Author: Joshua Gans

Australia surrenders to monopolists and codifies corporate oligarchy

This is apparently a news site. It has been around for 15 years but I didn’t know that until yesterday. Below you will find a link to share this post on Facebook. But at the moment, Facebook won’t permit that. If you copy the link into a Facebook post, Facebook won’t permit you to post. As a site that reports opinions and often linked to news articles, this is confusing to me. As a site whose last post was in June 2020, I don’t think it even covers the ‘new’ part of ‘news.’ But no posts from the last 15 years can be shared on Facebook anywhere in the world now. Suffice it to say, I’m very upset. I feel censored.

My intention had been to stay out of commenting on the Australian government’s media bargaining code. This is for two reasons. The first is that I was an advisor to the ACCC’s Digital Platforms Inquiry and felt that I had been able to discuss what I needed to discuss as part of that process. I think that, by and large, the report was a good analysis of the issues. The second is that I am currently working for governments in enforcement action against large digital platforms and so want to ensure that the cause of being able to bring about increased competition in all elements of digital platform markets wasn’t compromised by anything I might write. However, I see that the Australian policy has elements in it so egregious that it may well compromise the ability of regulators to improve competitive outcomes. For this reason, I am writing this. It is my own opinion but it is a complement to my broader opinion that we need to address serious competitive issues with respect to digital platforms. However, that does not give license to enact bad policy. In other words, I believe strongly in the case for regulation but do not believe that this implies that any regulation is worthwhile especially when it is at the expense of good regulation.

The context

The broad issue is very simple. News and other content are shared on digital platforms. Some of that is by the content providers themselves posting links on social media. Some of that is by the digital platforms who look for links and post them on their platforms. Some of that is by users who post links to share with others. When that happens there are two beneficiaries. First, the digital platforms themselves who are permitting such links. Second, the content providers who are themselves permitting such links because they want people to click on them. (On the latter point, Google have long given content providers the ability to block their links appearing on that digital platform). What this means is that both beneficiaries are receiving benefits as they both have the ability to veto this practice.

For commercial content providers — of which this blog is not one — there are commercial interests in this arrangement. There are also competitive pressures that impact on the incentives to not veto link provision. For example, a news organisation that does not appear on Google may receive no links but because they are competing with others, they may also lose share as a result of that. The same competitive externality can apply to digital platforms. This can give rise to a situation where content providers say, “I may prefer a world where no one I compete with shares links but I have no choice because of competition.” That said, we have to remember that such incentives are often the whole point of competition: we want to apply pressure on content providers to provide content and not have a situation where they may all find it mutually beneficial to cooperate on not doing that.

From this perspective, the participants here have the power to say no. That power is diminished because of competition. But competition is what we want so that is fine. The issue we face is that we may want even more competition between digital platforms and that we may want even more competition between content providers. The goal of any competition-motivated policy is to enhance competition on both sides of that transaction. The end result is that consumers have better content to view and better content to share.

There is, however, editorial power in both of those broad markets. News organisations pride themselves on selecting what is “newsworthy” although, let’s face it, there is no objective standard and hence, we worry about both media bias and misinformation. Digital platforms pride themselves on selecting what their consumers want or, relatedly, what might produce the most advertising revenue. Again there is no objective standard and hence, we worry about both media bias and misinformation. In both cases, if there are sufficient options, we think consumers will be OK with editorial choices as they can select amongst them. That is why we want competition. But when we don’t have competition in the form of those options, then editorial power will mean that consumers are without sufficient power. This is something that the ACCC explicitly worried about in its digital inquiry and it is something most competition regulators are worried about. Editor power to change what is given priority is dangerous when those consuming content cannot easily switch to other editorial rules.

It is worth emphasising that the Internet — large digital platforms and all — has increased consumer options to choose editorial rules enormously. Previously, only large media organisations could do that and they faced little competition. Now there are many more editors of content on the Internet. Thus, we are in a world where, compared to two decades ago, there is significantly more competition. I read the submissions of news organisations to the ACCC. For the most part, they were complaining because they are facing more competition and would like less. Only relatively less often did they note that they were now subject to the editorial power that they had previously wielded in an unfettered way.

The code

The Australian government explains the new code here. There are the legal words, of course, and there is the thing that everyone understands. I am going to focus on the latter as that is what matters. One aspect of this code is something that is useful. When you are subject to the exercise of editorial power and you do not have sufficient exit options, you want to encourage voice. By providing a means by which a content provider can compel a digital platform to talk about some change to an editorial rule that was made, the code can enable that voice. What sort of voice? Here is what the explanation says:

The issues can be about remuneration or another topic but, in
order for the Code to apply, they must relate to the registered news
businesses’ covered news content which is made available on (or via) a
designated digital platform service.

It is about money or “other.” I actually think the other is useful here as it can allow a content provider to compel a digital platform to notify and explaining upcoming changes and then challenge them in some way.

But it is the money that all this is really about. The news organisations want more of it. Large digital platforms have it. It is that simple.

The code is perfectly designed to allow news organisations to get money from digital platforms. It does this by (a) requiring that a digital platform who does not want to pay cannot provide any links to any Australian news. This gives each individual news outlet the power to negotiate as if they can prevent a digital platform from allowing any of them to be linked to (thus, obviating the competitive pressure and so giving them monopoly power); (b) allowing deals to be made that are never authorised by any regulator acting say in the public interest; (c) ensuring that should deals not be freely made, there is a regulatory stop gap; and (d) ensuring that the regulatory stop gap is tilted in favour of an outcome that is in the private interest of one or the other parties.

This last step requires a little explanation. It is not unknown, especially in Australia, for competition policy to run by default. That is, two parties in a competition dispute are encouraged to come together and negotiate a solution and if they fail to do so they are sent to a regulatory process. But normally that regulatory process is designed to drive towards a socially desirable outcome. Also, this mechanism is put in place where it is a denial of competitive outcomes that is the issue and so the regulation will drive towards more competition — it is baked in. (Here is a paper on that from 1999).

So you would think, therefore, that the code would by all about empowering the little guy. Nope. It is, in fact, explicitly about not empowering them. They can be kicked off the platform if the platform does not like being in the news sharing business any more but actually have no role under the code. The media bargaining code is really the Big Media bargaining code. You have to be a large news outlet — in the top 0.1% of outlets banned by Facebook this week — to be empowered. In other words, rather than doing what any person would think is reasonable to promote competition, the code explicitly does not promote competition by keeping the entire thing amongst the already powerful.

What is more, the code obviates any risk to the powerful. The regulatory arbitration that may occur forces the arbitration to select between the two offers of the digital platform and news outlet. It is highly unlikely that either will be in the public interest. Why would they be? We are supposed to have regulators to come up with socially desirable regulators but the code pretty much says, it doesn’t want that. Well may we say WTF!

Let’s contrast this with, say, France whose government can get digital platforms to pay them if they serve news content. That is a tax. The French government may want more in taxes but when it comes to giving the money out at least, it won’t necessarily be doing so in some naked private interest. That isn’t necessarily about competition either but at least it provides a mechanism where good outcomes might occur.

The new oligarchy

As an economist, making predictions regarding what happens from these sort of policies is my bread and butter. Given the earlier content, a policy is a good one if (a) it will promote entry by more digital platforms and better products from existing ones and/or (b) it will promote entry by more news content providers and better products from existing ones. This policy looks like it will do neither.

First, the whole process requires a digital platform being designated as “responsible” by the Minister — in this case, the Treasurer of Australia. There is no judicial process. There are no real criteria. The Minister can do whatever they want here. But if they do designate a digital platform it may well mean work for them. Suffice it to say, at the moment, everyone seems to think that Google and Facebook will be designated.

Well, not really. First, the Minister is unlikely to designate a platform that no large media organisation has a problem with as this entails work. So if some arrangement can be made that quiets news outlets, then that will save a platform. Second, the Minister cannot designate a platform that doesn’t carry any Australian news. So if a digital platform wants out, it can get out.

We have seen both of these things start to come to pass in the last day — even before the code has been legislated. Google have done deals with some large news outlets and thereby signalled they will do deals with others to ensure they are not designated. That alleviates them from being responsible for all of the other voice outcomes that I argued where likely to be a good thing.

Facebook have opted out of the news content business altogether. They decided it wasn’t worth it them. For now at least. One reason for this is that Australians can still share news from around the world and it turns out that is the majority of the news Australians share! They don’t need to link for local news as they can talk about it anyway.

But there is another part to this. The code, by pushing Facebook to that option, actually could give them license to do so as part of negotiating a better deal. Let’s face it, the best weapon in the arsenal of a firm with market power is exclusion. If, yesterday, Facebook had banned Australian news content with the explicit goal of ensuring a lower price, the ACCC could have prosecuted it under Australian antitrust law for exclusionary conduct. However, the code gives Facebook a license to undertake that very exclusion and argue that it could not have been an exercise of market power as it was simply taking the identified route laid out by the government to not be regulated. Never mind that what this really means is that Facebook (a) has now demonstrated to news outlets how much they need Facebook and (b) that when those news outlets try to negotiate an outcome that allows them back, Facebook can end up getting them to agree to a much lower price and conditions. In other words, the entire process has the surely unintended consequence of enhancing the very market power that it was supposedly concerned about.

All those games aside: where will we end up? We will end up with the large digital platforms doing deals with the largest news outlets. Those deals will be multi-year lump-sum payments which otherwise enable everyone to go about their merry business. There will be no new digital platforms. The existing ones will change nothing. There will be no new content providers. The existing ones will change nothing. But the shareholders of digital platforms will be a few million dollars poorer and the shareholders of large Australian news outlets will be a few million dollars richer. In other words, there is no improvement in any competitive outcome whatsoever. It is the codification of an oligarchy. For those outside, notably Australian consumers, it offers nothing.

It’s worse

The Australian code is being touted as “world-beating.” And the rest of the world is taking notice. I see many folks in Europe, for example, giddy with excitement that someone is seemingly harming Google and Facebook. But these companies face billions of dollars of antitrust fines and costs should antitrust actions around the world be successful. By contrast, that won’t happen in Australia. And you know what is cooler than facing a billion dollar antitrust fine? A million dollar side-payment to silence news opponents.

What is more, this entire deal — and if you can’t imagine the smoke filled rooms with politicians and news outlets dreaming this up then you have no imagination — is basically a simple way of exercising the power large news outlets have over politicians. Why else would this whole arrangement fly though Australian political circles with no criticism from either side of government? Very simple. That criticism would not reach anyone because of the news outlet power. And worse, there may be retribution. What is world-beating from Australia was the invention of news outlet political influence. Now Australia is showing the rest of the world how to do that.

That is what I fear most. This entire cosy arrangement in the name of competition will spur other governments to do the same thing and will, in the process, solidify news outlet power and subvert the policy process that needs to take place to nullify digital platform power. That latter power extends beyond simply news content but a process that harms the efficacy of advertising-based business models on the internet. For the sake of innovation and consumer welfare, it needs to be addressed. But I worry that bad policy will drive out good policy. The apple is just too tempting for the would be oligarchists not to eat.

A Nobel prize for breaking through the hurdles placed by economists

This year’s Nobel Prize in Economics has been shared by Bill Nordhaus and Paul Romer for “integrating innovation and climate with economic growth.” That is one way to thread the needle to link these fine recipients and I applaud the Nobel Committee for finding a way to do it. That said, there is a real reason that Nordhaus and Romer should be linked and it turns on the way they have made their ideas persuasive — not to the general public or even politicians but to economists.

Back in the 1980s, both climate policy and science/innovation policy faced significant barriers moving forward. In each case, the main constituents who were holding up such policies were economists — they were trained in textbook tools of economics and had very strong influence throughout governments due to their ability to frame arguments. In the case of climate policy, while the science pushed for action, the big unknown was precisely what the economic cost of mitigating greenhouse gases would be. In the case of innovation policy, while the costs were known, the big problem was what the return would be. Thus, for each type of policy, economists who had won the push for cost-benefit analysis in government, were able to point out — somewhat accurately — that one-side of the equation was missing in each case. My personal opinion is that uncertainty should not necessarily be a barrier to action but when it comes to dealing with policy advocacy uncertainty is a weapon that can be used by special interests to generate inaction and, at the time, economists were the, perhaps unwitting, wielders of that weapon.

Let me start will Bill Nordhaus. If we choose to mitigate greenhouse gas pollution, it will impact all manner of activity in the economy. From energy to food production to transportation networks, the effects would be widespread and profound. They would impact on different regions differently. In other words, the economic impact was complex and hard to think through. And there was a possibility the costs could be overwhelming.

What Nordhaus did was embed climate change and climate policy into our general equilibrium models of economic growth. He then found ways to quantify the costs that everyone was hitherto conjecturing about. As it turned out, the costs were significant but nowhere near the doomsday assertions that interested parties opposed to climate policy were claiming. Even without technological change, there were existing ways economies could adapt to climate policy and, in the process, self-limit the costs that many were worried about. It moved the debate away from economic assertion and I guess pushed interested parties from “reasonable” arguments to “denialism,” thereby, exposing their naked interests more clearly. While progress has been far from what we would want, the progress that has happened can be attributed to this critical work.

Moving on now to Paul Romer. I have known Paul for 30 years since I was a graduate student. I was deeply interested in economic growth as an undergraduate and felt it had been neglected and was fortunate to be doing my PhD soon after Paul’s work had been published. It drove my interest further and into the fields of innovation and entrepreneurship that I have worked on since. There was even a time I contemplated an offer to join Paul’s education startup but that is another story.

Romer’s contribution is the inventing of what has become termed, endogenous growth theory. The first real theories of economic growth — starting with Robert Solow and Trevor Swan — examined how investment could generate growth and found that it could not explain the growth we had seen over the past two centuries. The missing component was technological change but they had no theory of it. It was well-known that science and innovation were not costless and so such activity would likely be driven by markets, competition and prices just as other economic activity was. But it was also known that these activities were special in that they generated positive externalities although some returns could be internalised through the use of formal intellectual property protection. Many people knew this was the missing ingredient in growth as documented by David Warsh’s terrific history of economic thought (including the contributions of Romer). As an undergraduate in Australia, even I saw this piece of the puzzle and, without knowledge of Romer and others, wrote my thesis about it leading to my very first published article.

I wasn’t the only one. Phillipe Aghion, Peter Howitt, Gene Grossman and Elhanan Helpman all saw it too and made their own separate contributions to endogenous growth theory. Those models, however, still, in many respects, had a microeconomic flavour that meant their main contribution would be to an understanding of how competition (and its potential limitors including patents) would impact on innovation in a growth context. This is very important but it was not as closely related to the growth puzzle that Romer was tackling.

Romer took his time making progress. His PhD thesis led to some technical advances that showed it was possible to have a balanced growth path — consistent with what we knew about economic growth — and also have a role for increasing returns. But to do things properly, the standard assumption of perfect competition was not going to cut it. And so in 1990 Romer published his most famous paper that (a) put the foundations of growth on a model of monopolistic competition (as those in trade theory and economic geography had done previously) and (b) divided the economy into a real and an ideas sector (something that no one had really done). In so doing, the Romer model was able to articulate and identify the key determinants of the returns to innovation.

The first was that the returns to innovation were limited by competition. Even with perfect patents, knowledge itself would promote entry and compete both for profits and scarce resources that limit the returns to past innovation and, as a consequence, to future innovation itself. The second was that by allocating resources — particularly science and engineering human capital — to the production of ideas, those limitations could be mitigated and economic growth itself would accelerate. In other words, front and centre for the promotion of economic growth was the direct promotion of science. Yes, science had been seen as a public good before. But now science was firmly seen as an engine of economic growth. Things that promoted the creation and, importantly, diffusion of scientific research were not just like the arts — there for consumption — but instead were an economy and indeed world-wide force for economic prosperity. To be sure, identifying the precise returns to any particular project would be difficult. But the idea that it is was critical to have a system for science and innovation promotion was now on a solid foundation.

As a person who was closely involved in economic policy in Australia on both the environment and innovation, it is difficult to understate how important Nordhaus and Romer’s work were. They were present in every, single policy discussion and tipped the balance towards action in cases where there were significant barriers and hurdles. In so doing, each showed how a careful accounting of economic forces can lead to progress, reduce uncertainty and make the case. That is what ties these two together and I am very pleased to see the Nobel committee recognising this long and sustained contribution to our knowledge and discourse.

Prediction Machines

My book with Ajay Agrawal and Avi Goldfarb is out now. It is called Prediction Machines: The Simple Economics of Artificial Intelligence.

We have written some pieces that provide little excursions into the book.

Also, we had a book launch and a video of it is available here.

Suffice it to say, if you like the material in this blog, it is a safe bet that you or your robot partner will like this book.

I guess I can’t run for Australian Parliament

I’m not sure if anyone was hoping I might return to Australia one day and run for Parliament. I certainly never thought about it. But it had never occurred to me that I might be prohibited from doing so. After all, I am an Australian citizen, was born in Australia, and right at the moment am not, to my knowledge a citizen of another country. I did know — thanks to the experience of my long-time co-author, Andrew Leigh, that if I wanted to run for Parliament I could not do so while holding a position at an Australian University as that would make me a government employee. But at least there was something I could do about it.

For those who don’t know, my brother — Jeremy — is a law professor at the University of Melbourne. That hasn’t really impacted on my life although he has lamented the inability to get the coveted ‘j.gans’ username there and previously at UNSW. He mostly writes about criminal stuff and even has a popular book out on some ridiculous jury laws in the UK. But over the past few months he has become somewhat obsessed with s44 of the Constitution which has now caused several MPs — including the Deputy Prime Minister — to be booted out of Parliament with perhaps more to follow. I have been waiting for all this to get on John Oliver but apparently it is still way down the list of Australian craziness.

Anyhow, in the wake of the High Court decision, he went on a rant about how ludicrous it was. The High Court basically decided that, in order to ensure that potential MPs did not shy away from checking whether they are beholden to a foreign power, they had better interpret the Constitution not as some sensible person might but as a strict rule that if you are potentially a citizen of another country — that is, they would be nice to you if you had nowhere else to go — then you had better make sure you have renounced your citizenship so that you cannot be tempted to be their agent in the future. I know that isn’t the legal interpretation but that is the way I read it.

Now Professor Jeremy’s rant — despite a surprising tie in with Gilbert and Sullivan — is mostly legal stuff and is kind of long so I didn’t notice until now this part:

I’m fortunate to have never contemplated nominating for elected office. But, like many Australians, the recent debate has caused me to ponder my own status under s44(i). Despite being born in Sydney and long assuming that I was exclusively an Australian citizen, my eligibility for election to my own nation’s Parliament proves to be quite a puzzle.

The simplest half of the puzzle is my father’s birth as a German citizen in Frankfurt in the 1930s. Thanks to Adolf Hitler, whose 1941 Eleventh Decree to the Law on the Citizenship of the Reich stripped my Jewish father of his citizenship years after he arrived in Australia, I am certain I’m no German.

But there is a complication: Article 116(2) of Germany’s Basic Law provides that people in my father’s position вЂ?and their descendants, shall on application have their citizenship restored’. Although I haven’t applied, it seems arguable that I am nevertheless вЂ?entitled to the rights or privileges of a subject or a citizen of a foreign power’ (a phrase that the current High Court says is part of the same вЂ?limb’ as s44(i)’s ban on foreign citizens.) This interesting legal question can only be tested if someone like me is first elected as an MP and then has her eligibility challenged in the Court of Disputed Returns.

The trickier part of the puzzle is my mother. She was born during World War Two somewhere on the Soviet side of the front. However, precisely where in the former Union she was born (and hence her potential current foreign citizenship in a former Soviet Republic) is something that only my long-dead grandparents know for sure. My mother obviously can’t confirm her birthplace with any certainty. Her earliest memories are crossing countless borders as a war refugee. (My grandparents themselves were very vague about the details and timelines of their respective wartime ordeals. It is obvious that they were awful.) While none of these facts concern me at all, every single detail would be crucial to determining my current eligibility under s44(i).

The current High Court’s judges (some of whom would also be my future electoral executioners) saw fit to smugly declare:

“It is necessary to bear in mind that the reference by a house of Parliament of a question of disqualification can arise only where the facts which establish the disqualification have been brought forward in Parliament. In the nature of things, those facts must always have been knowable. A candidate need show no greater diligence in relation to the timely discovery of those facts than the person who has successfully, albeit belatedly, brought them to the attention of the Parliament.”

But, if I was ever elected to a very narrowly divided parliament, then there would be a good many people with much better resources and motivation than me to solve the mystery of my citizenship. Somewhere, there may be an old Soviet record, or a wartime refugee camp form, or a surviving acquaintance of my grandparents, or a genetic link to some �atomic globule’ in Central Asia, that could belatedly confirm me as a citizen of one of a potential dozen or so nations, each with their own highly complex and shifting citizenship laws. My own ignorance of these matters (no matter how diligent my personal search) would be absolutely irrelevant to my future eligibility,. So holds Re: Canavan.

And for me to do my constitutional �homework’ would, at a minimum, be punishingly expensive, much more so than the truly ridiculous sums that Sam Dastyari had to pay to (probably) rid himself of his Iranian citizenship. Worse, there is every likelihood that I would be unable to ever be sure that I wasn’t a foreign citizen, much less satisfy any party contemplating nominating me. The likely result of any �serious reflection on the question’ of my eligibility is that nominating me would not be worth the risk. And I am hardly an unusual case (outside of the �came with the First Fleet� set, that is.)

Hang on a second I thought as I read this. Jeremy’s mother and father are my mother and father too — sometimes it takes a minute for the ball to drop on that. That means all this crap applies to me!

And not just my but prominent MPs like Josh Frydenberg and several other Jewish MPs.

So I don’t see how I could ever run for Parliament. Well in Australia. If I become a Canadian citizen — and no, they don’t care how many other citizenships I hold in order to do that (phew!) — then I could run for Parliament here. In other words, I am potentially barred — forever! — from running for Parliament in Australia by the High Court decision but can actually do so elsewhere.

But there is another thing. While Malcolm Turnbull and the current government I know did not agree with the High Court’s decision as they put forward an argument that would not have led to this if they had adopted it, I do now wonder what the Opposition’s position really is. From my reading, they have been playing politics in criticising the Government and now taking seriously the idea of contesting the new by-elections etc. That sounds like they accept that interpretation. If that is so, am I to read that they also believe that immigrants and children of immigrants should never run for Parliament in Australia? I think we all deserve an answer on that one.

[Update: it gets worse for Jewish people in Australia. They may all be prohibited. A High Court test case on this is urgently needed.]

Why would banks eliminate ATM fees?

Over the past two days, the four major Australian banks have eliminated ATM fees charged to users who are not their customers who use their ATMs. This is great news for people who do not use ATMs of their own banks. They no longer have to pay the fees — that have been transparent since 2009 — that were charged by ATMs — at least those owned by the four major banks. Not surprisingly, the media is fawning over it as are politicians.

But nothing tickles an economist’s spidy sense like this. Wait a second? Banks have decided to charge nothing for a service, that people who are otherwise not their customers for any other products, use? I have to ask: doesn’t this use impose direct costs on the banks? Aren’t those costs likely to be non-trivial? Aren’t those costs likely to rise substantially as consumers do not suffer the pain at the ATM of paying for those costs? The stench no economist nose is picking up is quite pugnant.

The news articles all say that this was the result of government pressure. To be sure, it is just that. There are no laws preventing such things nor has any government wanted to pass them.

And there is a good reason for that. This will have consequences.

For starters, there are going to be fewer ATMs; at least from the big four banks. They no longer have to roll them out to please their own customers, so they won’t. If you all decide a service will be free, it will be supplied by a free service. In addition, independent ATM operators — who charge the highest fees — will also see returns slashed by the new competitive pressure and so they will pull back to. As for smaller banks and credit unions, they get a gift. People will use their ATMs less but since they likely didn’t earn anything other than covering their costs, they might even expand a little. However, in the aggregate, there will be fewer ATMs.

(Actually, the smaller banks really do benefit from all of this. I am not saying that is a bad thing per se but once again, why are the majors giving them this gift?)

I have not been following recent regulatory developments but it strikes me that this may be the first act in trying to get a better deal under the hood. Banks are doing this to get lighter regulation elsewhere. Perhaps to avoid a Royal Commission? This is something that Australians will need to watch out for.

Personally, I have not really bought the notion that Australian banks are colluding on things like interest rates. (I looked). But this time, one bank (the CBA) seemingly unilaterally eliminated fees (for people who weren’t their own customers) and then the other banks followed. The only way the CBA’s customers benefited from this was if the other banks followed. Otherwise, there is no benefit coming back to the CBA. So there is no private benefit, only a group benefits. Usually, those things do not happen without explicit coordination.

Is cross-ownership a competition problem in Australia?

Possibly.

First some context. I raised this issue a couple of years ago in a post here. It was motivated by new research in the US on the impact of cross-ownership by institutional investors on competition in US airlines.

So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.

In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that.

That research was recently updated but has also been extended to banks and also executive compensation consistent with a competition-reducing effect (compensation is based on absolute rather than relative performance).

In an op ed, Shadow Assistant Treasurer and my long-standing co-author, Andrew Leigh, took the US approach and applied it to Australia. He looked at cross-ownership patterns but he made a mistake looking at custodial firms (who don’t have voting or influence rights) rather than the core institutional investors that are the core of the theory. Peter Martin pointed out the error. Who knew that determining ownership could be so complicated?

This of course highlights how difficult it is for politicians to research and make arguments. One little error and it is as if the whole hypothesis doesn’t exist any more. But we academics in the real world don’t operate that way. What I wondered was: do the patterns we see in the US match occur in Australia.

Fortunately, for me, I didn’t have to do much heavy lifting to find out. Here are some summary stats provided on Twitter by Martin Schmalz who is a key player in the US studies. First, let’s check out energy retailing:

martincschmalz_2017-Mar-16 3.jpg

The top three investors are the same across the two biggest competitors in Australia.

Let’s turn to grocery and other retailing:

Wesfarmers (who owns Coles) and Woolworths have some similarities there.

Or petrol:

martincschmalz_2017-Mar-16.jpg

Or investing itself:

martincschmalz_2017-Mar-16 1.jpg

For banking in general, I took a look and NAB’s top shareholders are (Vanguard 2.03% and BlackRock 1.43% and Capital Research and Management Company, 1.13%); Commonwealth Bank has (Vanguard 2.78%, BlackRock 1.46% and Govt Pension Fund of Norway, 0.88%), while Westpac appears to have little shareholder concentration.

Looking at telecommunications we have Telstra (Capital Research and Management Company, 1.13%; Vanguard 1.62%, BlackRock 0.63%) while Singtel is owned by the Singapore government.

This is, of course, far from a comprehensive concern but the pattern is interesting. The very funds — BlackRock and Vanguard — whose ownership changes were related to competition reductions in the US by research there have the same pattern of ‘diversified’ holdings in Australian oligopoly companies.

Now you might say that even so, the ownership of the largest shareholders is low. That is true. It is not like they themselves command a majority for voting purposes. However, as the largest shareholders they have power and their trading behaviour can impact on the returns of others. The very fact that we see cross-ownership patterns in Australia similar to the US where there are concerns that have been measured suggests that this is something we need to watch.

Australian Banks ask for permission to collude against Apple

This news caused me to make a spit-take on my morning coffee.

Several of the country’s big banks are seeking to join forces and negotiate as a bloc with technology giant Apple, which could lead to a collective boycott of Apple Pay, in a bid to offer “digital wallets” on the iPhone.

Commonwealth Bank, National Australia Bank, Westpac and Bendigo Bank have this week applied to the Australian Competition and Consumer Commission, asking permission to negotiate as one with Apple.

Their application also seeks permission to undertake a “limited form of collective boycott,” in which the banks will agree not to negotiate with Apple individually while the collective talks are occurring.

Let’s unpack this. Apple has an NFC solution on its iPhone (just as Google does) but in order for Australian consumers to use it, they need permission of their banks. The banks claim that because Apple controls the phones of some of its customers, they need to negotiate as a block on access to the NFC component on the iPhone. Of course, not all banks. ANZ has already signed up to Apple Pay.

But here is what I don’t get. First, what does negotiating for access to the NFC component mean? Do the banks think that Apple will open it up to them when they haven’t opened it up to anyone else in the world? The reason Apple keep that close knit is because of security. It is unlikely there is anything else going on.

Second, the idea apparently is for the banks to agree not to sign up to Apple Pay until this is done. Then they will negotiate terms of access individually. In other words, a collective boycott.

The Australian law has provisions to allow this sort of thing if there are public benefits. But in this case, the public benefits only arise (potentially) if it is in the public interest for Apple to open up access to NFC. However, that decision would lie elsewhere with a much more detailed process. Also, because Apple is not a dominant handset maker — it has much less than 50% market share in Australia and elsewhere — opening up access through the usual route won’t happen. Put simply, Google have already developed this and so access to NFC is possible.

Instead, the idea here is to allow for something blantantly anti-competitive. One of the forces the drives banks to adopt new technologies that are provided by others is competitive pressure between them — that is, their customers want it. That is why AmEx and ANZ are already on board with Apple Pay. What the remaining banks want to do is ensure any one of them doesn’t break ranks and adopt Apple Pay and activate a competitive response.

In summary, the banks are using the wrong part of the law to deal with a public interest question precisely because Apple is not dominant in the Australian market. And they are doing it to protect what is likely a poor set of investments on their part and because they are unwilling to throw their weight behind Google alone. In other words, it is classic undermining of competition to benefit the interests of competitors and not the interests of consumers. Hopefully the ACCC will deal with it quickly because it is pretty clear that while the regulators deliberate, the same effect as a collective boycott is actually occuring.

The NBN needs emergency triage

Now that the election is done and sorted and there isn’t a hung parliament, it is time for Australia to get on to the job of urgent policy-making. There are lots of areas in need of help but I am going to focus here on one close to my heart: broadband.

By any measure, broadband policy in Australia has been an abject failure. Despite brief moments of hope, we moved from a regulatory morass dominated by a private monopoly to a set of deals and politics dominated by a government monopoly. No one advocated for this but in the reality of political mess that is what happened. As a result, broadband has not improved in almost a decade. Indeed, much of regular internet use by ordinary Australians has moved to wireless.

I know the Prime Minister agrees with me about this because he and I had a public conversation on it in 2011 before the Coalition was in government. You can read the transcript here. But I suspect that political truths have prevented progress. Thus, the first course of action is to cut out those political truths.

The first one is that one size cannot fit all in broadband. There is variation in demand. There is variation in the costs of supply. That means setting equal terms in urban and rural areas won’t cut it. It is far better to explicitly subsidise than cross-subsidise. Full stop. But because it takes time, a period of unequal pricing and quality is necessary. Any solution that tries to do otherwise will only continue the morass.

The second one is that the NBN’s active role needs to be diminished. It needs to retreat to the backbone. I am not sure what architectural requirements would be needed but taking any customer facing role of the NBN (they may not be any but it is hard to tell from the media reporting) and divesting it — and yes privatising it — is probably the right way to go. If you don’t want privatisation, then split it up into local areas and hand it over to local government. Broadband is not a national public good it is a local one. It shares more in common with garbage collection than defense. Treat it that way.

The third is that it then needs a clear open access regime. We need to encourage retail competition at the local level. Full stop.

The fourth thing is that we need to diminish any sort of exclusivity the NBN has. Any sort. Mobile should be able to compete with it fully. Other wired providers should be able to build over the top of it.

The fifth thing is that a temporary sacrifice in local environmental regulations on wires not in the ground needs to be nationally suspended. The idea is to allow these unsightly things for 5 years on the condition that they be then grounded. Sorry. That is what the rest of the world has done. If local governments want to pay to speed up grounding them then fine. It should not slow down any rollouts.

The final thing is a big one. After all these years we have learned that the biggest broadband use is video consumption mostly for private purposes. The wholesale pricing model and also retail ones will need to switch to something that ensures that those consumers using the most video have to pay more. That means no ‘under the count’ options. You will find them willing. The only thing is that means broadband caps as a default. That sucks — I know — I pay to have mine removed but the economics require it.

If it is wanted to make this more politically compatible then the basic free account is something that can be offered. That will open up the notion of broadband as a citizen right.

[Updated to reflect user comments and clarifications]

Finally, return to work tax rebates

I have been following the Australian election at a distance and it is amazing how much more policy-centered it is than elections taking place here in North America. There are so many policies it is easy to miss some. Thankfully an alert Twitter follower noticed something familiar about the ALP’s new policy with regard to employment by small businesses.

Top of the list was a new promise to give small businesses an additional $20,000 a year tax deduction for taking on a new employee who is under 25, over 55 or a parent returning to employment and parental leave.

There is alot here but the one that got my attention was the notion of giving small businesses a tax rebate for employing someone return from parental leave. I searched for details and couldn’t find any but I did want to say that this has the makings of the best parental leave policy ever, anywhere. Of course, I would say that as it is the same as the policy I have been advocating for almost a decade.

Anyhow, for those interested, here are some links to accessible articles about this:

And here is a set of videos I recorded explaining the scheme.

The bottom line is that rather than simply handing out dollars to parents on leave, this policy targets the real issue — discrimination in the workplace — and makes it easier for businesses to encourage parental leave and ensure parents return to work successfully. In other words, target the problem rather than the symptoms. While the policy announced is small scale relative to what I was proposing, I should note that is the sensible place to start so we can learn whether what is proposed in theory actually works in practice.

I already left Australia because of continual idiotic debates like parallel imports

Magda Szubanksi said she would consider leaving Australia if the Productivity Commission’s recommendations regarding parallel importing of books were to come into place. Leaving aside the notion that leaving Australia would make absolutely no positive difference to her income with or without Australia’s current laws — her core market is still Australians — this is just one in a continual douching of verbage that comes from Australian authors ever single time the parallel importing laws come up. This time around the most ridiculous bit of self-interested dribble came from Richard Flanagan.

His argument is that he is a writer, the things he and other writers are good. Actually not just good so bloody good that the government should pay for them because they can’t convince readers to shell out. Flanagan argues that look other interest groups get money so we should too. That last bit is not a bad argument — if ship is sinking let’s get more people lifeboats — but I am not in the multiple wrongs make a right mood.

The Productivity Commission’s crime is to suggest that Australians should not pay more for books than people overseas. That includes the fraction of those books that are authored by Australians. So the Flanagan argument is that all books in history should cost much much more so that the fraction of current Australian writers can get a little bit more. This is basically the same argument as big coal uses to stop climate change policy — we shouldn’t have to pay more even if it is going to help save every living thing on the planet.

I hate these continual interest group based arguments. Their on-going nature and my personal failure to do anything about it was defnitely on the ‘reasons to go’ side of the ledger when I left Australia six years ago.

But on this issue I have more moral authority. I am an author. Several of my books cannot be bought digitally by Australians because we have parallel import laws and their like. I can’t even give them away! But more critically, I am a co-author on Australia’s leading textbook on economics. That is one of the books that earns a shit-ton of money (mostly for publishers but also for its authors) by charging Australians ridiculous prices — sometimes a couple of hundred dollars. Parallel import laws may well crush those prices. And that is just fine by me. Why? Because it will lower the prices of all books.

My strong wish is that finally this time around the Government actually follows the Prouctivity Commission and stands up for Australian readers and Australian students and the culture of the world.