Tuesday, September 17, 2002

Monopolies, Oligopolies and Regulation-Josh Claybourn pointed out this Paul Musgrave piece in Hoosier Review that gave praise to Nixionian economics. Josh wants a libertarian response. Will dynamist do, Josh? First, let's start with the Brad DeLong piece on the California electric sewer-pit that started Mr. Musgrave on his errands. Traditionally, electric utilities were dealt with as regulated monopolies, where the state government set the rates that utilities could charge their customers, but did so at a rate that would insure a fair profit for the utility's stockholders. This led to somewhat inefficient electric utilities, since the cost-plus nature of setting rates didn't encourage utilities to be efficient. In the last decade, many states have started to deregulate electric utilities. California came up with a cock-eyed "deregulation" scheme where wholesale rates of bulk power transfers between companies were somewhat free to rise and fall at market rates but where retail rates are still set by the government. The lack of new plants in California over the last decade coupled with a growing economy led to an electricity shortage a year and a half ago. The wholesale rates went up, but the retail rates stayed low, forcing many California utilities into bankruptcy. The California state government then proceeded to set up some long-term power-purchasing agreements at what looked to be favorable rates at the time, but prices have fallen since then, making the contracts an albatross around Gray Davis' neck. Let's start with the quote of DeLong's that Musgrave cites
The existence of very many very large firms in our economy demonstrates that there are lots of circumstances in which you would rather have "command" than "market" governing local resource allocation. Is there any reason to think that the inelastic demand for and inelastic supply of electricity makes it one such?
Demand for electricity is inelastic (insensitive to price changes), but supply need not be inelastic in the long term. In the short term, supply is inelastic, since there are only so many power plants. However, in the long term, additional plants can make the supply more elastic. Emphasis on can, for that assumes that the system allows new plants to be built. Enviros will fight any new plants and NIMBYs will join in to slow down the process. A streamlined licensing process as well as increased deregulation will tend to produce more electric plants, thus increasing supply. A command economy for electricity is slow to react to needs, for a Utilities Commission may not be interested in responding if they are controlled by forces that oppose added supply, either for economic or ideological needs. A heavy-handed commission can bankrupt a company by setting rates too low, forcing a government takeover and turning business decisions into political ones. A business in a competitive market will react to customer's needs while a commission will react to their political backer's needs. How then do we insure a competitive market? By guarding against monopolies and oligopolies (too few competitors). Some pure monopolies, such as cable TV, electrical distribution and water are candidates for a regulatory approach, where a fair profit is offered in return for a governmentally fixed price. However, outside of utilities, the markets are better vehicles of looking after the end consumer than government boards. The package market is a good example. Innovation came from FedEx and UPS, not the Post Office, for the government monopoly didn't need to do much innovating. We might need to take a second look at anti-trust law and try to keep oligopolies from forming; it's easier for two or three big competitors to avoid a "price war" than it is if ten businesses are in the market. The application of anti-trust law has been erring on the side of allowing oligopolies for the last 20 years, even the Clinton Justice Department didn't do that much more intervention that the Reagan or Bush 41 or 43 administrations. If Musgrave is looking for a thinking-man's conservatives, he'd be better to go back ten decades rather than three. As much has he's been given a bad name by the McCainiacs, Teddy Roosevelt was possibly the last classic liberal. In the 19th century, liberalism was taking power away from the aristocracy and giving it to the public at large. His trust-busting of a century ago was an extension of that form of liberalism. The nomenclature changed shortly thereafter, as classic liberalism became called conservatism and liberalism became taking power from individuals and giving it to the state. Such statism was the cornerstone of the New Deal; Nixon and Eisenhower ware part of a breed of mid-century conservative statist who was conservative on cultural issues but interventionist on economics; sort of an anti-libertarian. It's a bit ironic that the breed is now called "Rockefeller Republicans" for it was the nouveau-aristocrat John Rockefeller whose Standard Oil was Enemy #1 of the trustbusters-his grandson Nelson became the caricature of a conservative statist. Watergate, Vietnam and J. Edger Hoover's FBI got liberals angry with Nixon, thus making him look like a conservative, but his politics were more anti-libertarian than conservative in the modern definition. We need a conservatism that holds to the cultural and spiritual touchstones that matter yet leave room for improvement in society. Statists don't innovate well; they may manage the status quo well, but aren't the people to modify it. That is the advantage of a free-market system in that new ideas are tried on a small scale and are ramped up when the work; if they don't work, they don't work on a small scale. When a command economy makes a boo-boo, it's a big boo-boo; even the "best and the brightest" recruited to run things from Washington don't have as good a batting average as the market as a whole. I think dynamist economic policy needs to take a long look at anti-trust policy. The dynamist has the libertarian distaste for government intervention, but a bit of well-placed governmental power might prevent oligopolies and monopolies from forming. While large corporations are good for enabling big projects and generating economies of size, they can start running into hierarchy costs and start exhibiting oligopolic behavior. A way to a thinking-man’s conservatism that Musgrave's looking for is to use the light touch of anti-trust policy, blocking mergers where oligopoly costs outweigh the synergies and economies of size, rather than the heavy-handed regulatory approach of a utilities commission. The centralization of many industries, such as airlines and broadcasting is starting to create oligopolies and new aristocrats that run counter to a dynamic economy. While I'm uncomfortable about Washington running things, I'm less thrilled with Microsoft or AOL-Time Warner running things, either; I can at least vote on what happens in Washington. We need more Bull Moose and less Tricky Dick.

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