In an editorial published by the Baltimore Sun on May 15, 2015, Robert Reich lamented the “appalling weakness” of modern antitrust. His opinion was written mostly in reaction to what he viewed as the tepid response of the Antitrust Division to alleged price fixing in the currency exchange markets. His broader point was that the Department of Justice and Federal Trade Commission, entities charged with the enforcement of the antitrust laws in the States, have dropped the ball over the last few decades and allowed a large number of American markets to consolidate anticompetitively, raise price and harm consumers; and ultimately that this concentration was as harmful to American society as the concentrations of the Gilded Age, the concentrations and other behaviors that provoked the passage of the antitrust laws in the first place.
Secretary Reich’s analysis is high-level and generalized and so is more rhetorical than academic. Google, for example, is a “verb” because it invented internet search. Monopoly power gained by virtue of business acumen does not violate the Sherman Act. United States v. Grinnell Corp., 384 U.S. 563 (1966). Secretary Reich complains that the five largest banks control 44 percent of America’s banking assets. How many entities control the remaining 56 percent? How easy is it to move capital from one bank to another? What products in particular does this concentration allows the banks to offer interest at less than market? The fact that no banker went to prison in that particular case could be a result of any number of different issues—the evidence was in fact weak; the banks pleaded to avert a long costly trial and so were able to obtain concessions that they would not otherwise get; the amount of commerce involved in the cartel was actually quite small and was not the entire “$5.3 trillion-a-day” currency exchange market.
Modern antitrust is absolutely not what it was one hundred years ago when the Justice Department took on Standard Oil and broke it into pieces, or even 30 years ago when it broke up AT&T. But one really cannot point the finger exclusively at the executive branch and claim that the cause is lax enforcement. The reality is more complex.
Whether to prosecute a particular case is absolutely and appropriately within the prosecutorial discretion of the executive. And Antitrust enforcement is political. The conservatives generally do not like aggressive antitrust. They feel it distorts markets which should be allowed to function as freely as possible. This attitude is felt most in the merger context where conservatives generally allow most deals to go through without significant tinkering. The liberals tend to investigate and challenge more mergers. Both conservatives and liberals go after criminal cases aggressively, however.
The real damage to antitrust was committed by the “Chicago school” movement. That movement sought to “ground” antitrust in sound microeconomic principals—it wasn’t enough that an agreement or merger lead to concentration, one had to demonstrate an actual harm to consumers in the form of an output reduction or price increase, and if there were efficiencies associated with a particular economic activity then antitrust should be loathe to condemn it.
At first blush, this approach seems reasonable if not desirable. With these principles, antitrust cannot be manipulated to squelch otherwise consumer-welfare-enhancing behavior. Cases like Vons Grocery Stores (merger to single digit market shares illegal) go away and cases like Kahn (maximum resale price maintenance is not per se illegal) become the rule.
These theories of efficiency and welfare grew in academia and spread to the courts. Robert Bork and Richard Posner, among many others, wove these theories into their decisions. Republicans and Democrats appointed enforcers with these views. Merger analysis is now mostly an exercise in finding the better-spoken economist, although the courts, and common sense, still play some role.
Basically the conservatives have redefined what competition is and in so doing have gutted antitrust’s versatility as a tool against concentrated economic and therefore social power. And the change is so pervasive at all levels of society that it may not be possible to reconstitute it as the same, powerful socio-economic tool it was in the Gilded Age. Justice doesn’t bring as many cases or seek to break up as many monopolists because the tools—the court decisions and enforcement paradigms—simply don’t find the behavior offensive any more. So thorough has the transformation been that there isn’t even a language to identify the problem let alone a solution.
The one exception may in fact be the Microsoft case where the judge found Microsoft guilty of illegal monopolization. The administration changed from Democrat to Republican during sentencing, and the Republican Justice Department almost immediately settled leaving the company largely intact save for a few behavioral promises. Many, including me, speculated that Justice would seek to break up Microsoft in the style of Standard Oil. That point in time—the moment before settlement—may have been antitrust’s last high water mark.
One solution to this dilemma may be to add a new antitrust act: “Undue market concentration irrespective of origin or design is illegal.” It would be a common law statute, much like the rest of American antitrust law, and it would be up to the courts and the agencies to define what undue concentration is. The law would mimic what the European Union effectively does. If they find that a company, like Google, has market power, any preference Google gives its own products is presumptively anticompetitive irrespective of whether there is an actual effect in any market. Such an approach would be impossible here in the States absent legislative change.
The downside to the new statute is, of course, the courts, which are packed with Chicago school philosophers. A conservative judge could very well read a statute like the one I suggest as being coterminous with the Sherman Act and wipe it from the U.S. code. A problem will also be with the agencies. A nascent statute like that one will need years of grooming. A Republican administration could very well issue guidelines that do the same damage to the new statute as a conservative judge.
But antitrust is just one tool against the consolidation of socio-economic power. It was one of many tools back in the Gilded Age as well. Labor laws, income tax, estate tax. They all functioned to pull apart the sclerotic upper classes. The emergence of the Chicago school weakened only one of these tools. The broader paradigm, into which the Chicago school philosophy fits, is that of trickle-down economics. Open up markets, reduce the ability of labor to secure collective bargaining, reduce the tax burden on the wealthy, and we make the economy more efficient and effective. As the economy becomes more competitive, all boats will rise, and all will be wealthier. What really happened in the 80’s was a classic Keyensian response to a major recession. Reagan’s defense spending and tremendous deficits, which may forget, bought our way out of the recession. His sill was convincing America that it was actually his conservative policies, which he was able to press through after the macroeconomic response, that were the base of the American renaissance. That was Reagan’s greatest gift to the aristocracy.
So Secretary Reich is right in some broad sense. But the problem he identifies really isn’t with the Justice Department or antitrust as it is constituted now, but it’s the social biases in favor of the free market, a much freer market than we’ve known since the Great Depression, that are the real culprit.