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Regulation Recessions

In his column “Robber Baron Recessions” Paul Krugman argued this Monday that American companies have been investing less because of greater market concentration in their industries. Exhibit A for Krugman is Verizon: he contends that it has not sufficiently invested in Fios, a fiber optic system that would accelerate internet speeds.  He thus wants more government intervention to police monopoly power and decrease economic concentration.

Both Krugman’s claim and his remedy are dubious.  Let’s begin with alternate explanations for low corporate investment. The most obvious is government regulation.  The Obama administration has been one of the most aggressive regulators in history. And given the resurgence of the left generally as represented by the relative success of Bernie Sanders, the political climate threatens even more onerous regulation in the future. Regulation and political uncertainty kill investment, because companies cannot assure themselves a projected rate of return.

Krugman could have hardly chosen a better example than Verizon to undermine his own case.  The Obama administration’s policy of net neutrality curbs pricing freedom and may well presage further government restrictions on those who provide the pipes for the internet.  The government could indeed do more for investment by reducing regulations and the uncertainty they bring.

Second, it is not at all clear that market concentration leads to lower investment. Joseph Schumpeter thought that monopoly power likely leads to more investment in innovation, because those with high market share could capture a greater return on their investment. To be sure, this effect has to be weighed against the advantages of multiple actors coming up with new ideas, but the trade-off between size and multiplicity almost certainly varies industry by industry.

Third, government regulators have compiled a terrible record of intervening to police concentration, particularly in our era of technological acceleration. They sued IBM for monopolization right before Microsoft ate IBM’s lunch and Microsoft right before Google came to dominate.

Finally, European companies have not been investing much in their enterprises either.   Yet there antitrust regulators embrace a more intrusive competition policy closer to the kind of which Krugman approves.

Thus, Krugman’s case is shaky on multiple grounds. Regulation rather than concentration is the likely cause of low investment and there is no empirical evidence that a more vigorous antitrust law will improve the situation. Indeed, in creating more regulatory uncertainty, it is likely to make things worse.

Reader Discussion

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on April 20, 2016 at 12:16:56 pm

1. I’m sympathetic to the idea that net neutrality depresses investment in telco lines. But is greater investment the goal?

Imagine we eliminated “railroad neutrality,” and told railroad companies that they could exercise absolute discretion about who uses their rails. This might in fact trigger a big investment in new rails, as various companies began laying down competing rails next to the existing tracks. And this would produce a better social outcome – how?

2. If regulation is such a bad thing, and if we’re enduring an unprecedented amount of it, how does it happen that we’re not in recession? As far as I can tell, US firms and the people who own them have never been richer.

Yup, Obama issued new regulation in health care, telecommunications, electricity, natural gas, education, etc. And how are these regulated industries doing these days? As far as I can tell, they’re booming.

So it is far from clear to me that regulation kills investment. Yes, uncertainty has a depressive effect, but transition from one regulatory regime to a (arguably better) one will always entail a modicum of uncertainty. Reform is a form of investment, too.

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nobody.really
on April 21, 2016 at 09:45:59 am

"Yup, Obama issued new regulation in health care, telecommunications, electricity, natural gas, education, etc. And how are these regulated industries doing these days? As far as I can tell, they’re booming."

Health care BOOMING, you say?

One might want to check the THC level of the organic material at one's disposal (consumption)?

Rates going up and up and up!

Deductibles going up and up!

Companies leaving Exchanges left and right!

Government bailouts for struggling insurers would be skyrocketing had not Senator Rubio passed the limit on this planned subsidy to insurers. Without those funds, the insurers are in deep trouble. (And it serves them right for going along with this monstrosity).

C'mon, nobody.really believes that healthcare is booming, now do they?

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gabe
on April 21, 2016 at 18:15:17 pm

Also, one can rightfully argue that this "boom" such as it is was done in spite of the Obamoron's regulatory efforts. Energy industry has nothing to do with Obamoron's efforts but more to do with more effective technology that has been in the pipeline for a number of years. And did I mention "FRACKING" - Gee, it would appear that the Obamorons would like to shut that down. An excellent regulatory regime, wouldn't you say.

Of course, I must concede that education is doing quite well; at least if one desires to measure educational excellence based solely upon the levels of tuition that the academy demands; For surely, nobody.really would want to measure the level of wisdom imparted to our young "crybabies" currently marauding through the halls of the academy.

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gabe
on April 21, 2016 at 20:54:44 pm

And, oh, just for the fun of it, here is more on the "booming" education establishment:

"Even at many “good” colleges and universities, most of the students have minds that are, writes Notre Dame professor Patrick Deneen, “largely empty, devoid of any substantial knowledge that might be the fruits of an education in an inheritance and a gift from a previous generation.”

"The pervasive ignorance of our students,” Deneen writes, “is not a mere accident or unfortunate but correctible outcome…It is the consequence of a civilizational commitment to civilizational suicide. The end of history for our students signals the End of History for the West.”

Read more at: http://www.nationalreview.com/phi-beta-cons/434392/know-nothings-college

Boy, wish I could get in on this type of *BOOM*, don't you?

And BOOM goes Western civilization; apparently nobody really wants that.

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gabe

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