Month: September 2014

Modeling Climate v. Modeling the Economy

Theodore A. Gebhard

Recently the Wall Street Journal published an op-ed by theoretical physicist, Steven Koonin wherein Dr. Koonin discussed the difficulty in modeling the climate and climate change. As a consequence, climate science is hardly settled. The op-ed, as well as subsequent Letters to the Editor, brought to mind what I believe to be a similar difficulty in modeling the economy. In fact, I would go so far as to say that modeling the economy is even more problematic. To make these points, I sought to join the discussion by submitting a Letter to the Editor. I reproduce the letter below for anyone interested in my argument.

————————————————————————————-

Dr. Steven Koonin’s Review article (Sept. 20, print edition) and the subsequent Letters (Climate Science and Interpreting Very Complex Systems, Sept. 27) describing the problems with modeling climate change bring to mind the like problem of modeling the American economy.  A key difference, however, is that climate science models rely on unmotivated data and relationships among variables that are fixed in nature.  At least in principle, as data quality improves over time, the accuracy of climate change models should likewise improve.  By contrast, the computer models on which our monetary masters at the Federal Reserve rely to manipulate interest rates, contrary to what the free market would generate, depend on data grounded in motivated human action and relationships among variables that are anything but fixed.  Unlike carbon dioxide, human beings have preferences, consumption patterns, and levels of risk acceptance that regularly change, making mathematical relationships derived from historical data prone to being grossly inaccurate representations of the future.  Moreover, there is little hope for improved accuracy over time.  It is no wonder that macroeconomic forecasting is largely an exercise in futility.  Yet, it is the driver that makes us all slaves of the boom/bust cycles brought to us courtesy of the central planners on Constitution Avenue.

Theodore A. Gebhard

The Wall Street Journal Has Antitrust Law Wrong

Theodore A. Gebhard

In a recent editorial, the Wall Street Journal claimed that the Department of Justice was doing Amazon’s bidding in the DoJ’s antitrust suit against e-book publishers Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster.  The DoJ alleges that the defendants conspired unlawfully to set prices for e-books. Amazon is the largest seller of e-books. Whether or not DoJ’s civil suit and Amazon’s interests are aligned is beside the point. The real issue is what the law says. In this regard, I found the editorial to be flawed in its understanding of antitrust law and analysis and submitted the following letter to the editor stating my position.

—————————————————————————————-

Although the Journal’s views on antitrust matters are usually spot on, your editorial “Amazon Loves Government” is that rare exception.  (Review & Outlook, Sept. 9, 2014)  You claim that the government is Amazon’s “chief patron” in its dispute with e-book publishers over the control of e-book pricing.  In point of fact, it is not government that favors Amazon, it is the law.  Antitrust law comprises the rules of the competitive game and exists to protect competition, not competitors. 

To be sure, the history of antitrust enforcement is replete with failures to meet this goal with many examples of false positives grounded in flawed economic theory or inadequate evidence of competitive harm.  As a former DOJ antitrust economist and FTC lawyer, I have personally witnessed several such examples.  Regrettably, the risk of false positives still exists, particularly when the enforcement agencies push the boundaries of antitrust liability theories.  The FTC’s “pay for delay” generic drug entry cases, for example, beget such risk.

By contrast, the Amazon matter is grounded in the universally accepted proposition in both law and economics that agreements among competitors respecting a vital dimension of competition such as price or service are anticompetitive.  As you point out, the current dispute with Hachette is an outgrowth of the DOJ litigation against five publishers and Apple alleging such anticompetitive agreements.  Although the publishers settled with DOJ without admitting guilt, a federal court found Apple guilty of participating with the publishers in a horizontal price-fixing conspiracy.  According to the court, the result was an almost immediate 18% increase in the average price of e-books.  One can only conclude that Amazon’s presence was a boon to consumers.

Theodore A. Gebhard