Archives For constitutional political economy

Following is the (slightly expanded and edited) text of my remarks from the panel, Antitrust and the Tech Industry: What Is at Stake?, hosted last Thursday by CCIA. Bruce Hoffman (keynote), Bill Kovacic, Nicolas Petit, and Christine Caffarra also spoke. If we’re lucky Bruce will post his remarks on the FTC website; they were very good.

(NB: Some of these comments were adapted (or lifted outright) from a forthcoming Cato Policy Report cover story co-authored with Gus Hurwitz, so Gus shares some of the credit/blame.)

 

The urge to treat antitrust as a legal Swiss Army knife capable of correcting all manner of social and economic ills is apparently difficult for some to resist. Conflating size with market power, and market power with political power, many recent calls for regulation of industry — and the tech industry in particular — are framed in antitrust terms. Take Senator Elizabeth Warren, for example:

[T]oday, in America, competition is dying. Consolidation and concentration are on the rise in sector after sector. Concentration threatens our markets, threatens our economy, and threatens our democracy.

And she is not alone. A growing chorus of advocates are now calling for invasive, “public-utility-style” regulation or even the dissolution of some of the world’s most innovative companies essentially because they are “too big.”

According to critics, these firms impose all manner of alleged harms — from fake news, to the demise of local retail, to low wages, to the veritable destruction of democracy — because of their size. What is needed, they say, is industrial policy that shackles large companies or effectively mandates smaller firms in order to keep their economic and political power in check.

But consider the relationship between firm size and political power and democracy.

Say you’re successful in reducing the size of today’s largest tech firms and in deterring the creation of new, very-large firms: What effect might we expect this to have on their political power and influence?

For the critics, the effect is obvious: A re-balancing of wealth and thus the reduction of political influence away from Silicon Valley oligarchs and toward the middle class — the “rudder that steers American democracy on an even keel.”

But consider a few (and this is by no means all) countervailing points:

To begin, at the margin, if you limit firm growth as a means of competing with rivals, you make correspondingly more important competition through political influence. Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions, and rent-seeking by smaller firms could both be more prevalent, and, paradoxically, ultimately lead to increased concentration.

Next, by imbuing antitrust with an ill-defined set of vague political objectives, you also make antitrust into a sort of “meta-legislation.” As a result, the return on influencing a handful of government appointments with authority over antitrust becomes huge — increasing the ability and the incentive to do so.

And finally, if the underlying basis for antitrust enforcement is extended beyond economic welfare effects, how long can we expect to resist calls to restrain enforcement precisely to further those goals? All of a sudden the effort and ability to get exemptions will be massively increased as the persuasiveness of the claimed justifications for those exemptions, which already encompass non-economic goals, will be greatly enhanced. We might even find, again, that we end up with even more concentration because the exceptions could subsume the rules.

All of which of course highlights the fundamental, underlying problem: If you make antitrust more political, you’ll get less democratic, more politically determined, results — precisely the opposite of what proponents claim to want.

Then there’s democracy, and calls to break up tech in order to save it. Calls to do so are often made with reference to the original intent of the Sherman Act and Louis Brandeis and his “curse of bigness.” But intentional or not, these are rallying cries for the assertion, not the restraint, of political power.

The Sherman Act’s origin was ambivalent: although it was intended to proscribe business practices that harmed consumers, it was also intended to allow politically-preferred firms to maintain high prices in the face of competition from politically-disfavored businesses.

The years leading up to the adoption of the Sherman Act in 1890 were characterized by dramatic growth in the efficiency-enhancing, high-tech industries of the day. For many, the purpose of the Sherman Act was to stem this growth: to prevent low prices — and, yes, large firms — from “driving out of business the small dealers and worthy men whose lives have been spent therein,” in the words of Trans-Missouri Freight, one of the early Supreme Court decisions applying the Act.

Left to the courts, however, the Sherman Act didn’t quite do the trick. By 1911 (in Standard Oil and American Tobacco) — and reflecting consumers’ preferences for low prices over smaller firms — only “unreasonable” conduct was actionable under the Act. As one of the prime intellectual engineers behind the Clayton Antitrust Act and the Federal Trade Commission in 1914, Brandeis played a significant role in the (partial) legislative and administrative overriding of the judiciary’s excessive support for economic efficiency.

Brandeis was motivated by the belief that firms could become large only by illegitimate means and by deceiving consumers. But Brandeis was no advocate for consumer sovereignty. In fact, consumers, in Brandeis’ view, needed to be saved from themselves because they were, at root, “servile, self-indulgent, indolent, ignorant.”

There’s a lot that today we (many of us, at least) would find anti-democratic in the underpinnings of progressivism in US history: anti-consumerism; racism; elitism; a belief in centrally planned, technocratic oversight of the economy; promotion of social engineering, including through eugenics; etc. The aim of limiting economic power was manifestly about stemming the threat it posed to powerful people’s conception of what political power could do: to mold and shape the country in their image — what economist Thomas Sowell calls “the vision of the anointed.”

That may sound great when it’s your vision being implemented, but today’s populist antitrust resurgence comes while Trump is in the White House. It’s baffling to me that so many would expand and then hand over the means to design the economy and society in their image to antitrust enforcers in the executive branch and presidentially appointed technocrats.

Throughout US history, it is the courts that have often been the bulwark against excessive politicization of the economy, and it was the courts that shepherded the evolution of antitrust away from its politicized roots toward rigorous, economically grounded policy. And it was progressives like Brandeis who worked to take antitrust away from the courts. Now, with efforts like Senator Klobuchar’s merger bill, the “New Brandeisians” want to rein in the courts again — to get them out of the way of efforts to implement their “big is bad” vision.

But the evidence that big is actually bad, least of all on those non-economic dimensions, is thin and contested.

While Zuckerberg is grilled in Congress over perceived, endemic privacy problems, politician after politician and news article after news article rushes to assert that the real problem is Facebook’s size. Yet there is no convincing analysis (maybe no analysis of any sort) that connects its size with the problem, or that evaluates whether the asserted problem would actually be cured by breaking up Facebook.

Barry Lynn claims that the origins of antitrust are in the checks and balances of the Constitution, extended to economic power. But if that’s right, then the consumer welfare standard and the courts are the only things actually restraining the disruption of that order. If there may be gains to be had from tweaking the minutiae of the process of antitrust enforcement and adjudication, by all means we should have a careful, lengthy discussion about those tweaks.

But throwing the whole apparatus under the bus for the sake of an unsubstantiated, neo-Brandeisian conception of what the economy should look like is a terrible idea.

An interesting thing happened on June 21st.  Scott Skavdahl, a federal district court judge appointed by President Barack Obama, invalidated the “Fracking Rule” adopted by the Interior Department’s Bureau of Land Management (BLM).  Even more interesting, however, was the fact that, in so holding, the judge relied heavily on a rather dusty, moth-eaten eighteenth century political doctrine, the separation of powers.  What was behind this quaint decision?  See the slip opinion in State of Wyoming, State of North Dakota, State of Utah, and Ute Indian Tribe v. U.S. Department of the Interior to find out.

The facts are straightforward.  As the court explained, fracking – the procedure by which oil and gas producers inject water, sand, and certain chemicals into tight-rock formations (typically shale) to create fissures in the rock and allow oil and gas for collection in a well – is primarily responsible for the steady increase in domestic oil and natural gas production over the last decade.  Purportedly in response to “public concern about whether fracturing can lead to or cause the contamination of underground water sources,” the BLM in 2012 initiated a rulemaking to implement “additional regulatory effort and oversight” of this practice on federal and Indian lands, over which it exercises jurisdiction.  Three years later, on March 26, 2015, the BLM issued a final Fracking Rule.  Several states, an Indian tribe, and representatives of affected industries challenged the Rule under the Administrative Procedure Act as arbitrary, not in accordance with law, and in excess of the BLM’s statutory jurisdiction and authority.

In its review, the court rejected the Government’s argument that various statutes authorized BLM to promulgate the Rule.  Moreover, the court noted, significantly, that “the BLM has previously taken the position, up until promulgation of the Fracking Rule, that it lacked the authority or jurisdiction to regulate hydraulic fracking.”  Furthermore, under the Safe Drinking Water Act of 1974, “Congress vested the EPA [Environmental Protection Agency] with the authority and duty to regulate hydraulic fracturing on all lands, federal, state and tribal.”  Subsequently, in enacting the Energy Policy Act of 2005 (EP Act), Congress sought “to expedite oil and gas development within the United States.”  Employing standard methods of statutory construction, the court then determined that “the 2005 EP Act’s explicit removal of the EPA’s regulatory authority over non-diesel hydraulic fracturing likewise precludes the BLM from regulating that activity, thereby removing fracking from the realm of federal regulation.”  It therefore concluded, as a matter of logic, that the BLM’s effort to regulate fracking on federal and Indian lands “through the Fracking Rule is in excess of its statutory authority and contrary to law.”

The court, however, did far more than rely on traditional tools of statutory construction in reaching its holding.  In a jurisprudential flourish, Judge Skavdahl explained that the logic of his decision was compelled by the separation of powers [citations and internal quotation marks omitted]:

As this Court has previously noted, our system of government operates based upon the principle of limited and enumerated powers assigned to the three branches of government. In its simplest form, the legislative branch enacts laws, the executive branch enforces those laws, and the judicial branch ensures that the laws passed and enforced are Constitutional. See Marbury v. Madison, 5 U.S. 137, 176 (1803). A federal agency is a creature of statute and derives its existence, authority and powers from Congress alone. It has no constitutional or common law existence or authority outside that expressly conveyed to it by Congress. . . . In the absence of a statute conferring authority, then, an administrative agency has none. . . .  This Court must be guided to a degree by common sense as to the manner in which Congress would likely delegate a policy decision of such economic and political magnitude to an administrative agency.  Given Congress’ enactment of the EP Act of 2005, to nonetheless conclude that Congress implicitly delegated BLM authority to regulate hydraulic fracturing lacks common sense.  Congress’ inability or unwillingness to pass a law desired by the executive branch does not default authority to the executive branch to act independently, regardless of whether hydraulic fracturing is good or bad for the environment or the Citizens of the United States.  [The Supreme] Court consistently has given voice to, and has reaffirmed, the central judgment of the Framers of the Constitution that, within our political scheme, the separation of governmental powers into three coordinate Branches is essential to the preservation of liberty.

The quaint notion that the separation of powers “is essential to the preservation of liberty” comports with the understanding of the Framers of the Constitution.  As James Madison pithily stated in The Federalist Number 47, “[t]he accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny.”  To avoid such a tyrannical outcome, Madison emphasized, in The Federalist Number 51, the need for structural checks and balances whereby each of the three branches of the federal government could check the others.  It is good to know that at least some recently minted federal judges remain attuned to the separation of powers’ significance.

Economic constitutionalists” also underscore the potential economic case for a robust separation of powers.   For example, Professor Jonathan Macey’s take on economic constitutionalism presents a particularly compelling defense of constitutionally separated powers as an economic welfare prescription that promotes efficiency.  In particular:

Self-interested groups or individuals will lobby to political powers for their goals, possibly leading to injustice or inefficiency. In Macey’s interpretation of Madison, the separation of powers channels lobbyists into the competitive, more efficient market by raising transaction costs so much that private market means are less expensive than appealing to the various separate powers of government.

In short, in addition to promoting respect for the rule of law, attention to the separation of powers advances economic welfare and efficiency, as a normative matter.

Ultimately, of course, the future appointment of judges (like Judge Skavdahl) who are attentive to constitutional constraints requires the election of legislators and Presidents who are faithful to constitutionally-mandated limitations on government power.  The latter, in turn, requires that the general public be made aware of – and support – those foundational constitutional restrictions.  As Madison aptly put it in The Federalist Number 51, “[a] dependence on the people is, no doubt, the primary control on the government”.  Let us hope that the American public will prove capable of fulfilling its Madisonian responsibility in this regard.