Daily Archives: 11 July 2013

The Wages of Competition

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Samsung Electronics Co’s  weaker-than-expected second-quarter earnings guidance and tepid results from HTC Corp show that high-end smartphone makers are starting to see growth taper as competition bites and cheaper devices flood the market.

And

High smartphone penetration rates in developed markets such as North America and Western Europe are leading to slower growth for high-end models…. Though premium models are most profitable for mobile-phone makers in general, they may have to look to cheaper models for growth, targeting emerging markets where growth potentials remain high….

And

Apple is widely expected to launch a lower-cost version of its iPhone later this year….  While Samsung and HTC have long made midrange phones, both are expected to bend their premium line down to more price-conscious customers.

In a free market, a monopoly’s barriers to entry always will be overcome by entrepreneurs, the monopoly’s pricing power will be broken, and the monopoly will lose market share to newer, better, cheaper rivals.

In a free market, a product leader’s high prices always will be driven lower through the competitive pressure of new entrants into the leader’s product niche.

You don’t get this competition in a managed economy, whether an openly socialist one, or the social democratic ones of Europe.  Or the regulation-controlled economy that the United States’ one is becoming.

Macroprudential Tools for Economic Flow Control

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Central banks, including the Fed, are trying to narrowly target their manipulation of national economies by using new tools to manipulate economic incentives in particular sectors.

The point of the new tools is to protect the entire financial system and economy, so economists refer to them as macroprudential.  That distinguishes them from microprudential, which describes traditional oversight to assure safety and soundness of individual banks.

However,

The whole idea makes some economists uneasy.
…
The techniques have ignited a debate among central bankers, bank regulators and academics over whether they can do what proponents promise.

Some see “macroprudential” as a euphemism for the largely discredited practice of governments deciding where capital should flow.

They should be uneasy; that’s exactly the effect, whether it’s intentional or not.  Too expensive to put money into this industry, investors and businesses say.  We’ll put our money in that industry, instead.

And create a bubble there instead of here.  Or we’ll put our money into that country instead of this one, they say.

And the net result is to drive inflation in that country instead of this one.  Or, more likely and more insidiously, strengthen an existing tendency toward a bubble or toward inflation, possibly pushing that tendency past a threshold.

But the US government, at least, more broadly than the Fed had already been engaged in macroprudential tools for economic flow control: the Community Reinvestment Act, which was used to pressure banks into making more home loans to poorer credit rated borrowers than the banks thought prudent; tax policy for social engineering, which among other things gives preferential treatment to loans for this purpose but not for that purpose; and so on.  This has gotten even more so since the Panic of 2008: stimulus spending, special loans for particular industries, selective law enforcement where this impacts the economy, etc.

We already know, from all that empirically derived evidence, that targeting this or that sector of the economy not only does not work positively, it exacerbates the economy’s corrections (recessions) when those do (inevitably) occur.

The Fed had at one time a mandate to control price level (inflation) while pushing toward full employment.  It needs to stick to its knitting.  Sure, those are broad-brush goals, but our economy is too complex for any force other than the invisible hand of a free market to control.