Pitting Americans Against Americans

In lobbying, that is. Here is a fasinating story in NYT on how Indian outsourcing firms have fine-tuned their lobbying strategy ahead of the US presidential election next year.

Best Line I have Read Today

"In theory, democracy is a bulwark against socially harmful policies, but in practice it gives them a safe harbor."

That is from Bryan Caplan's brilliant book, The Myth of the Rational Voter.

Here is a review of the book from the Economist magazine.

Special Interest Legislation is Popular?!

Bottomline:

"Special-interest" legislation is popular.

That is from Bryan Caplan's oped in WSJ, read the whole thing here.

No, I Don't Believe in Consumer Protection Law

Peter up at HK Competition Law asked:

"I'm know that at a macro level we can leave competitive markets to work things out over the longer term, but at the micro level (like you or me as a single consumer entering into a single transaction) is there a need for some protection against unscrupulous businesses? The theory is good, but the reality can be quite different. I know there are problems with law enforcement etc. But as a concept, do you think some consumer protection is a good thing (for instance, mandatory product labelling) or should we not bother?"

Read more of Pete's comments here, and my original post here.

My answer to Pete's question of whether I think there is a place for consumer protection law is NOPE. A lot of studies have been conducted aiming at evaluating the effectiveness of consumer protection regulations and most of them would tell us that the costs of having such law far outweigh the benefits they would bring.

Here is one example:

"Since the 1910s, the Federal Trade Commission has sought to promote truth in advertising. Specifically, it is responsible for preventing deceptive acts or practices in the sale of various products, with particular attention given to food, drugs, and alcohol. In accordance with its regulations that define deceptive practices, the FTC conducts investigations of alleged falseadvertising and can order firms to stop running particular ads.

Peltzman (1981) found that the investigations raised firms’ costs, but itwas unclear whether they enabled consumers to make more informe dchoices that enhanced their welfare."

The above quotation is from p.29 of the excellent book by Brookings scholar Clifford Winston. The title of the book is aptly named as Government Failure vs Market Failure. Read it for free here.

Since I expect readers of this post would read Winton's book themselves, so my response would be brief.

People expect government would do a better job than the market in protecting consumers because they assume:

1) While market imperfections (or what they would label as market failures) are widespread, government operates smoothly without a glitch. This is what Harold Demsetz, a professor of economcis at UCLA, called the nirvana approach to economics in his 1969 piece "Information and Efficiency: Another Viewpoint," Journal of Law and Economics.

2) Government officials are actually out there to serve US and not themselves. So a person who would be a greedy monster if he or she works in the private market would suddenly turn into a saint once he or she joins the government.

I think both of these assumptions are false.

So both theory and evidence reported in empricial studies convince me consumer protection laws have only a very small role to play, if there is any, in our economy.

Must Read for Democracy Advocates in HK

Bryan Caplan's excellent book, which demolishes the myth of the rational voter, is out. Go get it, now! Here is the introduction, here is the book's page, and here is Bryan's homepage at George Mason University. And yes, Bryan is a blogger too.

Once you are done with Bryan's book, you should also read Don Wittman's The Myth of Democratic Failure (which pushes the rational voter model to its logical extreme).

Here is an exchange between Don and Bryan over at Econ Journal Watch back in 2005.

China Further Liberalizes its Banking Sector

A story in a weekend edition of the SCMP reports:

"The mainland's banking regulator will allow the country's 114 city commercial banks to expand their businesses nationwide, a move that will strengthen their competitiveness and boost their attractiveness to investors."

Read more here.

In other words, from now on the city banks would be free to build their branches nationwide and diversify their businesses as well as risks. Needless to say this policy is a boon to these city commercial banks.

This policy certainly is not what the dominant players like Bank of China and ICBC would like to see though. Because the new policy would inevitably intensify the competition between the city banks and the dominant players. And it is not hard to imagine that the dominant players would try very hard in lobbying the government to prevent this policy from implemented in the first place.

The question is then why these dominant players would let this happen, why now?

I guess this might have something to do with the fact that foreign banks now could, on paper at least, compete head on with the Mainland's dominant players on a level playing field starting this year as part of China's fulfilment of its WTO commitments. Read more here.

Afterall, if you would have to compete with the likes of Citibank and HSBC, you wouldn't mind letting the city banks jump into the fray, would you? Hence, the timing of the policy.