Competition and Inequality

In my last post, Labour and the American Middle Class, I expressed my scepticism of the ability of unions to improve the incomes of the disadvantaged.  However, this still leaves the question of how the government can help those in need, apart from welfare.

For me, there are two major paths that will help – the first is promoting competition, the second is growth promotion more broadly.

As I mentioned in my previous post, the one way unions can successfully transfer income from employers to employees is if the employers are reaping significant benefits from imperfect competition.  Furthermore, monopoly rents are allocatively inefficient (which is to say the monopolist gains less than consumers lose).  So this suggests to me that improving competition should be good for society in aggregate, and good for poorer people in particular.

But how much scope is there to improve competition is the US?  I think quite a lot, here are some examples:

• Licensure Requirements.  One thing that is commonly misunderstood about the power of monopolies is that the number of firms in a market has much less to do with the level of competition in that market, than the ease with which new firms can enter the market.  Or, to put it in a pithier way, contestability matters more than concentration.  This is where licensing comes in.  By imposing a barrier for a new person to enter a market, a licensure requirement restricts, or prevents, the primary mechanism by which market forces dissipate monopoly rents – new firms coming in to market and thereby driving down prices.  Now, one might object that there are legitimate roles for licensure – would you trust an unlicensed doctor?  Now Milton Friedman advocated the abolition of licensure requirements, but I’m not sure I’d go that far.  But there are definitely areas where licenses could be cut back.  Is it really necessary that taxi drivers, interior designers and barbers / hairstylists be licensed by the government to operate?  In New Zealand we restrict none of these occupations and we haven’t sunk into the sea yet.  Licensure requirements are especially pernicious when you need the approval of existing operators to enter the market, at that point you’ve effectively recreated the medieval guilds.
• Antitrust Law.  Now antitrust law is designed to promote competition by identifying and halting attempts at collusion.  And that’s just fine.  The problem I have is that antitrust law seems to focus too heavily on concentration and not enough on contestability.  So long as its fairly easy for a new firm to enter, it doesn’t really matter how many or few incumbent firms there are – if prices are too high, new firms will be attracted in by the high profits on offer.  So the key area of focus for antitrust regulators shouldn’t be scrutinising every merger, but rather asking “is this going to make it easier for new firms to enter or harder”.  The trouble with overzealous merger scrutiny is that it can discourage firms from trying to break into a new market (acquiring a failing firm in another industry is one common way to gain entry into a new industry), and thereby actually harm competition.
• Trade barriers.  Competition need not come from within your own country.  By imposing tariffs, quotas or the nebulous set of restrictions the WTO calls “non-tariff barriers” the US protects producers in the US at the expense of American consumers.  Now many of you will likely raise objections on this point, but believe me I have heard every objection you can imagine.  This is the issue economists are most unified on (over 90% according to Mankiw), and while there may be a (very narrow) range of legitimate exceptions, in the vast majority of cases eliminating tariffs, quotas and other special barriers to international trade would be good for your country, and I believe for workers in general.

I’ll just finish up with a little on growth promotion.  I think there’s not a whole lot governments can do here (long-run per-capita real growth rates have been stable in the West for the best part of 200 years), but there are a few things – keeping public infrastructure properly built and maintained, perhaps the promotion of basic research.  But other than that growth is not somethign that is easily amenable to government control.  A large part of that may be that economists don’t understand growth very well.  There are about 150 variables that have been identified as potential growth factors, and if you’ve ever tried statistical modelling with 150 variables at once, you’ll know that it can be a bit of a pain to get anything useful out of it.

My proposed solutions are part of the reason why I don’t think unions can help much.  Unions thrive in uncompetitive environments, because that when they can be of most value to their members.  Unions have been especially vocal in advocating protectionism in particular, which is less than encouraging.  This leaves open the question of how to build a coalition to bring about these reforms, since I see neither the Democrats nor the Republicans as suitable candidates at the moment.  But if liberals (or anyone else) are interesting in advocating for policies that will better help people thrive in a modern economy, this is where I would start.