Pluralistic: 03 Oct 2022 An antitrust murder whodunnit

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A modified version of a Soviet propaganda cartoon called 'Capital controls the government.' An ogrish, giant business-man in a top hat with a cigar and a monocle stands before a control-box, yanking on a lever that is shaped like a golden dollar-sign. The lever operates an eject mechanism on a chair atop the control box, sending a tiny figure hurtling over the edge. The ogre holds another finger aloft, suspended between thumb and forefinger. Behind the control box are ranks of more tiny figures, awaiting their turn in the chair. The tiny figures all sport judges' powdered and curled wigs.

An antitrust murder whodunnit (permalink)

40-some years ago, US antitrust enforcement took sick. In the years since, it has been largely comatose – right up until the very recent past, when the Biden administration began to take muscular – but very belated – action to restore a modicum of competition to the economy.

There's a widely received narrative about what happened to antitrust law. 40+ years ago, fringe economists and other ideological entrepreneurs from the University of Chicago won the argument, publishing such a rigorous defense of monopolies as "efficient" that lawmakers, regulators and judges had no choice but to change their ways.

That is the "enlightened technocrat narrative," and, as a narrative, you can be forgiven for assuming that it is not empirically testable. But as a trio of scholars show in "The Political Economy of the Decline of Antitrust Enforcement in the United States," this narrative can and must be subjected to empirical scrutiny.

First, I'll explain the authors' conclusion, then I'll explain the evidence that supports it. The authors conclude that the change in US antitrust enforcement wasn't the result of reasoned argument, but rather, a mix of financial enticements and a covert influence operation.

They find that the change in antitrust enforcement didn't arise from:

  • public clamor for more monopolies or less competition regulation;

  • campaign promises by politicians;

  • explicit marching orders from politicians to the regulators they funded;

  • the confirmation hearings for regulators and judges

Instead, the degredation of antitrust can be causally linked to an increase in lobbying, a revolving door between regulators and the industries they regulate, and lavish "educational" programs aimed at judges that included luxury holidays.

In other words, the complete reversal in antitrust enforcement in the US was not the result of better arguments, nor was it the result of democratic deliberation. Instead, it was a self-accelerating mix of bribery and propaganda, funded by big businesses, which grew even bigger as a result.

What's more, this outcome is theoretically consistent with the Chicago School's own orthodoxy. Under "public choice theory," Chicago School economists predict that regulation will inevitably come under the sway of regulated industries, who will suborn their regulators to make them do their bidding, to the detriment of the public interest.

The "enlightened technocrat narrative" asks us to believe that antitrust is an exception to the tendency of regulators to be captured by the firms they are charged with regulating – especially when those firms are concentrated, making it easier for them to coordinate their policy preferences.

In truth, the whodunnit for the murder of antitrust enforcement has a pretty obvious set of perps. They subscribe to a theory that says that if the question of antitrust enforcement is up for grabs, it will be captured by big business.

As if that weren't enough, there's a smoking gun, the "Powell memo," in which a corporate lawyer advised the US Chamber of Commerce to increase and harmonize its lobbying, particularly around who gets federal judgeships. That lawyer, Lewis Powell, later got a seat on the Supreme Court, after intensive lobbying, and went on to contribute to many decisions that encouraged monopoly formation.

If that's not enough of a smoking gun, how about this one? Richard Posner – an archduke of Chicago School economics – cowrote a memo to one of Reagan's key economist entitled "Throttling Back on Antitrust: A Practical Proposal for Deregulation."

The memo makes the case that publicly arguing for weak antitrust would be a bad news, because it would "antagoniz[e] politically influential constituencies." Instead, they argue for making policy through the back door, by slashing enforcement budgets and installing regulators who quietly assured them that they will not enforce antitrust.

Big American businesses had motive, means and opportunity. They told us they would do it. They told us how they would do it. They told us it was theoretically inconceivable that they wouldn't do it. They did it. They got rich. US antitrust enforcement wasn't beaten in the marketplace of ideas – it was slaughtered in smoke-filled back rooms.

That is the paper's conclusion and while it might seem obvious to people who pay attention to this stuff, they offer a wealth of data to support it. Start with the political question:

Since the 1970s, no president advocated for a reduction in antitrust enforcement, no Congress voted for reduced enforcement except indirectly in obscure budget bills, and no senate knowingly confirmed nominees to the FTC or DOJ, or to the supreme court, who openly promised to reduce antitrust enforcement

Even though no one who was approved to the federal judiciary advocated for dismantling antitrust, dismantle it they did. This is especially visible at the Supreme Court, where key decisions like Illinois Brick stripped standing from nearly everyone who was harmed by monopolistic behavior, which meant that almost no one was entitled to sue, undertake discovery, and reveal evidence that could vindicate them.

Other decisions legalized formerly prohibited conduct, such as vertical monopolies, and created narrow, impossible-to-satisfy tests for when a company should be prohibited from buying its suppliers or customers. Still more decisions effectively legalized predatory pricing. And over all of it was the decision to allow companies to impose binding arbitration on their customers and workers, which ended the risk of class actions for harms from monopolistic conduct.

Lower courts took their cues from the Supremes and also narrowed and weakened antitrust. At all levels of the federal judiciary, judges got their ideology on antitrust from the Manne Seminars, luxury junkets paid for by giant American companies where judges were indoctrinated into Chicago School theories of antitrust.

At one point, a full 40% of the US federal judiciary was a Manne Seminar graduate, and after they attended, they radically changed their behavior, finding in favor of monopolies again and again:

Antitrust enforcement became a mere vestige of American policy. As firms grew bigger – and as they became more capable of abusing their market power – the number of enforcement actions declined steeply. This was made all the more urgent by deregulation in other areas, which increased the scope for abuse of market power.

The American public did not want antitrust euthanized. American trust in big business has been in freefall for decades. A 1974 poll found that 60% of Americans were in favor of increasing antitrust penalties (6% opposed this). In 1980, 64% of American said that "promoting competition" was "important, very important, or very, very important" (12% said it wasn't important "at all").

In 1982, 75% of Americans polled wanted the government to do more to control the activities of large companies. Not surprisingly, nearly every presidential candidate until the 1970s spoke favorably of antitrust on the campaign trail. After that, candidates just stopped mentioning it – but they didn't campaign against it.

The list of presidents who supported muscular antitrust enforcement isn't limited to FDR and Kennedy – it includes Truman, Eisenhower, and other right-wing figures. Reagan's 1980 platform promised to "assur[e] through anti-trust enforcement that neither predatory competitive pricing nor price gouging of captive customers will occur. In 1988, the Bush campaign boasted that "we have filed more criminal anti-trust cases than the previous Administration."

During their confirmation hearings, Supreme Court justices averred their support for antitrust: per the paper, O'Connor spoke of "the key role antitrust plays in eliminating monopolies and protecting small businesses." Souter affirmed "antitrust law’s key role in preventing the consolidation of economic power." These sentiments were repeated by Thomas, Ginsburg, Kagan and Roberts.

And yet, all of these justices would go on to write or support opinions that dismantled antitrust. RBG wrote the Volvo Trucks decision that killed off the Robinson-Patman Act's enforcement powers. Breyer, O’Connor, Souter, Thomas and Ginsburg gave us the Trinko decision, killing off enforcement over refusal to deal. Roberts, Souter, and Thomas gave us Twombly, which gutted private enforcement. Breyer. Roberts and Thomas signed onto Italian Colors, weakening private antitrust enforcement. In the unanimous State Oil decision, the Supremes raised the bar for preventing retail price maintenance. None of this was hinted at in their answers on antitrust during their confirmations.

Congress, too, played a part. The obscure wrangles over agencies' budgets saw massive cuts to the enforcement budgets of the DoJ and the FTC, even as the Supremes were raising the evidentiary bar for antitrust enforcement, making each action vastly more costly for government agencies to pursue.

One particularly sneaky trick was allowing the FTC and DoJ to fund themselves by imposing filing fees for mergers. This was billed as a means of augmenting their budgets: the more mergers industry attempted, the more money the agencies would have. But very quickly, Congress used the existence of these fees to slash the agencies' budgets, saying, effectively, "You don't need public money because you get all those fees." The agencies real budgets deflated and enforcement all but ceased.

The policy paid off…if you were a big business. The profit margins of smaller US firms have been flat or declined since 1980, at around 20%, while large firms' margins per item have climbed to about 80%. Big business's shareholders have shared in the bounty: the share of US income commanded by the top 1% grew from 10% to 19% since 1980.

American productivity grew, but wages stagnated. Before the antitrust revolution, workers' pay rose with productivity. Male workers' wages rose 36% in real terms from 1960-1980. From 1980-2016, their wages did not rise in real terms. Meanwhile, their foreign counterparts continued to reap benefits from improved productivity: in the UK, wages rose by 25% in real terms. In France, it was 10%.

Monopolies have inflicted real, measurable harms on the public, disproving the Chicago School's claims that monopolies were efficient and would contribute to the public good. This is especially visible in health markets, where "unchallenged mergers in the dialysis market led to higher prices and reduced availability of dialysis facilities, which caused a 3.1 percentage point higher hospitalization rate and 1.6-2.0 percentage point lower survival rate."

In pharma, we see runaway "killer acquisitions" – where a big company buys a potential rival and kills off its product before it can compete. Within-state hospital mergers have driven up prices 7-9% between 1996-2012.

In the mobile phone market, rampant consolidation drives $44-$65b/year in transfers from consumers to shareholders. Mergers in beer drove up prices 4-7%.

In other words, letting big business capture its regulators resulted in exactly the outcome that public choice theory predicts: more profits for big business, and worsening economic, material, and health outcomes for the public.

Those profits are mobilized into still more policy wins by big businesses. The same courts that gave us lax antitrust also gave us fewer and fewer limits on lobbying, culminating in Citizens United and the near-total incineration of US campaign finance laws. "In 1974 there were 2.3 Labor PACs for every corporate PAC. By 1976, the ratio was inverted. By 1985, there were 4.4 corporate PACs for every Labor PAC."

An analysis of 370 $100m+ mergers from 2008-14 found that "companies that increased their general direct lobbying expenditures in the quarters before announcing a deal are significantly more likely to receive a favorable response from the antitrust authorities."

Shareholders understand this. "The stock price response to horizontal merger announcements is higher when the bidder has lobbied more in advance."

Lobbying is just one way to influence policy. Just as important is the revolving door, whereby regulators who make decisions favorable to industry are given well-paid jobs in that industry after their turn in office. Prior to 1970, the majority of senior FTC and DOJ personnel came out of government service, and either returned to government or retired after their terms were up. That changed in the mid-70s. Today, almost two-thirds of top FTC and DoJ enforcers go to law firms representing big business in antitrust actions or to big businesses themselves.

Rising executive compensation at large firms make this an increasingly attractive proposition. The average white-shoe law firm partner in 1970 earned twice as much an an FTC chair. That rose to 500% in the 1980s. Today it's 1000%. Wages for FTC and DoJ enforcers have been constant since 2000, while the cost of a house in DC has quadrupled over the same period.

Like I said, the circumstantial case that big business secretly murdered antitrust enforcement in smoke-filled rooms was always strong. But this paper also provides an evidentiary record.

One fascinating wrinkle: one of the paper's co-authors is Eric A Posner, son of Richard Posner, one of the architects of the neoliberal revolution. That strange fact is explored in detail in this week's episode of Capitalisn't, which is co-hosted by Luigi Zingales, another one of the paper's authors:

Hey look at this (permalink)

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Colophon (permalink)

Today's top sources: Linda Holliday.

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