Never Trust Large Companies

This Conspiracy Appears Well Past the "Theory" Stage

Here is an interesting tale.  It appears at The Federalist,  entitled  "These Screenshots Show How Google Shadowbans Conservative And Pro-Trump Content".   Author and commentator, Doug Wead says: "It appears that Google, YouTube, Facebook, and Twitter have all gone to war with President Trump, and are punishing anyone who dares to speak up for him."

He presents an extensive account of his own experience as a case study to establish the claim.  It seems like Google, YouTube, Facebook, and Twitter need to be made to take a long draught of castor oil, served up under US Antitrust laws.  (Antitrust laws, also referred to as "competition laws," are statutes developed by the U.S. Government to protect consumers from predatory business practices by ensuring that fair competition exists in an open-market economy.  [Investopedia])

Let's hope that the Trump Administration and the Congress are up for serving up the medicine.  Ah, if we could only see a re-make of AT&T, Kodak, and Standard Oil.  Them's were the days.

We would do well to remember Adam Smith's dictum--when you get a dozen business leaders into the same room, you will be confronted with two dozen self-serving conspiracies.  At least that will be the case when mercantilism is the dominant economic theory--as appears to be case among the giant tech media companies.

Robber Barons: Control Too Strong to Resist

Where Are the Left’s Modern Muckrakers?

Victor Davis Hanson

National Review Online

Where Are the Left’s Modern Muckrakers?

By Victor Davis Hanson

National Review Online

 

High-tech corporations have acquired massive power and wealth, dwarfing the might of the robber barons of the past.

In the late 19th and early 20th centuries, there was an epic fight of so-called muckrakers — journalists and novelists such as Frank Norris, Upton Sinclair, Lincoln Steffens, and Ida Tarbell, along with trust-busting politicians like Teddy Roosevelt — against rail, steel, and oil monopolies. Whatever one thought of their sensationalism and often hard-left socialist agendas, they at least brought public attention to price fixing, product liabilities, monopolies, and the buying of politicians.

No such progressive zealotry exists today in Silicon Valley and its affiliated tech spin-offs. And the result is a Roman gladiatorial spectacle with no laws in the arena.

In the last two elections, Facebook has sold its user data to Democratic and, apparently more controversially, Republican campaign affiliates. Google, Twitter, and Facebook have often been accused of censoring users’ expression according to their own political tastes. Civil libertarians have accused social-media and Internet giants of violating rights of privacy, by monitoring the shopping, travel, eating, and entertainment habits of their customers to the extent that they know where and when Americans travel or communicate with one another.

Apple, Alphabet (Google), Amazon, Microsoft, and Facebook are the world’s five largest companies in terms of stock value. Together they have market capitalization of about 3 trillion dollars, about the net worth of the entire country of Switzerland.

Conspiracies Against Public Citizens

The  Perpetual Threat Of Robber Barons

We have often pointed out that businesses ought to be treated with perpetual scepticism.  Never trust a group of businessmen alone in a room together.  They will often quickly end up scheming how to control the market, create a de facto monopoly, and plunder their customers and the market in general.  This was Adam Smith's view--as so many on the right often forget.  

We are now seeing just such a conspiracy (whether formal or informal) to control the market and the economy for IT services, particularly consumer IT services.

We have a couple of articles to run on this theme.  The first is from James Delingpole.

Smash Big Tech’s Robber Baron Cartel Now!

James Delingpole
Breitbart News

The thing that puts me off libertarianism is the “more libertarian than thou” game so many libertarians like to play.  “What? You mean you don’t believe that enterprising heroin dealers should be free to ply their wares in kindergartens so as to catch ’em while they’re young? You’re not a real libertarian. You’re a fascist control freak…”

All right, I exaggerate. But the latest libertarian test is very real – and is the subject of a big falling out between two National Review writers Victor Davis Hanson and Kevin Williamson.  See where you stand.

Exemplary Bi-Partisanship

How Politics and Government Are Supposed to Be

New Zealand is a small country with a concomitant population.  It is relatively easy for companies to achieve near monopoly market power.  In the past there have been instances of "big business" being far too cosy with politicians and bureaucrats.  In recent times, less so.  The New Zealand economy is now one of the most open in the world.  Most kiwi businesses are now competing against global or international competitors--on our home ground.  

But the risk remains of oligarchies or duopolies emerging over time.  The oil/gasoline industry is one example.  Market power is concentrated in the hands of just a few large corporates--most with huge multi-national "parents".  It is, therefore, salutary and encouraging to see the Energy and Resources Minister, Judith Collins take an interest in the industry.

Energy and Resources Minister Judith Collins said a report into the retail fuel market had found "features which may not be consistent with a workably competitive market."  The gross profit margin on fuel at the pump had doubled to about 30 cents a litre in Wellington and the South Island over the past four years, the report found.   Higher profit margins in the South Island and Wellington were also "not explained by higher costs in those areas", it found.  [Stuff]

Collins is one tough Minister of the Crown.

Paradigm Shifts Put Entrenched, Privileged Business at Risk

Monopolists and Rent Seekers

Various investment gurus, Warren Buffet included, have sometimes described the best investment opportunities come when one discovers a business protected by a wide, deep moat.  The barriers to competition are high.  The business in question is market dominant.  Such businesses are able to operate as a virtual monopoly.  They sit at the toll bridges over the moat and click each passing  ticket to pecuniary advantage.  If you can find a business like that buy it.  It will reward you handsomely.

But, and it is a big "but", all too often such wide-moat businesses are allowed to exist because they are protected by perverse government rules, regulations, and laws.  Competitors are not able to enter the market and drain the moat.  It is not that they themselves are not efficient, or their service or products are sub-standard, it is more that the incumbent company is protected by unjust and perverse laws rather than the loyalty of free consumers.

A market place and economy which truly respects the property rights of all citizens will abhor state licensing, rules, and regulations which impede competitors coming into the market.  When competition is free and open, watch the feather-bedded monopolies collapse; watch the water levels in the moats drain away.

One such case being played out right now is in the taxi industry, facing competition from Uber.  New York is providing an instructive example.

New York’s Taxi King Is Going Down

People don’t deserve to be millionaires because they can get government to let them pick people’s pockets.

By Jared Meyer 

The Federalist

Evgeny “Gene” Freidman is no fan of Uber. The increasing popularity of this vehicle-for-hire (or ridesharing) company has lost him millions of dollars. He has even asked New York City taxpayers for a bailout. As difficult as bailing out the big banks was to swallow, bailing out a taxi mogul—who at one point owned more than 1,000 New York City taxi medallions—is an even harder sell. A bailout would be especially outrageous considering that Freidman and his financial backers are actively working to make consumers pay more for fewer options.

Freidman reluctantly took over his father’s modest yellow taxi business as a young man. He brought his experience in Russian finance to the industry, and started to accumulate increasing numbers of taxi medallions using highly leveraged financing. Freidman expanded a company with just a few taxis into a conglomeration of three- to five-car mini-fleets. 

As Freidman’s taxi empire grew, he expanded into other cities, including New Orleans, Philadelphia, and Chicago. He gained control of hundreds more medallions that are also now in financial trouble. His willingness to bid on practically any medallion that came up for sale helped drive a rapid increase in medallion prices across the country.

Subprime Taxi Medallions

This model can work when times are good but, as the housing crisis showed, it has its dangers. It works until another technology emerges, consumers move on, and funding dries up.  This is where Uber comes in. Competition from Uber has left investors wondering how much the company will grow and what further effects its growth will have on taxis’ market share. While yellow taxi medallions were selling for $1.32 million as recently as May 2013, now they may be worth as little as $650,000.

This drastic drop in price has made the banks and credit unions that fund Freidman’s vast enterprise nervous. For example, his companies still owe around $750,000 for each medallion financed by Citibank. Without new loans to meet existing obligations and expand his fleet, Freidman’s companies became insolvent. This is why he sought the bailout and wants the government to support the medallion market by offering taxpayer-guaranteed loans.

Adding to this financing crunch, the lease rates Freidman now can charge taxi drivers who rent his cars have declined. Many taxi drivers switched to Uber, which offers increased earning potential, flexible work schedules, and improved driver safety. Competition led Freidman to complain that he is no longer able to charge the city’s legal maximum lease rate. This is promising news for drivers, but problematic for Freidman’s income.

There’s Not Much Argument for a Monopoly

Medallions commanded such astronomical prices in New York because yellow taxis had, and still do have, a monopoly on street hails in Manhattan south of the northern boundary of Central Park. Ubers come rapidly, but they are not street hails, because people summon them beforehand with a smartphone. In cities across the country that also use a medallion system, the same reasoning applies. Government restricts the supply of taxis below the level of demand, and medallion owners reap the profits—all at the expense of consumers.

It is not just Freidman’s companies that are in trouble. The banks and credit unions that funded him and other medallion owners are also worried. Just four credit unions hold security interests in over 5,300 medallions, for which they are on the hook for about $2.5 billion. In the face of greater potential losses, these companies have resorted to calling people who work in policy (myself included) to try and convince researchers that Uber is illegal and needs to be banned.

The credit union argument progresses as follows:

1. Yellow taxi medallion owners were granted a monopoly on street hails.
2. For-hire vehicles are only allowed to offer pre-arranged rides.
3. Uber uses street hails, not pre-arranged rides, to connect riders with its driver partners.
4. Therefore, Uber is illegally using street hails, and this infringes on yellow taxi medallion owners’ government-granted monopoly.

If the third premise is true, this argument could hold some rule-of-law water. It is not. The law governing New York City’s street hails date back to the Haas Act of 1937. This law restricted the number of New York yellow taxi medallions to 16,900, which was lowered and now stands at 13,437—even though the city’s population has grown by over 20 percent since 1940.

The Haas Act also set the stage for other common carrier regulations that apply to the taxi industry. These regulations place substantial limits and requirements on taxi owners and drivers in exchange for their monopoly privileges. For example, the city’s Transportation and Limousine Commission sets fare prices, and fares cannot change with increased demand for rides. This is one of the main reasons it is so difficult to hail a taxi in the rain or at the beginning of rush hour.

Updating regulations takes time, but New York City taxis were finally granted the ability to accept ride requests from smartphones (e-hails) early this year. Once taxis were allowed to accept e-hails, something they needed to compete with new technologies, four credit unions argued that the technology was now off-limits for Uber—the company that had popularized e-hails. They sued New York City for infringing upon medallion holders’ monopoly privileges.

This makes no sense. How can a decades-old law covering street hails be construed to cover ride requests made through smartphones? Anyone who has tried to hail a taxi on the side of the road, and then used Uber, knows that the two experiences are vastly different. Simply put, holding your hand up is not the same as pressing a button on your phone.

How to Save Taxis Without Squeezing People

The path forward is not to ban ridesharing or bail medallion owners out. It is to make taxis more like Ubers. This takes more than simply allowing taxis to accept e-hails. Rather, the only ways to save taxis are greater flexibility in pricing and service and increased competition.

As Uber’s rise has made obvious, when the crucial aspect of competition is missing from markets, established companies do not have to worry about improving their services to attract and keep customers. Regulations need to be continually modified and updated in light of new technology.  There is no reason to require New York taxis to have expensive (and annoying) Taxi TVs. Pointless mandates such as this only increase the cost of taxi rides.

Even with a relaxed regulatory framework that embraces ridesharing and competition, taxis will still have an advantage. No one is talking about taking away New York City’s yellow taxi monopoly on street hails. Applying antiquated laws and regulations to new technology is what laid the groundwork for the rise of Uber and other ridesharing services in the first place.

Everyone Shouldn’t Pay for Some People’s Bad Bets

Credit unions oppose allowing Uber to grow because they want to protect their investments. The Queens County Supreme Court ruled against the credit unions last month. The court found that the credit unions did not have a cause of action against the city and its Transportation and Limousine Commission. This was a major win for Uber and consumers, but a death-knell for Freidman’s business and its financers.

The whole yellow taxi financing model is crashing, along with medallion prices. After the ruling, Montauk Credit Union, one of the plaintiffs, was seized by the New York State Department of Financial Services because of “unsafe and unsound conditions.” The day that New York City’s proposed cap on Uber’s growth was defeated, 22 of Freidman’s mini-fleet companies filed for bankruptcy.

Even if medallion holders such as Freidman lost a lot of money, it does not follow that the public should subsidize their losses. The returns from a yellow taxi medallion in cities such as Philadelphia, Chicago, or New York far outpaced the stock market or gold for many years. The values of these medallions about doubled in each city from 2009 to 2013.

Investments carry risk, as Freidman knows from his background in finance. He made a poor calculation that the Manhattan yellow taxi street hail monopoly would continue to provide him enough future cash flow to satisfy bankers, who would loan him more money to expand his fleet. Freidman and his investors have no claim to a taxpayer-funded bailout to cover their poor business decisions. Perhaps they should consider investing in Uber instead.

Jared Meyer is a fellow at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter @JaredMeyer10.

When Only One Will Do

The Security of a Monopoly 

One of the most insidious and debilitating effects of a monopoly is that the consumer has to take what he is given.  A monopoly is Henry Ford's dictum writ large: "You can have any colour you want, as long as it's black."  A monopoly is supply driven and controlled, not demand controlled.  A monopoly reduces the consumer to the status of a "take-it or leave-it" beggar. 

Competition turns this perverse circumstance upon its head.  In a competitive market place, the consumer is king, the supplier/manufacturer is the servant.  In order to win customers the supplier must provide what the customer wants. 

One by-product of this arrangement is a perpetual discipline of cost control.  A high preference factor for most consumers is value, which translates into purchasing the best quality for the lowest possible price.  In a competitive market place, suppliers are perpetually disciplined by customers to control and even lower their costs.  Those who don't, go out of business. 

Monopolies have no regimen for cost-controls.  Since the customer is captive (he has nowhere else to go), he must end up paying whatever the monopoly ends up charging. 

Government monopolies are no exception.

Reforming a Government Monopoly

Execution is Nine Tenths of Success

The Prime Minister, John Key has announced some common sense initiatives in the government school sector--which is the monopoly provider of education in New Zealand. 

Several new positions have been announced, some with substantial pay increases.  According to the NZ Herald,

The Government will spend an extra $359 million over the next four years to support teachers and principals, which will create four new management roles in schools - executive principals, expert teachers, lead teachers and change principals.

Brief job descriptions of the new roles are:

Keeping Business Honest

Rotten Eggs

It is a truism that in the heart of every merchant lurks a craven monopolist.  Given the merest chance monopolist conspiracies will arise in the throat like nauseous bile to hobble competitors and corrupt the market.  We believe strongly that civil courts must be open, accessible, and vigilant to break up such conspiracies--whether upon the unsuspecting customer, or competitors, or upon regulators.  The civil courts need to be vigilant to prosecute with alacrity all forms of fraud, deception, theft, and false weights and measures.  The civil courts must be accessible to plaintiffs and inexpensive. 

Unfortunately, due to the ceaseless flood towards centralised government, none of this is the case.  Civil courts have long since languished into a very weak and expensive and anaemic relation of justice, whilst central government rules and regulations flood websites and exhaust printing presses.  Which suits the monopolists just fine.  They have sufficient funds, industry associates, and cabals of fellow merchants to massage and morph regulations to suit their own interests.  The consumer consequently becomes a well gnawed carcass.

The egg industry in New Zealand is certainly oligopolistic in structure if not virtually monopolistic. 

Monopolists All

Ah, Competition, Thou Art a Jewel

Milton Friedman once famously observed that enterprise owners want all their competitors to face open market competition, whilst they call for regulation of their own business.  Too true.  We have known more than our fair share of business owners spending a good deal of time lobbying government for regulations (to protect consumers, of course) in the attempt to get the "inside track" with officials, so they can secure their own financial market advantage.  Beware the business owner who speaks often about the "public interest".  More often than not the real motive is to put the squeeze on their competitors or prevent competitors coming into "their" patch. 

All business owners are natural monopolists, and should be regarded as such.

Cocooned in Lancashire Cotton Wool

Troglodyte Reactionary Reflex Syndrome

Mike Lee--Auckland Councillor, former Chair of the now defunct Regional Council, and left-wing true believer--has weighed in on the Ports of Auckland stoush.  His argument draws upon a spurious ideology and is parlous economic on fact. 

Mike complains that competition between the Ports of Auckland and the Port of Tauranga is doing no-one any good.  It is driving down prices and operating margins so that big business (Maersk and Fonterra) can make a killing.  The people who suffer include every Aucklander (an argument likely to be less appealing to Bay of Plenty folk than a fetid, mildewed jaffa) and, of course, the unionised work force at Ports of Auckland.  This, from the NZ Herald: