August 7, 2017 3:56PM

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).

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.