Tag: Better Way plan

Antitrust for Fun and Profit: The Democrats’ Better Deal (Part 2)

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.

Antitrust for Fun and Profit: The Democrats’ Better Deal (Part 1)

“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).