Back in 2017, tax expert Professor Michael Devereux claimed that digital services taxes being proffered in Europe were “Marxist.” Not because they were socialist or communist ideas. No, he didn’t have good old Karl Marx’s theories in mind. A limited tax on certain firms’ sales, with those burdened being determined by arbitrary thresholds and industry definitions, instead echoed the spirit of Groucho Marx. He who famously said: “those are my principles, and if you don’t like them, well I have others.”
European countries have long adopted the principle that profits should be the basis for corporate taxation. Those corporate profit taxes are supposedly levied in the country where the profit making takes place. Yet with murkiness about where true profit-making activity occurs for digital firms, given intellectual property and firms’ ability to shift headquarters between countries, the European polities looked willing to throw out their principles altogether upon disliking its results. Their aim instead was higher government revenue from certain firms, and if new, highly targeted secondary tax bases were needed to achieve it, so be it.
That, sadly, is the new reality in France and soon the UK too. The French this week passed a law such that any digital company with worldwide revenue of more than $844 million (and at least $28 million from France) will face a new 3 percent tax on sales generated in France. The UK tax is likewise introducing a 2 percent tax on revenues from intermediate (not retail) sales for “search engines, social media platform or online marketplaces” for those with worldwide revenue exceeding $628 million, and at least $31 million from UK activity.
If this seems arbitrary and highly targeted at companies such as Google, Facebook, and Amazon, that’s because it is. There are big, evident challenges for the current corporate tax system. But rather than debate wholesale change, such as whether a destination-based tax system might be preferable to the status quo (explicitly changing the central principle from taxing where profits are made to where sales occur), the UK and France are instead undergirding their existing approach with a new revenue stream explicitly directed at large, American businesses.
Implementation is almost certain to lead to a reaction from President Donald Trump. Since Europe isn’t blessed with many home-grown tech giants, these digital services taxes are a bit like tariffs. The odds of a tit-for-tat reaction from a US President who self-identifies as “Tariff Man” must therefore be very short. But in truth, these measures won’t just hit existing firms and their consumers. They could have chilling effects on tech innovation too, especially in Europe.
It will be future digital giants – those fast growing, initially low profit-margin (or even loss-making) digital businesses – who will suffer most from a revenue tax. Think Amazon a decade ago. Businesses in those positions may find they have to raise funds just to pay their tax bills. That’s why the UK is already thinking about an exemption for very low profit companies, making the policy even messier. On the margin, still, such taxes could deter firms scaling up or serving new markets due to the compliance cliff-edges. This problem will be much worse if there are very different taxes operating across different countries. It’s almost a fatalistic admission that Europe is completely giving up on ever becoming a breeding ground for successful digital giants.
Sadly, as I’ve written before, new taxes for digital companies are politically popular, and supported by bricks and mortar retail competitors to Amazon, especially in the UK. These firms and prominent politicians have effectively popularized the line that it’s unfair that businesses such as Amazon are not burdened by local business property taxes, unlike “High Street” stores. The result, it is said, is “unfair competition” caused by an “uneven playing field.”
This, of course, completely misunderstands the nature of the competitive process. Companies such as Amazon have developed business models that explicitly avoid the need for high-cost, inner-city premises. That’s one reason why they can offer consumers low prices. To punish them for that with a new revenue tax would be a bit like imposing extra revenue taxes on companies that found ways to automate certain activities to save on labor costs.
That is the key point. The French and UK governments are not thinking through their tax codes from first principles, or trying to develop a neutral framework updated for modern challenges. They are, Groucho Marx-like, trying to justify the revenue grab from large foreign firms by adding new principles to their already hideously complex tax laws.
Recently, I wrote about “other channels of adjustment” for firms facing minimum wage increases (other than reducing hiring or laying off workers). My main point was this: though a minimum wage hike need not lead to job losses at every single firm, in the absence of firms not knowing how to incentivize their workers properly to maximize profitability, other business responses are not costless.
A good example can be seen in today’s story about Whole Foods. Under pressure from campaigners, Amazon recently raised its pay for its lowest-paid employees to $15-an-hour. Now some workers aren’t enjoying the effects:
The Illinois-based worker explained that once the $15 minimum wage was enacted, part-time employee hours at their store were cut from an average of 30 to 21 hours a week, and full-time employees saw average hours reduced from 37.5 hours to 34.5 hours. The worker provided schedules from 1 November to the end of January 2019, showing hours for workers in their department significantly decreased as the department’s percentage of the entire store labor budget stayed relatively the same.
“We just have to work faster to meet the same goals in less time,” the worker said.
The labor budget and schedule cuts at Whole Foods in the wake of the minimum wage increase appear to be similar to changes Amazon made after it raised the pay of warehouse workers to a minimum wage of $15 an hour. That move was widely praised but Amazon also cut stock vesting plans and bonuses that had provided extra pay to some workers.
Some Whole Foods workers say the cuts have led to understaffing issues. “Things that have made it more noticeable are the long lines, the need to call for cashier and bagging assistance, and customers not being able to find help in certain departments because not enough are scheduled, and we are a big store,” said one worker in California.
Whole Foods and Amazon therefore seem to be adjusting to higher hourly pay in several ways: cutting hours for employees and sweating them harder during those reduced hours, cutting back on stock plans and bonuses, and passing on the extra cost to consumers in the form of worse service. None of these are costless:
- cutting hours or bonuses negates the earnings boost from hourly pay increases
- sweating workers harder makes the work environment less pleasant, and may reduce job opportunities for workers incapable of “upping their game”
- a worse shopping experience is a quality-adjusted price increase for consumers
These are exactly the types of impacts I was referring to re: high minimum wages. When statutory wage floors are increased, the fact that the firm would not have opted to undertake these changes in the absence of the wage hike suggests changes would otherwise not have been profitable, and as such are still costly (though some firms are no doubt currently not efficient – making it feasible for some that higher minimum wages could jolt them to a better business model.)
There’s a great discussion of this issue towards the end of a brilliant EconTalk podcast on the minimum wage this week.
For more on the minimum wage, read here, here, here, here, here, here and here.
President Trump continued his grumbling about Amazon this morning, echoing common but misguided views about the states being hurt by the rise of retail sales over the Internet. NPR has said, “The big problem is a loss of sales tax revenues as online sales climb.” And a coalition of states recently complained that online sales are imposing an “ever-increasing toll on the states’ fiscal health.”
But government data does not show any substantial “toll.” The chart shows total state-local revenues from income and sales taxes as a percentage of gross domestic product (GDP). E-commerce sales have grown to nine percent of retail sales, but sales tax revenues have nonetheless roughly kept pace with economic growth.
Since 1990, sales tax revenues (including excise taxes) have dipped only slightly from 3.1 percent to 3.0 percent of GDP.
Meanwhile, state-local income tax revenues have fluctuated with the economy, but have trended upward. They have risen from 1.8 percent of GDP in 1990 to 2.1 percent today.
Overall, state-local tax revenues (including property and other taxes) have edged up since 1990 from 8.7 percent of GDP to 8.8 percent.
It is not a lack of revenue that is taking “a toll on the states’ fiscal health,” but, rather, ever-increasing spending on Medicaid and worker pensions, as the Wall Street Journal discusses today.
This continues Part 1 and Part 2 of my critique of the arguments for aggressive antitrust activism offered in Steven Pearlstein’s Washington Post article, “Is Amazon Getting Too Big,” which is largely based on a loquacious law review article by Lina Kahn of the Google-funded “New America” think tank.
My previous blogs found no factual evidence to support claims of Pearlstein and Kahn that many markets (which must include imported goods and services) are becoming dominated by near-monopolies who profit from overcharging and under-serving consumers.
Yet the wordiest Kahn-Pearlstein arguments for more antitrust suits against large tech companies are not about facts at all, but about theories and predictions.
Kahn makes a plea for preemptive punishment based on omniscient futurism. “The current market is not always a good indication of competitive harm,” she writes. Antitrust enforcers “have to ask what the future market will look like.” But how could antitrust enforcers’ predictions about what might or might not happen in the future be deemed a crime or a cause for civil damages? If the law allowed courts to levy huge fines or break-up companies on the basis of prosecutors’ predictions of the future, the potential for whimsical damages and political corruption would be almost limitless.
We have already experienced extremely costly federal (and European) antitrust cases based largely on incredible predictions about “what the future market will look like” – mostly obviously in the cases against IBM and Microsoft.
IBM was the subject of 13 years of antitrust “investigation” (harassment) before the suit was finally dismissed "without merit" in 1982. My first article about antitrust was a 1974 critique of the IBM case in Reason magazine which remains the best explanation (aside from this book) of what I mean about antitrust being “for fun and profit.”
Pearlstein imagines “it was the government’s aborted prosecution of IBM . . . that made Microsoft possible.” But IBM’s decision to offer three operating systems for the PC and allow Microsoft to sell MS-DOS to Compaq had nothing to do with the government’s antitrust crusade against IBM. That crusade was a well-funded project of Control Data, Honeywell, NCR and Sperry Rand – competitors of IBM’s who hoped to do better in court than they had with customers.
“In May 1998,” notes Pearlstein, “U.S. attorneys general filed an antitrust suit against Microsoft, which lurks in the background of the current debate” (about Amazon, Google and Apple). Microsoft was said to have a supposedly invincible monopoly of “Intel-based” personal computers (inexcusably excluding Apple, Sun, Palm, Linux and others from the market), but the prosecutors could not deny that this dominance was achieved legally by consumer preference. The essence of the antitrust allegations was that Microsoft was accused of extending its legal dominance in PCs to achieve a monopoly of Internet browsers and assorted “middleware” (media players, email clients and instant messaging) that could supposedly serve as “alternative platforms” to Windows (or iOS) in some totally incomprehensible fashion. In reality, the Internet was the alternative platform, and it is platform-independent. Online services also don’t know or care which media player you use to watch movies or listen to music. Online tax return services don’t care either.
The government’s technologically illiterate case against Microsoft became a decade-long, ever-changing battle waged by prosecutors and judges who were unable to even contemplate that (1) Apple, Amazon and Google could ever be competitive rivals of Microsoft in hardware, software or services, or that (2) cellphones and tablets could possibly serve as handy computers. The Microsoft settlement “barred Microsoft from entering into Windows agreements that excluded competitors from [offering software installed on] new computers, and forced the company to make Windows interoperable with non-Microsoft software.” But Windows had always been far more welcoming to outside software than Apple. And the browsers, search engines or media players preloaded on new computers became a non-issue once broadband made it easy to install any or all of them on PCs, tablets and phones. Open-source VLC soon became a popular media player, and open-source Firefox is a popular browser. Instant messaging is dominated by Facebook, Snapchat and Skype.
Google’s Android, Apple’s IOS and Amazon’s Kindle (which is not counted in those shares) have greatly eroded Microsoft’s share of all relevant markets without help from antitrust cops. By July 2017, Windows had only a 26.8% share of platforms used to access the Internet, and IE/Edge had an 8% share of browsers.
Ms. Kahn now worries that antitrust must now shift focus toward Microsoft’s (previously unnoticed) rivals lest they prove to be just as firmly entrenched as DOJ wrongly predicted that Windows and IE would now be. “Google, Apple and Amazon have created disruptive technologies that changed the world,” says Kahn. “But the opportunity to compete must remain open for new entrants and smaller competitors that want their chance to change the world.” Sure, but the opportunity to compete was always open and still is. New entrants explain why IBM gave up making PCs, and why few people use Microsoft’s capable Edge browser or Bing search engine.
Rather than offer any evidence that new entrants are somehow excluded from [undefined] markets supposedly dominated by Google, Apple and Amazon, Kahn offers theoretical conjecture. Paraphrasing her, Pearlstein says, “Chicago antitrust theory is ill equipped to deal with high-tech industries, which naturally tend toward winner-take-all competition. In these, most of the expenses are in the form of upfront investments, such as software (think Apple and Microsoft), meaning that the cost of serving additional customers is close to zero. . . What this “post-Chicago” economics shows [asserts?] is that in such industries, firms that jump into an early lead can gain such an overwhelming advantage that new rivals find it nearly impossible to enter the market. . . [emphasis added].”
Tim Muris and Bruce Kobyashi, by contrast, find Post-Chicago economics is all about “stylized theoretical models, producing possibility theorems that largely eschew empirical testing. [The] lack of empirical verification of these theories likely has limited the impact of Post-Chicago School economics on U.S. antitrust law.”
Consider the possibility theorem that early entrants into high-tech gained “such an overwhelming advantage that new rivals [found] it nearly impossible to enter the market.” Anything might be possible in theory, but that claim has not been true in fact.
- In personal computers, Apple, Commodore and Sinclair were first, followed by Apollo and the IBM PC in 1981, Osborne and Sun in 1982, Compaq in 1983. Contrary to what trustbusters predicted, IBM gave up the ThinkPad business in 2005.
- Netscape had an overwhelming dominance of Internet browsing in 1995, but that not deter Opera and Internet Explorer from entering the market that year, nor Firefox in 2002, Safari in 2003, or Google Chrome in 2008.
- AOL was the dominant Internet portal in 1993 until challenged by Netscape in 1994, Yahoo in 1995 and later by Comcast, Google, Facebook and many more.
- AltaVista, Lycos and Yahoo were meta-search engines that “jumped into an early lead,” yet were soon trumped by Google, Bing and numerous specialized “vertical” search engines (Amazon, Yelp, eBay, Trip Advisor, Expedia. . .) and Comparative Shopping Engines (Nextag, Shopzilla. . . ) which lobbied for “the absurd EU antitrust case against Google.”
- Palm, Nokia and Motorola jumped into an early lead in cellphones, yet were shoved aside by Blackberry, which in turn was shoved aside (for the moment) by Samsung and iPhone.
- Friendster, Linked-in and My Space jumped into an early lead in social networking in 2002-03, yet Facebook did not find it impossible to jump into that market in 2004, nor did Twitter in 2006, followed by Google+, Snapchat, Instagram, and others.
Ms. Khan would not only have antitrust czars prosecuting cases based on their technological predictions, but would have them “overseeing concentrations of power that risk precluding real competition.” This “structural” approach removes all annoying requirements for evidence that competition is impeded in any way. All that would be needed is a prosecutor’s perception that apparent concentration of undefinable “power” might someday risk some undefinable vision of “real competition” or otherwise harm some undefinable “public interest.”
Pearlstein quotes former antitrust authorities who view Ms. Kahn’s proposed carte blanche antitrust mandate as an invitation to “political and ideological mischief.” President Trump, for example, threatened Jeff Bezos with “a huge antitrust problem” because Amazon owns The Washington Post “and he’s using that as a tool for political power against me.”
Mr. Pearlstein began his piece by noting that, “Democrats cited stepped-up antitrust enforcement as a centerpiece of their plan to deliver ‘a better deal’ for Americans should they regain control of Congress and the White House.” If such stepped-up enforcement follows the advice of Pearlstein and Kahn, it would add paralyzing uncertainty to business plans and decisions. The Kahn-Pearlstein vision of stepped-up antitrust activism is a recipe for judicial fiat. It would encourage interest group meddling in business planning and pricing, invite political corruption, and largely replace the rule of law with the rule of lawyers.
The first installment of this blog was a preliminary look at a Washington Post article “Is Amazon Getting Too Big?” by Steven Pearlstein. That article promoted strong opinions of Yale law school student Lina Khan based largely on (1) faulty market concentration estimates from President Obama’s Council of Economic Advisers and (2) a selective 40-year survey of mergers as evidence of some current problem linking concentrated markets to rising prices.
There was another bit of indirect evidence in the Obama CEA memo which merits discussion. A graph from former CEA Chair Jason Furman showed large recent gains in “returns on invested capital” among public nonfinancial firms, as measured by McKinsey & Co. The CEA insinuated that this shows a recent surge in “rents” (receipts larger than needed to attract capital) which they wrongly defined as “greatly in excess of historical standards.” There is a simpler explanation.
Return on invested capital is notoriously difficult to estimate and, as McKinsey explains, returns look relatively larger by this measure because invested capital has become smaller as the economy shifted from capital-intensive manufacturing to services and software:
“What if the invested-capital side of the equation approaches zero, as it increasingly does among companies that use outsourcing and alliances and thus reduce the capital intensity of parts of their businesses? Other businesses, such as software development and services, also have inherently low capital requirements or take advantage of atypical working-capital dynamics, including prepayment by customers for licenses and payment by suppliers for inventory. Even traditional businesses are shedding capital: the median level of invested capital for US industrial companies dropped from around 50 percent of revenues in the early 1970s to just above 30 percent in 2004.”
Like the CEA’s mention of a rising share of sales by Top 50 firms in 10 industries between two years, the CEA’s return on invested capital data also failed to uncover any new “market concentration” problem to be solved by the Democratic Party’s mysterious “Better Deal.”
Neither Khan, Pearlstein, nor their cited sources provide any evidence of (1) the alleged widespread increase in market share held by 3 or 4 firms, nor of (2) higher prices outside of federally-regulated and subsidized industries, nor of (3) any connection between concentration and monopoly pricing, nor of (4) any connection between return on invested capital and concentration or monopoly pricing.
Despite no evidence that market share (concentration) predicts higher pricing, Pearlstein and Khan talk about Amazon’s share of markets. Pearlstein claims Amazon sells 40% of books in this country, but such estimates vary depending on how we handle Kindle’s share of e-Books, Amazon’s consumer-friendly discounting of new books, and Amazon’s utility as a market for used books. Many people, like me, sell very good used books on Amazon and eBay, making the market for new books more competitive than ever. Stacy Mitchell’s “The Big Box Swindle” costs $14.32 on Amazon Prime, but very good used copies sell below $2.
Khan claims “Amazon now controls 46% of all e-commerce in the United States.” That inflated figure includes sales that Amazon processes for other retailers and producers. And retail alone is not “all e-commerce” even ignoring the biggest e-commerce market – China. In U.S. business-to-business sales, Amazon Business is ranked 37th in the B2B E-Commerce 300 by Digital Commerce. Besides, e-commerce only amounted to 11.7% of U.S. retail sales last year, according to the Commerce Department.
The source of Amazon's alleged 46% share of something or other is Stacy Mitchell (BA in History) a publicist for “local-self-reliance” (which was also the unwise goal [zi li geng sheng] of Mao Tse-tung’s 1958-59 “Great Leap Forward”). As Ms. Mitchell and her co-author explain, “Amazon’s market share was calculated by the authors, drawing on information from Amazon and Channel Advisor.”
E-commerce is not a market, much less a U.S. market, and it’s not something that can be “controlled.” But the Khan-Mitchell-Pearlstein complaint is not about a big market share causing higher prices for buyers but about lower prices for sellers. Mitchell applauds the Democrats’ new tough talk on antitrust because, “With most industries now dominated by just a few firms, it is harder. . . for small businesses to compete and for farmers and producers to get a fair price” [emphasis added].
“In considering whether a proposed merger or business practice would harm competition,” writes Mr. Pearlstein, “courts and regulators narrowed their analysis to ask whether it would hurt consumers by raising prices.” He and Kahn blame such a “narrow” emphasis on consumer welfare on what they call “The Chicago School.” They want courts and regulators to instead ask whether businesses structure or practices would harm competitors by reducing prices. Khan thinks “antitrust enforcers” should take a “holistic” approach, taking account the interests of rival sellers or producers who might have a tough time competing with Amazon’s low prices, huge inventories, or fast delivery.
As I noted in the first blog, antitrust law is a large and lucrative industry, which has long been famously generous to politicians and think tanks who try to enlarge the volume and value of antitrust activities. “Amazon is reported to be in the market for an antitrust economist,” notes Pearlstein, and “has engaged the services of two former heads of the Justice Department antitrust division, one Democrat and one Republican.” Indeed. That’s the way the antitrust extortion racket is played. Skilled antitrust lawyers are equally eager to prosecute or defend, since they win either way.
Antitrust works very much like any other regulatory bureaucracy. Business lobbyists recruit antitrust agencies to get them to damage or constrain their more-successful rivals. Key members of congressional committees use antitrust threats to shake down corporate executives for campaign contributions and discourage them from supporting a rival Party’s policies or candidates. Redundant federal agencies, the DOJ and FTC, drag companies into costly litigation battles for years, with the usual result being multi-billion-dollar fines rather than noticeable change in business practices. Ambitious prosecutors use the publicity from high-profile cases as a red-carpet invitation into the revolving door of high-paying positions as antitrust defense attorneys or as executives in the effected industries.
Pearlstein suggests antitrust should be more about “fair play” and a “level field” to protect competitors who would much prefer to charge higher prices for less selection and slower service. “Some observers point to the E.U.’s Google case as an example of the difference between the American and European approach: They protect competitors; we protect consumers. ... To me, this view betrays a naïve belief that in our open market system, every person and every company has the same opportunity to succeed. ... Leveling the playing field is a legitimate policy goal.”
To me, Pearlstein’s view betrays naïve optimism that ambitious politicians and prosecutors are omniscient and incorruptible. He thinks future antitrust cops should have great discretionary authority to “block Amazon” from competing too effectively with UPS, Oracle or Comcast. If that threat ever materialized, it would surely attract generous donations from UPS, Oracle, or Comcast to sympathetic politicians and think tanks. Antitrust law is not supposed to be about dividing the spoils but frequently is.
“Is Amazon getting too big?” asks Washington Post columnist Steven Pearlstein, in a 4000-word column seeking justification for the Democrat Party’s quixotic pledge to “break up big companies" in its recent “Better Deal." “Just this week,” notes Pearlstein, “Democrats cited stepped-up antitrust enforcement as a centerpiece of their plan to deliver ‘a better deal’ for Americans should they regain control of Congress and the White House.” He concludes by saying “it sometimes takes a little public power to keep private power in check.” But maybe it takes a lot of public power to write antitrust lawyers some big checks.
Politics aside, the question “Is Amazon getting too Big?” should have nothing to do with antitrust, which is supposedly about preventing monopolies from charging high prices. Surely no sane person would dare accuse Amazon of monopoly or high prices.
Even Mr. Pearlstein has doubts: “Is Amazon so successful, is it getting so big, that it poses a threat to consumers or competition? By current antitrust standards, certainly not. . . Here is a company, after all, known for disrupting and turbocharging competition in every market it enters, lowering prices and forcing rivals to match the relentless efficiency of its operations and the quality of its service. That is, after all, usually how firms come to dominate an industry. . .”
That should have ended this story “by current antitrust standards.” But if we simply lower those standards, then “Better Way” antitrust shakedown threats could become far more numerous, unpredictable, and lucrative for politically-generous antitrust law firms.
Among the 19 largest law firm contributions to political parties in 2015/2016, according to Open Secrets, all but one, Jones Day, contributed overwhelmingly to Democrats. More to the point, all of these law firms contributing most generously to the Democratic Party are specialists in antitrust and mergers: They appear on U.S. News list of top Antitrust attorneys. And the Trial Lawyers Association (now disguised as “American Association for Justice”) contributed over $2.1 million to Democrats, over $1 million to liberal organizations and $67,500 to Republicans.
Antitrust law is a very big, profitable and concentrated industry. Antitrust lawyers’ have a special interest in greatly expanding the reach and grip of antitrust law. They were surely delighted by Pearlstein’s prominent endorsement of law journal paper by Lina Khan, a 28-year old student and fellow at the “liberal-leaning” think tank New America.
Ms. Kahn believes it self-evident that low operating profits must prove Amazon is “choosing to price below-cost.” That’s uninformed accounting. What low profits actually show is that Amazon has been plowing-back rapidly expanding cash flow into capital expenditures, such cloud computing, a movie studio, and unique consumer electronics (Kindle and Echo).
“If Amazon is not a monopolist, Khan asks, why are financial markets pricing its stock as if it is going to be?” That’s uninformed finance theory. Investors rightly see Amazon’s current and future growth of cash flow (the result of expensive investments) as the source of future dividends and/or capital gains (more net assets per share).
Kahn believes antitrust has been unduly constrained by “The Chicago School approach to antitrust, which gained mainstream prominence and credibility in the 1970s and 1980s.” She thinks Chicago’s “undue focus on consumer welfare is misguided. It betrays legislative history, which reveals that Congress passed antitrust laws to promote a host of political economic ends.”
The trouble with grounding policy on legal precedent is that Congress passed many laws to promote the special interest of producers at the expense of consumers—including the Interstate Commerce Commission (1887), the National Economic Recovery Act (1933), the Civil Aeronautics Board (1938), and numerous tariffs and regulations designed to benefit interest groups and the politicians who represent them.
The well-named chapter “Antitrust Pork Barrel” in The Causes and Consequences of Antitrust quotes Judge Richard Posner noting that antitrust investigations are usually initiated “at the behest of corporations, trade associations, and trade unions whose motivation is at best to shift the cost of their private litigation to the taxpayer and at worse to harass competitors.”
To grasp how and why anti-trust is easily abused as a rent-seeking device, it helps to relearn the wisdom of Frederic Bastiat: “The seller wants the goods on the market to be scarce, in short supply, and expensive. The [buyer] wants them abundant, in plentiful supply, and cheap. Our laws should at least be neutral, not take the side of the seller against the buyer, of the producer against the consumer, of high prices against low prices, of scarcity against abundance [emphasis added].”
Contrary to Bastiat, however, Ms. Kahn claims to have found “growing evidence shows that the consumer welfare frame has led to higher prices and few efficiencies.”
Growing evidence turns out to mean three papers, one of which seems to say what she says it does (but only about mergers, not concentration): “Research by John Kwoka of Northeastern University,” Pearlstein writes, “has found that three-quarters of mergers have resulted in [were followed by?] price increases without any offsetting benefits. Kwoka cited industries such as airlines, hotels, car rentals, cable television and eyeglasses.”
If you believe that, mergers left consumers overcharged by the Marriott hotel and Enterprise Rent-A-Car ‘monopolies.’ Even if that sounds plausible, Kwoka’s evidence does not. Two-thirds of his sample covers just three industries (petroleum, airlines, and professional journal publishing), the price estimates are unweighted without standard error data, and several mergers date back to 1976-82. As Federal Trade Commission economists Vita and Osinksi charitably noted, “Kwoka has drawn inferences and reached conclusions . . . that are unjustified by his data and his methods.”
Pearlstein turns to another paper in Kahn’s trio: “There is little debate that this cramped [Chicago] view of antitrust law has resulted in an economy where two-thirds of all industries are more concentrated than they were 20 years ago, according to a study by President Barack Obama’s Council of Economic Advisers, and many are dominated by three or four firms.”
Nothing in Pearlstein’s statement is even approximately correct. The Obama CEA looked at shares revenue earned by two different lists of Top 50 firms (not “three or four”) in just 13 industries (not “all industries”) in 1997 and 2012. Pearlstein’s “two-thirds of all” really means 10 out of 13, though the U.S. has considerably more than 13 industries. In transportation, retailing, finance, real estate, utilities, and education, for example, the Top 50 had a slightly larger share of sales in 2012 than in 1997. So what?
Should we fear monopoly price gouging simply because 50 firms account for a larger share of the nation’s very large number of retail stores, real estate brokers, or finance companies? Of course not. “An increase in revenue concentration at the national level,” the Obama CEA concedes, “is neither a necessary nor sufficient condition in market power.”
The Obama CEA did add that “in a few industries. . . there is some evidence of increasing market concentration.” How few? Just three: Hospitals, railroads, and wireless providers. Those industries are heavily regulated, as is banking.
The CEA notes the 10 largest banks had a larger share of bank loans in 2010 than in 1980, which is hardly a surprise. Hundreds of banks that existed before the 1981-82 stagflation and 2008-09 Great Recession had closed by 2010. More lending now flows through nonbanks and securities. And the Internet (e.g., lending tree) makes shopping for loans or credit cards more competitive than ever.
Did the Obama CEA present any evidence that its extraneous data about industry-level or market concentration “has led to higher prices and few efficiencies”? Certainly not. They made no such claim because so many previous efforts have failed. “The Market Concentration Doctrine” could not explain higher prices when Harold Demsetz examined it in 1973, and it still can’t.
A year ago in this space I discussed one of the more disturbing things then-candidate Donald Trump was saying on the campaign trail, his threats against the business interests of Washington Post owner Jeff Bezos, whose paper has been consistently critical of Trump. Trump mentioned tax and antitrust as issues on which Amazon, the company founded by Bezos, might find its status under review. I quoted Wall Street Journal columnist Holman Jenkins: “Mr. Trump knows U.S. political culture well enough to know that gleefully, uninhibitedly threatening to use government’s law-enforcement powers to attack news reporters and political opponents just isn’t done. Maybe he thinks he can get away with it.”
Mr. Trump is now fighting a very public grudge match against cable network CNN, which as it happens is one of the enterprises affected by the pending AT&T-Time Warner merger. (Time Warner is CNN's parent company.) During the campaign, Trump criticized the merger, but in March he nominated to head the Department of Justice's antitrust division Makan Delrahim, a veteran antitrust lawyer who seemed to take a more benign view. “The sheer size of it, and the fact that it’s media, I think will get a lot of attention,” Delrahim had said in an interview on Canadian TV in October, before the election. “However, I don’t see this as a major antitrust problem.”
On Wednesday the New York Times reported that some close to the President, at least, were looking at options:
White House advisers have discussed a potential point of leverage over their adversary, a senior administration official said: a pending merger between CNN’s parent company, Time Warner, and AT&T. Mr. Trump’s Justice Department will decide whether to approve the merger, and while analysts say there is little to stop the deal from moving forward, the president’s animus toward CNN remains a wild card.
And then yesterday Alex Pfeiffer of the Daily Caller reported:
The White House does not support the pending merger between CNN’s parent company Time Warner and AT&T if Jeff Zucker remains president of CNN, a source familiar with President Trump’s thinking told The Daily Caller.
Maybe reports based on unnamed sources are better ignored. Or maybe they'll prove accurate, and we're facing a White House that -- like the late Sen. Edward Kennedy of Massachusetts, or disgraced Illinois Gov. Rod Blagojevich -- is not above using the resources of government in an effort to oust owners or editors from unfriendly press outlets.
Either way, I'll repeat what I wrote in this space five years ago:
One moral is that we cannot expect our First Amendment to do the whole job of protecting freedom of the press. Yes, it repels some kinds of incursions against press liberty, but it does not by its nature ward off the danger of entanglement between publishers and closely regulated industries, stadium operators, and others dependent on state sufferance. That’s one reason there’s such a difference in practice between a relatively free economy, where most lines of business do not require cultivating the good will of the state, and an economy deeply penetrated by government direction, in which nearly everyone is subject to (often implicit) pressure from the authorities.