Former central banker Paul Tucker is the chair of the Systemic Risk Council, a Fellow at the Harvard Kennedy School, and author of Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State. 

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Time to look again at the role of consumer welfare in our competition policy

by Philip Aldrick, The Times

Lord Tyrie, the former Tory MP and scourge of the banks in his seven years chairing the Treasury select committee, took the hot seat at the Competition and Markets Authority six days ago. As chairman, he will have the power to block mergers, sanction price-gouging energy companies and, after Brexit, veto state bailouts. Up first, though, is the £15 billion merger between J Sainsbury and Asda. He had better get used to the spotlight.

Competition policy is one of those areas of big economic consequence but little public interest. The principle is simple: promote “consumer welfare” by holding prices down and keeping the market honest. Sir Paul Tucker, in his book Unelected Power, describes it as a “vital centre of economic policymaking in a market economy, ranking in importance with the central bank”.

Brexit promises to bring the CMA into the public gaze as rarely before. Since 1998, UK competition law has been aligned with European Union rules and state aid judgments have been decided in Brussels. Outside the EU, Britain will need its own state aid regime (if only in order that politicians have an excuse to deny failing companies when they beg for cash). Above all, Britain must decide the competition framework it wants.

The debate could not be better timed. Competition theories are under scrutiny. Consumer welfare was not always the defining antitrust principle. America’s Sherman Act of 1890 was a reaction against political corruption by big business. Similarly, after the Second World War, German policy was designed to prevent the collusion seen between corporations and the Nazis.

For two decades, policy followed a Harvard School doctrine that presumed mergers were bad and set market share limits — until the late 1960s, when the rival Chicago School decreed that a deal should be cleared as long as prices were shown to fall. It moved the balance of power to business from the state, which now had to prove harm. Consumer welfare was used in case law through the 1970s and 1980s until it defined competition theory.

As Sir Paul writes, it is astonishing that economic policy was set by unaccountable judges without consultation. Were Harvard School rules still ascendant, a merger between Sainsbury and Asda, with 31 per cent of the market, would be unthinkable. Today, a new group of Chicago School economists is trying to overturn their forebears.

Luigi Zingales, a Chicago professor, wants market power assessed for political influence alongside price effects. On that basis, “many mergers considered welfare-enhancing would appear to be welfare-reducing instead”, he said. For José Azar, a professor at IESE Business School, pay is key. A business may promise lower prices but if it does so by cutting wages the consumer welfare vanishes.

The Chicago model “has the simplification that firms are wage takers” but that is “wrong”, he says. His analysis shows that “market concentration”, by which he means fewer employers, has grown in the US since 2000 and is “negatively correlated with wages”. Market power is not being abused to raise prices, he says, but to “recoup profits from workers in lower wages”. Sir Paul echoes such concerns by questioning the “orthodoxy that anything that could be regarded as distributional is better pursued by other means, such as tax and benefits”.

What’s galling about a myopic “consumer welfare” policy is not that it may be wrong but that it was decided without debate. Perhaps big business exerts too much political power, perhaps the link with lower wages should worry policymakers, perhaps competition models need updating. “It turns out that choosing the objectives of antitrust policy is a very big deal,” Sir Paul says. Brexit offers a chance to re-evaluate them. Lord Tyrie shouldn’t squander it.

Philip Aldrick is Economics Editor of The Times