What You Should Be Reading: November 2024

Welcome to “What You Should Be Reading,” a monthly series in which the Taxpayers Protection Alliance (TPA) gives the greatest holiday gift imaginable: the gift of public-policy research. Well, TPA is technically re-gifting here, but you will enjoy it, anyhow.

This edition – the final edition for 2024 – sends a crossbow bolt through the zombie Robinson–Patman Act, debunks the myths of “financialization,” and monitors the progress of digital trade.

Information Technology & Innovation Foundation: “No, Reviving the Robinson-Patman Act Will Not Lead to More Competition or a Better Economy”

Hipsters are trying to bring back bell bottoms…and hipster antitrusters – known also as “neo-Brandeisians” – are trying to bring back the Robinson–Patman Act (RPA). Neither attempt deserves anything but the strongest disapprobation.

A new report by Trelysa Long, a policy analyst at the Information Technology & Innovation Foundation’s Schumpeter Project on Competition Policy, outlines the RPA’s sketchy origin story, its ignominious enforcement history, and many other reasons Congress ought to repeal it. Enacted in 1936, the law, which bans price discrimination between large and small buyers, fell into disrepute after a few chaotic decades of enforcement. Since then, regulators have declined to enforce it — until the Federal Trade Commission in 2022 began a preliminary investigation against Coca-Cola and PepsiCo, injecting new life into the all-but-dead statute.

From the start, the RPA served to shield uncompetitive small businesses against pressure from larger, more efficient chains. Specifically, it was enacted to hamstring the Great Atlantic and Pacific Tea Company (A&P), whose larger scale and concomitant lower prices took customers from small stores. Lobbyists who objected to A&P’s success – derived entirely from pro-competitive business and pro-consumer practices– prevailed upon Congress to erect regulatory barriers to the chain’s efficiency and innovation.

The RPA’s purpose diverges from the traditionally understood purpose of competition policy. The law does not try to curb anticompetitive business dealings – quite the opposite. Nor does the law protect consumers’ interests.  In fact, by disallowing large companies buying at scale to obtain discounts, it raises the prices consumers pay. Instead, it gives life support to subpar competitors that would, if market forces were left alone to work, lose customers and market share. From a philosophical standpoint, it differs little from a regulation to protect buggy makers from the automobile or the pager industry from cell phones. The RPA would “create a level playing field” not by boosting flagging businesses but by dragging down successful ones.

As Long writes, the RPA’s resurrection by neo-Brandeisians can be prevented only by its repeal.

Read the full piece here.

American Institute for Economic Research: “Financialization and Missed Boats”

It has become quite common for market-skeptical commentators to worry about “financialization.” Precisely what the term means is often quite unclear – though it is generally used (and abused) for one purpose: to advocate further constricting the choices available to the managers of financial institutions. However, as David Bahnsen argues in a new paper from the American Institute for Economic Research, “critics have seized on the ambiguity of the word to wage class warfare and attack capital markets, which are little understood.” 

 “Critics are fair (prima facie) to suggest that if such profits [for the financial services industry] come at the expense of other sectors, and at the price of total economic growth, then there may be a problem,” Bahnsen writes. It would be big, if true, as the saying goes. However, the case wilts under scrutiny. Investment does not, in fact, occur for its own sake – or, in most cases, to the diminution of general prosperity. Instead, it funds other business ventures, blunts risk, and performs myriad other services integral to the modern American economy.

Markets’ complexity and opacity obscures the ways in which they fuel prosperity as well as the true origin – regulator’s interventions – of many of the troubles with which they contend. As Bahnsen explains:

When capital is made available for projects, the goods and services underlying the capital are still paramount. The use of debt or equity to entice support of a project invites a risk-reward trade-off, and creates a new “market,” but it does so towards the aim of an underlying market. Will customers like this product, or not? Will this entrepreneur execute? Is this cost of capital appropriate for this endeavor? Financial markets represent the pursuit of a return on capital, and yet, the return that capital rationally pursues comes from an underlying good or service. Forgetting these points leads to economically ignorant conversations where you hear critics of financial markets suggest that we must stop talking about “cash flows” and “financial engineering,” and start focusing more on productive activity, customer satisfaction, and innovation.

Bahnsen readily admits that non-productive investments have been pursued in recent years, a malady often ascribed to too much freedom and insufficient regulatory oversight. But this is a misdiagnosis. Interventionist policy makers – not markets, investors, or the oft-maligned profit motive – bear the most blame.

For example, in the last decade and a half, the Federal Reserve has held down interest rates, providing the equivalent of noise-cancelling headphones that deaden financial institutions to even the market’s loudest signals. “Overly accommodative monetary policy extends the lifeline of those whose time has come and gone preventing fresh ideas from receiving the capital and human resources they need to breathe life into the economy,” he writes. “It fosters malinvestment, distorts economic calculation, and wreaks havoc on economic growth.”

Economic interventions can be had only at an opportunity cost – and usually only at a severe one. If regulators undertake further to burden or micromanage financial markets, their efforts will further distort markets and deprive Americans of badly needed capital – that is, of economic opportunity.

Read the full piece here.

Cato Institute: “Digital Trade Brings the World to Your Fingertips”

Digital trade is flourishing, according to a new paper from the Cato Institute, authored by Gabriella Beaumont-Smith. It is an international phenomenon: “Juniper Research forecasts that cross-border e-commerce directly from business to consumer will reach $3.3 trillion by 2028, slightly more than double its 2023 forecast of $1.6 trillion,” Beaumont-Smith reports.

As the report notes, “digital trade” encompasses not just fully digital services — such as video streaming — but physical goods purchased through online platforms. “In recent decades, technological innovation has blurred the line between businesses that produce goods and businesses that produce services, giving rise to firms that produce and supply a combination of both,” Beaumont-Smith writes.

A few details stand out.

The rise of digital trade has increasingly benefitted undeveloped countries. “While OECD member countries represented 82 percent of global estimated digital trade exports in 1995, the share fell to 73 percent in 2018, suggesting that countries at all stages of development are engaging in digital trade,” the report notes. 

Small- and medium-sized businesses (SMEs), too, have profited. “The WTO found that 97 percent of digitally enabled small firms (which can simply mean they have a website) export, which allows them to play an active role in global value chains.”  Moreover, “SMEs in both the manufacturing and services sectors are projected to save the most in export-related costs in a digital environment.”

Read the full piece here.

Note: TPA highlights research projects that contribute meaningfully to important public-policy discussions. TPA does not necessarily endorse the policy recommendations featured authors make.