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    Trump's FTC Chair Is Continuing To Push Lina Khan's Antitrust Ideology

    On February 26, new Federal Trade Commission (FTC) Chair Andrew Ferguson announced the creation of the Joint Labor Task Force, continuing former Chair Lina Khan's departure from what is known as the consumer welfare standard. Congress established the FTC in 1914 to prevent unfair competition and deceptive business practices. This has primarily meant "protecting Americans in their role as consumers," according to Ferguson. The FTC enforces the Clayton Antitrust Act, which outlawed price discrimination between customers, exclusive dealing, interlocking directorates, and mergers or acquisitions that "substantially reduce competition." But Khan was more interested in Americans' role as producers than consumers. In 2022 she signed a memorandum of understanding (MOU) with the National Labor Relations Board to "protect workers against unfair methods of competition, unfair or deceptive acts or practices, and unfair labor practices," such as restrictive contract provisions. In August 2023, Khan signed a similar MOU with the Department of Labor recognizing both agencies' shared commitment to protecting workers from deceptive earnings claims, restrictive noncompete and nondisclosure contracts, and the "impact of labor market concentration." Alden Abbott, the FTC's general counsel from 2018–2021, opposed the MOUs. Abbott argued in September 2023 that labor market oversight is "far-removed from the FTC's statutory mandate to focus on combating impediments to competition and consumer protection [and] would reduce the funding available to attack fraudulent and clearly anticompetitive acts." Khan's FTC went further, attempting to ban noncompete agreements in April 2024, describing them as an unfair method of competition in violation of the FTC Act. Ferguson dissented on legal grounds, arguing that the Commission does not possess the power "to declare categorically unlawful a species of contract that was lawful when the Federal Trade Commission Act was adopted." Though Ferguson opposed banning noncompetes, he still identifies them as one of 12 anticompetitive labor practices under FTC jurisdiction. Ferguson has directed his new Joint Labor Task Force to "prioritize investigation and prosecution" of such practices and to advocate regulatory and legislative changes that would address them. Ferguson's endorsement of the 2023 joint merger guidelines, along with his hostility to the tech industry and support for enforcing the anti–price discrimination Robinson-Patman Act, all suggest a continuation of Khan's activist antitrust ideology. The Joint Labor Task Force is yet more evidence. The post Trump's FTC Chair Is Continuing To Push Lina Khan's Antitrust Ideology appeared first on Reason.com.

    Capital One/Discover Deal: Rumored Concerns Lack Substance

    The proposed merger of Capital One Financial Corp. and Discover Financial Services Inc. would appear to be moving toward completion, as more than 99% of the companies’ shareholders voted last month to approve the $35.3 billion deal. According to at least one report, however, anonymous sources in the U.S. Justice Department (DOJ) suggest the agency might still challenge the merger on antitrust grounds due to alleged concerns about the significant market share the combined company would hold in the subprime credit-card market.  But as my International Center for Law & Economics (ICLE) and I demonstrate in a white paper we published last summer, the DOJ’s focus on subprime competition may be missing some key market dynamics. In particular, the combination likely would benefit consumers—especially those with lower credit scores—by creating new opportunities and potentially more competitive financial services. Beyond Market-Share Numbers Writing in RealClearMarkets, my white paper co-authors Julian Morris and Todd Zywicki note that this merger barely raises an eyebrow under traditional antitrust analysis. While the combined entity would be the sixth-largest bank by assets, it would hold just 3% of all domestic assets.  While it would be the third-largest credit-card issuer by purchaser volume (after JPMorgan Chase and American Express), there are thousands of credit-card-issuing banks in the United States, and even the largest issuers only have a modest percentage of all volume.  Nevertheless, New York State Attorney General Letitia James has raised concerns that the combined company would control roughly 30% of the subprime credit-card market. While this figure might seem significant at first glance, it requires deeper analysis. The “subprime” credit-card market (typically defined as borrowers with FICO scores of less than 660) represents a relatively small segment of all credit-card users. As of 2023, only about 13% of consumers with at least one credit card fell into the near-prime (8.6%) or subprime (4.4%) categories. More importantly, the subprime market is not a static group of consumers, as consumers’ credit scores are constantly changing. Research from Fair Isaac has found that, over the course of just six months, 14% of accounts saw their scores fall by more than 20 points, while 19% saw their scores increase by more than 20 points. This fluidity makes it exceptionally difficult to define a reliable—or stable—“subprime market” for antitrust analysis. Innovation and Competition Capital One’s success in the subprime segment stems largely from innovation, not market dominance. The company pioneered data-driven strategies to identify relatively lower-risk individuals within higher-risk groups, allowing them to serve underserved consumers while managing default risk. In 1991, Capital One became the first major credit-card issuer to introduce balance transfers, creating a new way for consumers to manage debt. They also implemented one of the first major secured credit-card programs, helping people with limited or damaged credit histories to build their creditworthiness. These innovations explain Capital One’s substantial market share in the subprime space better than any anticompetitive behavior. In fact, their approach has created new pathways for borrowers deemed “subprime” to improve their credit and eventually access mainstream financial products. The Network Effect The proposed Capital One/Discover merger presents a unique opportunity to strengthen competition in the payment-networks space, which long has been dominated by Visa and Mastercard. The transaction wouldn’t reduce the number of payment networks; it would simply transfer ownership of Discover’s network to Capital One. With Capital One’s technological sophistication and resources behind it, the Discover network could become a more effective competitor to the major players. This could potentially benefit both merchants (through lower processing fees) and consumers (through better services and rewards). A More Nuanced View Antitrust analysis should consider not just the number of competitors, but also the effectiveness of the competition. A market with fewer but stronger competitors often delivers better outcomes than one with many weaker players. A combined Capital One/Discover could be a more formidable competitor to industry giants like Chase, Bank of America, and Citibank in the credit-card-issuer space, and to Visa and Mastercard in the payment-networks arena. While the DOJ’s concerns about subprime consumers deserve consideration, regulators should weigh them against the potential for increased competition in the broader credit-card and payment-networks markets; continued innovation in serving diverse consumer needs; and the fluid nature of credit categories. As regulators evaluate this transaction, they should take a holistic view that considers these complex market dynamics, rather than focusing narrowly on market-share percentages in a segment that’s difficult to define with precision. The post Capital One/Discover Deal: Rumored Concerns Lack Substance appeared first on Truth on the Market.

    Sleepwalking Into a Cashless Society

    Philip Lane, chief economist of the European Central Bank, recently expressed urgency for the need to develop a digital euro—also known as a central bank digital currency (CBDC)—to compete against stablecoins such as Tether and electronic payment systems developed by U.S. tech firms, such as Google Pay and Apple Pay. Not content with eliminating cash, now the goal of central banks is to eliminate any competing electronic payment system. We're sleepwalking into a world with digital currencies without any government coercion whatsoever. As a 51-year-old Generation Xer, I carry lots of cash in my wallet. I teach personal finance at the local university and recently asked a class of about 30 students if any of them had any cash. Not one of them had a single bill or coin on them. They use debit cards, credit cards, Venmo, and Apple Pay. As it turns out, cash usage among the 18–24 age cohort has declined from 28 percent to 13 percent over the last five years. Most like the convenience of electronic payments, even though studies show that people spend 12 percent to 18 percent more when using credit cards than cash. If the government does attempt to implement a digital dollar, there will be little resistance to it. Currently, there is $2.36 trillion in U.S. currency in circulation. Of course, much of this is held outside our borders, owing to the dollar's dominance as the global reserve currency. The most common denomination of U.S. currency is the $100 bill. There are more $100 bills in circulation than $1 bills. Many residents of foreign countries, such as Argentina, consider the U.S. dollar to be a store of value and a hedge against inflation and local currency depreciation. If the U.S. government ever decided to phase out paper currency, it would have far-reaching effects around the globe. Promoters of a digital currency allege that it would cause a drop in criminal and illicit activity. That may be correct, or people may simply resort to another medium of exchange or barter. Philosophically speaking, virtue is not possible without the freedom of choice. If people can't choose to misbehave, it does not make them virtuous. A society in which nobody has the freedom to misbehave is far more horrifying than a society where people actually misbehave. Cash is anonymous. Just because one isn't doing anything illegal doesn't mean one wants the government to know where they go to lunch every day. If you have a complete electronic record of someone's economic activity, you have a pretty good idea of who they are as a person, which is why economic privacy is so important. Far more sinister than the desire to socially engineer good behavior is the potential for central banks to implement stimulative monetary policy using negative interest rates. Cash pays no interest. Interest rates are off the pre-pandemic lows, so today, it is not hard to find a bank that pays a decent interest rate on a savings account. But in the 2010s, interest rates were zero for about a decade, and central planners believed they could reverse deflation by setting interest rates at negative levels. Negative interest rates mean that your money in the bank loses value over time. Naturally, people would withdraw their money in the form of cash, because zero interest is better than negative interest, but if cash didn't exist, people would be forced to spend the cash in the bank before it lost value. Since we're now dealing with inflation rather than disinflation, these talks have mostly dried up, but negative rates could be attempted at some point in the future. Of course, any income received in the form of cash is invisible to the IRS and cannot be taxed. The informal economy accounts for about 7 percent of gross domestic product in the United States, which is low, relative to the rest of the world. Low-income people absolutely rely on cash. Households with incomes under $25,000 use cash for 36 percent of their payments, while households with incomes over $150,000 use cash for only 10 percent of theirs. Lower-middle class or poor households are frequently un- or under-banked and have practically no savings rate as it is—forcing them into the formal economy would reduce their standard of living even further. The number of cashless businesses is exploding. Part of this is consumer preferences—paying with a card or a phone is less awkward and clumsy than having a bunch of change slamming around your pocket. But what we gain in convenience, we lose in privacy and freedom. The chance that a digital dollar will be implemented in the next 20 years is exceptionally high, and most of the population will go along with it—willingly. The post Sleepwalking Into a Cashless Society appeared first on Reason.com.

    Global financial centre and its regulators: what’s the strategy when everyone wants to be the top dog?

    Carlos Cañón Salazar, John Thanassoulis and Misa Tanaka Several global financial centres, including London, Hong Kong and Singapore, are overseen by financial regulators with an objective on competitiveness and growth. In a recent staff working paper, we develop a theoretical model to show that some competitive deregulation can arise when several regulators are focused on growth, though not a ‘race-to-the-bottom’: regulators will not lower regulations to levels favoured by banks if the costs of financial instability are large. To maintain competitiveness and stability of the UK as a global financial centre, there is a need for a comprehensive strategy which takes into account both regulatory and non-regulatory measures. This may require coordination across multiple institutions. How much do financial regulators care about growth? In 2023, the UK’s Prudential Regulatory Authority (PRA) acquired a secondary competitiveness and growth objective to facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy (in particular the financial services sector) and its growth over the medium and long term. The PRA is not unique in having such a growth objective. For example, the Monetary Authority of Singapore (MAS) has a development objective of growing Singapore into an internationally competitive financial centre. Similarly, helping to maintain Hong Kong’s status as an international financial centre is one of the key functions of the Hong Kong Monetary Authority (HKMA). To gauge the extent of growth-focus of regulators, we conducted a textual analysis of 2013–23 annual reports by the Federal Reserve Board (FRB), the European Banking Authority (EBA), the MAS, the HKMA and the PRA to produce a crude measure of how often growth-oriented words are used relative to stability-oriented words. Based on this measure, which indexes the EBA’s level in 2013 as 1, the MAS and the HKMA appear to have been more growth focused – at least in their published documents – than the PRA, the FRB, and the EBA over the last decade (Chart 1). Our measure also detects an uptick of PRA’s growth focus in 2023 after it was given its secondary growth and competitiveness objective. Chart 1: Growth preference – cross country comparison, 2013–23 What happens when regulators compete? What happens when several regulators have a growth objective? To answer this question, we developed a game-theoretic model. In our model, regulators in two financial centres have an objective function which consists of a weighted sum of the output from financial intermediation (‘growth objective’) and the expected loss from bank failures (‘stability objective’). The ‘growth-focused’ regulator 2 has a higher weight on the growth objective than the ‘stability-focused’ regulator 1. Regulators set the level of ‘regulatory stringency’ (parameter t in our model) to maximise their objectives: this captures the full package of regulatory and supervisory requirements, including capital and liquidity requirements, but also the intrusiveness of supervisory oversight and the acceptability of different business models. Increasing the level of regulatory stringency lowers the probability of bank failure but also increases the operating costs for banks. Some banks are committed to operating in a specific country because it is attractive for non-regulatory reasons. Indeed, regulatory environment is only one of the many factors which determines a city’s ranking in the Global Financial Centres Index 36: other factors such as taxation, availability of skilled workers, and infrastructure also matter. But some other banks are willing to move their operations to any country in response to the relative level of regulatory stringency. Banks can bluff and pretend to be mobile, so the regulators cannot observe which banks are truly internationally mobile and thus they respond by setting the same standard for all banks. The level of regulatory stringency affects growth in our model by influencing the number of banks attracted to the country. In turn, these banks support increased commercial activity by matching international capital with productive investment opportunities. Internationally mobile banks move to countries which allow them to maximise their profits, and so they move to countries which offer lower levels of regulatory stringency. However, there will be a level of stringency below which profits decline: banks don’t like regulatory stringency below this level as they don’t want to operate in a poorly regulated, unstable environment. As a benchmark we consider the following thought experiment. Suppose that regulators are operating in a closed economy in which no bank can move abroad. In this case, regulators will set the regulatory stringency to maximise the expected benefit per bank by weighing expected output against expected cost of failure. Moving to our core analysis, suppose that regulators are operating in an open economy, where some banks can move abroad. Regulators are now competing with each other, so will set the level of regulatory stringency to also take into account its impact on attracting mobile banks. If it is set too high, none of the mobile banks will come, so the expected output generated by the financial sector will be low. But if it is set too low, the regulator will attract mobile banks but only at the expense of increasing all banks’ failure rate: so the expected cost of bank failure will rise and the expected output could also be low. We call the resulting equilibrium ‘competitive deregulation’. It is a situation where a regulator may set the level of regulatory stringency below its closed-economy optimal level to attract internationally mobile banks. An extreme version of this is a ‘race to the bottom’, which we define as a situation whereby the regulatory stringency is driven to the level preferred by banks. We show that, although competitive deregulation can arise, regulators will not race to the bottom to set the regulatory stringency to levels preferred by banks if the expected cost of bank failures is large and their mandate, usually set by the government, requires them to limit this cost. What happens when regulators are given a stronger growth mandate? The next step in our analysis is to ask how the levels of financial regulation will respond when a government revises its regulator’s mandate to increase its focus on growth. We show that, if the growth-focused regulator 2 becomes even more growth focused, then competitive deregulation may be mitigated. This is because the stability-focused regulator 1 becomes less willing to compete as it expects its rival to compete more aggressively to secure all the mobile banks. Numerical simulations in Chart 2 show that the expected level of regulatory stringency offered by the two regulators (on the y-axis) stays fairly stable as regulator 2 becomes more growth focused (as alpha-2 on the x-axis increases): it initially increases modestly, then decreases. This suggests that a stronger growth mandate does not necessarily result in competitive deregulation. Chart 2: Expected regulatory stringency is fairly stable as growth-focused regulator becomes more growth focused However, competitive deregulation results if the stability-focused regulator 1 becomes more growth focused. Regulator 1 competes more aggressively and lowers its average level of regulatory stringency. The growth-focused regulator 2 responds to this challenge, so it too lowers its level of regulatory stringency. It follows that competitive deregulation intensifies and the expected level of regulatory stringency declines. Numerical simulations, in Chart 3, show that as the growth focus of regulator 1 becomes more prominent (alpha 1 on the x-axis increases), and approaches that of regulator 2, the expected level of regulatory stringency declines. Chart 3: Expected regulatory stringency falls as stability-focused regulator becomes more growth focused The strategy of the regulators also depends on how many banks are willing to move, which depends on the relative stringency of financial regulation – and this will in turn depend on non-regulatory issues such as taxes and labour laws which also determine the attractiveness of a country. If more banks are internationally mobile, the growth-focused regulator will lower its regulatory stringency to attract them. But the reaction of the stability-focused regulator is ambiguous, as it weighs the benefit of attracting a larger pool of mobile banks against the cost of having to deregulate more to compete against the more aggressive rival. A global financial centre needs a comprehensive strategy to flourish Our analysis has a number of policy implications. First, setting global regulatory standards would help limit the extent of competitive deregulation. However, in practice, it is not always possible to agree on and enforce global standards across all dimensions. Second, setting hierarchical objectives, whereby the growth objective is made strictly secondary to the stability objective (as in the case of the UK’s PRA), could be another way of limiting competitive deregulation. To ensure that the stability objective remains strictly primary, regulators could monitor a set of quantitative indicators for its primary stability objective. Finally, there will be less need for financial regulators to use regulatory stringency to attract financial institutions if they become committed to staying in the country because it is attractive in other dimensions. This calls for a comprehensive strategy, which takes into account both regulatory and non-regulatory measures, to maintain both competitiveness and stability of the UK as a global financial centre. Carlos Cañón Salazar and Misa Tanaka work in the Bank’s Research Hub and John Thanassoulis is a Professor at the University of Warwick. If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below. Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

    Regulations' Enormous Costs Give DOGE an Enormous Opportunity

    The Department of Government Efficiency (DOGE) has made a promise: It will go after regulations that slow growth, obstruct innovators and cost American households thousands of dollars each year. Here's hoping for success. The burden of excessive regulation is hard to measure. We know, for instance, that the Code of Federal Regulations is over 188,000 pages long, guaranteeing that citizens can never really be sure they comply with every regulation. While the stated intent of many rules is to protect the public interest—be it the environment, safety, or market fairness—the unintended consequences are often staggering. Regulations frequently impose costs far beyond their benefits, stifling entrepreneurship and innovation while hampering businesses' ability to produce at full potential, hire workers, or provide consumers with what we need. Wayne Crews, author of the Competitive Enterprise Institute's "Ten Thousand Commandments" study, produced a price tag that he says is very conservative: $2.1 trillion per year. That's equivalent to Canada's entire economy and a hidden regulatory tax of $15,788 annually on each American household. These eye-popping figures tell only part of the story. The costs disproportionately impact new, small- and medium-sized enterprises, which lack the resources to hire compliance officers or navigate complex regulations. The Dodd-Frank financial legislation, enacted in response to the 2008 financial crisis, was over 2,300 pages long and added more than 400 new rules and mandates. While it aimed at reducing systemic financial risks, it's much harder for smaller banks and credit unions to navigate, leading to financial sector consolidation and reduced competition. Environmental regulations are renowned for going too far and imposing costs that outweigh any benefits. Ignoring that the Clean Air Act's approach could be better handled through property rights and tort law, this act—which the Cato Institute's Peter Van Doren calls "utopian 'costs-don't-matter' air quality standards"—imposes massive compliance costs on businesses with diminishing returns. Each new amendment tackles increasingly smaller amounts of pollution at exponentially higher prices that are passed on to consumers. Stringent Environmental Protection Agency emissions standards have made it prohibitively expensive to construct new manufacturing plants, effectively halting innovation in certain industries. The auto industry, too, faces onerous fuel-efficiency standards that raise the cost of vehicles—even green ones—and reduce consumer choice, all while delivering marginal environmental benefits. And don't get me started on the National Environmental Protection Act of 1970 (NEPA). Its requirement for exhaustive environmental reviews has evolved into an endless process whereby even simple projects can be delayed for years through nonstop studies, public comments, and litigation. A single environmental impact statement can cost millions of dollars; on average, each takes four and a half years to complete. This regulatory maze makes it far more difficult to build critical infrastructure like highways, bridges, and energy projects promptly. NEPA essentially gives federal bureaucrats and activists veto power over private development, even on state and private lands. Rather than protecting the environment, it's become a weapon for blocking development through death by delay, driving up costs for everything from housing to energy while providing minimal environmental benefit. A prime example is the Keystone XL pipeline saga. The pipeline, which would have transported Canadian crude oil to U.S. refineries, was ultimately canceled after political and regulatory pushback. But NEPA is even more punishing to green projects. The coming reforms should prioritize inserting sunset clauses on rules as they become outdated, streamlining compliance processes, and focusing on outcomes rather than prescriptive, rigid mandates that rule out more innovative approaches. Reducing regulatory burdens with these simple methods can unleash the creative potential of entrepreneurs and businesses. Indeed, Van Doren reminds us that we are still benefiting from 1970s deregulation. Airline deregulation, while worth it on its own, opened the door to competition and innovation, including the emergence of low-cost airlines and other mass travel that no one could imagine at the time. A freer economy is not just more productive or better equipped to meet the challenges of the future. It also means lower prices. Writing about Argentina's large, ongoing deregulation under President Javier Milei, Wall Street Journal columnist Mary O'Grady writes that the country's deregulation czar has "discovered a rough rule of thumb: Where deregulation happens, prices decline in the range of 30%. He has seen it in textiles, logistics and some agricultural products." Thirty percent! That leads to a lot of extra economic growth. Potentially 3 percent more, argues economist John Cochrane. And since economic growth is everything—making nations richer, safer, healthier, cleaner and even more peaceful and tolerant—we should all cheer for DOGE to succeed. COPYRIGHT 2024 CREATORS.COM The post Regulations' Enormous Costs Give DOGE an Enormous Opportunity appeared first on Reason.com.

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