When in doubt, antitrust for the win

Issue 38/2019

Last week President Donald Trump escalated his trade war with China (FYI his frequently updated Twitter feed is a near-endless source of amusement), citing theft of intellectual property and a lack of what he calls "Far and Balanced Trade" (not properly defined). But the thing is, Trump's tariffs are only possible because of Section 232 of the Trade Expansion Act of 1962, which allows a President to impose tariffs if "an article is being imported into the United States in such quantities or under such circumstances as to threaten or impair the national security".

There's nothing in there about intellectual property or "fair and balanced trade", just national security. He even opted to name-drop the International Emergency Economic Powers Act of 1977, a scary piece of legislation that effectively gives the President the power to freeze people's assets, block their private transactions and even confiscate property. Provided he can prove that there's an "unusual and extraordinary threat... to the national security, foreign policy, or economy of the United States", that originates "in whole or substantial part outside the United States", that is. But that's the thing about national security; deliberately opaque and ill-defined, it's a brilliant method that an executive, empowered by decades of Congress undermining itself, can use to justify almost anything.

The same might be said for antitrust, which is topical at the moment as people who dislike Big Tech are trying to use it as a cudgel with which beat it down, provided they can prove sufficient "market power" (like national security,not properly defined). This isn't a new phenomenon, either; even the now defunct MySpace was once accused (and acquitted) of an antitrust violation, when the CEO of its former owner sued it for refusing to link to his website.

Alas history tends to repeat, and it appears some are beginning to worry that a few Big Tech companies have been satisfying their customers for far too long:

"Big Tech will soon be facing too many antitrust probes to count on one hand, as several states reportedly plan to launch their own joint investigation to accompany all of the federal inquiries already in progress. Attorneys general for as many as 20 states may be joining forces to dig into whether the dominant tech players use their outsized market power unfairly to quash competition, sources tell the Wall Street Journal.
...
The specific targets of the probe were not named but are widely considered to include Apple, Amazon, Facebook, and Google—all of which are the targets of other antitrust probes, both in the US and abroad—at a minimum."

Not content with services that actually exist, Facebook might even cop an antitrust case for Libra - something it hasn't even created yet - with the European Union clearly desperate for things to regulate (you can only regulate the curvature of a banana once, after all):

"European Union antitrust regulators are already probing Facebook Inc.’s two-month-old Libra digital currency project, according to a document seen by Bloomberg. The European Commission is "currently investigating potential anti-competitive behavior" related to the Libra Association amid concerns the proposed payment system would unfairly shut out rivals, the EU authority said in a questionnaire sent out earlier this month."

For the sake of consumers everywhere I hope, as with the MySpace case, that these legal but mostly political assaults fall flat. While I much prefer paying for a product than being the product, most people seem quite happy with the current arrangement. If any Big Tech companies decided to piss enough of their users off they will quickly go the way of MySpace, Friendster, Bebo, OpenSocial, ConnectU, Tribe.net, Path, Yik Yak, Ello, Orkut, Google+ and Vine, i.e. into the social media void.

Yes, those were all competitors of Facebook that it managed to fend off, but only by offering a superior product. Let's face it, Facebook is the #1 social network not because it was first but because it got social media right and managed to turn a profit at the same time. Its acquisitions of WhatsApp and especially Instagram have helped, but those are not immune to market forces either. Sure, there are network effects, but those only go so far; if a competitor is good enough, people will switch.

As for the other two Big Tech targets, Amazon is only able to maintain its online market share of nearly 50% in the US (it's only responsible for ~5% of total retail spending) by offering people better value than its many, many competitors. It barely makes any money on its retail activities due to its razor-thin margins, precisely the opposite of how a monopolist exploiting its "market power" is supposed to behave, i.e. by restricting output and charging higher prices.

https://finelybalanced.com/images/amazon-revenue-profit.png

As for Google, it is only the dominant search engine because it was the first to offer people a quality web search option (Google is literally now the verb for a web search) and maintain that quality over time. If Google slips and/or something people value more emerges, whether that be a higher quality search result or a more privacy-friendly option (e.g. DuckDuckGo), Google will fade away into obscurity.

Ultimately, antitrust regulation targeted at companies in a sector which is almost as far removed from what antitrust was designed to prevent will result in a worse outcome for consumers. As I have written many times before, regulating these firms as monopolies will risk making them monopolies. It assumes a static state of affairs and acts accordingly, when that could not be further from the truth.

Enjoy the rest of this week's issue. Cheers,

— Justin


The bits


Who pays the tax (or tariff, subsidy, costs of poor regulation)?

Consumers. A thousand times, consumers.

Learn more:


When artificial intelligence just isn't good enough...

...use humans. Given how fickle these algorithms are there will be plenty of high- and low-skilled jobs directly created by the increased use of AI.

Learn more:


The culture that is tipping

I have never understood how tipping, as it exists in some places today (e.g. North America), has persisted for so long (culture really is hard to change). I get how it came about - aligning incentives between employee and customer to improve service - but that connection was severed long ago. Maybe, just maybe, it won't be around for much longer.

Learn more:



Image of the week

View source

Subprime is back baby

When is the worst time to deregulate and industry riddled with moral hazard? At the peak of the cycle. Yet as Scott Sumner points out, that's exactly what US regulators are doing:

"In a perfect world, there would be no capital requirements at all, but also no FDIC, no too-big-to-fail, no Fannie Mae and Freddie Mac, no FHA, etc. Given all the moral hazard in the system, there needs to be some way of discouraging excessive risk-taking... [however] what I object to is procyclical banking regulation. We loosen regulations during booms and tighten them during recessions."

He's right. While the next financial crisis is unlikely to be centred on mortgage-backed securities again (regulators are generally good at cracking down on prior causes), it certainly won't help.

Remember, this is a system with similar feedback mechanisms (or lack thereof) to that which people are relying upon to regulate big tech. 🤦‍♂️


This week's data breaches



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Issue 38/2019: When in doubt, antitrust for the win was compiled by Dr Justin Pyvis and delivered on 27 August, 2019. Feel free to send feedback, suggestions for future issues, ideas, insults, or pretty much anything that crosses your mind to his Keybase or Twitter account.