Search on for best way to deal with latter-day robber barons

ECONOMICS:Will Alan Shatter and Richard Bruton, the Ministers involved in competition issues, become modern-day John Shermans?

THE GAP between the incomes of plutocrats and of the average Joe has widened in the United States in recent decades.

This has happened both because those on lower incomes have experienced protracted wage stagnation (always a bad thing) and because the super-rich have got richer (almost always a good thing).

This is the second Gilded Age in America, say some, the first one having taken place in the late 19th century when industrialisation led to that country’s transformation and the emergence of a new, fabulously wealthy commercial class.

Americans have almost always celebrated those who get rich, but the late 19th century was one of the exceptions. Many of the super-rich then were known popularly as the “robber barons” owing to the manner in which they made and grew their fortunes – by stitching up markets to exclude upstart new entrants and by pushing up prices to the detriment of consumers.

So strong was the backlash that politicians were stirred to action.

John Sherman, a senator, was among the most ardent proponents of breaking up US cartels during the Gilded Age. The Sherman Act of 1890 is seen today as the single most important piece of competition law and the foundation of subsequent legislation – both in the US and elsewhere in the world – designed to ensure markets are not gamed by incumbents.

Although the income gap between the rich and the poor in Ireland has narrowed in the current recession, resentment towards those in cosseted sectors of the economy has increased. Pressure to squeeze those who might be described as latter-day robber barons is on the rise.

The obligations of the EU-IMF bailout and a new government, which appears to be readier than its predecessor to address the injustices of anti-competitive practices, mean that much new law is to be enacted with a view to achieving that end.

Will the Ministers most immediately involved in competition issues – Alan Shatter and Richard Bruton – become modern-day John Shermans?

Shatter is to introduce legislation that, he says, will bring the legal profession out of the 19th century. If lawyers’ loathing of him is anything to go by, he looks set to deliver a series of Shermanesque blows to the profession’s structures and institutions, which in some respects more closely resemble a medieval guild than a modern services profession.

From what Shatter said of the Legal Services Bill this week, it looks like living up to radical expectations.

Bruton’s Bill aimed at increasing penalties for breaches of competition law, published last week, was the first and much smaller piece of legislation on general competition issues (his main Bill is due next year).

Andrew Whittaker, publisher of a journal on competition matters, was disappointed. He believed civil fines should have been introduced to bolster existing fines for breaches of criminal law (despite concerns about their constitutionality), and raised concerns about the much-reduced resources of those enforcing competition rules.

Last week, at a conference on competition law and practice organised by Whittaker, regulators, lawyers and economists pondered the coming changes. Among the most striking contributions was that from Noreen Mackey of the Competition Authority – the entity empowered to break up cartels, prevent abuse by those in a dominant market position and assess whether business mergers pose a threat to competition.

Mackey’s wish list of additional powers was long. She wants to be able to help the Garda question those charged with criminal anti-competitive practices (to ensure non-expert gardaí are not given the run-around) and advocates giving the Garda powers of arrest over those obstructing the authority.

She also seeks stiffer penalties for those found lying to the authority during investigations and for those participating in cartels. (A day after she spoke that latter wish was granted in Bruton’s Bill.)

On assessing the impact of mergers on competition, Mackey suggested the authority be granted greater flexibility, longer time limits and a clock-stopping option if complications arise.

All this is ambitious – all the more so in a country where strong opposition exists to the Oireachtas having the sort of investigative powers enjoyed by parliaments across the democractic world.

It will only become clear whether Bruton is prepared to be as radical as his Cabinet colleague when he finalises his main piece of competition legislation next year.

Vincent Power, a thoughtful if somewhat conservative corporate lawyer, reflected the cautious approach to updating competition powers and frameworks at last week’s conference. He wondered if the legislative agenda was excessive and worried about too much tweaking and tinkering. Use the powers that already exist, he urged, rather than putting new ones on the statute book.

More pro-actively, he suggested that a more integrated approach was needed to competition policy and wider competitiveness issues. He made the worthwhile suggestion that the merger of the Competition Authority and the National Consumer Agency should include the National Competitiveness Council.

Retired academic economist Moore McDowell was characteristically blunt. He was dismissive of the NCA and old-school in his purist view that competition policy is about efficient markets and nothing else.

Introducing notions of consumer welfare can only distract enforcers from their core efficiency-seeking function, he said.

London-based consultant Simon Pilsbury differed. His views are informed by the rapidly advancing field of behavioural economics, which attempts to incorporate more realistic assumptions about human decision-making into economists’ models than has traditionally been the case.

Behavioural economics recognises that people are not always-rational automatons. They can, and frequently do, make bad choices. Companies can take advantage of consumer frailties in many ways, including by deliberately confusing customers with baffling pricing structures and tagging on barely visible extra charges to headline prices.

Consumers need to make good choices to improve economic efficiency, Pilsbury said. Sometimes they need help to do that.

There needs to be a “joined-upness” between consumer and competition policy, the Englishman concluded. It is hard to disagree.

Patrick Massey, a former Competition Authority man who now runs his own consultancy firm, raised some pertinent issues about the commitment of the new Government to taking a Sherman-like approach to vested interests.

The decision to sell a minority stake in ESB was one such issue. The evidence internationally suggests that breaking up generation and grid functions pushes down prices and boosts competition. This was proposed by the McCarthy report on State assets earlier this year, but has been rejected by the Government.

Massey believes selling a minority stake now may prevent the possibility of separating generation and grid in the future. Significantly, Ibrahim Bah of the Competition Authority agreed.

Massey also raised Government meekness in pushing competition in public transport. Bus fares have risen by 25 per cent in five years, he said, the third-highest rate of increase in the euro zone.

Competitive tendering of routes was Fine Gael policy in opposition, but now appears to have been abandoned. He fears a continuation of a “Bertie Ahern approach to protecting the public sector”.

A truly depressing thought.