Thursday, March 14, 2019

It's The Enforcement, Stupid!

Kim Stanley Robinson is a remarkable author. In 1990 he concluded his Wild Shore triptych of novels describing alternate futures for California with Pacific Edge:
Pacific Edge (1990) can be compared to Ernest Callenbach's Ecotopia, and also to Ursula K. Le Guin's The Dispossessed. This book's Californian future is set in the El Modena neighborhood of Orange in 2065. It depicts a realistic utopia as it describes a possible transformation process from our present status, to a more ecologically-focused future.
Why am I writing about this now, nearly three decades later? Follow me below the fold for an explanation.

After last summer's Decentralized Web Summit I wrote:
Cory Doctorow's barn-burner of a closing talk, Big Tech's problem is Big, not Tech, was on anti-trust. I wrote about anti-trust in It Isn't About The Technology, citing Lina M. Kahn's Amazon's Antitrust Paradox. It is a must-read, as will Cory's talk be if he posts it (Update: the video is here). I agree with him that this has become the key issue for the future of the Web; it is a topic that's had a collection of notes in my blog's draft posts queue for some time.
With the start of the 2020 Presidential race, anti-trust has become a highly visible issue, just less visible than economic inequality. In The Myth of Capitalism: Monopolies and the Death of Competition Jonathan Tepper and Denise Hearn argue that these issues are intimately related; the rise of oligopoly capitalism has been a major cause of the rise of economic inequality. From John Hempton's review of the book:
[the book] starts in an entirely appropriate place.

Dr Dao - a doctor with patients to serve the next day - was "selected" by United Airlines to be removed from an overbooked plane.

As he had patients to tend the next day he did not think he should leave the plane. So the airline sent thugs to bash him up and forcibly removed him.

The video (truly sickening) went viral. But the airline did not apologise. The problem it seems was caused by customer intransigence.

They apologised after what Tepper and Hearn think was true public revolt, but what I think was more likely the realistic threat to ban United Airlines from China because of the racial undertones underlying that incident.

If a "normal" company sent thugs to brutalise its customers it would go out of business. But United went from strength to strength.

The reason the authors assert was that United has so much market power you have no choice to fly them anyway - and by demonstrating they had the power to kick your teeth in they also demonstrated that they had the power to raise prices. The stock went up pretty sharply in the end.

Oligopoly - extreme market power - not only makes airlines super-profitable. It gives them the licence to behave like complete jerks.

But what is true of airlines is true of industry after industry in the United States. Hospital mergers have left many towns with one or two hospitals. Health insurance is consolidated to the point where in most states there is only one or two realistic choices. Even the chicken-farming industry is consolidated to the point where the relatively unskilled and non-technical industry makes super-normal profits.
How did we get to the point where a company can hike its stock price by assaulting its customers? It wasn't that anti-trust law changed, it is that the Chicago school changed the way the law was interpreted to focus on "consumer welfare" defined as low prices, thereby ham-stringing its enforcement. As we see in the contrast between the Savings and Loan crisis and the Global Financial crisis, a law isn't effective simply because it is on the books, but only if it is effectively enforced.

The need for enforcement is something that features in Senator Elizabeth Warren's antitrust proposal. Her idea is that companies that exceed $25B/yr in revenue encounter special rules requiring them to divest certain parts of their operations, and that weaker rules apply between $90M/yr and $25B/yr. Nilay Patel interviewed Senator Warren at SXSW. Patel's questions are in bold:
At $25 billion [in annual revenue to trigger a breakup], you’re not anticipating that the local supermarket is going to stop having to do house brands.

Exactly. And no one’s looking for that. You’re getting into the nuance, that actually this is a two level regulation. The one that’s caught all the headlines is that for everybody above $25 billion, you got to break off the platform for many of the ancillary or affiliated businesses.

But between 90 million and 25 billion [in annual global revenue], the answer is to say if you run a platform, you have an obligation of neutrality, so you can’t engage in discriminatory pricing. Obviously, it’s like the net neutrality rule: you can’t speed up some folks and slow down other folks, which is another way of pricing. So there’s an obligation of neutrality.

The advantage to breaking them up at the top [tier] rather than just simply saying, “gosh, girl, why didn’t you just go for obligation of neutrality all the way through?” is that it actually makes regulation far easier. When you’ve just got a bright-line rule, you don’t need the regulators. At that point, the market will discipline itself. If Amazon the platform has no economic interest in any of the formerly-known-as-Amazon businesses, you’re done. It takes care of itself.
...
So you’re articulating a bright-line rule. A lot of conversations I’ve had with antitrust people like the Tim Wus and Lina Khans of the world, they’re saying we need to change the standard. We need to go from the consumer welfare antitrust standard to a European-style competition standard. Are you advocating that we change the antitrust standard?

I just think it’s a lot harder to enforce that against a giant that has huge political power.

So you’re in favor of leaving the consumer welfare standard alone?

Look, would I love to have [that changed] as well? Sure. I have no problem with that.

My problem is in the other direction: there are times when hard, bright-line rules are the easiest to enforce, and therefore you’re sure you’ll get the result you want.

Let me give you an example of that: I’ve been arguing for a long time now for reinstatement of [the] Glass-Steagall [Act]. And my argument is basically, don’t tell me that the Fed and the Office of the Comptroller of the Currency can crawl through Citibank and JPMorgan Chase and figure out whether or not they’re taking on too much risk and whether they’ve integrated and cross-subsidized businesses. Just break off the boring banking part — the checking accounts, the savings accounts, what you and I would call commercial banking — from investment banking, where you go take a high flyer on this stock or that new business

When you break those two apart, you actually need fewer regulators and less intrusion on the business.

You also get more assurance it really happened. We live in an America where it’s not only economic power that we need to worry about from the Amazons and Facebooks and Googles and Apples of the world — we have to worry about their political power as well. There’s a reason that the Department of Justice and the Federal Trade Commission are not more aggressive. There was a time, long ago, when they were more aggressive, a golden age of antitrust enforcement.

These big companies exert enormous influence in the economy and in Washington, DC. We break them apart, that backs up the influence a little bit, and it makes absolutely sure that they’re not engaged in these unfair practices that stomp out every little business that’s trying to get a start, every startup that’s trying to get in there.
Senator Warren is clearly right about the importance of bright lines for enforceable anti-trust laws when she says:
When you’ve just got a bright-line rule, you don’t need the regulators. At that point, the market will discipline itself.
But in my view she doesn't go far enough, for two reasons:
  • In her vision, what happens when a company exceeds $25B/yr in revenue is that a conversation starts between the company and the regulators. Given the resources available on both sides, this is a conversation that (a) will go on for a long time, and (b) will be resolved in some way acceptable to the company.
  • Her vision seems narrowly tailored to the FAANGS, ignoring the real oligopoly of the online world, the telcos. But her arguments apply equally to oligopoly and monopoly in other areas.  John Hempton uses the example of Lamb Weston, the dominant player in french fries:
    French fries it seems are absurdly profitable. The return on assets is in the teens (which seems kind-of-good in this low return world). Margins keep rising and yet there is no obvious emerging competition.

    It may be a good investment even though it looks pretty expensive. But if competition comes Lamb Weston could be a terrible stock.

    There has been plenty of consolidation in this industry. Sure many of the mergers shouldn't have been approved by regulators - but they were - and the industry has become oligopolistic.

    But this is not a complicated industry - it is not obvious why competition doesn't come.
I think Robinson was on to a better alternative. Although it is never spelled out explicitly, one key aspect of the transformation in Pacific Edge is that there are hard limits on both personal incomes and the size of corporations. There is a very simple way to implement such hard limits, via the tax code:

Corporations should be subject to a 100% tax rate on revenue above the cap.

There should be no need for anti-trust regulators to argue with the company about what it should do. It is up to the company, as always, to decide how to minimize their tax liability. They can decide to break themselves  up, to lower prices, to stop selling product for the year, whatever makes sense in their view. It isn't up to the government to tell them how to structure their business. Basing the cap on revenue, as opposed to profit, prevents most of the ways companies manipulate their finances to avoid tax. Basing enforcement on the tax code leverages existing mechanisms rather than inventing new ones. And, by the way:

Individuals should be subject to a 100% tax rate on income above a similar cap.

In both cases the 100% rate should be supplemented by a small wealth tax, a use-it-or-lose-it incentive for cash hoards to be put to productive use instead of imitating Smaug's hoard.

4 comments:

N3JIM said...

Great post, David! Lots to think about in here. When I opened the fold, my browser put me at the bottom of the article and the first thing I saw was '100% tax'. My first reaction was incredulity, but it's an elegant solution which I think Sen. Warren would approve.

David. said...

In Facebook Is Not a Monopoly, But It Should Be Broken Up, Antonio García Martínez' argues that monopoly isn't the problem, monopsony is. For example:

"As amply elucidated in Charles Fishman’s The Walmart Effect, Walmart is a ruthless monopsonist, having seized an enormous amount of retail demand in the US and then—and here’s the key distinguishing point from monopolists—begun offering its customers more and more for less and less. It maintains roughly 25 percent gross margins by chiseling suppliers endlessly, applying the dealmaking screws on everything from mangoes to Levi’s jeans, and demanding volume discounts that it uses to undercut smaller retailers, demolishing Main Streets everywhere. The company keeps shoppers happy and suppliers miserable by threatening to shut off its demand spigot."

David. said...

Dominic Gates of the Seattle Times, Boeing's home-town newspaper, has an exemplary piece of journalism entitled Flawed analysis, failed oversight: How Boeing and FAA certified the suspect 737 MAX flight control system that clearly demonstrates how regulators lacking a bright line end up captured by the companies they regulate:

"Several technical experts inside the FAA said October's Lion Air crash, where the MCAS has been clearly implicated by investigators in Indonesia, is only the latest indicator that the agency's delegation of airplane certification has gone too far, and that it's inappropriate for Boeing employees to have so much authority over safety analyses of Boeing jets."

And:

"But several FAA technical experts said in interviews that as certification proceeded, managers prodded them to speed the process. Development of the MAX was lagging nine months behind the rival Airbus A320neo. Time was of the essence for Boeing.

A former FAA safety engineer who was directly involved in certifying the MAX said that halfway through the certification process, "we were asked by management to re-evaluate what would be delegated. Management thought we had retained too much at the FAA."

"There was constant pressure to re-evaluate our initial decisions," the former engineer said. "And even after we had reassessed it ... there was continued discussion by management about delegating even more items down to the Boeing Company."

Even the work that was retained, such as reviewing technical documents provided by Boeing, was sometimes curtailed.

"There wasn't a complete and proper review of the documents," the former engineer added. "Review was rushed to reach certain certification dates."

When time was too short for FAA technical staff to complete a review, sometimes managers either signed off on the documents themselves or delegated their review back to Boeing."

The whole article is a must-read and, if you fly, very scary.

David. said...

Edward J. Kane's Double Whammy: Implicit Subsidies and the Great Financial Crisis describes how subsidies from governments to banks led to the Global Financial Crisis, and how regulation and supervision was structured to ensure that the regulators and supervisors could avoid blame.

Kane identifies two kinds of subsidies:

"Politically-Directed Subsidies to Selected Borrowers (particularly to would-be homeowners): The policy framework either explicitly requires—or implicitly rewards—institutions for making credit available to selected classes of borrowers at a subsidized interest rate"

and:

"Subsidies to Bank Risk-Taking: The policy framework commits government officials to offer on subsidized terms explicit and/or implicit (i.e., conjectural) guarantees of repayment to banks’ depositors and other kinds of counterparties engaging in complex forms of bank deal making"

Kane then notes:

"Defective Monitoring and Control of the Subsidies: The contracting and accounting frameworks used by banks and government officials fail to make anyone directly accountable for reporting or controlling the size of these subsidies in a conscientious or timely fashion."

The need for bright-line regulation is to avoid this problem. In Kane's words:

"he framework minimizes regulators’ exposure to blame when things go wrong. Gaps in the reporting system make it all but impossible for outsiders –particularly the press— to hold supervisors culpable for violating their ethical duties. These gaps prevent outsiders from understanding —let alone monitoring— the true costs and risks generated by the first two strategies. Few politicians and regulators want to subject the intersectoral flow of net regulatory benefits to informed and timely debate. This weakness in accountability exists because the press is often content with regurgitating the content of agency press releases and accounting systems do not report the value of regulatory benefits as a separate item for banks and other parties that receive them."