Culling the commerce commision during a recession: WTF

In a Herald editorial the possibility of weakening the CC during a recession is put forward.  To be fair, the article is saying that the people that want to weak the CC are missing the benefits – but the article still states:

If conditions deteriorate badly, there may just be a case for temporarily relaxing some elements of competition law to help the corporate sector

This doesn’t make sense to me.  How do you “help” the corporate sector by allowing anti-competitive processes.

During a recession the primary problem is that prices ARE NOT ADJUSTING and so the allocation of resources is inefficient and this is costly.  Allowing firms to keep prices artificially high won’t help the economy – it will hinder it.

There is too much of a micro focus on “keeping a businesses afloat” – the important issue is actually making sure that the allocation of resources across the economy is as efficient as possible.  Allowing prices to get stuck outside of their competitive level isn’t going to help this …

  • DanT

    OMG what a horsesh*t idea!

    “There is too much of a micro focus on “keeping a businesses afloat” – the important issue is actually making sure that the allocation of resources across the economy is as efficient as possible.”
    – Indeed.

  • Kimble

    That tops the leaderboard of “bizarrely stupid things people with a public voice said this week” along with Sue Bradfords claim that the current economic woes are going to be worse than the Great Depression, and will last longer than her life time.

  • insider

    the problem is these lobbyists are preying on a naive new government, a civil service in flux and poor economic conditions to push for a large, free transfer of wealth their way.

    This week we’ve seen the electricity industry completely capture a less than sharp energy minister. A secret report they paid for, they were interviewed for and which only they peer reviewed, has now suddenly become the cornerstone of Brownlee’s regulatory review because they secretly briefed him on it and he thought it was brill! That is outsourcing to a bizarre degree.

    It’s not the power system that’s third world, it’s the politics.

    The concern is that there is no-one in cabinet or the civil service who sees these risks, and who will point out the serious implications for a proper working democracy

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  • DanT

    – Kimble: agree
    – Insider: agree with your point about a new government, concerned about the rest of what you say!

  • Peter Brown

    “The necessary precondition of a coercive monopoly is closed entry – the barring of all competing producers from a given field.” — Ayn Rand

    http://aynrandlexicon.com/lexicon/monopoly.html

    It’s obvious to me now, after some time of reading this blog – that Matt Nolan opposes freedom and is a strong advocate of the current straitjacketing of business organizations at the point of a gun.

    I know some banks in the United States that can’t acquire each other, because of anti-trust – the Capitalist goes to fix the problem – but stops before putting the fire out – as there’s a regulation – this is especially true since this financial crisis was caused by the U.S. government subsidization of the financial industry and a myriad of Congressional boasting about how they forced banks to provide 0% no doc loans to people in poor communities – and the laws that enabled them to do it.

    The crisis gets worse the more the U.S. government intervenes and props up failing institutions – or continues its policy of forcing a secondary market in mortgages through the GSEs – I’m a trader I see it every day – some government official opens his mouth with a plan and I open shorts.

    I recommend Matt Nolan checkout the Community Reinvestment Act of 1977, and wake up to himself – http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Relation_to_2008_financial_crisis – it’s government intervention that’s caused these recessions and made them worse – if you really care about economic growth and freedom then you’d target the supply side (lowering the corporate tax creates upward pressure on stock prices, for example) – or for once checkout Say’s law – as it appears you haven’t.

  • “OMG what a horsesh*t idea!”

    To be fair – I only quoted the rubbish bit. The editorial is not as bad as that one quote …

  • “That tops the leaderboard of “bizarrely stupid things people with a public voice said this week” along with Sue Bradfords claim that the current economic woes are going to be worse than the Great Depression, and will last longer than her life time.”

    That was a shocker 😛

  • “the problem is these lobbyists are preying on a naive new government, a civil service in flux and poor economic conditions to push for a large, free transfer of wealth their way”

    Hi Insider,

    I see potential for that – but I’m not sure that is quite the way it is going. Lobbyists always push new governments – hopefully government can read around and get a feeling for issues themselves.

    I have faith that things won’t end up that bad 🙂

  • You could perhaps make an argument about corporate profits being a better driver of spending than consumption? If the people aren’t willing to spend, give firms the power to forcibly extract more and hope they spend it themselves, and maybe reinflate asset prices somewhat while they’re at it?

  • Hi Peter,

    First, do not be so aggressive with your posting – it is fine to be passionate but insulting me isn’t going to prove your argument.

    “It’s obvious to me now, after some time of reading this blog – that Matt Nolan opposes freedom and is a strong advocate of the current straitjacketing of business organizations at the point of a gun”

    Do you actually understand freedom? I support the role of government to increase civil liberties – a society that is free of government does not by default have greater freedom.

    I agree with the Rand quote you put up – and I see a well function commerce commission as PART of the way of lowering barriers to entry and increasing competition.

    “The crisis gets worse the more the U.S. government intervenes and props up failing institutions – or continues its policy of forcing a secondary market in mortgages through the GSEs – I’m a trader I see it every day – some government official opens his mouth with a plan and I open shorts.”

    I am talking about the NZ commerce commission – not the messy regulation in the US. I wish they would just settle policy in the US – as I believe that the uncertainty they are creating is far more damaging than everything else going on.

    I have said that here before.

    “I recommend Matt Nolan checkout the Community Reinvestment Act of 1977, and wake up to himself – http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Relation_to_2008_financial_crisis – it’s government intervention that’s caused these recessions and made them worse”

    I know about the community reinvestment act – and I think it was a bit silly. But I think it is a long shot to go from there to the conclusion that government involvement was the sole cause of the recession.

    “if you really care about economic growth and freedom then you’d target the supply side (lowering the corporate tax creates upward pressure on stock prices, for example) – or for once checkout Say’s law – as it appears you haven’t.”

    Economic growth and freedom are not the same thing – they are related in complicated ways, but stating that whatever causes the highest GDP gives the highest freedom (which you seem to be implying) is ridiculous.

    I do know Say’s law, I know all about the debates surrounding it, and I know that if prices don’t clear perfectly, if people don’t have complete information, and if there is market power Say’s Law fails!

    Now, in the above post I said:

    “the important issue is actually making sure that the allocation of resources across the economy is as efficient as possible”

    And I was talking about having competition so that prices could adjust. My view is that the more competition we have, the closer we get to a Say’s Law type case – which is what we want to reduce the impact of changes to the economic situation.

    Now, feel free to tell me why you disagree with my value judgments – but if you are attacking me for saying that it is possible that a public institution can help the market achieve competitive outcomes you aren’t going to get very far.

  • “You could perhaps make an argument about corporate profits being a better driver of spending than consumption? If the people aren’t willing to spend, give firms the power to forcibly extract more and hope they spend it themselves, and maybe reinflate asset prices somewhat while they’re at it?”

    The idea of driving spending is always a second best type argument for me – we want to “inflate” our way out only when some prices are stuck too high. If we allow enough competition such that prices can adjust we don’t face this problem 🙂

    Ultimately, the hard issue with the current recession is picking what is the structural shift, and what stems from price stickiness (or potentially messed up expectations). Given the ability of the CC to promote competition I am concerned about weakening it during a recession …

  • Peter Brown

    @Andrew
    “You could perhaps make an argument about corporate profits being a better driver of spending than consumption? If the people aren’t willing to spend, give firms the power to forcibly extract more and hope they spend it themselves, and maybe reinflate asset prices somewhat while they’re at it?”

    I disagree with your premise Andrew. Your premise that the destruction of wealth (consumption) is stimulative to economic growth is a complete inversion of the Law of Markets, known as Say’s law.

    From wikipedia: “According to Say’s Law, the production of goods provides the means to the producers to purchase what is produced, and hence, demand will grow as supply grows. For this reason, prosperity should be increased by stimulating production, not consumption.”

    And to Matt Nolan I say this: even without a MARKET price markets clear (for example, minimum wages are far above market clearing rates, and so there’s less aggregate production and less employment than there otherwise would be in a free market, or for example, if you put a price control on cheese far below the market clearing rate you end up with a shortage).

    From wikipedia:

    “Keynesian economics places central importance on demand, believing that on the macroeconomic level, the amount supplied is primarily determined by effective demand or aggregate demand. For example, without sufficient demand for the products of labor, the availability of jobs will be low; without enough jobs, working people will receive inadequate income, implying insufficient demand for products.”

    This is consistent with Keynsianism (wow, wiki got it right), and yet Say’s law still smashes this idea — the amount supplied is primarily determined by WANT — Keynes equates WANT with demand for goods at market. A bum on the street who wants pork belly futures isn’t demanding it until he’s in the CME pits, and if he ever did demand said futures contracts, aggregate demand for goods and services at market consists of the aggregate supply of goods and services at market (i.e., for the bum, on a small scale, he’ll have to go get a job [supply-production] and go spend his first paycheck on said futures).

    Again with regards to Andrew you say quote “If the people aren’t willing to spend, give firms the power to forcibly extract more and hope they spend it themselves” — forcibly extract? This is Marxism.

    You exchange your time and effort for money, that’s a job, it’s voluntary. As an Australian I applaud New Zealand’s relatively free dairy industry (once I get my passport I’ll be able to buy ATM on the NZAX [a2 milk] :D). Free nations don’t have laws that put a gun to an employers head and makes him sit down in a room with a union official. If I own a business, it’s my property, if I wake up one day hating blacks and fire all my black workers, so bet it, it’s my business.

    Profits are the lifeblood of the economy, if you lower the corporate tax rate (preferably a gradual move to 1% [which also boosts revenues]) market participants discount future profits into the capital values of stock prices (which are based on corporate profit expectations).

    The proper role of government is only come in and retaliate against initiators of physical force and fraud, that is, courts, police and military — all the welfare statist institutions you see around you today in this mixed economy are the aspects of government that are the PRIMARY initiators of force, and a complete inversion of government’s role of protecting individual rights such as in the example of the American constitutional Republic and how that model approached unfettered, unregulated, laissez faire capitalism in the 19th century (and saw man’s lifespan triple).

    Matt Nolan, if you don’t believe economic growth and freedom are intertwined, cover your eyes next time you see Hong Kong’s skyline (15% flat-tax, stable government, objective law), or Dubai’s skyline (0% flat-tax for 50 years), of course I’m not making this a primary of tax rates (Russia has a 13% flat tax, but you need to deal with corrupt officials to get anything done), but these cases are of undoubtedly freer jurisdictions.

    Say’s law doesn’t fail, that is markets don’t fail. Recessions or aggregate reductions in output are primarily caused by exogenous shocks to aggregate supply because of government intervention in the economy.

    I’m also not using the CRA as a primary, the entire crisis is a combination of the Federal Reserve raising interest rates to fight growth and cause a recession and to destroy housing wealth in America, the top in interest rates (market participants in mid-2006 discounting a far lower fed funds rate than 5.25% and a higher unemployment rate, and recession, discounting lower home capital values), Fannie Mae attempting to standardize the 40-yr loan term (March 2007), FAS 157 mark-to-market (Nov 15 2007), the freezing of mortgage rates by the Bush administration (Dec 7 2007), all of this plus the full brunt of the Sherman Antitrust Act of 1896, the National Housing Act of 1934, 37, 49, the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974 and the Home Mortgage Disclosure Act of 1975 topped by the Community Reinvestment Act and Bill Clinton’s ramping up of Fannie Mae in 1999 ( http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260 [1999] ) the implicit government guarantee of Fannie and Freddie and every environmental regulation and the massive increase in said regulations you can cite in every legislative rulebook in most industrial nations ( development restrictions were assumed to be another floor under home capital values ).

    At the root, in the short-run, the almost 83% decline in U.S. bank stocks can be almost entirely be attributed to (in terms of magnitude and intensity) FAS 157 mark-to-market accounting which created the massive swing from profit making to the current slew of headline corporate earnings writedowns, 28% of the downmove can be attributed to a one week collapse of 20% in the S&P500 after the U.S. Emergency Economic Stabilization Act of 2008 was passed (700bln)(October 3).

    The commerce commission is like Australias ACCC, it’s the implementation of arbitrary anti-trust laws.

    I recommend American philosopher Ayn Rand on anti-trust, she’s very eloquent: http://aynrandlexicon.com/lexicon/antitrust.html

    Inlfation lowers corporate profits, and constitutes downward pressure on stock prices (i.e., inflate a tiny bit, and the stock market will rise at a 45 degree angle rather than a 55, but if you inflate a lot – guess what – you’ll get the 1970s [down]).

    Notice I just pooped on those Austrians who believe, falsely, that printing moves stock prices higher.

    Hehe, whenever I make free market talking points I always make sure I put down Austrians (who accidently believe in market failure [i.e., their concept of bubbles or market ‘corrections’ imply ‘false moves’ or prior failure rather than the market reacting to incoming exogenous shocks])

    I recommend you all checkout the New Classical school’s primary business cycle theory, economists concerned with economic growth, or the conditions necessary for production, must necessarily be stewards of the notion that there’s a basic friction between markets and government, and that enterprises ought to be free to merge (and that such represents the most efficient allocation of resources [and that it happens automatically, if government simply leave business alone]): http://en.wikipedia.org/wiki/Real_Business_Cycle_Theory

    How about making anti-trust less arbitrary and or/abolish it? That’s the long-run structural policy that is most conducive to production.

  • Hi again Peter,

    “And to Matt Nolan I say this: even without a MARKET price markets clear”

    There is ALWAYS a price – if the price isn’t the market price then the market doesn’t clear, that is a truism. We don’t need a $ amount to have a price – that is true, but if the price isn’t determined efficiently we do have a market failure.

    I agree that we can split Say into “supply creates demand” and Keynes into “demand creates supply” – however, the only difference between these points of view is the idea of how the price system functions, nothing more.

    “Matt Nolan, if you don’t believe economic growth and freedom are intertwined”

    You are misquoting me – I said they aren’t the same thing. You were treating them as interchangeable terms, which is not really appropriate. I completely agree that they can be related – and complementary. However, the thing that maximises growth is not always the thing that satisfies our liberties.

    “Say’s law doesn’t fail, that is markets don’t fail. Recessions or aggregate reductions in output are primarily caused by exogenous shocks to aggregate supply because of government intervention in the economy.”

    This is a very extreme assumption – and there is no evidence for it. New Classical economics was too extreme, and if we judged it on an empirical basis it would be an abject failure.

    However, it provided a strong methodology that economists could use to try and describe reality – which is how we have arrived at New Keynesianism.

    The gyrations of the economy are not all the result of efficient reallocation in the face of technology shocks.

    “How about making anti-trust less arbitrary and or/abolish it? That’s the long-run structural policy that is most conducive to production.”

    Because anti-competitive actions are one of the very things that retard economic growth. Adam Smith was writing AGAINST monopolies – not against government. (Although note, I agree with the less arbitrary here – I am talking about the abolishion).

    Monopolies are a coercive force – competition is the ideal we are after. A good institutional framework would help this.

    I have no doubt that the strcture of the CC could be improved, these things always can. But stating that we should allow anti-competitive practices during a recession will make matters worse.

    Putting this another way. Say that we have an economy that would function in line with Say’s Law in the short-run, except for the fact that industries are organised along monopolistic lines – because of imposed barrier to entry. In this case, strategic considerations would ensure that Say’s Law fails in the face of a shock – as relative prices and relative reward could not meet.

    In this case, good anti-trust law can help push us towards the dreamy, perfect macro-reaction equilibrium that we would all like to see.

  • Peter Brown

    What do you define as anti-competitive actions?

    You’ve seemed to have totally lost the plot on this: name a coercive monopoly that wasn’t government instituted.

    Here in Australia the monopolies used to be the Post Office, Telecom, nationalized money, and the horrible road system we have.

    Telecom is now Telstra, and freer, this has increased competition in the telecommunications industry. The road system is still nationalized, and it’s god awful. If only the railroad industry weren’t the first heavily regulated industry in the United States, there would be no national highway system and nothing but fast trains surging across that nation — setting an example for other mixed economies not to get involved in roads. The market wants trains and centralization, the government wants urban sprawl and thousands of trucks wasting oil and extra costs.

    Checkout the quality of some of the rare heavily used private roads around you in development estates, and compare them to the government suburbs.

    I see where you’re going.. you think Microsoft is a coercive monopoly.. want to know the government intervention that was the main cause of the 2000 tech crash?

    United States v. Microsoft anti-trust case causing a 10% drop in MSFT’s stock price March-April 2000 due to anti-trust headlines.

  • insider

    @DanT
    DanT

    Read the Business NZ press release where they say “a notable degree of consensus was achieved between the generators, Transpower and large electricity users during the report’s preparation” and then Brownlee’s speech where he is “very impressed by the report” and thinks it “a working document that may form the basis for recommendations on future regulatory and governance arrangements.”

    This was a report which no-one but those selling it had seen or had input into and which Brownlee bought without sharing with anyone

  • insider

    @Matt Nolan
    Matt

    Agreed that is their role. Not sure if the checks and balances are in place within or without government and the cabinet process.

  • insider

    @insider
    to which I’ll add a point I forgot, that my concern is heightened on two points –

    1) Brownlee immediately came out after the power cut in Auckland and said “Don’t blame Transpower it’s the regulators’ fault” even though it was Transpower’s equipment that failed, their decision making that led to the neighbouring equipment being out of service and no other way to carry the load if there was a failure, and their maintenance regime is known to be questionable according to their own expert reports.

    2) Brownlee is using a basic factual error to drive part of his policy direction. He says individual grid upgrade projects costing more than $1.5 million must be approved by the Electricity Commission and this needs changing.

    It’s untrue. So who is telling him this is true and why are his advisers not picking up the error?

  • steve

    Wow! I thought the jury was out on the need for competition policy?? seems i’m mistaken. a properly functioning market does result in the best outcomes for society. But when the market does not function properly, be it not competitive or contestable, there is reason for intervention by the Commission. Wish I were reading this earlier to get in on the action…

  • Hi Peter,

    “You’ve seemed to have totally lost the plot on this: name a coercive monopoly that wasn’t government instituted.”

    Huh? The whole concept of a commerce commision stemmed from the piles of anti-competitive behaviour recorded during the nineteenth centry to now.

    I completely agree that there are substantial government failures – in some areas the government becomes a giant monopoly, one that doesn’t face any effective market pressure. Furthermore, I agree that the government can’t figure out where to invest unless they get information from the market.

    However, competitive issues to exist in the private sector as well – especially in a small, distant, economy like New Zealand. Anti-competitive behaviour (including unions) throughtout the economy makes prices sticky – sticky prices are a huge problem any time of year, but especially during a recession.

    Now I never said anything about Microsoft – this is an example of an industry where some degree of monopoly power is useful, as there is a lot of investment that was required that other firms could free ride off. However, over time there could still be a role to help reduce barriers to entry in the industyr (if we felt Microsoft was arbitrarily putting them up) – and a fall in microsofts market cap is not an indication of whther this is a good idea or not.

    My concern is more with industries that experience some degree of price fixing (which is really just quantity limiting) and the such.

  • Hi Insider,

    “Agreed that is their role. Not sure if the checks and balances are in place within or without government and the cabinet process.”

    Indeed. The is one of the useful things with the commerce commision though – it is “relatively” independent of government.

    I’m not very happy with all the Jawboning the Brownlee is doing – I get the feeling there is going to be a lot of complaining on this blog about this sort of thing if it keeps on happening.

  • Hi Steve,

    I agree with what you are saying. Competition issues are one issue where the government can help – although there does need to be some balance, when the CC action is reactive (responding to mergers) compared to proactive (where they are researching industries).

    A larger CC that focuses more on proactive policy could be useful – if it is kept independent from political concerns.

  • Kimble

    LOL.

    Matt just got Rand Spammed ©.

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  • Kimble :
    LOL.
    Matt just got Rand Spammed ©.

    Rand Spammed is an AWESOME term – I’ll have to use it next time I’m debating with Austrian economists (which could well be tonight – if I end up drinking)

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