Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't by John Jr. (books to read for 12 year olds txt) 📗

to expand their market share or create more jobs. Public firms also frequently enjoy state financing and tax advantages that give them the financial resources needed to sustain predation-related losses much longer than private companies can. Finally, because they often don’t have freely trading stock, state-owned companies are typically immune to the stock-shorting strategy that makes it profitable for firms to enter a market dominated by a predator, as previously discussed.38

Airbus, the giant European aircraft maker, provides a telling example. Many European governments have an ownership stake in the firm, which lost billions in 2006 due to a two-year delay in the manufacture of its A380 super-jumbo. Nevertheless, the Germans worry that the French want to increase their stake in the company by up to 15 percent because “if France has the upper hand in [the company] boardroom, Germany fears it could be forced to bear the brunt of any [labor force] cut-backs.” The UK has similar concerns.39

Looking at Airbus’ production methods, we see how jobs are prioritized over profits:

The contribution of the United Kingdom taxpayer alone towards the A380 program is 530 million [British pounds]. In return for that, Broughton [in England]...got to make the wings. But it also means that each completed set of wings has to make a remarkable journey to the final assembly site in France by way of container ship, river barge and specially adapted road trailer. With the main fuselage having to travel from Germany and the tailfin from Spain, no wonder Christian Streiff, the man who was drafted in to head Airbus in July [2006], commented that there must be a simpler way.40

Because many state-run firms likewise refuse to prioritize profits, they make ideal predators. For example, weather forecasting offers a good case study in the effectiveness of public predators. During the 1980s, private meteorology services saw a chance to make money by providing television stations with specialized forecasts that the National Weather Service hadn’t been offering. But soon after the private companies began providing this service, the National Weather Service started giving stations the same specialized forecasts for free, thus driving the private forecasting companies out of the business.41 According to Jeffery Smith, executive director of the Association of Private Weather-Related Companies, “many commercial meteorologists have been reluctant to take an increased role in forecasting because of the constant threat of government provision of these specialized forecasting services. Private firms do not know what service the government will choose to offer next for ‘free.’”42

Other cases of public predation are evident in higher education. Public universities can charge much lower tuition than private schools because public schools enjoy more state financing. My alma mater of UCLA, for example, spends almost $40,000 per student but charges only $6,522 tuition for in-state students.43 Students generally pay a much smaller percentage of public university’s costs than students at private universities.44 Below-cost pricing sometimes also extends to the smaller operations run by public universities such as bookstores, food handling, and entertainment. These businesses may receive free building space or special tax privileges that allow them to charge artificially low prices with which private vendors simply can’t compete.45

The comparatively low tuition for public universities undoubtedly has a big impact on a student’s choice of school. Between 1965 and 2005, when average tuition at public universities and colleges fell from 22 to 18 percent of the average private tuition, the percentage of students enrolled in public schools rose from 67 to 79 percent.46 This should come as no surprise—the ability to charge below-cost prices thanks to government subsidies gives public schools an enormous advantage over private universities.

In fact, state universities have acquired many formerly private universities after driving, or threatening to drive, the private schools into bankruptcy—examples include George Mason University School of Law, University of Buffalo, University of Houston, and University of Pittsburgh. In the case of the University of Buffalo, the State University of New York reportedly threatened to open up a public university across the street unless the University of Buffalo joined the state system.47

Private firms can’t take over their rivals so easily due to antitrust regulations. These regulations create a real difficulty for private predation—a big company may drive a competitor out of business, but the latter’s factory and other key assets are often left standing. Some new entrant can easily step in, purchase these assets at greatly discounted prices, and restart the competition. Then, the predator will face a new competitor with lower costs than its former rival had. State-owned firms, in contrast, are exempt from many antitrust rules, and this makes it easier for them to buy up a victim’s assets and forestall the entrance of new competitors.

Post offices worldwide are notorious for adopting predatory tactics against private competitors. Post offices systematically use their profits from operations where they have a government-protected monopoly to subsidize money-losing operations in sectors where they face private competition.48 In 2001, the European Commission found the German post office, Deutsche Post AG, to be illegally cross-subsidizing its parcel business with funds from its first class mail monopoly.49 In 2005, the Danish, Spanish, and French post offices were fined for engaging in similar practices.50

The U.S. Postal Service engages in the same kind of chicanery. When the postal service raised first-class mail to thirty-three cents in January 1999, it simultaneously reduced the price of domestic overnight express mail from $15.00 to $13.70, even though it was already losing money at $15.00. The price, which was lowered in response to increasingly successful competition in overnight delivery from FedEx and UPS Overnight, remained below $15.00 for the next seven years.51 Clearly the postal service was not seeking to drive its competitors out of business with this maneuver. But expanding its market share through below-cost pricing is still predation nonetheless.

There are almost endless examples of predatory practices by state-owned companies and services. One peculiar predator is the U.S. Forest Service, which requires lumber companies to bid on lumber that is profitable to cut as well as lumber that is unprofitable.