the process.

Choice

For those skeptical of reforming public schools by allowing choice, Don Boudreaux proposed a useful thought experiment that I discussed in my earlier post “Public Monopolists Sa y Don’t Be Choosy“. It examines a hypothetical world in which supermarkets are structured like public schools. Consumers pay for their food via local taxes and must shop at one local public supermarket, and only one, at which food products are available at no additional marginal cost. However, parents are free to pay their taxes and pay for food elsewhere, at a private supermarket. Most thinking people would probably agree that this is a spectacularly bad idea. Public supermarkets would deteriorate relative to private supermarkets. Rural and inner city supermarkets would likely suffer the most. Public supermarket worker unions would lobby for higher food taxes. And of course proposals for supermarket choice would be met with hysteria. Read the earlier post for more discussion of the likely consequences.

One of the arguments often made in favor of today’s public school monopoly is that K-12 education should be regarded as a necessity, but few would take that as a compelling reason to grant government a monopoly in the retail food business. A better argument for government schools, were it strictly true, would be that education is a public good, yielding significant non-exclusive benefits to the community. And in truth there are some external benefits to society from an educated citizenry. The primary benefits of an education, however, are exclusive to the student. Kevin Currie-Knight offers an excellent treatment of the education-as-public-good question, and he concludes otherwise. And the public-good argument does not imply that parents should be denied choice in their selection of a school for their children. Ultimately, the policy question hinges on whether government schools, as currently structured, do a good job in educating students, and as Corey A. DeAngelis points out, they do not.

There is no shortage of evidence that school choice is beneficial for students and society in several respects, including academic outcomes for students and schools, racial integration, fiscal impacts, and parental satisfaction. This paper by MIT researchers found that school choice improved educational outcomes for special education students and those who were not proficient in English. This essay in Education Week, signed by nine educational researchers, emphasized the preponderance of positive findings on school choice and some additional dimensions of improvement on which they hope the education research community will focus.

The promise of choice is seldom greeted objectively by the public education establishment and its reflexive allies. To their dishonor, distortions of fact and ad hominem attacks on choice advocates are almost the rule. For example, John Stossel writes the following in “Why the Left Hates Betsy DeVos“:

“When she spoke at the Kennedy School of Government, students held up signs calling her a ‘white supremacist.’ … When she tried to visit a school, activists physically blocked her way. … The haters claim DeVos knows little about education, only got her job because she gave money to Republican politicians, and hates free public education.“

Of course, public education is not free! But it is a disgrace that someone so dedicated to the cause of improved education should be treated this way. The DeVos family has given over a billion dollars to various causes over the years, much of it to educational initiatives, and even those gifts, somehow, are seen by critics as a pretext for vilifying Betsy DeVos. But she knows much more about the poor performance of public schools than her critics care to discuss, as well as the dynamism and improvement that choice and competition can bring to education. Her critics disparage the performance of charter schools in DeVos’s home state of Michigan even while the facts show that they have performed well.

The idea that charter schools “hurt” public schools by creating educational choice is the very weakest protest a monopolist can put forward. These critics conveniently overlook the fact that most charter schools are in fact public schools! More importantly, an erstwhile monopolist must respond by adding value for consumers! If it fails to do so, it must be closed or reorganized. THAT is a good idea!

Monopoly public schools do not earn a profit in the way of monopolistic business enterprises, but remember that perhaps the greatest social costs imposed by monopolies are languid effort and a poor product. This is not to dismiss the great efforts of many teachers who toil under trying circumstances, though the current system also tends to protect bad teachers. And much of the waste in government schools is caused by bloated bureaucracy and costs imposed on teachers and schools of complying with regulation.

The Federal Bureaucracy

Another priority of Secretary DeVos is to reduce the federal role in education. Hurry, please! The unpopular Common Core standards, implemented in 2009, proved a failure. Test scores declined for student cohorts expected to benefit the most (those in the lowest percentiles). At the last link, Nancy Thorner discusses more recent legislation:

“It was in December of 2015 that Congress passed the Every Student Succeeds Act (ESSA), that replaced the often criticized No Child Left Behind Act (NCLB). ESSA, in contrast to NCLB, signified a clear move away from federally prescribed standards. In fact, ESSA expressly forbid federal regulators from attempting to ‘influence, incentivize, or coerce’ states to adopt the Common Core.”

That’s progress, but 36 states plus DC still use those standards. Curriculum mandates are only one area of federal school regulation that must be addressed. “Educational equity” is also mandated along several dimensions, requiring schools to devote a disproportionate share of resources to various subsets of students who might not benefit from the extra instructional intensity. Then there are the administrative costs of demonstrating compliance with these mandates, not to mention the virtual prohibition under these mandates of developing innovative, local solutions to the problem of educating their charges.

There is well-deserved pushback against federal control over school discipline, which requires schools to implement policies that avoid disparate impacts on certain minorities (African Americans, Latino, and special-ed children) such that they are no more likely to receive detention, suspension, or expulsion than the general student population. This is an absurdity, potentially requiring schools to go light on offenders should they happen to belong to a minority. Even worse, if the enforcement of discipline results in an observable bias in favor of any minority, it is likely to be noticed by the minority students themselves, creating a negative behavioral incentive and potentially stoking resentment among non-minority students.

In April, President Trump signed an executive order authorizing a review of federal education rules imposed on states and local school districts. Again, central regulation is costly: it involves rule-making at the federal level to interpret enabling legislation, then review by state departments of education where specific policies are designed, which are then passed down to school districts and individual schools, who must review and attempt to implement the policies, and who then must report back on their success or failure in meeting the mandates. Resources are consumed at every level. In the end, the process creates increased complexity, and the policies have proven to be of questionable value to the goal of good education. While spending on education has soared over the past 30 years, student achievement has remained static, and the same disparities of outcome remain.

Secular Statism

Robert P. Murphy provides a brief history of U.S. public schooling. It is a fascinating take on the history of secularization of education in America. It is the story of the substitution of state for private institutions, including family and church, in the development and socialization of children. Murphy offers a telling quote:

“Thus Henry Brown, second only to Horace Mann in championing state education, commented, ‘No one at all familiar with the deficient household arrangements and deranged machinery of domestic life, of the extreme poor, and ignorant, to say nothing of the intemperate—of the examples of rude manners, impure and profane language, and all the vicious habits of low bred idleness—can doubt, that it is better for children to be removed as early and as long as possible from such scenes and examples.'”

Whoa! The K – 12 public education system, as it now stands, is striking in its failure to benefit the children and families it is intended to serve. Critics of meaningful reform do not acknowledge the abysmal condition and performance of many government schools in America today, except to insist that they need more money. These critics, including the educational bureaucracy, teachers unions, and misguided statists generally, behave as if they accept the attitudes expressed by Henry Brown. They have no respect for private decision makers — families, churches, private schools of any stripe, and private markets in general. They do not understand the power of incentives and competition to allocate resources efficiently and maximize well-being. But they know how to disparage, defame, and propagate hateful rhetoric for those with a true interest in creating a better educational system for all.

Secession and Other Remedies for Intrastate Revolt

14 Monday May 2018

Posted by pnuetz in Federalism, Regulation, Tyranny, Uncategorized

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Federal Supremacy, Federalism, Glenn Reynolds, Guarantee Clause, Representative Democracy, Republican Government, State Secession, Supremacy Clause

How many states will we have in the Union in twenty years? Probably 50, but there’s an outside chance that the number will be 55 plus. That could include a split of upstate New York from New York City, downstate Illinois from Chicagoland, eastern from western Washington State, eastern from western Oregon (or eastern Oregon combining with Idaho), and a division of California into as many as six states, as one proposal has it. There are secessionist movements alive in all of those states and it has happened before, as Glenn Reynolds notes in his recent paper “Splitsylvania: State Secession and What to Do About It“.

The origins of state boundaries and state governments were probably based on combinations of natural geographic features and confluent economic and political interests existing at the time. It would be surprising if those factors remained in static alignment over time, however. For various reasons, West Virginia seceded from Virginia many years ago, and Tennessee was once part of North Carolina. But to the extent that interests diverge within states, would a series of secessions promote better representative government? Reynolds’ approach to this question is fairly even-handed, though he apparently leans toward less disruptive solutions to the kinds of grievances voiced by secessionists.

Secession is a complex process; it obviously involves a major task in establishing a new state governmental apparatus. Also, legislative roadblocks to secession movements exist at both the state and federal levels. Nevertheless, there is great disaffection among rural interests in the states mentioned above for the policies they say are forced upon them by “urban elites”, as Reynolds calls them. At present, the secession of rural areas would tend to benefit republicans at the federal level, as two new Senate seats would be created to offset the seats held by democrats elected in more urban areas. Conceivably, however, the same process could work in reverse in other states, such as Texas. Even the proposal for six Californias seems designed to at least neutralize any possible negative impact on democrats in national politics.

Reynolds’ paper outline a few ways in which interests represented by legislative minorities, such as rural populations, could be better served without a step so drastic as secession. State regulation is often what rankles secessionists. To add fuel to the fire, states are free to adopt rules that are more strict than rules established under federal legislation, if they so choose, but never rules that are less strict. Today this applies to wages, working conditions, gun regulation, and environmental law. Reynolds suggests turning this on its head:

“The federal government’s legislative role has traditionally been the opposite: To use (as in the case of the 1964 Civil Rights Act) a national majority to ensure that local majorities can’t oppress local minorities. I thus suggest that federal laws regulating these key subject-matter areas be recast to pre-empt more restrictive state laws, meaning that urban regions would be unable to impose stricter laws on less- powerful rural areas. If this seems too inflexible, perhaps that pre-emption should in some cases be defeasible at the county level; if the government of a county affirmatively wants to accept stricter state regulations, then it may do so, but if not, then the federal regulations are a ceiling, as well as a floor.”

Reynolds contends that this approach would be relatively easy to defend against state challenges. The idea that federal rules provide minimum standards of regulation is only one interpretation of the Supremacy Clause of Article VI of the Constitution. There is no reason why federal legislation cannot be written in the way Reynolds describes. Moreover, Reynolds asserts that the Guarantee Clause of Article IV, which assures that mandates are to be established according to republican principles, could be used to buttress this argument. But he offers another remedy to curb secessionism among rural voters that states could exercise:

“There is nothing to stop a state from being mindful of the differences between urban and rural areas when crafting legislation or regulations, after all. States could adopt a local-option regulatory scheme relating to key subject areas on their own, and by doing so would lighten their footprint in rural areas and lessen the likelihood of festering resentments.”

Perhaps that’s hoping for too much. State majorities are unlikely to cede power to rural minorities, but it’s nice to imagine that sort of cooperation. There is no question that this sort of state regulatory approach would protect local interests from the tyranny of one-size-fits-all state regulation, but it wouldn’t eliminate the burdens created by the standard interpretation of federal supremacy.

In general, federal preemption of stricter state laws is no less consistent with the principles of federalism than federal pre-emption of more lenient state laws. One could even argue that the best way to apply federal supremacy depends on the issue, so there is some symmetry in Reynolds’ proposal. In terms of representative democracy, it is less an evil than federal preemption of less restrictive laws. It does what a democratic republic is supposed to do: protect minorities from the tyranny of a majority.

Secession from states is an intriguing possibility. Perhaps it is even the best approach in some cases. Nevertheless, Reynolds’ suggestions for revising federal and state regulatory approaches would be less costly and would avoid a nationwide race to subdivide states in order to gain a federal political advantage.

Social Media and the Antitrust Reflex

10 Tuesday Apr 2018

Posted by pnuetz in Antitrust, Regulation, Social Media

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Anticompetitive Behavior, Antitrust, Brendan KIrby, Cambridge Analytica, Data Privacy, EconTalk, Facebook, Fact-Checking, Geoffrey A. Fowler, Information Fiduciary, John O. McGinnis, Jonathan Zittrain, Judicial Restraint, Mark Zuckerberg, Matt Stoller, MeWe, Navneet Alang, Predatory Pricing, Social Media, Trust- Busting

Facebook is under fire for weak privacy protections, its exploitation of users’ data, and the dangers it is said to pose to Americans’ free speech rights. Last week, Mark Zuckerberg, who controls all of the voting stock in Facebook, attempted to address those issues before a joint hearing of the Senate Judiciary and Commerce Committees. It represented a major event in the history of the social media company, and it happened at a time when discussion of antitrust action against social media conglomerates like Facebook, Google, and Amazon is gaining support in some quarters. I hope this intervention does not come to pass.

The Threat

At the heart of the current uproar are Facebook’s data privacy policy and a significant data breach. The recent scandal involving Cambridge Analytica arose because Facebook, at one time, allowed application developers to access user data, and the practice continued for a few developers. Unfortunately, at least one didn’t keep the data to himself. There have been accusations that the company has violated privacy laws in the European Union (EU) and privacy laws in some states. Facebook has also raised ire among privacy advocates by lobbying against stronger privacy laws in some states, but it is within its legal rights to do so. Violations of privacy laws must be adjudicated, but antitrust laws were not intended to address such a threat. Rather, they were intended to prevent dominant producers from monopolizing or restraining trade in a market and harming consumers in the process.

Matt Stoller, in an interview with Russ Roberts on EconTalk, says antitrust action against social media companies may be necessary because they are so pervasive in our lives, have built such dominant market positions, and have made a practice of buying nascent competitors over the years. Steps must be taken to “oxygenate” the market, according to Stoller, promoting competition and protecting new entrants.

Tim Wu, the attorney who coined the misleading term “network neutrality”, is a critic of Facebook, though Wu is more skeptical of the promise of antitrust or regulatory action:

“In Facebook’s case, we are not speaking of a few missteps here and there, the misbehavior of a few aberrant employees. The problems are central and structural, the predicted consequences of its business model. From the day it first sought revenue, Facebook prioritized growth over any other possible goal, maximizing the harvest of data and human attention. Its promises to investors have demanded an ever-improving ability to spy on and manipulate large populations of people. Facebook, at its core, is a surveillance machine, and to expect that to change is misplaced optimism.”

Google has already been subject to antitrust action in the EU due to the alleged anti-competitive nature of its search algorithm, and Facebook’s data privacy policy is under fire there. But the prospect of traditional antitrust action against a social media company like Facebook seems rather odd, as acknowledged by the author at the first link above, Navneet Alang:

“… Facebook specifically doesn’t appear to be doing anything that actively violates traditional antitrust rules. Instead, it’s relying on network effects, that tendency of digital networks to have their own kind of inertia where the more people get on them the more incentive there is to stay. It’s also hard to suggest that Facebook has a monopoly on advertising dollars when Google is also raking in billions of dollars.“

Competition

The size of Facebook’s user base gives it a massive advantage over most of the other platforms in terms of network effects. I offer myself as an example of the inertia described by Alang: I’ve been on Facebook for a number of years. I use it to keep in touch with friends and as a vehicle for attracting readers to my blog. As I contemplated this post, I experimented by opening a MeWe account, where I joined a few user groups. It has a different “feel” than Facebook and is more oriented toward group chats. I like it and I have probably spent as much time on MeWe in the last week as Facebook. I sent MeWe invitations to about 20 of my friends, nearly all of whom have Facebook accounts, and a few days later I posted a link to MeWe on my Facebook wall. Thus far, however, only three of my friends have joined MeWe. Of course, none of us has deactivated our Facebook account, and I speculate that none of us will any time soon. This behavior is consistent with “platform inertia” described by Alang. Facebook users are largely a captive market.

But Facebook is not a monopoly and it is not a necessity. Neither is Google. Neither is Amazon. All of these firms have direct competitors for both users and advertising dollars. It’s been falsely claimed that Google and Facebook together control 90% of online ad revenue, but the correct figure for 2017 is estimated at less than 57%. That’s down a bit from 2016, and another decline is expected in 2018. There are many social media platforms. Zuckerberg claims that the average American already uses eight different platforms, which may include Facebook, Google+, Instagram, LinkedIn, MeWe, Reddit, Spotify, Tinder, Tumblr, Twitter, and many others (also see here). Some of these serve specialized interests such as professional networking, older adults, hook-ups, and shopping. Significant alternatives for users exist, some offering privacy protections that might have more appeal now than ever.

Antitrust vs. Popular, Low-Priced Service Providers

Facebook’s business model does not fit comfortably into the domain of traditional antitrust policy. The company’s users pay a price, but one that is not easily calculated or even perceived: the value of the personal data they give away on a daily basis. Facebook is monetizing that data by allowing advertisers to target individuals who meet specific criteria. Needless to say, many observers are uncomfortable with the arrangement. The company must maintain a position of trust among its users befitting such a sensitive role. No doubt many have given Facebook access to their data out of ignorance of the full consequences of their sacrifice. Many others have done so voluntarily and with full awareness. Perhaps they view participation in social media to be worth such a price. It is also plausible that users benefit from the kind of targeted advertising that Facebook facilitates.

Does Facebook’s business model allow it to engage in an ongoing practice of predatory pricing? It is far from clear that its pricing qualifies as “anti-competitive behavior”, and courts have been difficult to persuade that low prices run afoul of U.S. antitrust law:

“Predatory pricing occurs when companies price their products or services below cost with the purpose of removing competitors from the market. … the courts use a two part test to determine whether they have occurred: (1) the violating company’s production costs must be higher than the market price of the good or service and (2) there must be a ‘dangerous probability’ that the violating company will recover the loss …”

Applying this test to Facebook is troublesome because as we have seen, users exchange something of value for their use of the platform, which Facebook then exploits to cover costs quite easily. Fee-based competitors who might complain that Facebook’s pricing is “unfair” would be better-advised to preach the benefits of privacy and data control, and some of them do just that as part of their value proposition.

More Antitrust Skepticism

John O. McGinnis praises the judicial restraint that has characterized antitrust law over the past 30 years. This practice recognizes that it is not always a good thing for consumers when the government denies a merger, for example, or busts up a firm deemed by authorities to possess “too much power”. An innovative firm might well bring new value to its products by integrating them with features possessed by another firm’s products. Or a growing firm may be able to create economies of scale and scope that are passed along to consumers. Antitrust action, however, too often presumes that a larger market share, however defined, is unequivocally bad beyond some point. Intervention on those grounds can have a chilling effect on innovation and on the value such firms bring to the market and to society.

There are more fundamental reasons to view antitrust enforcement skeptically. For one thing, a product market can be defined in various ways. The more specific the definition, the greater the appearance of market dominance by larger firms. Or worse, the availability of real alternatives is ignored. For example, would an airline be a monopolist if it were the only carrier serving a particular airport or market? In a narrow sense, yes, but that airline would not hold a monopoly over intercity transportation, for which many alternatives exist. Is an internet service provider (ISP) a monopoly if it is the only ISP offering a 400+ Mbs download speed in a certain vicinity? In a very narrow sense, yes, but there may be other ISPs offering slower speeds that most consumers view as adequate. And in all cases, consumers always have one very basic alternative: not buying. Even so-called natural monopolies, such as certain public utilities, offer services for which there are broad alternatives. In those cases, however, a grant of a monopoly franchise is typically seen as a good solution if exchanged for public oversight and regulation, so antitrust is generally not at issue.

One other basic objection that can be made to antitrust is that it violates private property rights. A business that enjoys market dominance usually gets that way by pleasing customers. It’s rewards for excellent performance are the rightful property of its owners, or should be. Antitrust action then becomes a form of confiscation by punishing such a firm and its owners for success.

Political Bias

Another major complaint against Facebook is political bias. It is accused of selectively censoring users and their content and manipulating user news feeds to favor particular points of view. Promises to employ fact-check mechanisms are of little comfort, since the concern involves matters of opinion. Any person or organization held to be in possession of the unadulterated truth on issues of public debate should be regarded with suspicion.

Last Tuesday at the joint session, Zuckerberg acted as if such a bias was quite natural, given that Facebook’s employee base is concentrated in the San Francisco Bay area. But his nonchalance over the matter partly reflects the fact that Facebook is, after all, a private company. It is free to host whatever views it chooses, and that freedom is for the better. Facebook is not like a public square. Instead, the scope of a user’s speech is largely discretionary: users select their own network of friends; they can choose to limit access to their posts to that group or to a broader group of “friends of friends”; they can limit posts to subgroups of friends; or they can allow the entire population of users to see their posts, if interested. No matter how many users it has, Facebook is still a private community. If its “community standards” or their enforcement are objectionable, then users can and should find alternative outlets. And again, as a private company, Facebook can choose to feature particular news sources and censor others without running afoul of the First Amendment.

Revisiting Facebook’s Business Model

The greatest immediate challenge for Facebook is data privacy. Trust among users has been eroded by the improprieties in Facebook’s exploitation of data. It’s as if everyone in the U.S. has suddenly awoken to the simple facts of its business model and the leveraging of user data it requires. But it is not of great concern to some users, who will be happy to continue to use the platform as they have in the past. Zuckerberg did not indicate a willingness to yield on the question of Facebook’s business model in his congressional testimony, but there is a threat that regulation will require steps to protect data that might be inconsistent with the business model. If users opt-out of data sharing in droves, then Facebook’s ability to collect revenue from advertisers will be diminished.

As Jonathan Zittrain points out, Facebook might find new opportunity as an information fiduciary for users. That would require a choice between paying a monthly fee or allowing Facebook to continue targeted advertising on one’s news feed. Geoffrey A. Fowler writes that the idea of paying for Facebook is not an outrageous proposition:

“Facebook collected $82 in advertising for each member in North America last year. Across the world, it’s about $20 per member. … Netflix costs $11 and Amazon Prime is $13 per month. Facebook would need $7 per month from everyone in North America to maintain its current revenue from targeted advertising.”

Given a choice, not everyone would choose to pay, and I doubt that a fee of $7 per month would cost Facebook much in terms of membership anyway. It could probably charge slightly more for regular memberships and price discriminate to attract students and seniors. Fowler contends that a user-paid Facebook would be a better product. It might sharpen the focus on user-provided and user-linked content, rather than content provided by advertisers. As Tim Wu says, “… payment better aligns the incentives of the platform with those of its users.” Fowler also asserts that regulatory headaches would be less likely for the social network because it would not be reliant on exploiting user data.

A noteworthy aspect of Zuckerberg’s testimony at the congressional hearing was his stated willingness to consider regulatory solutions: the “right regulations“, as he put it. That might cover any number of issues, including privacy and political advertising. But as Brendan Kirby warns, regulating Facebook might not be a great idea. Established incumbents are often capable of bending regulatory bodies to their will, ultimately using them to gain a stronger market position. A partnership between the data-rich Facebook and an agency of the government is not one that I’d particularly like to see. Tim Wu believes that what we really need are competitive alternatives to Facebook: he floats a few ideas about how a Facebook competitor might be structured, most prominently the fee-based alternative.

Let It Evolve

Like many others, I’m possessed by an anxiety about the security of my data on social media, an irritation with the political bias that pervades social media firms, and a suspicion that certain points of view are favored over others on their platforms. But I do not favor government intervention against these firms. Neither antitrust action nor regulation is likely to improve the available platforms or their services, and instead might do quite a bit of damage. “Trust-busting” of social media platforms would present technological challenges, but even worse, it would disrupt millions of complex relationships between firms and users and attempt to replace them with even more numerous and complex relationships, all dictated by central authorities rather than market forces. Significant mergers and acquisitions will continue to be reviewed by the DOJ and the FTC, preferably tempered by judicial restraint. I also oppose the regulatory option. Compliance is costly, of course, but even worse, the social media giants can afford it and will manipulate it. Those costs would inevitably present barriers to market entry by upstart competitors. The best regulation is imposed by customers, who should assert their sovereignty and exercise caution in the relationships they establish with social media platforms … and remember that nothing comes for free.

Sacred Cow Chips

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