Monday, October 20, 2014

Krugman does IO

The IO in my title stands for Industrial Organization, one of the fields within Economics.  The Econ department at Illinois used to offer a separate course on Antitrust.  I don't recall when it stopped doing that, but for my purposes the reader should view Antitrust to be subsumed within IO.

Most of Paul Krugman's columns for the NY Times Op-Ed page deal with Macroeconomics and a related field, Monetary Economics.  He sometimes writes about politics rather than about economics.  And he sometimes ventures away from macroecon issues in writing about economics.  When the Affordable Care Act was in its gestation stages (and before that too) Krugman had many columns on health care, where he would regularly extol the virtues of Medicare and VA Hospitals, while lambasting private health insurers. 

In today's column Krugman ventures onto new ground (for him). He takes on, particularly in its very public fight with Hachette. What bothers him are the essentially predatory practices of squeezing its suppliers, some of whom happen to be book publishers.  In that Krugman likens to the Standard Oil Trust and considers Jeff Bezos to be a latter day John D. Rockefeller.  The Robber Barons abused there power.  The reaction was first muckraking, to expose the predatory practices, and then Trust busting, embodied in the Clayton and Sherman Acts and the Presidency of Teddy Roosevelt.  Krugman doesn't say this in the piece I linked to, but he hints at the need for a like response today.

This is where, in my opinion, the analogy with Standard Oil is less than helpful.  Here are some of the issues as I see them.

There are other big and powerful companies today that squeeze their suppliers.  Walmart and Apple are two that are well known for doing that.  Is the argument that they all need to be disciplined away from their abuse of power, or is publishing somehow different from these other industries?  What is the operative principle on which to answer that question?

The piece from the Guardian that I linked to above in reference to Hachette says there really is no difference.  Given that, publishers need to get used to the new world of eCommerce.  I am less sure, since writing is such a solitary effort and since that with books as distinct from shorter written pieces, there can be rather long lead times (years) from initiation of the idea to the delivery of a well written and well edited manuscript.  Incentives need to be in place to support that activity which, from a Baumol's costs disease view, will not tolerate process innovation aimed at cost reduction.  On the flip side, I do think that much of the fight with Hachette is about economic rents that well known authors and the publishers who have them under contract received in the old model, which is now being "disrupted" by Amazon's approach.  The Baumol's cost disease part of the argument worries me, while the loss of economic rents to star authors does not.

But my real concern in writing this post is that even if Krugman is right about the abuse of power, there may not be remedies available now akin to the Trust busting of a century ago.

  • eCommerce may be a different animal.  The most obvious way to look at this from an economics perspective is to consider sales tax and eCommerce.  Everybody understands there is a massive amount of tax avoidance going on with eCommerce or, viewed alternatively, the burden of reporting the tax obligation has shifted from the sellers to the buyers.  In Illinois, for example, when I buy something from Amazon and they withhold no tax in their purchase price, I am supposed to compute what I owe and pay that on my Illinois Income Tax.  (Just to avoid confusion, the state calls this a Use Tax, rather than a sales tax.)  Of course, few people do this with their online purchases (and many are probably ignorant of their tax obligation).  States like Illinois could go after Amazon, if not for withholding the tax in the purchase, then for not giving customers a ready way to calculate their tax obligation for the year.  
    • Going after Amazon (and other online retailers) in this way would be one approach to restraining its power but...
    • ...doing so would be enormously unpopular with most people.  They've gotten used to the implicit subsidy they've been receiving by purchasing online. 
    • The reality of the tax avoidance allows Amazon to maintain its uniform pricing policy, which would be impossible in the presence of tax that varied from state to state.
  • Multinationals are much harder to govern.  If the Justice department were actually to go after Amazon for violation of Antitrust law, it would undoubtedly encourage Amazon to shift its activity outside our national borders, where the behavior would be subject to the laws of the host country and the host country's desire to enforce those laws.  These sort of relocation efforts are frequently driven not by the core economics, but by which host will be most generous on tax and regulatory matters.  
    • In other words, trying to do something about the predatory practice may not stop the practice at all but only alter where the practice originates from.
    • Nowadays capital can flow very quickly indeed.  The adjustments we're talking about here need not take long at all.  So, in spite of good intentions to restrain abuse of power, one needs to be wary of unanticipated reactions.
  • There doesn't seem to be concern for the little guy here.  I'm talking about the little guy who works in the supply chain that Amazon controls.  Joe Nocera had a recent column about the Amazon and Hachette battle, but he takes a different view than Krugman.  "Does Amazon have a dark side? Yes, it does — primarily in the way it has historically treated its warehouse workers. But to say that Amazon has to be stopped because it is giving people what they want is to misunderstand the nature of capitalism."
Let me wrap up.  Like Krugman, I am uncomfortable with Amazon's power, but I'm also troubled by Apple's power and Walmart's power. Yet I buy from all three of them.  More to the point, I don't see how we can really restrain that power in the latter two.  Why should we think we can do otherwise with Amazon?

No comments: