Archives For

No, Chevron Deference Will Not Save the FTC’s Noncompete Ban

Corbin K. Barthold —  14 February 2023

The Federal Trade Commission (FTC) announced in a notice of proposed rulemaking (NPRM) last month that it intends to ban most noncompete agreements. Is that a good idea? As a matter of policy, the question is debatable. So far as the NPRM is concerned, however, that debate is largely hypothetical. It is unlikely that any rule the FTC issues will ever take effect. 

Several formidable legal obstacles stand in the way. The FTC seeks to stand its rule on the authority of Section 5 of the FTC Act, which bars “unfair methods of competition” in commerce. But Section 5 says nothing about rulemaking, as opposed to case-by-case prosecution. 

There is a rulemaking provision in Section 6, but for reasons explained elsewhere, it only empowers the FTC to set out its own internal procedures. And if the FTC could craft binding substantive rules—such as a ban on noncompete agreements—that would violate the U.S. Constitution. It would transfer lawmaking power from Congress to an administrative agency, in violation of Article I.

What’s more, the U.S. Supreme Court recently confirmed the existence of a “major questions doctrine,” under which an agency attempting to “make major policy decisions itself” must “point to clear congressional authorization for the power it claims.” The FTC’s proposed rule would sweep aside tens of millions of noncompete clauses; it would very likely alter salaries to the tune of hundreds of billions of dollars a year; and it would preempt dozens of state laws. That’s some “major” policymaking. Nothing in the FTC Act “clear[ly]” authorizes the FTC to undertake it.

But suppose that none of these hurdles existed. Surely, then the FTC would get somewhere—right? In seeking to convince a court to read the statute its way, after all, it could make a bid for Chevron deference. Named for Chevron v. NRDC (1984), that rule (of course) requires a court to defer to an agency’s reasonable construction of a law the agency administers. With the benefit of such judicial obeisance, the FTC would not have to show that noncompete clauses are unlawful under the best reading of Section 5. It could get away with showing merely that they’re unlawful under a plausible reading of Section 5.

But Chevron won’t do the trick.

The Chevron test can be broken down into three phases. A court begins by determining whether the test even applies (often called Chevron “step zero”). If it does, the court next decides whether the statute in question has a clear meaning (Chevron step one). And if it turns out that the statute is unclear—is ambiguous—the court proceeds to ask whether the agency’s interpretation of the statute is reasonable, and if it is, to yield to it (Chevron step two).

Each of these stages poses a problem for the FTC. Not long ago, the Supreme Court showed why this is so. True, Kisor v. Wilkie (2019) is not about Chevron deference. Not directly. But the decision upholds a cognate doctrine, Auer deference (named for Auer v. Robbins (1997)), under which a court typically defers to an agency’s understanding of its own regulations. Kisor leans heavily, in its analysis, both on Chevron itself and on later opinions about the Chevron test, such as United States v. Mead Corp. (2001) and City of Arlington v. FCC (2013). So it is hardly surprising that Kisor makes several points that are salient here.

Start with what Kisor says about when Chevron comes into play at all. Chevron and Auer stand, Kisor reminds us, on a presumption that Congress generally wants expert agencies, not generalist courts, to make the policy judgments needed to fill in the details of a statutory scheme. It follows, Kisor remarks, that if an “agency’s interpretation” does not “in some way implicate its substantive expertise,” there’s no reason to defer to it.

When is an agency not wielding its “substantive expertise”? One example Kisor offers is when the disputed statutory language is derived from the common law. Parsing common-law terms, Kisor notes, “fall[s] more naturally into a judge’s bailiwick.”

This is bad news for the FTC. Think about it. When it put the words “unfair methods of competition” in Section 5, could Congress have meant “unfair” in the cosmic sense? Could it have intended to grant a bunch of unelected administrators a roving power to “do justice”? Of course not. No, the phrase “unfair methods of competition” descends from the narrow, technical, humdrum common-law concept of “unfair competition.”

The FTC has no special insight into what the term “unfair competition” meant at common law. Figuring that out is judges’ work. That Congress fiddled with things a little does not change this conclusion. Adding the words “methods of” does not rip the words “unfair competition” from their common-law roots and launch them into a semantic void.

It remains the case—as Justice Felix Frankfurter put it—that when “a word is obviously transplanted” from the common law, it “brings the old soil with it.” And an agency, Kisor confirms, “has no comparative expertise” at digging around in that particular dirt.

The FTC lacks expertise not only in understanding the common law, but even in understanding noncompete agreements. Dissenting from the issuance of the NPRM, (soon to be former) Commissioner Christine S. Wilson observed that the agency has no experience prosecuting employee noncompete clauses under Section 5. 

So the FTC cannot get past Chevron step zero. Nor, if it somehow crawled its way there, could the agency satisfy Chevron step one. Chevron directs a court examining a text for a clear meaning to employ the “traditional tools” of construction. Kisor stresses that a court must exhaust those tools. It must “carefully consider the text, structure, history, and purpose” of the regulation (under Auer) or statute (under Chevron). “Doing so,” Kisor assures us, “will resolve many seeming ambiguities.”

The text, structure, history, and purpose of Section 5 make clear that noncompete agreements are not an unfair method of competition. Certainly not as a species. “‘Unfair competition,’ as known to the common law,” the Supreme Court explained in Schechter Poultry v. United States (1935), was “a limited concept.” It was “predicated of acts which lie outside the ordinary course of business and are tainted by fraud, or coercion, or conduct otherwise prohibited by law.” Under the common law, noncompete agreements were generally legal—so we know that they did not constitute “unfair competition.”

And although Section 5 bars “unfair methods of competition,” the altered wording still doesn’t capture conduct that isn’t unfair. The Court has said that the meaning of the phrase is properly “left to judicial determination as controversies arise.” It is to be fleshed out “in particular instances, upon evidence, in the light of particular competitive conditions.” The clear import of these statements is that the FTC may not impose broad prohibitions that sweep in legitimate business conduct.

Yet a blanket ban on noncompete clauses would inevitably erase at least some agreements that are not only not wrongful, but beneficial. “There is evidence,” the FTC itself concedes, “that non-compete clauses increase employee training and other forms of investment.” Under the plain meaning of Section 5, the FTC can’t condemn a practice altogether just because it is sometimes, or even often, unfair. It must, at the very least, do the work of sorting out, “in particular instances,” when the costs outweigh the benefits.

By definition, failure at Chevron step one entails failure at Chevron step two. It is worth noting, though, that even if the FTC reached the final stage, and even if, once there, it convinced a court to disregard the common law and read the word “unfair” in a colloquial sense, it would still not be home free. “Under Chevron,” Kisor states, “the agency’s reading must fall within the bounds of reasonable interpretation.” This requirement is important in light of the “far-reaching influence of agencies and the opportunities such power carries for abuse.”

Even if one assumes (in the teeth of Article I) that Congress could hand an independent agency unfettered authority to stamp out “unfairness” in the economy, that does not mean that Congress, in fact, did so in Section 5. Why did Congress write Section 5 as it did? Largely because it wanted to give the FTC the flexibility to deal with new and unexpected forms of wrongdoing as they arise. As one congressional report concluded, “it is impossible to frame definitions which embrace all unfair practices” in advance. “The purpose of Congress,” wrote Justice Louis Brandeis (who had a hand in drafting the law), was to ensure that the FTC can “prevent” an emergent “unfair method” from taking hold as a “general practice.”

Noncompete agreements are not some startling innovation. They’ve been around—and allowed—for hundreds of years. If Congress simply wanted to ensure that the FTC can nip new threats to competition in the bud, the NPRM is not a proper use of the FTC’s power under Section 5.

In any event, what Congress almost certainly did not intend was to hand the FTC the capacity (as Chair Lina Khan would have it) to “shape[] the distribution of power and opportunity across our economy.” The FTC’s commissioners are not elected, and they cannot be removed (absent misconduct) by the president. They lack the democratic legitimacy or political accountability to restructure the economy.

All the same, nothing about Section 5 suggests that Congress gave the agency such awesome power. What leeway Chevron might give here, common sense takes away. The more the FTC “seeks to break new ground by enjoining otherwise legitimate practices,” a federal court of appeals once declared, “the closer must be our scrutiny upon judicial review.” It falls to the judiciary to ensure that the agency does not “undu[ly] … interfere[]” with “our country’s competitive system.”

We have come full circle. Article I and the “major questions” principle tell us that the FTC cannot use four words in Section 5 of the FTC Act to issue a rule that disrupts contractual relations, tramples federalism, and shifts around many billions of dollars in wealth. And if we march through the Chevron analysis anyway, we find that, even at Chevron step two, the statute still can’t bear the weight. Chevron deference is not a license for the FTC to ignore the separation of powers and micromanage the economy.

In Antitrust & Competition, Constitutional Law, Federal Trade Commission, Federalism, Section 5, Supreme Court, Truth on the Market , , , , , , , ,
permalink

National Petroleum Refiners v FTC: A Tale of Two Opinions

Corbin K. Barthold —  27 April 2022

[This guest post from Corbin K. Barthold of TechFreedom —the fourth post in our FTC UMC Rulemaking symposium—is adapted from his and Berin Szoka’s chapter “The Constitutional Revolution That Wasn’t: Why the FTC Isn’t a Second National Legislature,” in the forthcoming book FTC’s Rulemaking Authority, which will be published by Concurrences later this year. It is the second of two contributions to the symposium posted today, along with this related post from Yale Law School student Leah Samuel. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

In 1972, a case came before Aubrey E. Robinson, Jr., a judge on the U.S. District Court for the District of Columbia, involving the scope of the Federal Trade Commission’s (FTC) regulatory authority. Section 5(a)(1) of the Federal Trade Commission Act outlaws “unfair methods of competition.” Section 6(g) says that the FTC may “make rules and regulations for the purposes of carrying out” the FTC Act.

What is a “rule or regulation” that helps “carry out” a statute? Does Section 6(g) simply permit the FTC to make “procedural” or “housekeeping” rules that set forth how the agency will conduct itself? Or does it instead empower the FTC to make “substantive” or “legislative” rules—precepts, binding on the public, that flesh out which methods of competition are “unfair”? This was the question before Judge Robinson.

If this question interests you, Robinson’s decision in National Petroleum Refiners v. FTC (D.D.C.) will repay close study.

Robinson kept his eye squarely on the FTC Act’s text and structure. What stood out to him, when he examined the statute, is the glaring structural distinction between Section 5 and Section 6. Section 5 enables the agency to file complaints, hold hearings, make findings of fact, and issue cease-and-desist orders. Section 6 permits the agency to gather and publish information about corporate practices. Each section is closely concerned with its assigned topic: Section 5 explains, in detail, how the FTC shall exercise quasi-judicial powers; Section 6 explains, in detail, how the FTC shall exercise investigative powers. The two sections have little to say to each other. This, concluded Robinson, was a strong signal that Section 6(g) does not leap its fence, progress to Section 5(a)(1), and enable the creation of rules that define “unfair methods of competition.”

That was just the beginning. Why would Congress pair a vague and open-ended rulemaking power with an elaborate and strictly circumscribed quasi-judicial power? If the FTC could make whole categories of conduct unlawful by diktat, why would it endure the rigmarole of Section 5 adjudication? More to the point, why would Congress bother to spell out that process, knowing that the FTC would go around it? In full, moreover, Section 6(g) gives the FTC the power “[f]rom time to time to classify corporations and to make rules and regulations for the purposes of carrying out the provisions of [the Act].” What is the part about “classify[ing]” companies doing there? Read as a whole, Section 6(g) seems merely to equip the FTC to conduct investigations, including, as Robinson put it, by ensuring that the agency has “the power to require reports from all corporations.”

Nor did the clues end there. Other statutes expressly grant the FTC the power to issue discrete consumer-protection rules, such as rules governing the labels of wool products. Congress knew how to grant legislative rulemaking power when it wanted to do so. And the limited grants of such power, in the other statutes, would be superfluous if the FTC already possessed a general “unfair methods” rulemaking authority in Section 6(g).

(Although Robinson did not mention it, a further sign of Section 6(g)’s narrow scope is the absence of statutory penalties for violating an FTC-issued rule. In the era when the FTC Act was passed, Congress never granted the power to make substantive rules without also specifying the price of noncompliance.)

In short, the FTC Act’s text and structure show that Section 6(g) has no intention of helping Section 5(a)(1). And when he checked his work against the FTC Act’s legislative history, Robinson found out why that is so. Section 6(g), he discovered, was originally in a House bill “that conferred only investigative powers on the Commission.” A competing bill in the Senate, meanwhile, contained quasi-judicial powers and the “unfair methods” standard but “made no provision whatever for the promulgation of rules and regulations in any context.” The investigations-only House bill and the no-rulemaking-power Senate bill were eventually stitched together. No wonder Section 6(g) does not seem to support the creation of legislative rules about the meaning of Section 5(a)(1); the two provisions were born into different bills.

If more support were needed, added Robinson, the FTC’s conduct would provide it. It had taken the FTC 50 years to “notice” a vast store of authority hiding in Section 6(g)—yet another revealing indication, Robinson wrote, “that the FTC knew it was not originally granted this rulemaking authority.” Over the years, the agency had even “repeatedly admitted that it has no power to promulgate substantive rules of law.”

Life is not fair. Judge Robinson’s well-crafted order is not good law. It was reversed. And in its place stands an appellate opinion that is longer, more repetitive, less rigorous, less disciplined, and altogether less convincing than the decision it overturns.

“Our duty,” J. Skelly Wright, a judge on the U.S. Court of Appeals for the D.C. Circuit, pronounced in his 1973 opinion in National Petroleum Refiners v. FTC (D.C. Cir.), “is not simply to make a policy judgment.” The FTC, after all, “is a creation of Congress, not a creation of judges’ contemporary notions of what is wise policy.” He might then have said: We therefore adopt the careful opinion of Judge Robinson as our own—affirmed.

He did not say that. In opening with a pious renunciation of judicial policymaking, in fact, he protested too much.

Wright’s treatment of the FTC Act’s text is brusque and general. Construing Section 6(g) to allow substantive rulemaking, Wright submitted, would “not in any formal sense circumvent” the quasi-judicial enforcement mechanism of Section 5. Congress, he went on, had not explicitly told the FTC it could only proceed case-by-case. He then discussed a pair of Supreme Court cases that, though concededly not on point, suggest the FTC Act should be read “broad[ly]” and as a “whole.” And he recited Section 6(g) itself, as though its support for his position were self-evident.

This casual nod to text complete, Wright moved on to his true preoccupation—policy considerations. Over and over, he praised the “invaluable resource-saving flexibility” of rulemaking. According to Wright:

  • “[U]se of substantive rule-making is increasingly felt to yield significant benefits. … Increasingly, courts are recognizing that use of rule-making to make innovations in agency policy may actually be fairer to regulated parties than total reliance on case-by-case adjudication.”
  • “[C]ontemporary considerations of practicality and fairness … certainly support the Commission’s position here.”
  • “Such benefits are especially obvious in cases involving the initiation of rules of the sort the FTC has promulgated here.”
  • “[T]he policy innovation involved in this case underscores the need for increased reliance on rule-making rather than adjudication alone.”
  • “[The FTC] has remained hobbled in its task by the delay inherent in repetitious, lengthy litigation[.] … To the extent substantive rule-making … is likely to deal with these problems … [it] should be upheld as [allowed under the FTC Act].”
  • “[T]he Commission will be able to proceed more expeditiously, … and … more efficiently with a mixed system of rule-making and adjudication[.]”
  • “[C]ourts have stressed the advantages of efficiency and expedition which inhere in reliance on rule-making instead of adjudication alone.”

So much for eschewing “judges’ contemporary notions of what is wise policy”! Rulemaking was the wave of the future, as all fashionable and enlightened judges understood. Wright seemed to believe, therefore, that he should insert into the FTC Act the power to make substantive rules. Whether the helpless text could bear such a reading was a secondary concern at best.

When not providing his personal endorsement of the benefits of rulemaking, Wright repeatedly invoked the FTC Act’s “purpose”:

  • “[R]ejecting the claim of rule-making power would run counter to the broad policies … that clearly motivated Congress in 1914.”
  • “[T]he broad, undisputed policies which clearly motivated the framers of the [FTC] Act of 1914 would indeed be furthered by our view[.]”
  • “[R]ule-making is not only consistent with the original framers’ broad purposes, but appears to be a particularly apt means of carrying them out.”
  • The FTC needs rulemaking power “to do the job assigned by Congress.”

But a judge may not appeal to a statute’s “purpose” on the false cry that he is divining what the legislators “really” meant. The Supreme Court in more recent years has explained that “no legislation pursues its purposes at all costs,” and that “it frustrates rather than effectuates legislative intent simplistically to assume that whatever furthers the statute’s primary objective must be the law.”The missing ingredient in Wright’s long document—what should have been the main ingredient—is obedience to the statutory text and structure.

Wright’s opinion in National Petroleum Refiners (D.C. Cir.) is a museum piece. It is a fossilized remnant of an extinct species of statutory interpretation. For a court trying to understand the FTC Act today, it is next to useless. Judges may not let their rulings be driven by their sense of “policy,” by their intuitions about statutory “purpose,” or by their desire for a personally satisfying result. The Supreme Court has shut the door on these factors. The judiciary possesses “no roving license,” it has said, to rewrite a statute on the assumption that “Congress ‘must have intended’ something broader.” Judges are “expounders of what the law is,” not “policymakers choosing what the law should be.”

In Administrative Law, Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Section 5, Symposia, Truth on the Market , , , ,
permalink

Big Tech and the Parable of the Broken Window

Corbin K. Barthold —  4 August 2020

This guest post is by Corbin K. Barthold, Senior Litigation Counsel at Washington Legal Foundation.

A boy throws a brick through a bakeshop window. He flees and is never identified. The townspeople gather around the broken glass. “Well,” one of them says to the furious baker, “at least this will generate some business for the windowmaker!”

A reasonable statement? Not really. Although it is indeed a good day for the windowmaker, the money for the new window comes from the baker. Perhaps the baker was planning to use that money to buy a new suit. Now, instead of owning a window and a suit, he owns only a window. The windowmaker’s gain, meanwhile, is simply the tailor’s loss.

This parable of the broken window was conceived by Frédéric Bastiat, a nineteenth-century French economist. He wanted to alert the reader to the importance of opportunity costs—in his words, “that which is not seen.” Time and money spent on one activity cannot be spent on another.

Today Bastiat might tell the parable of the harassed technology company. A tech firm creates a revolutionary new product or service and grows very large. Rivals, lawyers, activists, and politicians call for an antitrust probe. Eventually they get their way. Millions of documents are produced, dozens of depositions are taken, and several hearings are held. In the end no concrete action is taken. “Well,” the critics say, “at least other companies could grow while the firm was sidetracked by the investigation!”

Consider the antitrust case against Microsoft twenty years ago. The case ultimately settled, and Microsoft agreed merely to modify minor aspects of how it sold its products. “It’s worth wondering,” writes Brian McCullough, a generally astute historian of the internet, “how much the flowering of the dot-com era was enabled by the fact that the most dominant, rapacious player in the industry was distracted while the new era was taking shape.” “It’s easy to see,” McCullough says, “that the antitrust trial hobbled Microsoft strategically, and maybe even creatively.”

Should we really be glad that an antitrust dispute “distracted” and “hobbled” Microsoft? What would a focused and unfettered Microsoft have achieved? Maybe nothing; incumbents often grow complacent. Then again, Microsoft might have developed a great search engine or social-media platform. Or it might have invented something that, thanks to the lawsuit, remains absent to this day. What Microsoft would have created in the early 2000s, had it not had to fight the government, is that which is not seen.

But doesn’t obstructing the most successful companies create “room” for new competitors? David Cicilline, the chairman of the House’s antitrust subcommittee, argues that “just pursuing the [Microsoft] enforcement action itself” made “space for an enormous amount of additional innovation and competition.” He contends that the large tech firms seek to buy promising startups before they become full-grown threats, and that such purchases must be blocked.

It’s easy stuff to say. It’s not at all clear that it’s true or that it makes sense. Hindsight bias is rampant. In 2012, for example, Facebook bought Instagram for $1 billion, a purchase that is now cited as a quintessential “killer acquisition.” At the time of the sale, however, Instagram had 27 million users and $0 in revenue. Today it has around a billion users, it is estimated to generate $7 billion in revenue each quarter, and it is worth perhaps $100 billion. It is presumptuous to declare that Instagram, which had only 13 employees in 2012, could have achieved this success on its own.

If distraction is an end in itself, last week’s Big Tech hearing before Cicilline and his subcommittee was a smashing success. Presumably Jeff Bezos, Tim Cook, Sundar Pichai, and Mark Zuckerberg would like to spend the balance of their time developing the next big innovations and staying ahead of smart, capable, ruthless competitors, starting with each other and including foreign firms such as ByteDance and Huawei. Last week they had to put their aspirations aside to prepare for and attend five hours of political theater.

The most common form of exchange at the hearing ran as follows. A representative asks a slanted question. The witness begins to articulate a response. The representative cuts the witness off. The representative gives a prepared speech about how the witness’s answer proved her point.

Lucy Kay McBath, a first-term congresswoman from Georgia, began one such drill with the claim that Facebook’s privacy policy from 2004, when Zuckerberg was 20 and Facebook had under a million users, applies in perpetuity. “We do not and will not use cookies to collect private information from any users,” it said. Has Facebook broken its “promise,” McBath asked, not to use cookies to collect private information? No, Zuckerberg explained (letting the question’s shaky premise slide), Facebook uses only standard log-in cookies.

“So once again, you do not use cookies? Yes or no?” McBath interjected. Having now asked a completely different question, and gotten a response resembling what she wanted—“Yes, we use cookies [on log-in features]”—McBath could launch into her canned condemnation. “The bottom line here,” she said, reading from her page, “is that you broke a commitment to your users. And who can say whether you may or may not do that again in the future?” The representative pressed on with her performance, not noticing or not caring that the person she was pretending to engage with had upset her script.

Many of the antitrust subcommittee’s queries had nothing to do with antitrust. One representative fixated on Amazon’s ties with the Southern Poverty Law Center. Another seemed to want Facebook to interrogate job applicants about their political beliefs. A third asked Zuckerberg to answer for the conduct of Twitter. One representative demanded that social-media posts about unproven Covid-19 treatments be left up, another that they be taken down. Most of the questions that were at least vaguely on topic, meanwhile, were exceedingly weak. The representatives often mistook emails showing that tech CEOs play to win, that they seek to outcompete challengers and rivals, for evidence of anticompetitive harm to consumers. And the panel was often treated like a customer-service hotline. This app developer ran into a difficulty; what say you, Mr. Cook? That third-party seller has a gripe; why won’t you listen to her, Mr. Bezos?

In his opening remarks, Bezos cited a survey that ranked Amazon one of the country’s most trusted institutions. No surprise there. In many places one could have ordered a grocery delivery from Amazon as the hearing started and had the goods put away before it ended. Was Bezos taking a muted dig at Congress? He had every right to—it is one of America’s least trusted institutions. Pichai, for his part, noted that many users would be willing to pay thousands of dollars a year for Google’s free products. Is Congress providing people that kind of value?

The advance of technology will never be an unalloyed blessing. There are legitimate concerns, for instance, about how social-media platforms affect public discourse. “Human beings evolved to gossip, preen, manipulate, and ostracize,” psychologist Jonathan Haidt and technologist Tobias Rose-Stockwell observe. Social media exploits these tendencies, they contend, by rewarding those who trade in the glib put-down, the smug pronouncement, the theatrical smear. Speakers become “cruel and shallow”; “nuance and truth” become “casualties in [a] competition to gain the approval of [an] audience.”

Three things are true at once. First, Haidt and Rose-Stockwell have a point. Second, their point goes only so far. Social media does not force people to behave badly. Assuming otherwise lets individual humans off too easy. Indeed, it deprives them of agency. If you think it is within your power to display grace, love, and transcendence, you owe it to others to think it is within their power as well.

Third, if you really want to see adults act like children, watch a high-profile congressional hearing. A hearing for Attorney General William Barr, held the day before the Big Tech hearing and attended by many of the same representatives, was a classic of the format.

The tech hearing was not as shambolic as the Barr hearing. And the representatives act like sanctimonious halfwits in part to concoct the sick burns that attract clicks on the very platforms built, facilitated, and delivered by the tech companies. For these and other obvious reasons, no one should feel sorry for the four men who spent a Wednesday afternoon serving as props for demagogues. But that doesn’t mean the charade was a productive use of time. There is always that which is not seen.

In Amazon, Antitrust & Competition, COVID-19, Facebook, Google, Platforms, Truth on the Market, Twitter , , , , , , ,
permalink

There is No Cure for Government Incompetence

Corbin K. Barthold —  23 March 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Corbin Barthold, (Senior Litigation Counsel, Washington Legal Foundation).]

The pandemic is serious. COVID-19 will overwhelm our hospitals. It might break our entire healthcare system. To keep the number of deaths in the low hundreds of thousands, a study from Imperial College London finds, we will have to shutter much of our economy for months. Small wonder the markets have lost a third of their value in a relentless three-week plunge. Grievous and cruel will be the struggle to come.

“All men of sense will agree,” Hamilton wrote in Federalist No. 70, “in the necessity of an energetic Executive.” In an emergency, certainly, that is largely true. In the midst of this crisis even a staunch libertarian can applaud the government’s efforts to maintain liquidity, and can understand its urge to start dispersing helicopter money. By at least acting like it knows what it’s doing, the state can lessen many citizens’ sense of panic. Some of the emergency measures might even work.

Of course, many of them won’t. Even a trillion-dollar stimulus package might be too small, and too slowly dispersed, to do much good. What’s worse, that pernicious line, “Don’t let a crisis go to waste,” is in the air. Much as price gougers are trying to arbitrage Purell, political gougers, such as Senator Elizabeth Warren, are trying to cram woke diktats into disaster-relief bills. Even now, especially now, it is well to remember that government is not very good at what it does.

But dreams of dirigisme die hard, especially at the New York Times. “During the Great Depression,” Farhad Manjoo writes, “Franklin D. Roosevelt assembled a mighty apparatus to rebuild a broken economy.” Government was great at what it does, in Manjoo’s view, until neoliberalism arrived in the 1980s and ruined everything. “The incompetence we see now is by design. Over the last 40 years, America has been deliberately stripped of governmental expertise.” Manjoo implores us to restore the expansive state of yesteryear—“the sort of government that promised unprecedented achievement, and delivered.”

This is nonsense. Our government is not incompetent because Grover Norquist tried (and mostly failed) to strangle it. Our government is incompetent because, generally speaking, government is incompetent. The keystone of the New Deal, the National Industrial Recovery Act of 1933, was an incoherent mess. Its stated goals were at once to “reduce and relieve unemployment,” “improve standards of labor,” “avoid undue restriction of production,” “induce and maintain united action of labor and management,” “organiz[e] . . . co-operative action among trade groups,” and “otherwise rehabilitate industry.” The law empowered trade groups to create their own “codes of unfair competition,” a privilege they quite predictably used to form anticompetitive cartels.

At no point in American history has the state, with all its “governmental expertise,” been adept at spending money, stimulus or otherwise. A law supplying funds for the Transcontinental Railroad offered to pay builders more for track laid in the mountains, but failed to specify where those mountains begin. Leland Stanford commissioned a study finding that, lo and behold, the Sierra Nevada begins deep in the Sacramento Valley. When “the federal Interior Department initially challenged [his] innovative geology,” reports the historian H.W. Brands, Stanford sent an agent directly to President Lincoln, a politician who “didn’t know much geology” but “preferred to keep his allies happy.” “My pertinacity and Abraham’s faith moved mountains,” the triumphant lobbyist quipped after the meeting.

The supposed golden age of expert government, the time between the rise of FDR and the fall of LBJ, was no better. At the height of the Apollo program, it occurred to a physics professor at Princeton that if there were a small glass reflector on the Moon, scientists could use lasers to calculate the distance between it and Earth with great accuracy. The professor built the reflector for $5,000 and approached the government. NASA loved the idea, but insisted on building the reflector itself. This it proceeded to do, through its standard contracting process, for $3 million.

When the pandemic at last subsides, the government will still be incapable of setting prices, predicting industry trends, or adjusting to changed circumstances. What F.A. Hayek called the knowledge problem—the fact that useful information is dispersed throughout society—will be as entrenched and insurmountable as ever. Innovation will still have to come, if it is to come at all, overwhelmingly from extensive, vigorous, undirected trial and error in the private sector.

When New York Times columnists are not pining for the great government of the past, they are surmising that widespread trauma will bring about the great government of the future. “The outbreak,” Jamelle Bouie proposes in an article entitled “The Era of Small Government is Over,” has “made our mutual interdependence clear. This, in turn, has made it a powerful, real-life argument for the broadest forms of social insurance.” The pandemic is “an opportunity,” Bouie declares, to “embrace direct state action as a powerful tool.”

It’s a bit rich for someone to write about the coming sense of “mutual interdependence” in the pages of a publication so devoted to sowing grievance and discord. The New York Times is a totem of our divisions. When one of its progressive columnists uses the word “unity,” what he means is “submission to my goals.”

In any event, disunity in America is not a new, or even necessarily a bad, thing. We are a fractious, almost ungovernable people. The colonists rebelled against the British government because they didn’t want to pay it back for defending them from the French during the Seven Years’ War. When Hamilton, champion of the “energetic Executive,” pushed through a duty on liquor, the frontier settlers of western Pennsylvania tarred and feathered the tax collectors. In the Astor Place Riot of 1849, dozens of New Yorkers died in a brawl over which of two men was the better Shakespearean actor. Americans are not housetrained.

True enough, if the virus takes us to the kind of depths not seen in these parts since the Great Depression, all bets are off. Short of that, however, no one should lightly assume that Americans will long tolerate a statist revolution imposed on their fears. And thank goodness for that. Our unruliness, our unwillingness to do what we’re told, is part of what makes our society so dynamic and prosperous.

COVID-19 will shake the world. When it has gone, a new scene will open. We can say very little now about what is going to change. But we can hope that Americans will remain a creative, opinionated, fiercely independent lot. And we can be confident that, come what may, planned administration will remain a source of problems, while unplanned free enterprise will remain the surest source of solutions.


In Antitrust & Competition, Cartels, COVID-19, The Law, Economics, and Policy of the COVID-19 Pandemic, Truth on the Market , , , , , , ,
permalink

The Snobbery of Bashing Big Tech

Corbin K. Barthold —  23 October 2019

This guest post is by Corbin K. Barthold, Senior Litigation Counsel at Washington Legal Foundation.

In the spring of 1669 a “flying coach” transported six passengers from Oxford to London in a single day. Within a few years similar carriage services connected many major towns to the capital.

“As usual,” Lord Macaulay wrote in his history of England, “many persons” were “disposed to clamour against the innovation, simply because it was an innovation.” They objected that the express rides would corrupt traditional horsemanship, throw saddlers and boatmen out of work, bankrupt the roadside taverns, and force travelers to sit with children and the disabled. “It was gravely recommended,” reported Macaulay, by various towns and companies, that “no public coach should be permitted to have more than four horses, to start oftener that once a week, or to go more than thirty miles a day.”

Macaulay used the episode to offer his contemporaries a warning. Although “we smile at these things,” he said, “our descendants, when they read the history of the opposition offered by cupidity and prejudice to the improvements of the nineteenth century, may smile in their turn.” Macaulay wanted the smart set to take a wider view of history.

They rarely do. It is not in their nature. As Schumpeter understood, the “intellectual group” cannot help attacking “the foundations of capitalist society.” “It lives on criticism and its whole position depends on criticism that stings.”

An aspiring intellectual would do well to avoid restraint or good cheer. Better to build on a foundation of panic and indignation. Want to sell books and appear on television? Announce the “death” of this or a “crisis” over that. Want to seem fashionable among other writers, artists, and academics? Denounce greed and rail against “the system.”

New technology is always a good target. When a lantern inventor obtained a patent to light London, observed Macaulay, “the cause of darkness was not left undefended.” The learned technophobes have been especially vexed lately. The largest tech companies, they protest, are manipulating us.

Facebook, The New Republic declares, “remade the internet in its hideous image.” The New Yorker wonders whether the platform is going to “break democracy.”

Apple is no better. “Have smartphones destroyed a generation?” asks The Atlantic in a cover-story headline. The article’s author, Jean Twenge, says smartphones have made the young less independent, more reclusive, and more depressed. She claims that today’s teens are “on the brink of the worst mental-health”—wait for it—“crisis in decades.” “Much of this deterioration,” she contends, “can be traced to their phones.”

And then there’s Amazon. It’s too efficient. Alex Salkever worries in Fortune that “too many clicks, too much time spent, and too much money spent on Amazon” is “bad for our collective financial, psychological, and physical health.”

Here’s a rule of thumb for the refined cultural critic to ponder. When the talking points you use to convey your depth and perspicacity match those of a sermonizing Republican senator, start worrying that your pseudo-profound TED-Talk-y concerns for social justice are actually just fusty get-off-my-lawn fears of novelty and change.

Enter Josh Hawley, freshman GOP senator from Missouri. Hawley claims that Facebook is a “digital drug” that “dulls” attention spans and “frays” relationships. He speculates about whether social media is causing teenage girls to attempt suicide. “What passes for innovation by Big Tech today,” he insists, is “ever more sophisticated exploitation of people.” He scolds the tech companies for failing to produce products that—in his judgment—“enrich lives” and “strengthen society.”

As for the stuff the industry does make, Hawley wants it changed. He has introduced a bill to ban infinite scrolling, music and video autoplay, and the use of “badges and other awards” (gamification) on social media. The bill also requires defaults that limit a user’s time on a platform to 30 minutes a day. A user could opt out of this restriction, but only for a month at a stretch.

The available evidence does not bear out the notion that highbrow magazines, let alone Josh Hawley, should redesign tech products and police how people use their time. You’d probably have to pay someone around $500 to stay off Facebook for a year. Getting her to forego using Amazon would cost even more. And Google is worth more still—perhaps thousands of dollars per user per year. These figures are of course quite rough, but that just proves the point: the consumer surplus created by the internet is inestimable.

Is technology making teenagers sad? Probably not. A recent study tracked the social-media use, along with the wellbeing, of around ten-thousand British children for almost a decade. “In more than half of the thousands of statistical models we tested,” the study’s authors write, “we found nothing more than random statistical noise.” Although there were some small links between teenage girls’ mood and their social-media use, the connections were “miniscule” and too “trivial” to “inform personal parenting decisions.” “It’s probably best,” the researchers conclude, “to retire the idea that the amount of time teens spend on social media is a meaningful metric influencing their wellbeing.”

One could head the other way, in fact, and argue that technology is making children smarter. Surfing the web and playing video games might broaden their attention spans and improve their abstract thinking.

Is Facebook a threat to democracy? Not yet. The memes that Russian trolls distributed during the 2016 election were clumsy, garish, illiterate piffle. Most of it was the kind of thing that only an Alex Jones fan or a QAnon conspiracist would take seriously. And sure enough, one study finds that only a tiny fraction of voters, most of them older conservatives, read and spread the material. It appears, in other words, that the Russian fake news and propaganda just bounced around among a few wingnuts whose support for Donald Trump was never in doubt.

Over time, it is fair to say, the known costs and benefits of the latest technological innovations could change. New data and further study might reveal that the handwringers are on to something. But there’s good news: if you have fears, doubts, or objections, nothing stops you from acting on them. If you believe that Facebook’s behavior is intolerable, or that its impact on society is malign, stop using it. If you think Amazon is undermining small businesses, shop more at local stores. If you fret about your kid’s screen time, don’t give her a smartphone. Indeed, if you suspect that everything has gone pear-shaped since the Industrial Revolution started, throw out your refrigerator and stop going to the dentist.

We now hit the crux of the intellectuals’ (and Josh Hawley’s) complaint. It’s not a gripe about Big Tech so much as a gripe about you. You, the average person, are too dim, weak, and base. You lack the wits to use an iPhone on your own terms. You lack the self-control to post, “like”, and share in moderation (or the discipline to make your children follow suit). You lack the virtue to abstain from the pleasures of Prime-membership consumerism.

One AI researcher digs to the root. “It is only the hyper-privileged who are now saying, ‘I’m not going to give my kids this,’ or ‘I’m not on social media,’” she tells Vox. No one wields the “privilege” epithet quite like the modern privileged do. It is one of the remarkable features of our time. Pundits and professors use the word to announce, albeit unintentionally, that only they and their peers have any agency. Those other people, meanwhile, need protection from too much information, too much choice, too much freedom.

There’s nothing crazy about wanting the new aristocrats of the mind to shepherd everyone else. Noblesse oblige is a venerable concept. The lords care for the peasants, the king cares for the lords, God cares for the king. But that is not our arrangement. Our forebears embraced the Enlightenment. They began with the assumption that citizens are autonomous. They got suspicious whenever the holders of political power started trying to tell those citizens what they can and cannot do.

Algorithms might one day expose, and play on, our innate lack of free will so much that serious legal and societal adjustments are needed. That, however, is a remote and hypothetical issue, one likely to fall on a generation, yet unborn, who will smile in their turn at our qualms. (Before you place much weight on more dramatic predictions, consider that the great Herbert Simon asserted, in 1965, that we’d have general AI by 1985.)

The question today is more mundane: do voters crave moral direction from their betters? Are they clamoring to be viewed as lowly creatures who can hardly be relied on to tie their shoes? If so, they’re perfectly capable of debasing themselves accordingly through their choice of political representatives. Judging from Congress’s flat response to Hawley’s bill, the electorate is not quite there yet.

In the meantime, the great and the good might reevaluate their campaign to infantilize their less fortunate brothers and sisters. Lecturing people about how helpless they are is not deep. It’s not cool. It’s condescending and demeaning. It’s a form of trolling. Above all, it’s old-fashioned and priggish.

In 1816 The Times of London warned “every parent against exposing his daughter to so fatal a contagion” as . . . the waltz. “The novelty is one deserving of severe reprobation,” Britain’s paper of record intoned, “and we trust it will never again be tolerated in any moral English society.”

There was a time, Lord Macaulay felt sure, when some brahmin or other looked down his nose at the plough and the alphabet.

In Amazon, Apple, Facebook, Google, Intellectual Property, Patent, Platforms, Regulation, Truth on the Market, Twitter , , , , , , , , ,
permalink

Can Experts Structure Markets? Don’t Count On It.

Corbin K. Barthold —  28 May 2019

This guest post is by Corbin K. Barthold, Litigation Counsel at Washington Legal Foundation.

Complexity need not follow size. A star is huge but mostly homogenous. “It’s core is so hot,” explains Martin Rees, “that no chemicals can exist (complex molecules get torn apart); it is basically an amorphous gas of atomic nuclei and electrons.”

Nor does complexity always arise from remoteness of space or time. Celestial gyrations can be readily grasped. Thales of Miletus probably predicted a solar eclipse. Newton certainly could have done so. And we’re confident that in 4.5 billion years the Andromeda galaxy will collide with our own.

If the simple can be seen in the large and the distant, equally can the complex be found in the small and the immediate. A double pendulum is chaotic. Likewise the local weather, the fluctuations of a wildlife population, or the dispersion of the milk you pour into your coffee.

Our economy is not like a planetary orbit. It’s more like the weather or the milk. No one knows which companies will become dominant, which products will become popular, or which industries will become defunct. No one can see far ahead. Investing is inherently risky because the future of the economy, or even a single segment of it, is intractably uncertain. Do not hand your savings to any expert who says otherwise. Experts, in fact, often see the least of all.

But if a broker with a “sure thing” stock is a mountebank, what does that make an antitrust scholar with an “optimum structure” for a market? 

Not a prophet.

There is so much that we don’t know. Consider, for example, the notion that market concentration is a good measure of market competitiveness. The idea seems intuitive enough, and in many corners it remains an article of faith.

But the markets where this assumption is most plausible—hospital care and air travel come to mind—are heavily shaped by that grand monopolist we call government. Only a large institution can cope with the regulatory burden placed on the healthcare industry. As Tyler Cowen writes, “We get the level of hospital concentration that we have in essence chosen through politics and the law.”

As for air travel: the government promotes concentration by barring foreign airlines from the domestic market. In any case, the state of air travel does not support a straightforward conclusion that concentration equals power. The price of flying has fallen almost continuously since passage of the Airline Deregulation Act in 1978. The major airlines are disciplined by fringe carriers such as JetBlue and Southwest.

It is by no means clear that, aside from cases of government-imposed concentration, a consolidated market is something to fear. Technology lowers costs, lower costs enable scale, and scale tends to promote efficiency. Scale can arise naturally, therefore, from the process of creating better and cheaper products.

Say you’re a nineteenth-century cow farmer, and the railroad reaches you. Your shipping costs go down, and you start to sell to a wider market. As your farm grows, you start to spread your capital expenses over more sales. Your prices drop. Then refrigerated rail cars come along, you start slaughtering your cows on site, and your shipping costs go down again. Your prices drop further. Farms that fail to keep pace with your cost-cutting go bust. The cycle continues until beef is cheap and yours is one of the few cow farms in the area. The market improves as it consolidates.

As the decades pass, this story repeats itself on successively larger stages. The relentless march of technology has enabled the best companies to compete for regional, then national, and now global market share. We should not be surprised to see ever fewer firms offering ever better products and services.

Bear in mind, moreover, that it’s rarely the same company driving each leap forward. As Geoffrey Manne and Alec Stapp recently noted in this space, markets are not linear. Just after you adopt the next big advance in the logistics of beef production, drone delivery will disrupt your delivery network, cultured meat will displace your product, or virtual-reality flavoring will destroy your industry. Or—most likely of all—you’ll be ambushed by something you can’t imagine.

Does market concentration inhibit innovation? It’s possible. “To this day,” write Joshua Wright and Judge Douglas Ginsburg, “the complex relationship between static product market competition and the incentive to innovate is not well understood.” 

There’s that word again: complex. When will thumping company A in an antitrust lawsuit increase the net amount of innovation coming from companies A, B, C, and D? Antitrust officials have no clue. They’re as benighted as anyone. These are the people who will squash Blockbuster’s bid to purchase a rival video-rental shop less than two years before Netflix launches a streaming service.

And it’s not as if our most innovative companies are using market concentration as an excuse to relax. If its only concern were maintaining Google’s grip on the market for internet-search advertising, Alphabet would not have spent $16 billion on research and development last year. It spent that much because its long-term survival depends on building the next big market—the one that does not exist yet.

No expert can reliably make the predictions necessary to say when or how a market should look different. And if we empowered some experts to make such predictions anyway, no other experts would be any good at predicting what the empowered experts would predict. Experts trying to give us “well structured” markets will instead give us a costly, politicized, and stochastic antitrust enforcement process. 

Here’s a modest proposal. Instead of using the antitrust laws to address the curse of bigness, let’s create the Office of the Double Pendulum. We can place the whole section in a single room at the Justice Department. 

All we’ll need is some ping-pong balls, a double pendulum, and a monkey. On each ball will be the name of a major corporation. Once a quarter—or a month; reasonable minds can differ—a ball will be drawn, and the monkey prodded into throwing the pendulum. An even number of twirls saves the company on the ball. An odd number dooms it to being broken up.

This system will punish success just as haphazardly as anything our brightest neo-Brandeisian scholars can devise, while avoiding the ruinously expensive lobbying, rent-seeking, and litigation that arise when scholars succeed in replacing the rule of law with the rule of experts.

All hail the chaos monkey. Unutterably complex. Ineffably simple.

In Amazon, Antitrust & Competition, Google, Platforms, Truth on the Market , , ,
permalink