Truth on the Market

This guest post is by Neil Chilson, Senior Research Fellow for Technology and Innovation at Charles Koch Institute and former Chief Technologist at the Federal Trade Commission.

Is it rude to respond to a compliment with a rebuttal? I’m afraid that’s what I’m about to do. The antitrust reformers at the University of Chicago’s Stigler Center recently paid me a generous compliment, and I’m going to reply with an argumentative blog post. I guess that’s just the kind of guy I am.

 First, some background. In mid-February the White House released its Annual Report of the Council of Economic Advisors. This CEA Report examines digital platforms and competition issues in some depth. In particular, it criticizes a September 2019 report by the Stigler Center (hereinafter the Final Report or Final Stigler Report). The Final Report recommends that the U.S. create a single, sector-specific Digital Authority to regulate digital companies, but the CEA Report rejects that recommendation.

In response, Luigi Zingales and Filippo Maria Lancieri of the Stigler Center posted “The Trump Administration Attacks the Stigler Report on Digital Platforms.” Zingales and Lancieri push back on the CEA’s conclusions. And here they pay me an unexpected compliment. From their blog post:

 The section [of the CEA Report] on the digital economy is centered on an attack on the proposal of the Stigler Report to create a Digital Agency, saying it “raises a host of issues” and “that the downsides of new, far-reaching regulation need to be taken seriously.” In doing so, the Council of Economic Advisers repeats, almost verbatim, a claim already advanced by Charles Koch Institute’s Neil Chilson in the Washington Post, an argument already refuted in an earlier ProMarket post. (emphasis added)

I am flattered that the Stigler Center would connect my op ed with the thoughtful analysis of the experts at the Council of Economic Advisors. I like to think my op ed influenced the CEA’s report. But I suspect this is just a case of independent folks saying relatively obvious things about regulatory capture.

However, I’m a bit put out by their claim that my op ed was “already refuted in an earlier ProMarket post.” It is true that Fiona Scott Morton and Luigi Zingales published a post in November criticizing my op ed. At the time I found it so unpersuasive that I thought it unnecessary to respond with anything more than one tweet:

Still, the November post has occasionally been promoted by various U. Chicago-related twitter accounts. And now the Stigler Center claims that post refuted my op ed (and, by implication, the CEA Report). So, it’s time to respond to the November post more fully.

My Washington Post op ed made two relevant points, one observational and one substantive. First, I observed the irony of a center named after George Stigler proposing a new agency. Stigler was a Nobel-prize winning economist. He popularized the term “regulatory capture” and warned that “regulation is acquired by the industry and is designed and operated primarily for its benefit.” As my op ed points out, it’s a fair bet that he would be skeptical of creating a new agency like that recommended by the Final Stigler Report.

Second, my op ed argues against establishing a single new agency to regulate digital companies, primarily because such single-industry agencies are more vulnerable to regulatory capture. That is, such specialized agencies are more likely than generalist agencies to serve the interests of the regulated companies rather than the public. It would be better to subject the digital companies to an existing economy-wide enforcement agency like the Federal Trade Commission, I argue.

In the November blog post Morton and Zingales did not rebut either of these points. They exaggerate how thoroughly the Final Stigler Report evaluated and addressed such concerns. But more importantly, they do not refute my substantive claim about the capture of single-industry agencies – indeed, they appear to begrudgingly agree with me.

Let’s look at each argument.

First, the Report eagerly recommends a new independent agency but barely acknowledges regulatory capture risks and offers only a last-minute, hardly discussed fix. The body of the Final Stigler Report, which draws from four separate subcommittee reports, enthusiastically endorses a stand-alone, industry-specific Digital Authority (DA). As the Report’s Policy Brief summarizes, “The strongest indication emerging from the four reports is the importance of having a single powerful regulator capable of overseeing all aspects of DPs [digital platforms].” This conclusion represents a common theme throughout the Final Stigler Report:

• “Therefore, the report suggests that Congress should consider creating a specialist regulator, the Digital Authority.” (p 32)
• “For the reasons above, we believe the establishment of a sectoral regulator should be seriously considered.” (p 100)
• “Finally, because the problems we identify may require action beyond antitrust, we also propose the establishment of a new digital regulatory agency, or Digital Authority.” (p 120)

Despite this enthusiastic support for a new agency, the 313-page body of the Final Report offers no institutional design solutions to address regulatory capture concerns. The Final Report does mention “regulatory capture” or similar phrases a few times, mostly in citations or in platitudes like “it is important to remain cognizant of the dangers of regulatory capture.” In one example, the Final Report points to the sector-specific Federal Communications Commission as a model for the Digital Authority even as it acknowledges the FCC’s deep historic problem with regulatory capture. (My op ed dives deep into the lessons for a Digital Authority from the FCC’s history of capture – analysis wholly ignored by Morton and Zingales’s post.) So, the body of the Final Report offers very little to support Morton and Zingales’ claim that regulatory capture concerns were addressed.

However, the Final Report’s 17-page “Policy Brief” summary does contain a single paragraph that acknowledges the importance of institutional design and suggests a potential mitigation:

The Dangers of a Digital Authority: As George Stigler would readily point out, a new Digital Authority runs the risk of being captured by industry, becoming a new barrier to entry rather than a promoter of competition. This risk can be minimized, albeit not eliminated, by a careful institutional design. This is one reason why we envision—at least initially—to have the Digital Authority as a subdivision of the FTC, an across-industry authority with a better-than-average record of avoiding capture. Most importantly, the Digital Authority will have to be very transparent in all its activities. The Reports discuss a range of different institutional design mechanisms that can be explored to protect the Digital Authority from capture. (emphasis added)

Morton and Zingales point to this lone paragraph in the Policy Brief as proof that the Stigler Center had considered regulatory capture implications for institutional design, saying:

To avoid the legitimate concern raised by Chilson, the Stigler Center proposal suggests, as one option, that the Digital Authority be placed inside the Federal Trade Commission (FTC), an agency even Chilson appreciates, having worked there. Rotating FTC staff between consumer protection, antitrust, and digital authority could create useful synergies and expertise and minimize the risk that DA employees will be captured by industry. More stringent restrictions to revolving doors would help minimize this risk.

Yet this single paragraph in the Policy Brief is the Final Report’s only proposed mitigation of regulatory capture. And it is the only mention of a FTC-embedded approach in all the reports, including the subcommittee reports. In fact, Morton and Zingales’ blog post, in suggesting rotating FTC staff and revolving door restrictions, provides more detail about the potential institutional design of the DA than do the Policy Brief and the Final Report combined.

This is not strong evidence of a thoughtful approach to regulatory capture. Instead, as I pointed out in my tweet, this tack-on paragraph looks more like someone raised last-minute concerns that George Stigler might have objected to creating an entire new agency.

Morton and Zingales also claim that the four preliminary reports “discuss a range of different institutional design mechanisms.” But there isn’t much in the subcommittee reports, either. Neither the Market Structure and Antitrust Subcommittee’s report nor the Privacy and Data Protection Subcommittee’s report offer any mechanisms to prevent capture. The Media Industry Subcommittee’s report actually agrees with my op ed, noting that “industry regulators are often more prone to capture than the antitrust regulator” and suggests some transparency requirements.

The Political Systems Subcommittee’s report contains four paragraphs with some relevant discussion. Those paragraphs discuss whether the new Digital Authority should be modeled on the Consumer Financial Protection Bureau or instead designed like the Securities Exchange Commission- or FTC. However, the Subcommittee primarily expresses concern about politicization rather than industry capture. And it never makes a recommendation, concluding that “[t]here is probably no single way to balance the concerns for preventing industry capture and those related to political manipulation.”

So, does the Final Report address regulatory capture concerns generally, as Morton and Zingales claim? To sum up, across the hundreds of pages in five reports there are a few mentions of regulatory capture. One report briefly suggests transparency as a remedy. Another considers two different institutional designs for the DA but mostly worries about politicization. Finally, one sentence of the Final Report’s Policy Brief offers a novel alternative to the DA that is counter to the recommendations in the body of the Final Report. Perhaps these brief, contradictory discussions would be enough to address George Stigler’s presumptive concerns about regulatory capture, but I remain skeptical.

Second, Morton and Zingales do not refute my argument that industry-specific agencies are more likely to be captured – indeed, they appear to begrudgingly agree with me.

Most of Morton and Zingales’ blog post furiously battles a strawman, which is why I didn’t feel a strong need to respond last November. For example, they claim that, “Chilson’s argument, taken at face value, eliminates all government agencies.” Not at all – I focus on the downsides of industry-specific regulators. They accuse me of a laissez-faire approach toward tech companies. Yet my piece applauds FTC enforcement. They accuse me of evidence-free fear mongering and lacking concern for our democracy while they hypothesize about TikTok monopolizing social media (odd hypo, given five paragraphs earlier they claimed Facebook has a monopoly on social media) and say I don’t care about disclosure of foreign spending on political ads.

None of this has anything to do with the argument my op ed. All it does is distract from the fact that, as they admit, I raise “a legitimate concern” about regulatory capture. And they must admit this, because the Policy Brief essentially agrees with my op ed when it rejects, at the last minute, the Final Report’s recommendation for a stand-alone industry-specific Digital Authority. Compare the Policy Brief’s “Dangers of a Digital Authority” paragraph quoted above with the final paragraphs of my op ed:

 [G]eneralist agencies that broadly regulate many industries are more resistant to capture. Further, agencies that primarily enforce laws (like the DOJ) are far less attractive targets for regulatory capture than those that mostly write rules (like the FCC). … In the United States, we already have an economywide enforcement agency: the Federal Trade Commission. Charged by Congress to promote competition and to protect consumers, the FTC has decades of experience addressing antitrust and consumer protection issues in the tech industry. … [I]f new capabilities are needed to police digital companies, doesn’t it make sense to give such authority to an experienced agency that has been resistant to regulatory capture?

Thus, Morton and Zingales don’t refute my op ed at all. I’m honestly not sure why they claim to. Perhaps I poked a sore spot. After all, there is a clear tension between the body of the Stigler Center Final Report, which recommends a stand-alone agency, and the Policy Brief, which in one sentence rejects that approach because of concerns over regulatory capture of an industry-specific regulator.

I share the concerns of that one sentence in the Policy Brief. So does the President’s Council of Economic Advisors. It remains to be seen where the Stigler Center settles on this point.