On September 28, the American Antitrust Institute released a report (“AAI Report”) on the state of U.S. antitrust policy, provocatively entitled “A National Competition Policy: Unpacking the Problem of Declining Competition and Setting Priorities for Moving Forward.” Although the AAI Report contains some valuable suggestions, in important ways it reminds one of the drunkard who seeks his (or her) lost key under the nearest lamppost. What it requires is greater sobriety and a broader vision of the problems that beset the American economy.
The AAI Report begins by asserting that “[n]ot since the first federal antitrust law was enacted over 120 years ago has there been the level of public concern over the concentration of economic and political power that we see today.” Well, maybe, although I for one am not convinced. The paper then states that “competition is now on the front pages, as concerns over rising concentration, extraordinary profits accruing to the top slice of corporations, slowing innovation, and widening income and wealth inequality have galvanized attention.” It then goes on to call for a more aggressive federal antitrust enforcement policy, with particular attention paid to concentrated markets. The implicit message is that dedicated antitrust enforcers during the Obama Administration, led by Federal Trade Commission Chairs Jonathan Leibowitz and Edith Ramirez, and Antitrust Division chiefs Christine Varney, Bill Baer, and Renata Hesse (Acting) have been laggard or asleep at the switch. But where is the evidence for this? I am unaware of any and the AAI doesn’t say. Indeed, federal antitrust officials in the Obama Administration consistently have called for tough enforcement, and they have actively pursued vertical as well as horizontal conduct cases and novel theories of IP-antitrust liability. Thus, the AAI Report’s contention that antitrust needs to be “reinvigorated” is unconvincing.
The AAI Report highlights three “symptoms” of declining competition: (1) rising concentration, (2) higher profits to the few and slowing rates of start-up activity, and (3) widening income and wealth inequality. But these concerns are not something that antitrust policy is designed to address. Mergers that threaten to harm competition are within the purview of antitrust, but modern antitrust rightly focuses on the likely effects of such mergers, not on the mere fact that they may increase concentration. Furthermore, antitrust assesses the effects of business agreements on the competitive process. Antitrust does not ask whether business arrangements yield “unacceptably” high profits, or “overly low” rates of business formation, or “unacceptable” wealth and income inequality. Indeed, antitrust is not well equipped to address such questions, nor does it possess the tools to “solve” them (even assuming they need to be solved).
In short, if American competition is indeed declining based on the symptoms flagged by the AAI Report, the key to the solution will not be found by searching under the antitrust policy lamppost for illumination. Rather, a more thorough search, with the help of “common sense” flashlights, is warranted.
The search outside the antitrust spotlight is not, however, a difficult one. Finding the explanation for lagging competitive conditions in the United States requires no great policy legerdemain, because sound published research already provides the answer. And that answer centers on government failures, not private sector abuses.
Consider overregulation. In its annual Red Tape Rising reports (see here for the latest one), the Heritage Foundation has documented the growing burden of federal regulation on the American economy. Overregulation acts like an implicit tax on businesses and disincentivizes business start-ups. Moreover, as regulatory requirements grow in complexity and burdensomeness, they increasingly place a premium on large size – only relatively larger businesses can better afford the fixed costs needed to establish regulatory compliance department than their smaller rivals. Heritage Foundation Scholar Norbert Michel summarizes this phenomenon in his article Dodd-Frank and Glass-Steagall – ‘Consumer Protection for Billionaires’:
Even when it’s not by nefarious design, we end up with rules that favor the largest/best-funded firms over their smaller/less-well-funded competitors. Put differently, our massive regulatory state ends up keeping large firms’ competitors at bay. The more detailed regulators try to be, the more complex the rules become. And the more complex the rules become, the smaller the number of people who really care. Hence, more complicated rules and regulations serve to protect existing firms from competition more than simple ones. All of this means consumers lose. They pay higher prices, they have fewer choices of financial products and services, and they pretty much end up with the same level of protection they’d have with a smaller regulatory state.
What’s worse, some of the most onerous regulatory schemes are explicitly designed to favor large competitors over small ones. A prime example is financial services regulation, and, in particular, the rules adopted pursuant to the 2010 Dodd-Frank Act (other examples could readily be provided). As a Heritage Foundation report explains (footnote citations omitted):
The [Dodd-Frank] act was largely intended to reduce the risk of a major bank failure, but the regulatory burden is crippling community banks (which played little role in the financial crisis). According to Harvard University researchers Marshall Lux and Robert Greene, small banks’ share of U.S. commercial banking assets declined nearly twice as much since the second quarter of 2010—around the time of Dodd–Frank’s passage—as occurred between 2006 and 2010. Their share currently stands at just 22 percent, down from 41 percent in 1994.
The increased consolidation rate is driven by regulatory economies of scale—larger banks are better suited to handle increased regulatory burdens than are smaller banks, causing the average costs of community banks to rise. The decline in small bank assets spells trouble for their primary customer base—small business loans and those seeking residential mortgages.
Ironically, Dodd–Frank proponents pushed for the law as necessary to rein in the big banks and Wall Street. In fact, the regulations are giving the largest companies a competitive advantage over smaller enterprises—the opposite outcome sought by Senator Christopher Dodd (D–CT), Representative Barney Frank (D–MA), and their allies. As Goldman Sachs CEO Lloyd Blankfein recently explained: “More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history. This is an expensive business to be in, if you don’t have the market share in scale.”
In sum, as Dodd-Frank and other regulatory programs illustrate, large government rulemaking schemes often are designed to favor large and wealthy well-connected rent-seekers at the expense of smaller and more dynamic competitors.
More generally, as Heritage Foundation President Jim DeMint and Heritage Action for America CEO Mike Needham have emphasized, well-connected businesses use lobbying and inside influence to benefit themselves by having government enact special subsidies, bailouts and complex regulations, including special tax preferences. Those special preferences undermine competition on the merits by firms that lack insider status, to the public detriment. Relatedly, the hideously complex system of American business taxation, which features the highest corporate tax rates in the developed world (which can better be manipulated by very large corporate players), depresses wages and is a serious drag on the American economy, as shown by Heritage Foundation scholars Curtis Dubay and David Burton. In a similar vein, David Burton testified before Congress in 2015 on how the various excesses of the American regulatory state (including bad tax, health care, immigration, and other regulatory policies, combined with an overly costly legal system) undermine U.S. entrepreneurship (see here).
In other words, special subsidies, regulations, and tax and regulatory programs for the well-connected are part and parcel of crony capitalism, which (1) favors large businesses, tending to raise concentration; (2) confers higher profits on the well-connected while discouraging small business entrepreneurship; and (3) promotes income and wealth inequality, with the greatest returns going to the wealthiest government cronies who know best how to play the Washington “rent seeking game.” Unfortunately, crony capitalism has grown like topsy during the Obama Administration.
Accordingly, I would counsel AAI to turn its scholarly gaze away from antitrust and toward the true source of the American competitive ailments it spotlights: crony capitalism enabled by the growth of big government special interest programs and increasingly costly regulatory schemes. Let’s see if AAI takes my advice.
This piece first appeared in Truth on the Market.