Obama Administration Seeks to Strengthen the Antitrust Racket

The Obama administration plans to strengthen antitrust rules:

President Obama’s top antitrust official this week plans to restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market share.

The new enforcement policy would reverse the Bush administration’s approach, which strongly favored defendants against antitrust claims. It would restore a policy that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s.

The head of the Justice Department’s antitrust division, Christine A. Varney, is to announce the policy reversal in a speech she will give on Monday before the Center for American Progress, a liberal policy research organization. She will deliver the same speech on Tuesday to the United States Chamber of Commerce.

The speeches were described by people who have consulted with her about the policy shift. The administration is hoping to encourage smaller companies in an array of industries to bring their complaints to the Justice Department about potentially improper business practices by their larger rivals. Some of the biggest antitrust cases were initiated by complaints taken to the Justice Department.

Ms. Varney is expected to say that the administration rejects the impulse to go easy on antitrust enforcement during weak economic times.

She will assert instead that severe recessions can provide dangerous incentives for large and dominating companies to engage in predatory behavior that harms consumers and weakens competition. The announcement is aimed at making sure that no court or party to a lawsuit can cite the Bush administration policy as the government’s official view in any pending cases.

The policy of antitrust intervention is fundamentally flawed in its very essence. I already explained why in Antitrust and Monopolies:

The coercive intervention creates a less competitive environment with less competitive pressure for the new business, since it doesn’t have to fear competition from the previous market monopoly business, and the consumers ultimately suffer.

The intervention sends out the message that as an entrepreneur you shouldn’t strive for perfection when selling to consumers. For if your product becomes too popular your output might be restricted by the government.

Thus the policy doesn’t help the consumer at all and is bound to fail.

Please read the entire post for details.

While this policy is obviously bound to fail, hurt the economy, destroy value for consumers, and rewad misuse of our scarce resources, trial lawyers will jubilate about the inevitable wave of lawsuits that will follow the DOJs encouragements. They are, as always, the beneficiaries of government interventionism, in particular of the enforcement of antitrust and labor legislation. To pursue such a policy during an economic downturn is not just irresponsible, it is downright criminal.

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The Swine Flu – Stop Panicking Already

Dr. Paul provides some facts about the current Swine Flu paranoia:

Don’t expect the governments of the world to stop inducing panic. Fear is what keeps them strong. Diversions from their disastrous economic policies are only welcome.

In 1976, the federal government mounted a massive program against swine flu … with predictable results:

By mid-March, CDC Director Dr. David J. Sencer had lined up most of the medical establishment behind his plan to call on Ford to support a $135 million program of mass inoculation.

On March 24, one day after a surprise loss to Ronald Reagan in the North Carolina Republican presidential primary, Ford decided to make the announcement to the American public.

Congress still had to appropriate the money, of course, and that wasn’t going to be easy. Even before official congressional consideration of the plan was taken up, there were forces arguing against it.

Another big hurdle was the drug makers, who were insisting the government take liability for any harmful side effects from the vaccine. During congressional hearings in the spring and early summer, lawmakers heard some naysayers who noted that the swine flu of last winter never got beyond Dix and that only one death had been reported.

The president and his experts prevailed, however, and on Aug. 12 Congress put up the money to get the job done. The mighty task was put into the hands of a charismatic 33-year-old physician for the Department of Health, Education and Welfare, Dr. W. Delano Meriwether, a world-class sprinter who still competed in track meets.

Now he was in a race for life, or so he thought. Meriwether was given until the end of the year to get all 220 million Americans inoculated against swine flu.

By Oct. 1, the makers had the serums ready and America’s public health bureaucracy had lined up thousands of doctors, nurses and paramedics to give out the shots at medical centers, schools and firehouses across the nation.

Jim Florio, then an ambitious rookie Democratic congressman supporting Jimmy Carter for president, didn’t use the situation to take a shot at Ford. He lined up and was the first Jersey resident to take the inoculation.

Within days, however, several people who had taken the shot fell seriously ill. On Oct. 12, three elderly people in the Pittsburgh area suffered heart attacks and died within hours of getting the shot, which led to suspension of the program in Pennsylvania.

Jersey pressed on with inoculations, however. Through the fall, even as more bad reports about the side effects of the vaccine came out, thousands of mostly older people in Greater Trenton lined up outside health centers, schools and firehouses to get the shot, sometimes waiting for an hour.

One of them was Lawrence’s Mary Kent, a 45-year-old mother of two teenage boys who couldn’t tie the ribbons on Christmas presents only days after she got her shot at the Trenton War Memorial in early December.

On Dec. 16, increasingly concerned about reports of the vaccine touching off neurological problems, especially rare Guillain-Barre syndrome, the government suspended the program, having inoculated 40 million people for a flu that never came.

By year’s end, Jack Kent knew his wife was seriously ill and started reading all about the side effects of the president’s flu inoculation, especially nerve problems like those his wife was experiencing.

Even before Mary Kent died an invalid at age 51 in January 1982, Kent had joined the hundreds of Americans who filed suit against the government on behalf of children left without a parent due to fatal side effects from the swine flu vaccine.

The #1 thing to fear about the current panic is that, once again, the Federal government will get involved.

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The Trouble with Bureaucracy

As explained, the objective of economic policy is to do whatever possible to enable the market to move toward market equilibrium in order to ensure that the largest possible number of individuals are supplied with the largest possible number of demanded consumer goods, given that the factors to produce these goods are always scarce.

Prices for consumer goods on the market enable entrepreneurs to understand which consumer goods are more amply or urgently demanded than others. Prices for factors of production indicate which factors of production, from the consumers’ point of view, could be employed in better occupations where they produce more or more urgently demanded goods.

The discrepancy between prices paid for factors of production and money earned from consumer goods sold is the entrepreneurial profit. It is the entrepreneur’s remuneration for enhancing the usage of productive factors based on what the consumers are asking for.

When the entrepreneur hires senior managers and directors, and when he divides his operation into different divisions, he still needs to ensure that every single one of his divisions contributes toward a profitable outcome. His directive to his subordinates will be but a simple one: Be profitable or lose your job. True, certain administrative and legal operations will by themselves not appear profitable, but the entrepreneur will need to keep those within limits and make sure the remaining operations more than offset these.

When a good is first offered on the market it will not be what the consumers were looking for. The entrepreneur and his entire business operation, in order to attain a desired sales level and reap a profit, will be forced to adjust and improve the good. Testing, fine-tuning, and adjusting attributes that pertain to the goods offered are indispensable steps in the production process.

The consumer himself, too, is not omniscient. He can’t tell the entrepreneur why precisely he dislikes or likes a good. He can merely decide to purchase or not to purchase. And when he uses the good he will either like it or not. And if he likes it he will come back. If he doesn’t he will abstain from further purchases.  It is up to the entrepreneur’s innovative and analytic capacity to deal with the consumer’s fancy to please him. The consumer is the toughest and most difficult to please supervisor in the supply chain. The ability to buy or not to buy a good gives the him the most powerful of all choices: the choice by action. The choice by action stands in contrast to the choice by voice. There is no more immediate and democratic vote than that of the unhampered market: every single penny counts and has an impact on entrepreneurial decisions. True, some people are richer than others and will have more voting power. However, this is only the case because they have been elected as representatives of other, less wealthy, consumers, by selling to them goods that they demanded, directly or indirectly.

Without price indicators and the ability to calculate profit and loss, entrepreneurs and consumers would be entirely at sea. All production would be mere guess work. Consumers could not be supplied as they desire. Factors of production would be squandered, misallocations and mass poverty would inevitably ensue.

Bureaucratic management has none of the above indicators at its disposal. Under bureaucratic management, money is taken via taxation from the consumers before they get to make a decision as to whether or not they want to purchase the good offered. The bureaucrat then, no matter how benevolent we assume he may be for the sake of the argument, faces an insurmountable task: He needs to spend the money obtained in order to usefully employ factors of production that produce goods which will be offered at no price since the money has already been violently taken from the consumers.

Without the ability to calculate profit and loss it is impossible for the bureaucrat to ascertain whether or not he is withdrawing factors from more urgently needed occupations and, from the consumers’ point of view, employing them in less urgent ones. To a certain extent, he will need to resort to mere guesswork. The merit of all his and his subordinates’ actions will have to be assessed by himself.

Under a constitutional government, the bureaucrat faces oversight from legislative bodies and parliaments. Those have been elected by the consumers via choice of voice. Without the simple and clear directive to make a profit, the bureaucrat will need to resort to other, even less perfect success measures. When he subdivides his operation, he can’t give his subordinates the simple directive to make a profit. Thus he needs to establish a set of meticulous rules, regulations, directives, and registers. He still has no idea weather his operation actually enhances the well being of society, but he tries to limit the potential damage caused.

As a result, the spirit of bureaucracy will swiftly permeate the entire operation. Success will be solely measured by strict adherence to the regulations established. Innovation and flexibility are done for. Adjustment to consumer demands will be impossible. Over time, as new bureaucrats fill the ranks of old ones, a more severe misuse of factors of production, if not already present, will become inevitable as the good intentions and ideas that stand behind the regulations established will no longer be grasped by the new officials in charge.

Thus economic policy, if it wants to attain its objectives, can do nothing but limit the extent to which matters are organized in a bureaucratic fashion. Since the main bureaucratic organization in any society is the government, this inevitably entails the limitation of the size of government and the scope of its intrusion into the lifes of individuals within the territory it oversees. So long as the government confines its activity to the protection of individuals against aggression and theft only little harm can be inflicted. Every expansion of governmental powers, however, will inevitably lead to a bureaucratic misuse of the scarce factors of production available, an increase in poverty, and a lower standard of living for everyone.

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Bailouts for Everyone

The US faces the most severe crisis in history. Everyone is facing the threat of bankruptcy. If everyone were to go out of business, everyone would lose their jobs. Everyone is too big to fail. It is not just those who are directly employed by everyone, millions of people are contractors and vendors who supply everyone. They, too, would be affected.

Unfortunately the bailout for everyone faces strong opposition in Congress. Only a few brilliant public figures have realized how severe the situation is:

Financial Services Committee Chairman Barney Frank had the following to say:

“If we don’t help everyone, we will see a disastrous ripple effect that will affect everyone. In a crisis like the current one we cannot afford this.”

House Speaker Nancy Pelosi:

“Bankruptcy is simply not an option for everyone. It takes way too long to go through the Chapter 11 proceedings for everyone. There is too much at stake here. We’re not just looking at anyone here, we’re talking about everyone!”

President Elect Barack Obama:

“If Congress doesn’t act during the lame duck session, my first act, when in office, will be a bailout for everyone. Everyone employs roughly 100% of the American workforce. We can’t afford unemployment to jump up to 100%.”

President Bush:

“I’m a market kinda’ guy, you know that. But after consulting with my experts Hank Paulson and Ben Bernanke I suddenly realized that a failure of everyone would be disastrous for everyone. The risk of not bailing out out everyone by far outweighs the cost of the package.”

A businessman from Detroit who sells stuff and is directly affected by everyone’s financial problems:

“Imagine you buy something from everyone and then it breaks. Who’s going to fix it when everyone goes out of business?”

It is time to end the partisan debate. It is imperative that the government step up to the plate and bail out everyone, whether Congress likes it or not. The money for this historic bailout would of course have to be raised through taxes, levied upon everyone. Now is really the time for everyone to set aside their selfish greediness and do what is right for everyone.

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The Great Depression – Now and Then

The public, these days, is cheering on a government that is repeating the mistakes of 1929 one by one.

It is thus necessary to outline the parallels between 1921-1933 and 2001-2008:

The Inflationary Periods

1921-1929:

  • A sharp recession occurs during 1920 which liquidates the previous inflation from World War 1
  • The 1920s boom is kicked off: The Federal Reserve Bank, established in 1913, inflates the money supply via credit expansion from July 1921 through December 1928 at an average annual rate of 7.7% by printing money to purchase acceptances, commercial paper, government securities, silver certificates, and foreign bonds
  • Motivations of this inflationary policy were mostly:
    • Facilitate speedy recovery of the 1920 recession
    • Support for the government of Great Britain and German states and municipalities via foreign loans
    • Support for export lobbyists in the US by making more US$ available to foreigners
  • The Dow Jones Industrial Average soars from 63.90 in 1921 to 381.17 in October 1929
  • President Coolidge, in office until March of 1929, calls the American prosperity “absolutely sound”, stocks “cheap at current prices”; secretary Treasury Mellon announces “There is an abundant supply of easy money which should take care of any contingencies that might arise.”; both announce a “new era” of permanent prosperity (Ralph W. Robey, “The Capadores of Wall Street”)
  • In October 1929, a liquidation of unsound investments is kicked off by the crash of October 1929

2001-2007:

The Depression

1929 – 1933:

  • In March of 1929 President Herbert Hoover takes office
  • In October 1929, immediately after the crash, the Federal Reserve doubles its holdings of government securities, adding over $150 million in reserves, and discounts about $200 million for member banks, thus postponing necessary liquidations on the stock market and enabling NYC banks to take over brokers’ loans which other non-banks would otherwise have liquidated
  • The money supply expands by nearly 10% in one week
  • The Federal Reserve lowers the rediscount rate from 6% at the time of the crash to 4.5% by mid November
  • Secretary Treasury Mellon periodically assures the public that there is “plenty of credit available”
  • However, toward the end of 1929 all these measures prove futile and the money supply drops back to pre-crash levels
  • During November 1929 Hoover calls in White House conferences with industry leaders, getting them to pledge that wage rates will be maintained and not adjusted as lower prices for goods sold would mandate, thus postponing the necessary correction and prolonging the depression
  • On November 24th 1929 the Dept. of Commerce establishes a definite organization to join with the states in expanding public works programs
  • Hoover grants more subsidies to ship construction through the Federal Shipping Board
  • The Federal Farm Board
    • In June 1929, the Agricultural Marketing Act is passed, establishing the Federal Farm Board (FFB), furnished with $500 million by the Treasury to make all-purpose loans to farm cooperatives at low interest rates and to establish price stabilization corporations with the objective to artificially keep up farm prices
    • On October 26th 1929 the newly established FFB launches a program to lend $150 million to wheat coops and establishes the Farmers’ National Grain Corporation with $10 million capital; as farm prices continue to fall, the Farmers’ National itself begins to buy up wheat to keep up prices; the inevitable fall of prices is thus postponed as farmers are encouraged to keep producing surpluses; in 1930 prices continue to fall as the FFB keeps accumulating wheat surpluses
    • In spring of 1930 Hoover acquires from Congress an added $100 million in order for the FFB to continue lending and buying and establishes the Grain Stabilization Corporation (GSC) to replace Farmers’ National and redouble price stabilization efforts
    • By June 30 1930 the GSC has accumulated over 65 million bushels of wheat held off the market; prices continue to fall
    • On November 15, the GSC is authorized to purchase as much wheat as necessary to stop any further decline in wheat prices and buys up another 200 million bushels until mid 1931; prices continue to fall
    • The FFB finally decides to dump the excess stock abroad and prices fall even more drastically, the entire operation significantly postponed the necessary correction and prolonged the depression
    • By the end of the Hoover administration the FFB has incurred cotton and wheat losses of over $300 million
    • Other programs launched by the FFB that either failed in the same manner or proved impractical from the outset: Cotton Stabilization Corporation, National Wool Marketing Corporation, National Livestock Marketing Association, California Grape Control Board
  • July 3rd 1930: Congress approves the expenditure of a giant $915 million public works program
  • Throughout 1930 the New York Federal Reserve lowers the rediscount rate from 4.5% to 2%; the money supply remains stagnant
  • In mid 1930 the Smoot-Hawley Tariff is signed into law, raising import tariffs to record highs, and spreading protectionism all over the world – consumers and exporters suffer from the ensuing decline of international trade
  • October 1930: Hoover threatens federal regulation of the New York Stock Exchange, unless it bans the practice of short-selling, which would speed up the market correction
  • By December 1930 factory employment has fallen by 16%, manufacturing production by 20%
  • Government expenses rise from 14.3% of Gross Private Product (GPP) in 1929 to 18.2% in 1930
  • May 1931: The crisis spreads to Europe with the run on the Austrian Boden-Kredit Anstalt – the Bank of England, the Austrian government, Rothschild, the Bank of International Settlements, and the New York Fed grant millions of dollars to it
  • In 1931 unemployment in the United States rises to 16%
  • Government expenses rise from 18.2% of GPP in 1930 to 24.3% in 1931
  • The Bacon-Davis act is passed in 1931, requiring a maximum 8 hr work day and payment of at least a prevailing wage on public works projects, thus increasing unemployment
  • By fall of 1931 all agitation to preserve wage rates proves futile and wages begin to fall
  • In fall of 1931 Stock Exchange authorities restrict short selling, prolonging the necessary adjustment of prices
  • In 1931, upon Hoover threatening Federal legislation, the largest US banks establish the National Credit Corporation which quickly moves to bail out failing banks, loaning $153 over a three month period, thus prolonging the misallocation of resources
  • In 1932 sales taxes are imposed on gasoline and other articles, new taxes are levied on bank checks, bond transfers, telephone, telegraph, and radio messages, income taxes are raised from a 1.5% – 5 % range to a 4%-8% range, the corporate income tax is raised from 12% to 13.75%, the gift tax of 33.33% is reinstated
  • Government intrusion increases from 24.3% of GPP in 1931 to 28.9% in 1932
  • In January of 1932 Congress hurriedly establishes the Reconstruction Finance Corporation (RFC), equipped with $500 million of taxpayer money, and empowered to issue further debentures of up to $1.5 billion
  • During the first 5 months of operation the RFC makes $1 billion worth of loans of which about 60% are lent to banks, and 20% to railroads whose securities are held by a lot of savings banks
  • In July 1932 the Emergency Relief and Construction Act increases the RFC’s authorized capital from $2 billion to $3.8 billion
  • Governor Franklin D. Roosevelt of New York establishes the first governmental unemployment relief authority: the Temporary Emergency Relief Administration, equipped with $25 million; other states quickly follow
  • In February 1932 the Glass-Steagall act is passed which greatly broadens the assets that the Federal Reserve Bank can purchase and permits it to use government bonds as collateral for its notes, in addition to commercial paper
  • Throughout 1932, the Federal Reserve increases its reserves by another $660 million to $2.51 billion, an unprecedented increase in history; the money supply keeps falling regardless, because commercial banks begin accumulating excess reserves; excess reserves rise from 2.4% in the first quarter of 1932 to 10.7% in the second
  • In July of 1932 the Federal Home Loan Bank Act establishes 12 district banks, equipped with $125 million of taxpayer money, and the authority to purchase mortgages at as low as 50% of value
  • In the beginning of 1933 many states impose compulsory debt moratoria, debt liquidations are halted
  • In 1933, bank failures rise to 4,000 from 1,453 in 1932
  • In 1933, as a response to increasing bank runs, states impose bank holidays, allowing banks not to redeem deposits
  • In March 1933 Hoover leaves office; as a result of his unprecedented government intervention, by now production has fallen by more than half from 1929, unemployment is at 25%, and GNP has fallen almost in half; the country is in the depths of the Great Depression
  • President Roosevelt continues Hoovers failed New Deal policies of massive government intervention. The US economy remains in a miserable state with above double digit unemployment until 1938 and with a horrible war lasting from then through 1945 during which people are forced to ration consumption and pay up to 90% taxes. The Depression comes to an end after WW2 when malinvestments are liquidated, taxes are but by 1/3 and government spending is cut by 2/3
  • Bottom Line: A recession that was the correction of a boom caused by government intervention in the money and credit market, was prolonged and turned into a decade long depression, again due to government intervention as a result of an unwillingness to let the correction occur clean and quickly.

2007 – 2008:

  • From 2000-2008 the percentage of government intrusion into the private sector increases steadily
  • Throughout 2007 and 2008 the Federal Reserve Bank lowers the federal funds rate from 5.25% in September 2006 to 1% by October 2008
  • Stock and Home Prices keep falling continuously
  • In December 2007 the Federal Reserve Bank introduces the Term Auction Facility (TAF) in order to purchase short term debt from troubled banks who need funds; so far it has injected about $400 billion under this program
  • On January 11, 2008, Bank of America announces that it plans to purchase the troubled bank Countrywide Financial for $4.1 billion in stock
  • In March 2008 the Federal Reserve Bank of New York provides an emergency loan to the troubled bank Bear Stearns; the measure proves useless and the bank is sold to JP Morgan Chase at $10 per share
  • In March 2008 the Federal Reserve announces that it will inject another $200 billion to battle the problems that banks are having with unsound investments
  • On September 7th 2008 the troubled semi-public banks Fannie Mae and Freddie Mac are taken over by the federal government; the banks own or guarantee about half of the U.S.’s $12 trillion mortgage market
  • In September 2008 the SEC imposes a temporary ban on short-selling
  • On September 16 2008, creates an $85 billion credit facility in order to support the troubled insurer AIG at the cost to AIG of the issuance of a stock warrant to the the Federal Reserve Bank for 79.9% of the equity of AIG
  • On October 3rd 2008 the Emergency Economic Stabilization Act of 2008 establishes the Office of Financial Stability, equipped with up to $700 billion in order to buy worthless securities with the objective of stabilizing their prices, home prices continue to fall
  • So far, the combined total of all government actions taken in order to battle the depression have amounted up to $8 trillion – aggravating the crisis significantly
  • From November 07 to November 08 the Federal Reserve Bank more than doubles the amount of assets on its balance sheet by $1.2 trillion to now $2 trillion, but banks build up excess reserves and thus the effect on the money supply is minimal
  • As these lines are written the crisis spreads to the job market. All across the country people are beginning to lose their jobs and production/consumption figures are beginning to slow down significantly; due to the misguided government policy these numbers will, however, turn much worse as the crisis progresses
  • The new government, taking office in January 2009 will enact further measures of government intrusion, including public works programs, raise taxes, and increase the national debt, repeating the mistakes of the Great Depression
  • As things have played out so far 1929 has roughly resembled 2007 and 1930 has resembled 2008; 2009, 2010, and 2011 will most likely resemble 1931, 1932, and 1933

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