[Jonathan Baker (American University, currently on leave at the Federal Communications Commission where he is Chief Economist) has written the following response to Josh’s earlier post commenting on Baker’s forthcoming article: Preserving a Political Bargain: The Political Economy of the Non-Interventionist Challenge to Monopolization Enforcement. Eds.]
Thanks to Josh for engaging with my article in such a thoughtful way. No author can ask for more.
I have a brief response. My paper is about monopolization enforcement so I will focus my comments on that offense (as Josh generally does, though he occasionally brings in other topics like resale price maintenance and vertical integration).
Josh and I mainly disagree as to the source of the primary pressure on the political bargain over the past decade: Josh says it is from the regulatory side; I say it is from the non-interventionist side. In order to make a colorable case, Josh focuses not on the past decade but on the last two years, after control of both the White House and Congress shifted to the Democrats. But it is hard to see a sea change in that change of control. Since 2008 the enforcement agencies have not initiated a wave of monopolization cases (whether based on post-Chicago thinking, pre-Chicago thinking or behavioral economics), and the only new monopolization legislation with serious prospects for success has involved the pay for delay problem (where Congress has come close to adopting the longstanding bipartisan position of the FTC). Nor have we have seen a political mobilization to attack monopolies. The “too big to fail” issue in financial regulation is concerned with moral hazard not market power, and the Citizens United decision raised concerns about the political power of corporations, not their ability to charge prices above competitive levels. Nor does market power appear to be a leading concern of the Tea Party activists, the most successful political mobilization of the past year (though I don’t know where they stand on antitrust enforcement specifically).
I’ll leave the rest of my affirmative case to my paper and respond to a few of Josh’s specific points.
AAG Varney’s comment. I don’t see how an offhand remark by the current AAG about false positives can be equated to the sustained institutional effort of multiple AAGs during the previous administration – amicus briefs, speeches, the Section 2 report, etc. – to cut back on Section 2. (By the way, I agree with Josh that most of the detailed analysis in the Section 2 report was unexceptional; the fuss was over the conclusions that DOJ drew which the FTC majority declined to accept.)
Error costs. Josh says that the modern Supreme Court’s monopolization-related decisions have adopted an error cost framework for evaluating doctrinal changes, and appears to argue (the post is not quite explicit) that doing so makes the rest of the dicta and holdings of those decisions mainstream antitrust. But the error cost framework per se – a mainstream economic idea – doesn’t imply any substantive conclusion as to monopolization enforcement. It is true that the non-interventionist economic argument that markets are self correcting supports the conclusion that “false positives are more common and more costly than false negatives” (quoting my paper in order to show that it didn’t ignore error costs). But if one accepts instead the counter economic arguments my paper also sets forth – for example that market power is often durable – the balance of error costs would not favor the non-interventionists. (And the empirical evidence Josh mentions, regardless of what it says, is largely irrelevant to a discussion about monopolization because it mainly concerns vertical agreements and resale price maintenance in settings not involving a dominant firm.)
Behavioral economics. The modern economic literature investigating cognitive biases and other behavioral regularities that deviate from rationality has surely influenced how policy-makers think about consumer protection, but I haven’t seen anything more than interesting speculation about how it might influence antitrust. Maybe we will look back in a few decades and see the current advocates of behavioral antitrust as the Aaron Directors of a larger movement (lonely voices in the wilderness now whose minority views eventually become more widely accepted), but I don’t see how Josh can view behavioral economics as creating serious intellectual pressure to move antitrust today.
Section 5 and Intel. It is not wildly interventionist if the FTC issues a complaint that frames a monopolization violation, not a case outside the four corners of the Sherman Act, regardless of what statute the Commission chooses to employ.
Josh and I come at the political economy issues we discuss from different starting points. For that reason, it is interesting that we agree on the potential for conflict between the courts and other governmental actors (though I think we disagree as to whether it is the Trinko majority in the Supreme Court or the Varney-led Antitrust Division that is potentially out of the antitrust mainstream), and that we both suspect that for all the fuss, for the next few years we will only see policy changes on the margin.
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One clarification: the phrase “Chicago political bargain” is Josh’s, not mine, and does not capture my idea that an informal political bargain (an informal understanding not an explicit deal) to rely on antitrust rather than regulation on the one hand or a laissez-faire approach on the other has been national economic policy since the 1940s – that is, during antitrust’s structural era as well as its Chicago school era. As my article says “… the political bargain does not determine closely the specifics of the doctrinal rules. The antitrust rules developed by the Supreme Court during the 1980s are on the whole consistent with it, but more interventionist rules would also be largely consistent with the bargain….” The article and its predecessor address many of the questions Josh raises, including who were the parties to the bargain, how it was reached, what are its terms, how it was modified during the 1980s, and how it is enforced.
Jon, thanks for sharing the response. I’ll follow your lead and start with two general points in this comment and then move to some specific points on areas of disagreement.
First, you write that:
“In order to make a colorable case, Josh focuses not on the past decade but on the last two years, after control of both the White House and Congress shifted to the Democrats. But it is hard to see a sea change in that change of control.”
I don’t think that makes a ton of sense in the context of what is in the paper. The paper claims that the Chicago adjustments to the bargain were all consensus and bipartisan and reasonable. Do we stop at Bork’s Antitrust Paradox (1978)? Easterbrook’s Limits of Antitrust (1984)? Is Leegin (2007) part of the reasonable Chicago consensus? What about Trinko and Brooke Group? The paper never specifies what the precise contours of this bargain are. I’d argue Leegin is obviously part of the Chicago School revolution you claim is reasonable (but Congress apparently disagrees). That was 2007. Starting to look for deviations from the bargain in 2008 seems pretty reasonable in that context. This may seem like a technical detail, but I don’t think so. It is difficult to know what is “in” the political bargain to start with — and failure to specify edges your account in the direction of a “just-so” story.
Second, lets talk about who is pressuring whom. At the same time that you argue that there is no pressure from the interventionist side to deviate from what you describe as the “Chicago School” bargain, heads at BOTH federal antitrust enforcement agencies are denouncing that bargain as irrelevant in light of the financial crisis. I’ve posted on this. But Commissioner Rosch has repeated invoked the financial crisis to declare the Chicago School “on life support, if not dead,” (despite not understanding the underlying economics emanating from Chicago nor the state of the literature). And if one wasn’t sure that declarations of impending death weren’t enough to say he wanted “out” of the bargain, Commissioner Rosch also described the Chicago School as the economics one learns in high school — as opposed to law school I guess.
AAG Varney misused a Posner quote from an interview to score similar points. As I’ve blogged about, she cherry-picked Posner’s comment that the term Chicago School ought to be retired in order to push an inference that even Chicago’s own Posner was dismissing the Chicago School’s role in antitrust and announcing it needed to be re-assessed. Of course, that is not — as was clear from the transcript of the interview — what he meant. Posner was making the point, as he has made elsewhere time and time again, that the Chicago School as applied to regulation, antitrust, and industrial organization economics, had been so broadly adopted into mainstream economic thought that it no longer made sense to describe a distinctive “Chicago School.” This is the point he also makes in the speech. Posner, actually goes so far as to reject the assertion Varney invites the reader to make, i.e. that the financial crisis should undermine faith in markets in a sense relevant to regulation and antitrust generally.
These are not academics or politicians or column writers. They are top officials at the antitrust enforcement agencies. Isn’t this good enough to say that there is some “pressure” to leave the Chicago political bargain you describe? And in fact, isn’t this pressure much more pronounced than anything that came out of the Barnett DOJ from 2000-08?
I don’t think its close. And the fact that the pressure from the interventionists from 2008-10 outweighs all of the activity from non-interventionists from 2000-08, I think, is fairly telling. The downside of accepting the Chicago bargain, as you do in the paper, as reasonable and bi-partisan is that you are logically compelled to either: (1) conclude that the current federal agencies are putting pressure on that bargain in the interventionist direction that is unreasonable, (2) that they are doing so but it is reasonable because you endorse their view that the financial crisis tells us, as a matter of economics, that we need more antitrust, or (3) argue we should just ignore them but focus on statements from Barnett’s DOJ to the extent they are consistent with your thesis.
Now responses and more specific comments:
1. You are right that we haven’t seen a huge uptick in monopolization enforcement at DOJ. But what are the implications? You seem to argue that this means that the non-interventionists should keep moving — “there is nothing to see here.” I doubt it. Section 2 law is the operating constraint here. If the Obama DOJ doesn’t bring and win cases, it is at least a partial vindication of the Bush DOJ’s Section 2 Report.
2. Is the Section 2 Report in or out of the deal? You seem to agree that the descriptive parts of it are “in the bargain” but the conclusions are out. Surely you agree that some of the rhetoric of the FTC in dissenting from the Report were “outside” the bargain? Surely you agree that AAG Varney’s speech describing the Section 2 cases as “tried and true” and identifying Conwood as among the model Section 2 cases while citing Aspen and ignoring Trinko is “outside” the bargain?
3. Varney’s Quote. I don’t buy the idea that this means nothing. Practitioner notes from leading firms cite it to clients. I don’t think they think it means nothing. And I don’t think read in conjunction with AAG Varney’s other speeches and the way the rejection of the Section 2 Report was handled, it is accurate to dismiss it in this way — though I can see why one would want to do so.
In your article you cite to documents from groups such as the Americans for Tax Reform and Open Letters from Economists as evidence that the non-interventionists are pressuring the bargain. Surely, Varney’s comments on a Section 2 panel at the American Antitrust Institute in June 2008 raise at least to this standard of relevance.
4. Behavioral Economics. I think you dismiss this, like the Varney quote, far too quickly. The interesting speculation about the use of BE in antitrust hasn’t come from just academics — there is a brand new government agency being built whose blueprints are based on apparent insights from the BE literature. A current FTC Commissioner has argued this body of economics has important implications for antitrust enforcement. If that isn’t serious pressure … I guess we disagree on what those words mean.
5. I don’t have much to say about Intel or error costs specifically here that I haven’t said already, other than the following. When the enforcement agency explicitly argues that the Supreme Court has “mistakenly” failed to recognize that the agencies shouldn’t face the same burdens of proof as private plaintiffs under Section 2, and that this is part of the justification for using Section 5, it is pretty interventionist. Similarly, when the case doesn’t square with any of the potentially reasonable justifications for use of Section 5, one is left with the conclusion that it is being employed merely to evade the tougher proof requirements of Section 2.