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Politico has released a cache of confidential Federal Trade Commission (FTC) documents in connection with a series of articles on the commission’s antitrust probe into Google Search a decade ago. The headline of the first piece in the series argues the FTC “fumbled the future” by failing to follow through on staff recommendations to pursue antitrust intervention against the company. 

But while the leaked documents shed interesting light on the inner workings of the FTC, they do very little to substantiate the case that the FTC dropped the ball when the commissioners voted unanimously not to bring an action against Google.

Drawn primarily from memos by the FTC’s lawyers, the Politico report purports to uncover key revelations that undermine the FTC’s decision not to sue Google. None of the revelations, however, provide evidence that Google’s behavior actually harmed consumers.

The report’s overriding claim—and the one most consistently forwarded by antitrust activists on Twitter—is that FTC commissioners wrongly sided with the agency’s economists (who cautioned against intervention) rather than its lawyers (who tenuously recommended very limited intervention). 

Indeed, the overarching narrative is that the lawyers knew what was coming and the economists took wildly inaccurate positions that turned out to be completely off the mark:

But the FTC’s economists successfully argued against suing the company, and the agency’s staff experts made a series of predictions that would fail to match where the online world was headed:

— They saw only “limited potential for growth” in ads that track users across the web — now the backbone of Google parent company Alphabet’s $182.5 billion in annual revenue.

— They expected consumers to continue relying mainly on computers to search for information. Today, about 62 percent of those queries take place on mobile phones and tablets, nearly all of which use Google’s search engine as the default.

— They thought rivals like Microsoft, Mozilla or Amazon would offer viable competition to Google in the market for the software that runs smartphones. Instead, nearly all U.S. smartphones run on Google’s Android and Apple’s iOS.

— They underestimated Google’s market share, a heft that gave it power over advertisers as well as companies like Yelp and Tripadvisor that rely on search results for traffic.

The report thus asserts that:

The agency ultimately voted against taking action, saying changes Google made to its search algorithm gave consumers better results and therefore didn’t unfairly harm competitors.

That conclusion underplays what the FTC’s staff found during the probe. In 312 pages of documents, the vast majority never publicly released, staffers outlined evidence that Google had taken numerous steps to ensure it would continue to dominate the market — including emerging arenas such as mobile search and targeted advertising. [EMPHASIS ADDED]

What really emerges from the leaked memos, however, is analysis by both the FTC’s lawyers and economists infused with a healthy dose of humility. There were strong political incentives to bring a case. As one of us noted upon the FTC’s closing of the investigation: “It’s hard to imagine an agency under more pressure, from more quarters (including the Hill), to bring a case around search.” Yet FTC staff and commissioners resisted that pressure, because prediction is hard. 

Ironically, the very prediction errors that the agency’s staff cautioned against are now being held against them. Yet the claims that these errors (especially the economists’) systematically cut in one direction (i.e., against enforcement) and that all of their predictions were wrong are both wide of the mark. 

Decisions Under Uncertainty

In seeking to make an example out of the FTC economists’ inaccurate predictions, critics ignore that antitrust investigations in dynamic markets always involve a tremendous amount of uncertainty; false predictions are the norm. Accordingly, the key challenge for policymakers is not so much to predict correctly, but to minimize the impact of incorrect predictions.

Seen in this light, the FTC economists’ memo is far from the laissez-faire manifesto that critics make it out to be. Instead, it shows agency officials wrestling with uncertain market outcomes, and choosing a course of action under the assumption the predictions they make might indeed be wrong. 

Consider the following passage from FTC economist Ken Heyer’s memo:

The great American philosopher Yogi Berra once famously remarked “Predicting is difficult, especially about the future.” How right he was. And yet predicting, and making decisions based on those predictions, is what we are charged with doing. Ignoring the potential problem is not an option. So I will be reasonably clear about my own tentative conclusions and recommendation, recognizing that reasonable people, perhaps applying a somewhat different standard, may disagree. My recommendation derives from my read of the available evidence, combined with the standard I personally find appropriate to apply to Commission intervention. [EMPHASIS ADDED]

In other words, contrary to what many critics have claimed, it simply is not the case that the FTC’s economists based their recommendations on bullish predictions about the future that ultimately failed to transpire. Instead, they merely recognized that, in a dynamic and unpredictable environment, antitrust intervention requires both a clear-cut theory of anticompetitive harm and a reasonable probability that remedies can improve consumer welfare. According to the economists, those conditions were absent with respect to Google Search.

Perhaps more importantly, it is worth asking why the economists’ erroneous predictions matter at all. Do critics believe that developments the economists missed warrant a different normative stance today?

In that respect, it is worth noting that the economists’ skepticism appeared to have rested first and foremost on the speculative nature of the harms alleged and the difficulty associated with designing appropriate remedies. And yet, if anything, these two concerns appear even more salient today. 

Indeed, the remedies imposed against Google in the EU have not delivered the outcomes that enforcers expected (here and here). This could either be because the remedies were insufficient or because Google’s market position was not due to anticompetitive conduct. Similarly, there is still no convincing economic theory or empirical research to support the notion that exclusive pre-installation and self-preferencing by incumbents harm consumers, and a great deal of reason to think they benefit them (see, e.g., our discussions of the issue here and here). 

Against this backdrop, criticism of the FTC economists appears to be driven more by a prior assumption that intervention is necessary—and that it was and is disingenuous to think otherwise—than evidence that erroneous predictions materially affected the outcome of the proceedings.

To take one example, the fact that ad tracking grew faster than the FTC economists believed it would is no less consistent with vigorous competition—and Google providing a superior product—than with anticompetitive conduct on Google’s part. The same applies to the growth of mobile operating systems. Ditto the fact that no rival has managed to dislodge Google in its most important markets. 

In short, not only were the economist memos informed by the very prediction difficulties that critics are now pointing to, but critics have not shown that any of the staff’s (inevitably) faulty predictions warranted a different normative outcome.

Putting Erroneous Predictions in Context

So what were these faulty predictions, and how important were they? Politico asserts that “the FTC’s economists successfully argued against suing the company, and the agency’s staff experts made a series of predictions that would fail to match where the online world was headed,” tying this to the FTC’s failure to intervene against Google over “tactics that European regulators and the U.S. Justice Department would later label antitrust violations.” The clear message is that the current actions are presumptively valid, and that the FTC’s economists thwarted earlier intervention based on faulty analysis.

But it is far from clear that these faulty predictions would have justified taking a tougher stance against Google. One key question for antitrust authorities is whether they can be reasonably certain that more efficient competitors will be unable to dislodge an incumbent. This assessment is necessarily forward-looking. Framed this way, greater market uncertainty (for instance, because policymakers are dealing with dynamic markets) usually cuts against antitrust intervention.

This does not entirely absolve the FTC economists who made the faulty predictions. But it does suggest the right question is not whether the economists made mistakes, but whether virtually everyone did so. The latter would be evidence of uncertainty, and thus weigh against antitrust intervention.

In that respect, it is worth noting that the staff who recommended that the FTC intervene also misjudged the future of digital markets.For example, while Politico surmises that the FTC “underestimated Google’s market share, a heft that gave it power over advertisers as well as companies like Yelp and Tripadvisor that rely on search results for traffic,” there is a case to be made that the FTC overestimated this power. If anything, Google’s continued growth has opened new niches in the online advertising space.

Pinterest provides a fitting example; despite relying heavily on Google for traffic, its ad-funded service has witnessed significant growth. The same is true of other vertical search engines like Airbnb, Booking.com, and Zillow. While we cannot know the counterfactual, the vertical search industry has certainly not been decimated by Google’s “monopoly”; quite the opposite. Unsurprisingly, this has coincided with a significant decrease in the cost of online advertising, and the growth of online advertising relative to other forms.

Politico asserts not only that the economists’ market share and market power calculations were wrong, but that the lawyers knew better:

The economists, relying on data from the market analytics firm Comscore, found that Google had only limited impact. They estimated that between 10 and 20 percent of traffic to those types of sites generally came from the search engine.

FTC attorneys, though, used numbers provided by Yelp and found that 92 percent of users visited local review sites from Google. For shopping sites like eBay and TheFind, the referral rate from Google was between 67 and 73 percent.

This compares apples and oranges, or maybe oranges and grapefruit. The economists’ data, from Comscore, applied to vertical search overall. They explicitly noted that shares for particular sites could be much higher or lower: for comparison shopping, for example, “ranging from 56% to less than 10%.” This, of course, highlights a problem with the data provided by Yelp, et al.: it concerns only the websites of companies complaining about Google, not the overall flow of traffic for vertical search.

But the more important point is that none of the data discussed in the memos represents the overall flow of traffic for vertical search. Take Yelp, for example. According to the lawyers’ memo, 92 percent of Yelp searches were referred from Google. Only, that’s not true. We know it’s not true because, as Yelp CEO Jerry Stoppelman pointed out around this time in Yelp’s 2012 Q2 earnings call: 

When you consider that 40% of our searches come from mobile apps, there is quite a bit of un-monetized mobile traffic that we expect to unlock in the near future.

The numbers being analyzed by the FTC staff were apparently limited to referrals to Yelp’s website from browsers. But is there any reason to think that is the relevant market, or the relevant measure of customer access? Certainly there is nothing in the staff memos to suggest they considered the full scope of the market very carefully here. Indeed, the footnote in the lawyers’ memo presenting the traffic data is offered in support of this claim:

Vertical websites, such as comparison shopping and local websites, are heavily dependent on Google’s web search results to reach users. Thus, Google is in the unique position of being able to “make or break any web-based business.”

It’s plausible that vertical search traffic is “heavily dependent” on Google Search, but the numbers offered in support of that simply ignore the (then) 40 percent of traffic that Yelp acquired through its own mobile app, with no Google involvement at all. In any case, it is also notable that, while there are still somewhat fewer app users than web users (although the number has consistently increased), Yelp’s app users view significantly more pages than its website users do — 10 times as many in 2015, for example.

Also noteworthy is that, for whatever speculative harm Google might be able to visit on the company, at the time of the FTC’s analysis Yelp’s local ad revenue was consistently increasing — by 89% in Q3 2012. And that was without any ad revenue coming from its app (display ads arrived on Yelp’s mobile app in Q1 2013, a few months after the staff memos were written and just after the FTC closed its Google Search investigation). 

In short, the search-engine industry is extremely dynamic and unpredictable. Contrary to what many have surmised from the FTC staff memo leaks, this cuts against antitrust intervention, not in favor of it.

The FTC Lawyers’ Weak Case for Prosecuting Google

At the same time, although not discussed by Politico, the lawyers’ memo also contains errors, suggesting that arguments for intervention were also (inevitably) subject to erroneous prediction.

Among other things, the FTC attorneys’ memo argued the large upfront investments were required to develop cutting-edge algorithms, and that these effectively shielded Google from competition. The memo cites the following as a barrier to entry:

A search engine requires algorithmic technology that enables it to search the Internet, retrieve and organize information, index billions of regularly changing web pages, and return relevant results instantaneously that satisfy the consumer’s inquiry. Developing such algorithms requires highly specialized personnel with high levels of training and knowledge in engineering, economics, mathematics, sciences, and statistical analysis.

If there are barriers to entry in the search-engine industry, algorithms do not seem to be the source. While their market shares may be smaller than Google’s, rival search engines like DuckDuckGo and Bing have been able to enter and gain traction; it is difficult to say that algorithmic technology has proven a barrier to entry. It may be hard to do well, but it certainly has not proved an impediment to new firms entering and developing workable and successful products. Indeed, some extremely successful companies have entered into similar advertising markets on the backs of complex algorithms, notably Instagram, Snapchat, and TikTok. All of these compete with Google for advertising dollars.

The FTC’s legal staff also failed to see that Google would face serious competition in the rapidly growing voice assistant market. In other words, even its search-engine “moat” is far less impregnable than it might at first appear.

Moreover, as Ben Thompson argues in his Stratechery newsletter: 

The Staff memo is completely wrong too, at least in terms of the potential for their proposed remedies to lead to any real change in today’s market. This gets back to why the fundamental premise of the Politico article, along with much of the antitrust chatter in Washington, misses the point: Google is dominant because consumers like it.

This difficulty was deftly highlighted by Heyer’s memo:

If the perceived problems here can be solved only through a draconian remedy of this sort, or perhaps through a remedy that eliminates Google’s legitimately obtained market power (and thus its ability to “do evil”), I believe the remedy would be disproportionate to the violation and that its costs would likely exceed its benefits. Conversely, if a remedy well short of this seems likely to prove ineffective, a remedy would be undesirable for that reason. In brief, I do not see a feasible remedy for the vertical conduct that would be both appropriate and effective, and which would not also be very costly to implement and to police. [EMPHASIS ADDED]

Of course, we now know that this turned out to be a huge issue with the EU’s competition cases against Google. The remedies in both the EU’s Google Shopping and Android decisions were severely criticized by rival firms and consumer-defense organizations (here and here), but were ultimately upheld, in part because even the European Commission likely saw more forceful alternatives as disproportionate.

And in the few places where the legal staff concluded that Google’s conduct may have caused harm, there is good reason to think that their analysis was flawed.

Google’s ‘revenue-sharing’ agreements

It should be noted that neither the lawyers nor the economists at the FTC were particularly bullish on bringing suit against Google. In most areas of the investigation, neither recommended that the commission pursue a case. But one of the most interesting revelations from the recent leaks is that FTC lawyers did advise the commission’s leadership to sue Google over revenue-sharing agreements that called for it to pay Apple and other carriers and manufacturers to pre-install its search bar on mobile devices:

FTC staff urged the agency’s five commissioners to sue Google for signing exclusive contracts with Apple and the major wireless carriers that made sure the company’s search engine came pre-installed on smartphones.

The lawyers’ stance is surprising, and, despite actions subsequently brought by the EU and DOJ on similar claims, a difficult one to countenance. 

To a first approximation, this behavior is precisely what antitrust law seeks to promote: we want companies to compete aggressively to attract consumers. This conclusion is in no way altered when competition is “for the market” (in this case, firms bidding for exclusive placement of their search engines) rather than “in the market” (i.e., equally placed search engines competing for eyeballs).

Competition for exclusive placement has several important benefits. For a start, revenue-sharing agreements effectively subsidize consumers’ mobile device purchases. As Brian Albrecht aptly puts it:

This payment from Google means that Apple can lower its price to better compete for consumers. This is standard; some of the payment from Google to Apple will be passed through to consumers in the form of lower prices.

This finding is not new. For instance, Ronald Coase famously argued that the Federal Communications Commission (FCC) was wrong to ban the broadcasting industry’s equivalent of revenue-sharing agreements, so-called payola:

[I]f the playing of a record by a radio station increases the sales of that record, it is both natural and desirable that there should be a charge for this. If this is not done by the station and payola is not allowed, it is inevitable that more resources will be employed in the production and distribution of records, without any gain to consumers, with the result that the real income of the community will tend to decline. In addition, the prohibition of payola may result in worse record programs, will tend to lessen competition, and will involve additional expenditures for regulation. The gain which the ban is thought to bring is to make the purchasing decisions of record buyers more efficient by eliminating “deception.” It seems improbable to me that this problematical gain will offset the undoubted losses which flow from the ban on Payola.

Applying this logic to Google Search, it is clear that a ban on revenue-sharing agreements would merely lead both Google and its competitors to attract consumers via alternative means. For Google, this might involve “complete” vertical integration into the mobile phone market, rather than the open-licensing model that underpins the Android ecosystem. Valuable specialization may be lost in the process.

Moreover, from Apple’s standpoint, Google’s revenue-sharing agreements are profitable only to the extent that consumers actually like Google’s products. If it turns out they don’t, Google’s payments to Apple may be outweighed by lower iPhone sales. It is thus unlikely that these agreements significantly undermined users’ experience. To the contrary, Apple’s testimony before the European Commission suggests that “exclusive” placement of Google’s search engine was mostly driven by consumer preferences (as the FTC economists’ memo points out):

Apple would not offer simultaneous installation of competing search or mapping applications. Apple’s focus is offering its customers the best products out of the box while allowing them to make choices after purchase. In many countries, Google offers the best product or service … Apple believes that offering additional search boxes on its web browsing software would confuse users and detract from Safari’s aesthetic. Too many choices lead to consumer confusion and greatly affect the ‘out of the box’ experience of Apple products.

Similarly, Kevin Murphy and Benjamin Klein have shown that exclusive contracts intensify competition for distribution. In other words, absent theories of platform envelopment that are arguably inapplicable here, competition for exclusive placement would lead competing search engines to up their bids, ultimately lowering the price of mobile devices for consumers.

Indeed, this revenue-sharing model was likely essential to spur the development of Android in the first place. Without this prominent placement of Google Search on Android devices (notably thanks to revenue-sharing agreements with original equipment manufacturers), Google would likely have been unable to monetize the investment it made in the open source—and thus freely distributed—Android operating system. 

In short, Politico and the FTC legal staff do little to show that Google’s revenue-sharing payments excluded rivals that were, in fact, as efficient. In other words, Bing and Yahoo’s failure to gain traction may simply be the result of inferior products and cost structures. Critics thus fail to show that Google’s behavior harmed consumers, which is the touchstone of antitrust enforcement.

Self-preferencing

Another finding critics claim as important is that FTC leadership declined to bring suit against Google for preferencing its own vertical search services (this information had already been partially leaked by the Wall Street Journal in 2015). Politico’s framing implies this was a mistake:

When Google adopted one algorithm change in 2011, rival sites saw significant drops in traffic. Amazon told the FTC that it saw a 35 percent drop in traffic from the comparison-shopping sites that used to send it customers

The focus on this claim is somewhat surprising. Even the leaked FTC legal staff memo found this theory of harm had little chance of standing up in court:

Staff has investigated whether Google has unlawfully preferenced its own content over that of rivals, while simultaneously demoting rival websites…. 

…Although it is a close call, we do not recommend that the Commission proceed on this cause of action because the case law is not favorable to our theory, which is premised on anticompetitive product design, and in any event, Google’s efficiency justifications are strong. Most importantly, Google can legitimately claim that at least part of the conduct at issue improves its product and benefits users. [EMPHASIS ADDED]

More importantly, as one of us has argued elsewhere, the underlying problem lies not with Google, but with a standard asset-specificity trap:

A content provider that makes itself dependent upon another company for distribution (or vice versa, of course) takes a significant risk. Although it may benefit from greater access to users, it places itself at the mercy of the other — or at least faces great difficulty (and great cost) adapting to unanticipated, crucial changes in distribution over which it has no control…. 

…It was entirely predictable, and should have been expected, that Google’s algorithm would evolve. It was also entirely predictable that it would evolve in ways that could diminish or even tank Foundem’s traffic. As one online marketing/SEO expert puts it: On average, Google makes about 500 algorithm changes per year. 500!….

…In the absence of an explicit agreement, should Google be required to make decisions that protect a dependent company’s “asset-specific” investments, thus encouraging others to take the same, excessive risk? 

Even if consumers happily visited rival websites when they were higher-ranked and traffic subsequently plummeted when Google updated its algorithm, that drop in traffic does not amount to evidence of misconduct. To hold otherwise would be to grant these rivals a virtual entitlement to the state of affairs that exists at any given point in time. 

Indeed, there is good reason to believe Google’s decision to favor its own content over that of other sites is procompetitive. Beyond determining and ensuring relevance, Google surely has the prerogative to compete vigorously and decide how to design its products to keep up with a changing market. In this case, that means designing, developing, and offering its own content in ways that partially displace the original “ten blue links” design of its search results page and instead offer its own answers to users’ queries.

Competitor Harm Is Not an Indicator of the Need for Intervention

Some of the other information revealed by the leak is even more tangential, such as that the FTC ignored complaints from Google’s rivals:

Amazon and Facebook privately complained to the FTC about Google’s conduct, saying their business suffered because of the company’s search bias, scraping of content from rival sites and restrictions on advertisers’ use of competing search engines. 

Amazon said it was so concerned about the prospect of Google monopolizing the search advertising business that it willingly sacrificed revenue by making ad deals aimed at keeping Microsoft’s Bing and Yahoo’s search engine afloat.

But complaints from rivals are at least as likely to stem from vigorous competition as from anticompetitive exclusion. This goes to a core principle of antitrust enforcement: antitrust law seeks to protect competition and consumer welfare, not rivals. Competition will always lead to winners and losers. Antitrust law protects this process and (at least theoretically) ensures that rivals cannot manipulate enforcers to safeguard their economic rents. 

This explains why Frank Easterbrook—in his seminal work on “The Limits of Antitrust”—argued that enforcers should be highly suspicious of complaints lodged by rivals:

Antitrust litigation is attractive as a method of raising rivals’ costs because of the asymmetrical structure of incentives…. 

…One line worth drawing is between suits by rivals and suits by consumers. Business rivals have an interest in higher prices, while consumers seek lower prices. Business rivals seek to raise the costs of production, while consumers have the opposite interest…. 

…They [antitrust enforcers] therefore should treat suits by horizontal competitors with the utmost suspicion. They should dismiss outright some categories of litigation between rivals and subject all such suits to additional scrutiny.

Google’s competitors spent millions pressuring the FTC to bring a case against the company. But why should it be a failing for the FTC to resist such pressure? Indeed, as then-commissioner Tom Rosch admonished in an interview following the closing of the case:

They [Google’s competitors] can darn well bring [a case] as a private antitrust action if they think their ox is being gored instead of free-riding on the government to achieve the same result.

Not that they would likely win such a case. Google’s introduction of specialized shopping results (via the Google Shopping box) likely enabled several retailers to bypass the Amazon platform, thus increasing competition in the retail industry. Although this may have temporarily reduced Amazon’s traffic and revenue (Amazon’s sales have grown dramatically since then), it is exactly the outcome that antitrust laws are designed to protect.

Conclusion

When all is said and done, Politico’s revelations provide a rarely glimpsed look into the complex dynamics within the FTC, which many wrongly imagine to be a monolithic agency. Put simply, the FTC’s commissioners, lawyers, and economists often disagree vehemently about the appropriate course of conduct. This is a good thing. As in many other walks of life, having a market for ideas is a sure way to foster sound decision making.

But in the final analysis, what the revelations do not show is that the FTC’s market for ideas failed consumers a decade ago when it declined to bring an antitrust suit against Google. They thus do little to cement the case for antitrust intervention—whether a decade ago, or today.

Policy discussions about the use of personal data often have “less is more” as a background assumption; that data is overconsumed relative to some hypothetical optimal baseline. This overriding skepticism has been the backdrop for sweeping new privacy regulations, such as the California Consumer Privacy Act (CCPA) and the EU’s General Data Protection Regulation (GDPR).

More recently, as part of the broad pushback against data collection by online firms, some have begun to call for creating property rights in consumers’ personal data or for data to be treated as labor. Prominent backers of the idea include New York City mayoral candidate Andrew Yang and computer scientist Jaron Lanier.

The discussion has escaped the halls of academia and made its way into popular media. During a recent discussion with Tesla founder Elon Musk, comedian and podcast host Joe Rogan argued that Facebook is “one gigantic information-gathering business that’s decided to take all of the data that people didn’t know was valuable and sell it and make f***ing billions of dollars.” Musk appeared to agree.

The animosity exhibited toward data collection might come as a surprise to anyone who has taken Econ 101. Goods ideally end up with those who value them most. A firm finding profitable ways to repurpose unwanted scraps is just the efficient reallocation of resources. This applies as much to personal data as to literal trash.

Unfortunately, in the policy sphere, few are willing to recognize the inherent trade-off between the value of privacy, on the one hand, and the value of various goods and services that rely on consumer data, on the other. Ideally, policymakers would look to markets to find the right balance, which they often can. When the transfer of data is hardwired into an underlying transaction, parties have ample room to bargain.

But this is not always possible. In some cases, transaction costs will prevent parties from bargaining over the use of data. The question is whether such situations are so widespread as to justify the creation of data property rights, with all of the allocative inefficiencies they entail. Critics wrongly assume the solution is both to create data property rights and to allocate them to consumers. But there is no evidence to suggest that, at the margin, heightened user privacy necessarily outweighs the social benefits that new data-reliant goods and services would generate. Recent experience in the worlds of personalized medicine and the fight against COVID-19 help to illustrate this point.

Data Property Rights and Personalized Medicine

The world is on the cusp of a revolution in personalized medicine. Advances such as the improved identification of biomarkers, CRISPR genome editing, and machine learning, could usher a new wave of treatments to markedly improve health outcomes.

Personalized medicine uses information about a person’s own genes or proteins to prevent, diagnose, or treat disease. Genetic-testing companies like 23andMe or Family Tree DNA, with the large troves of genetic information they collect, could play a significant role in helping the scientific community to further medical progress in this area.

However, despite the obvious potential of personalized medicine, many of its real-world applications are still very much hypothetical. While governments could act in any number of ways to accelerate the movement’s progress, recent policy debates have instead focused more on whether to create a system of property rights covering personal genetic data.

Some raise concerns that it is pharmaceutical companies, not consumers, who will reap the monetary benefits of the personalized medicine revolution, and that advances are achieved at the expense of consumers’ and patients’ privacy. They contend that data property rights would ensure that patients earn their “fair” share of personalized medicine’s future profits.

But it’s worth examining the other side of the coin. There are few things people value more than their health. U.S. governmental agencies place the value of a single life at somewhere between $1 million and $10 million. The commonly used quality-adjusted life year metric offers valuations that range from $50,000 to upward of $300,000 per incremental year of life.

It therefore follows that the trivial sums users of genetic-testing kits might derive from a system of data property rights would likely be dwarfed by the value they would enjoy from improved medical treatments. A strong case can be made that policymakers should prioritize advancing the emergence of new treatments, rather than attempting to ensure that consumers share in the profits generated by those potential advances.

These debates drew increased attention last year, when 23andMe signed a strategic agreement with the pharmaceutical company Almirall to license the rights related to an antibody Almirall had developed. Critics pointed out that 23andMe’s customers, whose data had presumably been used to discover the potential treatment, received no monetary benefits from the deal. Journalist Laura Spinney wrote in The Guardian newspaper:

23andMe, for example, asks its customers to waive all claims to a share of the profits arising from such research. But given those profits could be substantial—as evidenced by the interest of big pharma—shouldn’t the company be paying us for our data, rather than charging us to be tested?

In the deal’s wake, some argued that personal health data should be covered by property rights. A cardiologist quoted in Fortune magazine opined: “I strongly believe that everyone should own their medical data—and they have a right to that.” But this strong belief, however widely shared, ignores important lessons that law and economics has to teach about property rights and the role of contractual freedom.

Why Do We Have Property Rights?

Among the many important features of property rights is that they create “excludability,” the ability of economic agents to prevent third parties from using a given item. In the words of law professor Richard Epstein:

[P]roperty is not an individual conception, but is at root a social conception. The social conception is fairly and accurately portrayed, not by what it is I can do with the thing in question, but by who it is that I am entitled to exclude by virtue of my right. Possession becomes exclusive possession against the rest of the world…

Excludability helps to facilitate the trade of goods, offers incentives to create those goods in the first place, and promotes specialization throughout the economy. In short, property rights create a system of exclusion that supports creating and maintaining valuable goods, services, and ideas.

But property rights are not without drawbacks. Physical or intellectual property can lead to a suboptimal allocation of resources, namely market power (though this effect is often outweighed by increased ex ante incentives to create and innovate). Similarly, property rights can give rise to thickets that significantly increase the cost of amassing complementary pieces of property. Often cited are the historic (but contested) examples of tolling on the Rhine River or the airplane patent thicket of the early 20th century. Finally, strong property rights might also lead to holdout behavior, which can be addressed through top-down tools, like eminent domain, or private mechanisms, like contingent contracts.

In short, though property rights—whether they cover physical or information goods—can offer vast benefits, there are cases where they might be counterproductive. This is probably why, throughout history, property laws have evolved to achieve a reasonable balance between incentives to create goods and to ensure their efficient allocation and use.

Personal Health Data: What Are We Trying to Incentivize?

There are at least three critical questions we should ask about proposals to create property rights over personal health data.

  1. What goods or behaviors would these rights incentivize or disincentivize that are currently over- or undersupplied by the market?
  2. Are goods over- or undersupplied because of insufficient excludability?
  3. Could these rights undermine the efficient use of personal health data?

Much of the current debate centers on data obtained from direct-to-consumer genetic-testing kits. In this context, almost by definition, firms only obtain consumers’ genetic data with their consent. In western democracies, the rights to bodily integrity and to privacy generally make it illegal to administer genetic tests against a consumer or patient’s will. This makes genetic information naturally excludable, so consumers already benefit from what is effectively a property right.

When consumers decide to use a genetic-testing kit, the terms set by the testing firm generally stipulate how their personal data will be used. 23andMe has a detailed policy to this effect, as does Family Tree DNA. In the case of 23andMe, consumers can decide whether their personal information can be used for the purpose of scientific research:

You have the choice to participate in 23andMe Research by providing your consent. … 23andMe Research may study a specific group or population, identify potential areas or targets for therapeutics development, conduct or support the development of drugs, diagnostics or devices to diagnose, predict or treat medical or other health conditions, work with public, private and/or nonprofit entities on genetic research initiatives, or otherwise create, commercialize, and apply this new knowledge to improve health care.

Because this transfer of personal information is hardwired into the provision of genetic-testing services, there is space for contractual bargaining over the allocation of this information. The right to use personal health data will go toward the party that values it most, especially if information asymmetries are weeded out by existing regulations or business practices.

Regardless of data property rights, consumers have a choice: they can purchase genetic-testing services and agree to the provider’s data policy, or they can forgo the services. The service provider cannot obtain the data without entering into an agreement with the consumer. While competition between providers will affect parties’ bargaining positions, and thus the price and terms on which these services are provided, data property rights likely will not.

So, why do consumers transfer control over their genetic data? The main reason is that genetic information is inaccessible and worthless without the addition of genetic-testing services. Consumers must pass through the bottleneck of genetic testing for their genetic data to be revealed and transformed into usable information. It therefore makes sense to transfer the information to the service provider, who is in a much stronger position to draw insights from it. From the consumer’s perspective, the data is not even truly “transferred,” as the consumer had no access to it before the genetic-testing service revealed it. The value of this genetic information is then netted out in the price consumers pay for testing kits.

If personal health data were undersupplied by consumers and patients, testing firms could sweeten the deal and offer them more in return for their data. U.S. copyright law covers original compilations of data, while EU law gives 15 years of exclusive protection to the creators of original databases. Legal protections for trade secrets could also play some role. Thus, firms have some incentives to amass valuable health datasets.

But some critics argue that health data is, in fact, oversupplied. Generally, such arguments assert that agents do not account for the negative privacy externalities suffered by third-parties, such as adverse-selection problems in insurance markets. For example, Jay Pil Choi, Doh Shin Jeon, and Byung Cheol Kim argue:

Genetic tests are another example of privacy concerns due to informational externalities. Researchers have found that some subjects’ genetic information can be used to make predictions of others’ genetic disposition among the same racial or ethnic category.  … Because of practical concerns about privacy and/or invidious discrimination based on genetic information, the U.S. federal government has prohibited insurance companies and employers from any misuse of information from genetic tests under the Genetic Information Nondiscrimination Act (GINA).

But if these externalities exist (most of the examples cited by scholars are hypothetical), they are likely dwarfed by the tremendous benefits that could flow from the use of personal health data. Put differently, the assertion that “excessive” data collection may create privacy harms should be weighed against the possibility that the same collection may also lead to socially valuable goods and services that produce positive externalities.

In any case, data property rights would do little to limit these potential negative externalities. Consumers and patients are already free to agree to terms that allow or prevent their data from being resold to insurers. It is not clear how data property rights would alter the picture.

Proponents of data property rights often claim they should be associated with some form of collective bargaining. The idea is that consumers might otherwise fail to receive their “fair share” of genetic-testing firms’ revenue. But what critics portray as asymmetric bargaining power might simply be the market signaling that genetic-testing services are in high demand, with room for competitors to enter the market. Shifting rents from genetic-testing services to consumers would undermine this valuable price signal and, ultimately, diminish the quality of the services.

Perhaps more importantly, to the extent that they limit the supply of genetic information—for example, because firms are forced to pay higher prices for data and thus acquire less of it—data property rights might hinder the emergence of new treatments. If genetic data is a key input to develop personalized medicines, adopting policies that, in effect, ration the supply of that data is likely misguided.

Even if policymakers do not directly put their thumb on the scale, data property rights could still harm pharmaceutical innovation. If existing privacy regulations are any guide—notably, the previously mentioned GDPR and CCPA, as well as the federal Health Insurance Portability and Accountability Act (HIPAA)—such rights might increase red tape for pharmaceutical innovators. Privacy regulations routinely limit firms’ ability to put collected data to new and previously unforeseen uses. They also limit parties’ contractual freedom when it comes to gathering consumers’ consent.

At the margin, data property rights would make it more costly for firms to amass socially valuable datasets. This would effectively move the personalized medicine space further away from a world of permissionless innovation, thus slowing down medical progress.

In short, there is little reason to believe health-care data is misallocated. Proposals to reallocate rights to such data based on idiosyncratic distributional preferences threaten to stifle innovation in the name of privacy harms that remain mostly hypothetical.

Data Property Rights and COVID-19

The trade-off between users’ privacy and the efficient use of data also has important implications for the fight against COVID-19. Since the beginning of the pandemic, several promising initiatives have been thwarted by privacy regulations and concerns about the use of personal data. This has potentially prevented policymakers, firms, and consumers from putting information to its optimal social use. High-profile issues have included:

Each of these cases may involve genuine privacy risks. But to the extent that they do, those risks must be balanced against the potential benefits to society. If privacy concerns prevent us from deploying contact tracing or green passes at scale, we should question whether the privacy benefits are worth the cost. The same is true for rules that prohibit amassing more data than is strictly necessary, as is required by data-minimization obligations included in regulations such as the GDPR.

If our initial question was instead whether the benefits of a given data-collection scheme outweighed its potential costs to privacy, incentives could be set such that competition between firms would reduce the amount of data collected—at least, where minimized data collection is, indeed, valuable to users. Yet these considerations are almost completely absent in the COVID-19-related privacy debates, as they are in the broader privacy debate. Against this backdrop, the case for personal data property rights is dubious.

Conclusion

The key question is whether policymakers should make it easier or harder for firms and public bodies to amass large sets of personal data. This requires asking whether personal data is currently under- or over-provided, and whether the additional excludability that would be created by data property rights would offset their detrimental effect on innovation.

Swaths of personal data currently lie untapped. With the proper incentive mechanisms in place, this idle data could be mobilized to develop personalized medicines and to fight the COVID-19 outbreak, among many other valuable uses. By making such data more onerous to acquire, property rights in personal data might stifle the assembly of novel datasets that could be used to build innovative products and services.

On the other hand, when dealing with diffuse and complementary data sources, transaction costs become a real issue and the initial allocation of rights can matter a great deal. In such cases, unlike the genetic-testing kits example, it is not certain that users will be able to bargain with firms, especially where their personal information is exchanged by third parties.

If optimal reallocation is unlikely, should property rights go to the person covered by the data or to the collectors (potentially subject to user opt-outs)? Proponents of data property rights assume the first option is superior. But if the goal is to produce groundbreaking new goods and services, granting rights to data collectors might be a superior solution. Ultimately, this is an empirical question.

As Richard Epstein puts it, the goal is to “minimize the sum of errors that arise from expropriation and undercompensation, where the two are inversely related.” Rather than approach the problem with the preconceived notion that initial rights should go to users, policymakers should ensure that data flows to those economic agents who can best extract information and knowledge from it.

As things stand, there is little to suggest that the trade-offs favor creating data property rights. This is not an argument for requisitioning personal information or preventing parties from transferring data as they see fit, but simply for letting markets function, unfettered by misguided public policies.

Admirers of the late Supreme Court Justice Louis Brandeis and other antitrust populists often trace the history of American anti-monopoly sentiments from the Founding Era through the Progressive Era’s passage of laws to fight the scourge of 19th century monopolists. For example, Matt Stoller of the American Economic Liberties Project, both in his book Goliath and in other writings, frames the story of America essentially as a battle between monopolists and anti-monopolists.

According to this reading, it was in the late 20th century that powerful corporations and monied interests ultimately succeeded in winning the battle in favor of monopoly power against antitrust authorities, aided by the scholarship of the “ideological” Chicago school of economics and more moderate law & economics scholars like Herbert Hovenkamp of the University of Pennsylvania Law School.

It is a framing that leaves little room for disagreements about economic theory or evidence. One is either anti-monopoly or pro-monopoly, anti-corporate power or pro-corporate power.

What this story muddles is that the dominant anti-monopoly strain from English common law, which continued well into the late 19th century, was opposed specifically to government-granted monopoly. In contrast, today’s “anti-monopolists” focus myopically on alleged monopolies that often benefit consumers, while largely ignoring monopoly power granted by government. The real monopoly problem antitrust law fails to solve is its immunization of anticompetitive government policies. Recovering the older anti-monopoly tradition would better focus activists today.

Common Law Anti-Monopoly Tradition

Scholars like Timothy Sandefur of the Goldwater Institute have written about the right to earn a living that arose out of English common law and was inherited by the United States. This anti-monopoly stance was aimed at government-granted privileges, not at successful business ventures that gained significant size or scale.

For instance, 1602’s Darcy v. Allein, better known as the “Case of Monopolies,” dealt with a “patent” originally granted by Queen Elizabeth I in 1576 to Ralph Bowes, and later bought by Edward Darcy, to make and sell playing cards. Darcy did not innovate playing cards; he merely had permission to be the sole purveyor. Thomas Allein, who attempted to sell playing cards he created, was sued for violating Darcy’s exclusive rights. Darcy’s monopoly ultimately was held to be invalid by the court, which refused to convict Allein.

Edward Coke, who actually argued on behalf of the patent in Darcy v. Allen, wrote that the case stood for the proposition that:

All trades, as well mechanical as others, which prevent idleness (the bane of the commonwealth) and exercise men and youth in labour, for the maintenance of themselves and their families, and for the increase of their substance, to serve the Queen when occasion shall require, are profitable for the commonwealth, and therefore the grant to the plaintiff to have the sole making of them is against the common law, and the benefit and liberty of the subject. (emphasis added)

In essence, Coke’s argument was more closely linked to a “right to work” than to market structures, business efficiency, or firm conduct.

The courts largely resisted royal monopolies in 17th century England, finding such grants to violate the common law. For instance, in The Case of the Tailors of Ipswich, the court cited Darcy and found:

…at the common law, no man could be prohibited from working in any lawful trade, for the law abhors idleness, the mother of all evil… especially in young men, who ought in their youth, (which is their seed time) to learn lawful sciences and trades, which are profitable to the commonwealth, and whereof they might reap the fruit in their old age, for idle in youth, poor in age; and therefore the common law abhors all monopolies, which prohibit any from working in any lawful trade. (emphasis added)

The principles enunciated in these cases were eventually codified in the Statute of Monopolies, which prohibited the crown from granting monopolies in most circumstances. This was especially the case when the monopoly prevented the right to otherwise lawful work.

This common-law tradition also had disdain for private contracts that created monopoly by restraining the right to work. For instance, the famous Dyer’s case of 1414 held that a contract in which John Dyer promised not to practice his trade in the same town as the plaintiff was void for being an unreasonable restraint on trade.The judge is supposed to have said in response to the plaintiff’s complaint that he would have imprisoned anyone who had claimed such a monopoly on his own authority.

Over time, the common law developed analysis that looked at the reasonableness of restraints on trade, such as the extent to which they were limited in geographic reach and duration, as well as the consideration given in return. This part of the anti-monopoly tradition would later constitute the thread pulled on by the populists and progressives who created the earliest American antitrust laws.

Early American Anti-Monopoly Tradition

American law largely inherited the English common law system. It also inherited the anti-monopoly tradition the common law embodied. The founding generation of American lawyers were trained on Edward Coke’s commentary in “The Institutes of the Laws of England,” wherein he strongly opposed government-granted monopolies.

This sentiment can be found in the 1641 Massachusetts Body of Liberties, which stated: “No monopolies shall be granted or allowed amongst us, but of such new Inventions that are profitable to the Countrie, and that for a short time.” In fact, the Boston Tea Party itself was in part a protest of the monopoly granted to the East India Company, which included a special refund from duties by Parliament that no other tea importers enjoyed.

This anti-monopoly tradition also can be seen in the debates at the Constitutional Convention. A proposal to give the federal government power to grant “charters of incorporation” was voted down on fears it could lead to monopolies. Thomas Jefferson, George Mason, and several Antifederalists expressed concerns about the new national government’s ability to grant monopolies, arguing that an anti-monopoly clause should be added to the Constitution. Six states wanted to include provisions that would ban monopolies and the granting of special privileges in the Constitution.

The American anti-monopoly tradition remained largely an anti-government tradition throughout much of the 19th century, rearing its head in debates about the Bank of the United States, publicly-funded internal improvements, and government-granted monopolies over bridges and seas. Pamphleteer Lysander Spooner even tried to start a rival to the Post Office by appealing to the strong American impulse against monopoly.

Coinciding with the Industrial Revolution, liberalization of corporate law made it easier for private persons to organize firms that were not simply grants of exclusive monopoly. But discontent with industrialization and other social changes contributed to the birth of a populist movement, and later to progressives like Brandeis, who focused on private combinations and corporate power rather than government-granted privileges. This is the strand of anti-monopoly sentiment that continues to dominate the rhetoric today.

What This Means for Today

Modern anti-monopoly advocates have largely forgotten the lessons of the long Anglo-American tradition that found government is often the source of monopoly power. Indeed, American law privileges government’s ability to grant favors to businesses through licensing, the tax code, subsidies, and even regulation. The state action doctrine from Parker v. Brown exempts state and municipal authorities from antitrust lawsuits even where their policies have anticompetitive effects. And the Noerr-Pennington doctrine protects the rights of industry groups to lobby the government to pass anticompetitive laws.

As a result, government is often used to harm competition, with no remedy outside of the political process that created the monopoly. Antitrust law is used instead to target businesses built by serving consumers well in the marketplace.

Recovering this older anti-monopoly tradition would help focus the anti-monopoly movement on a serious problem modern antitrust misses. While the consumer-welfare standard that modern antitrust advocates often decry has helped to focus the law on actual harms to consumers, antitrust more broadly continues to encourage rent-seeking by immunizing state action and lobbying behavior.

With the passing of Justice Ruth Bader Ginsburg, many have already noted her impact on the law as an advocate for gender equality and women’s rights, her importance as a role model for women, and her civility. Indeed, a key piece of her legacy is that she was a jurist in the classic sense of the word: she believed in using coherent legal reasoning to reach a result. And that meant Justice Ginsburg’s decisions sometimes cut against partisan political expectations. 

This is clearly demonstrated in our little corner of the law: RBG frequently voted in the majority on antitrust cases in a manner that—to populist leftwing observers—would be surprising. Moreover, she authored an important case on price discrimination that likewise cuts against the expectation of populist antitrust critics and demonstrates her nuanced jurisprudence.

RBG’s record on the Court shows a respect for the evolving nature of antitrust law

In the absence of written opinions of her own, it is difficult to discern what was actually in Justice Ginsburg’s mind as she encountered antitrust issues. But, her voting record represents at least a willingness to approach antitrust in an apolitical manner. 

Over the last several decades, Justice Ginsburg joined the Supreme Court majority in many cases dealing with a wide variety of antitrust issues, including the duty to deal doctrine, vertical restraints, joint ventures, and mergers. In many of these cases, RBG aligned herself with judgments of the type that the antitrust populists criticize.

The following are major consumer welfare standard cases that helped shape the current state of antitrust law in which she joined the majority or issued a concurrence: 

  • Verizon Commc’ns Inc. v. Law Offices of Curtis Trinko, LLP, 540 U.S. 398 (2004) (unanimous opinion heightening the standard for finding a duty to deal)
  • Pacific Bell Tel. Co v. linkLine Commc’ns, Inc.,  555 U.S. 438 (2009) (Justice Ginsburg joined the concurrence finding there was no “price squeeze” but suggesting the predatory pricing claim should be remanded)
  • Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549 U.S. 312 (2007) (unanimous opinion finding predatory buying claims are still subject to the dangerous probability of recoupment test from Brooke Group)
  • Apple, Inc. v. Robert Pepper, 139 S.Ct. 1514 (2019) (part of majority written by Justice Kavanaugh finding that iPhone owners were direct purchasers under Illinois Brick that may sue Apple for alleged monopolization)
  • State Oil Co. v. Khan, 522 U.S. 3 (1997) (unanimous opinion overturning per se treatment of vertical maximum price fixing under Albrecht and applying rule of reason standard)
  • Texaco Inc. v. Dagher, 547 U.S. 1 (2006) (unanimous opinion finding it is not per se illegal under §1 of the Sherman Act for a lawful, economically integrated joint venture to set the prices at which it sells its products)
  • Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) (unanimous opinion finding a patent does not necessarily confer market power upon the patentee, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product)
  • U.S. v. Baker Hughes, Inc., 908 F. 2d 981 (D.C. Cir. 1990) (unanimous opinion written by then-Judge Clarence Thomas while both were on the D.C. Circuit of Appeals finding against the government’s argument that the defendant in a Section 7 merger challenge can rebut a prima facie case only by a clear showing that entry into the market by competitors would be quick and effective)

Even where she joined the dissent in antitrust cases, she did so within the ambit of the consumer welfare standard. Thus, while she was part of the dissent in cases like Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), Bell Atlantic Corp v. Twombly, 550 U.S. 544 (2007), and Ohio v. American Express Co., 138 S.Ct. 2274 (2018), she still left a legacy of supporting modern antitrust jurisprudence. In those cases, RBG simply  had a different vision for how best to optimize consumer welfare. 

Justice Ginsburg’s Volvo Opinion

The 2006 decision Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. was one of the few antitrust decisions authored by RBG and shows her appreciation for the consumer welfare standard. In particular, Justice Ginsburg affirmed the notion that antitrust law is designed to protect competition not competitors—a lesson that, as of late, needs to be refreshed. 

Volvo, a 7-2 decision, dealt with the Robinson-Patman Act’s prohibition on price discimination. Reeder-Simco, a retail car dealer that sold Volvos, alleged that Volvo Inc. was violating the Robinson-Patman Act by selling cars to them at different prices than to other Volvo dealers.

The Robinson-Patman Act is frequently cited by antitrust populists as a way to return antitrust law to its former glory. A main argument of Lina Khan’s Amazon’s Antitrust Paradox was that the Chicago School had distorted the law on vertical restraints generally, and price discrimination in particular. One source of this distortion in Khan’s opinion has been the Supreme Court’s mishandling of the Robinson-Patman Act.

Yet, in Volvo we see Justice Ginsburg wrestling with the Robinson-Patman Act in a way to give effect to the law as written, which may run counter to some of the contemporary populist impulse to revise the Court’s interpretation of antitrust laws. Justice Ginsburg, citing Brown & Williamson, first noted that: 

Mindful of the purposes of the Act and of the antitrust laws generally, we have explained that Robinson-Patman does not “ban all price differences charged to different purchasers of commodities of like grade and quality.”

Instead, the Robinson-Patman Act was aimed at a particular class of harms that Congress believed existed when large chain-stores were able to exert something like monopsony buying power. Moreover, Justice Ginsburg noted, the Act “proscribes ‘price discrimination only to the extent that it threatens to injure competition’[.]”

Under the Act, plaintiffs needed to demonstrate evidence of Volvo Inc. systematically treating plaintiffs as “disfavored” purchasers as against another set of “favored” purchasers. Instead, all plaintiffs could produce was anecdotal and inconsistent evidence of Volvo Inc. disfavoring them. Thus, the plaintiffs— and theoretically other similarly situated Volvo dealers— were in fact harmed in a sense by Volvo Inc. Yet, Justice Ginsburg was unwilling to rewrite the Act on Congress’s behalf to incorporate new harms later discovered (a fact which would not earn her accolades in populist circles these days). 

Instead, Justice Ginsburg wrote that:

Interbrand competition, our opinions affirm, is the “primary concern of antitrust law.”… The Robinson-Patman Act signals no large departure from that main concern. Even if the Act’s text could be construed in the manner urged by [plaintiffs], we would resist interpretation geared more to the protection of existing competitors than to the stimulation of competition. In the case before us, there is no evidence that any favored purchaser possesses market power, the allegedly favored purchasers are dealers with little resemblance to large independent department stores or chain operations, and the supplier’s selective price discounting fosters competition among suppliers of different brands… By declining to extend Robinson-Patman’s governance to such cases, we continue to construe the Act “consistently with broader policies of the antitrust laws.” Brooke Group, 509 U.S., at 220… (cautioning against Robinson-Patman constructions that “extend beyond the prohibitions of the Act and, in doing so, help give rise to a price uniformity and rigidity in open conflict with the purposes of other antitrust legislation”).

Thus, interested in the soundness of her jurisprudence in the face of a well-developed body of antitrust law, Justice Ginsburg chose to continue to develop that body of law rather than engage in judicial policymaking in favor of a sympathetic plaintiff. 

It must surely be tempting for a justice on the Court to adopt less principled approaches to the law in any given case, and it is equally as impressive that Justice Ginsburg consistently stuck to her principles. We can only hope her successor takes note of Justice Ginsburg’s example.

Hardly a day goes by without news of further competition-related intervention in the digital economy. The past couple of weeks alone have seen the European Commission announce various investigations into Apple’s App Store (here and here), as well as reaffirming its desire to regulate so-called “gatekeeper” platforms. Not to mention the CMA issuing its final report regarding online platforms and digital advertising.

While the limits of these initiatives have already been thoroughly dissected (e.g. here, here, here), a fundamental question seems to have eluded discussions: What are authorities trying to achieve here?

At first sight, the answer might appear to be extremely simple. Authorities want to “bring more competition” to digital markets. Furthermore, they believe that this competition will not arise spontaneously because of the underlying characteristics of digital markets (network effects, economies of scale, tipping, etc). But while it may have some intuitive appeal, this answer misses the forest for the trees.

Let us take a step back. Digital markets could have taken a vast number of shapes, so why have they systematically gravitated towards those very characteristics that authorities condemn? For instance, if market tipping and consumer lock-in are so problematic, why is it that new corners of the digital economy continue to emerge via closed platforms, as opposed to collaborative ones? Indeed, if recent commentary is to be believed, it is the latter that should succeed because they purportedly produce greater gains from trade. And if consumers and platforms cannot realize these gains by themselves, then we should see intermediaries step into the breach – i.e. arbitrage. This does not seem to be happening in the digital economy. The naïve answer is to say that this is precisely the problem, the harder one is to actually understand why.

To draw a parallel with evolution, in the late 18th century, botanists discovered an orchid with an unusually long spur (above). This made its nectar incredibly hard to reach for insects. Rational observers at the time could be forgiven for thinking that this plant made no sense, that its design was suboptimal. And yet, decades later, Darwin conjectured that the plant could be explained by a (yet to be discovered) species of moth with a proboscis that was long enough to reach the orchid’s nectar. Decades after his death, the discovery of the xanthopan moth proved him right.

Returning to the digital economy, we thus need to ask why the platform business models that authorities desire are not the ones that emerge organically. Unfortunately, this complex question is mostly overlooked by policymakers and commentators alike.

Competition law on a spectrum

To understand the above point, let me start with an assumption: the digital platforms that have been subject to recent competition cases and investigations can all be classified along two (overlapping) dimensions: the extent to which they are open (or closed) to “rivals” and the extent to which their assets are propertized (as opposed to them being shared). This distinction borrows heavily from Jonathan Barnett’s work on the topic. I believe that by applying such a classification, we would obtain a graph that looks something like this:

While these classifications are certainly not airtight, this would be my reasoning:

In the top-left quadrant, Apple and Microsoft, both operate closed platforms that are highly propertized (Apple’s platform is likely even more closed than Microsoft’s Windows ever was). Both firms notably control who is allowed on their platform and how they can interact with users. Apple notably vets the apps that are available on its App Store and influences how payments can take place. Microsoft famously restricted OEMs freedom to distribute Windows PCs as they saw fit (notably by “imposing” certain default apps and, arguably, limiting the compatibility of Microsoft systems with servers running other OSs). 

In the top right quadrant, the business models of Amazon and Qualcomm are much more “open”, yet they remain highly propertized. Almost anyone is free to implement Qualcomm’s IP – so long as they conclude a license agreement to do so. Likewise, there are very few limits on the goods that can be sold on Amazon’s platform, but Amazon does, almost by definition, exert a significant control on the way in which the platform is monetized. Retailers can notably pay Amazon for product placement, fulfilment services, etc. 

Finally, Google Search and Android sit in the bottom left corner. Both of these services are weakly propertized. The Android source code is shared freely via an open source license, and Google’s apps can be preloaded by OEMs free of charge. The only limit is that Google partially closes its platform, notably by requiring that its own apps (if they are pre-installed) receive favorable placement. Likewise, Google’s search engine is only partially “open”. While any website can be listed on the search engine, Google selects a number of specialized results that are presented more prominently than organic search results (weather information, maps, etc). There is also some amount of propertization, namely that Google sells the best “real estate” via ad placement. 

Enforcement

Readers might ask what is the point of this classification? The answer is that in each of the above cases, competition intervention attempted (or is attempting) to move firms/platforms towards more openness and less propertization – the opposite of their original design.

The Microsoft cases and the Apple investigation, both sought/seek to bring more openness and less propetization to these respective platforms. Microsoft was made to share proprietary data with third parties (less propertization) and open up its platform to rival media players and web browsers (more openness). The same applies to Apple. Available information suggests that the Commission is seeking to limit the fees that Apple can extract from downstream rivals (less propertization), as well as ensuring that it cannot exclude rival mobile payment solutions from its platform (more openness).

The various cases that were brought by EU and US authorities against Qualcomm broadly sought to limit the extent to which it was monetizing its intellectual property. The European Amazon investigation centers on the way in which the company uses data from third-party sellers (and ultimately the distribution of revenue between them and Amazon). In both of these cases, authorities are ultimately trying to limit the extent to which these firms propertize their assets.

Finally, both of the Google cases, in the EU, sought to bring more openness to the company’s main platform. The Google Shopping decision sanctioned Google for purportedly placing its services more favorably than those of its rivals. And the Android decision notably sought to facilitate rival search engines’ and browsers’ access to the Android ecosystem. The same appears to be true of ongoing investigations in the US.

What is striking about these decisions/investigations is that authorities are pushing back against the distinguishing features of the platforms they are investigating. Closed -or relatively closed- platforms are being opened-up, and firms with highly propertized assets are made to share them (or, at the very least, monetize them less aggressively).

The empty quadrant

All of this would not be very interesting if it weren’t for a final piece of the puzzle: the model of open and shared platforms that authorities apparently favor has traditionally struggled to gain traction with consumers. Indeed, there seem to be very few successful consumer-oriented products and services in this space.

There have been numerous attempts to introduce truly open consumer-oriented operating systems – both in the mobile and desktop segments. For the most part, these have ended in failure. Ubuntu and other Linux distributions remain fringe products. There have been attempts to create open-source search engines, again they have not been met with success. The picture is similar in the online retail space. Amazon appears to have beaten eBay despite the latter being more open and less propertized – Amazon has historically charged higher fees than eBay and offers sellers much less freedom in the way they sell their goods. This theme is repeated in the standardization space. There have been innumerable attempts to impose open royalty-free standards. At least in the mobile internet industry, few if any of these have taken off (5G and WiFi are the best examples of this trend). That pattern is repeated in other highly-standardized industries, like digital video formats. Most recently, the proprietary Dolby Vision format seems to be winning the war against the open HDR10+ format. 

This is not to say there haven’t been any successful ventures in this space – the internet, blockchain and Wikipedia all spring to mind – or that we will not see more decentralized goods in the future. But by and large firms and consumers have not yet taken to the idea of open and shared platforms. And while some “open” projects have achieved tremendous scale, the consumer-facing side of these platforms is often dominated by intermediaries that opt for much more traditional business models (think of Coinbase and Blockchain, or Android and Linux).

An evolutionary explanation?

The preceding paragraphs have posited a recurring reality: the digital platforms that competition authorities are trying to to bring about are fundamentally different from those that emerge organically. This begs the question: why have authorities’ ideal platforms, so far, failed to achieve truly meaningful success at consumers’ end of the market? 

I can see at least three potential explanations:

  1. Closed/propertized platforms have systematically -and perhaps anticompetitively- thwarted their open/shared rivals;
  2. Shared platforms have failed to emerge because they are much harder to monetize (and there is thus less incentive to invest in them);
  3. Consumers have opted for closed systems precisely because they are closed.

I will not go into details over the merits of the first conjecture. Current antitrust debates have endlessly rehashed this proposition. However, it is worth mentioning that many of today’s dominant platforms overcame open/shared rivals well before they achieved their current size (Unix is older than Windows, Linux is older than iOs, eBay and Amazon are basically the same age, etc). It is thus difficult to make the case that the early success of their business models was down to anticompetitive behavior.

Much more interesting is the fact that options (2) and (3) are almost systematically overlooked – especially by antitrust authorities. And yet, if true, both of them would strongly cut against current efforts to regulate digital platforms and ramp-up antitrust enforcement against them. 

For a start, it is not unreasonable to suggest that highly propertized platforms are generally easier to monetize than shared ones (2). For example, open-source platforms often rely on complementarities for monetization, but this tends to be vulnerable to outside competition and free-riding. If this is true, then there is a natural incentive for firms to invest and innovate in more propertized environments. In turn, competition enforcement that limits a platforms’ ability to propertize their assets may harm innovation.

Similarly, authorities should at the very least reflect on whether consumers really want the more “competitive” ecosystems that they are trying to design (3)

For instance, it is striking that the European Commission has a long track record of seeking to open-up digital platforms (the Microsoft decisions are perhaps the most salient example). And yet, even after these interventions, new firms have kept on using the very business model that the Commission reprimanded. Apple tied the Safari browser to its iPhones, Google went to some length to ensure that Chrome was preloaded on devices, Samsung phones come with Samsung Internet as default. But this has not deterred consumers. A sizable share of them notably opted for Apple’s iPhone, which is even more centrally curated than Microsoft Windows ever was (and the same is true of Apple’s MacOS). 

Finally, it is worth noting that the remedies imposed by competition authorities are anything but unmitigated successes. Windows XP N (the version of Windows that came without Windows Media Player) was an unprecedented flop – it sold a paltry 1,787 copies. Likewise, the internet browser ballot box imposed by the Commission was so irrelevant to consumers that it took months for authorities to notice that Microsoft had removed it, in violation of the Commission’s decision. 

There are many reasons why consumers might prefer “closed” systems – even when they have to pay a premium for them. Take the example of app stores. Maintaining some control over the apps that can access the store notably enables platforms to easily weed out bad players. Similarly, controlling the hardware resources that each app can use may greatly improve device performance. In other words, centralized platforms can eliminate negative externalities that “bad” apps impose on rival apps and consumers. This is especially true when consumers struggle to attribute dips in performance to an individual app, rather than the overall platform. 

It is also conceivable that consumers prefer to make many of their decisions at the inter-platform level, rather than within each platform. In simple terms, users arguably make their most important decision when they choose between an Apple or Android smartphone (or a Mac and a PC, etc.). In doing so, they can select their preferred app suite with one simple decision. They might thus purchase an iPhone because they like the secure App Store, or an Android smartphone because they like the Chrome Browser and Google Search. Furthermore, forcing too many “within-platform” choices upon users may undermine a product’s attractiveness. Indeed, it is difficult to create a high-quality reputation if each user’s experience is fundamentally different. In short, contrary to what antitrust authorities seem to believe, closed platforms might be giving most users exactly what they desire. 

To conclude, consumers and firms appear to gravitate towards both closed and highly propertized platforms, the opposite of what the Commission and many other competition authorities favor. The reasons for this trend are still misunderstood, and mostly ignored. Too often, it is simply assumed that consumers benefit from more openness, and that shared/open platforms are the natural order of things. This post certainly does not purport to answer the complex question of “the origin of platforms”, but it does suggest that what some refer to as “market failures” may in fact be features that explain the rapid emergence of the digital economy. Ronald Coase said this best when he quipped that economists always find a monopoly explanation for things that they fail to understand. The digital economy might just be the latest in this unfortunate trend.

The great Dr. Thomas Sowell

One of the great scholars of law & economics turns 90 years old today. In his long and distinguished career, Thomas Sowell has written over 40 books and countless opinion columns. He has been a professor of economics and a long-time Senior Fellow at the Hoover Institution. He received a National Humanities Medal in 2002 for a lifetime of scholarship, which has only continued since then. His ability to look at issues with an international perspective, using the analytical tools of economics to better understand institutions, is an inspiration to us at the International Center for Law & Economics.

Here, almost as a blog post festschrift as a long-time reader of his works, I want to briefly write about how Sowell’s voluminous writings on visions, law, race, and economics could be the basis for a positive agenda to achieve a greater measure of racial justice in the United States.

The Importance of Visions

One of the most important aspects of Sowell’s work is his ability to distill wide-ranging issues into debates involving different mental models, or a “Conflict of Visions.” He calls one vision the “tragic” or “constrained” vision, which sees all humans as inherently limited in knowledge, wisdom, and virtue, and fundamentally self-interested even at their best. The other vision is the “utopian” or “unconstrained” vision, which sees human limitations as artifacts of social arrangements and cultures, and that there are some capable by virtue of superior knowledge and morality that can redesign society to create a better world. 

An implication of the constrained vision is that the difference in knowledge and virtue between the best and the worst in society is actually quite small. As a result, no one person or group of people can be trusted with redesigning institutions which have spontaneously evolved. The best we can hope for is institutions that reasonably deter bad conduct and allow people the freedom to solve their own problems. 

An important implication of the unconstrained vision, on the other hand,  is that there are some who because of superior enlightenment, which Sowell calls the “Vision of the Anointed,” can redesign institutions to fundamentally change human nature, which is seen as malleable. Institutions are far more often seen as the result of deliberate human design and choice, and that failures to change them to be more just or equal is a result of immorality or lack of will.

The importance of visions to how we view things like justice and institutions makes all the difference. In the constrained view, institutions like language, culture, and even much of the law result from the “spontaneous ordering” that is the result of human action but not of human design. Limited government, markets, and tradition are all important in helping individuals coordinate action. Markets work because self-interested individuals benefit when they serve others. There are no solutions to difficult societal problems, including racism, only trade-offs. 

But in the unconstrained view, limits on government power are seen as impediments to public-spirited experts creating a better society. Markets, traditions, and cultures are to be redesigned from the top down by those who are forward-looking, relying on their articulated reason. There is a belief that solutions could be imposed if only there is sufficient political will and the right people in charge. When it comes to an issue like racism, those who are sufficiently “woke” should be in charge of redesigning institutions to provide for a solution to things like systemic racism.

For Sowell, what he calls “traditional justice” is achieved by processes that hold people accountable for harms to others. Its focus is on flesh-and-blood human beings, not abstractions like all men or blacks versus whites. Differences in outcomes are not just or unjust, by this point of view, what is important is that the processes are just. These processes should focus on institutional incentives of participants. Reforms should be careful not to upset important incentive structures which have evolved over time as the best way for limited human beings to coordinate behavior.

The “Quest for Cosmic Justice,” on the other hand, flows from the unconstrained vision. Cosmic justice sees disparities between abstract groups, like whites and blacks, as unjust and in need of correction. If results from impartial processes like markets or law result in disparities, those with an unconstrained vision often see those processes as themselves racist. The conclusion is that the law should intervene to create better outcomes. This presumes considerable knowledge and morality on behalf of those who are in charge of the interventions. 

For Sowell, a large part of his research project has been showing that those with the unconstrained vision often harm those they are proclaiming the intention to help in their quest for cosmic justice. 

A Constrained Vision of Racial Justice

Sowell has written quite a lot on race, culture, intellectuals, economics, and public policy. One of the main thrusts of his argument about race is that attempts at cosmic justice often harm living flesh-and-blood individuals in the name of intertemporal abstractions like “social justice” for black Americans. Sowell nowhere denies that racism is an important component of understanding the history of black Americans. But his constant challenge is that racism can’t be the only variable which explains disparities. Sowell points to the importance of culture and education in building human capital to be successful in market economies. Without taking those other variables into account, there is no way to determine the extent that racism is the cause of disparities. 

This has important implications for achieving racial justice today. When it comes to policies pursued in the name of racial justice, Sowell has argued that many programs often harm not only members of disfavored groups, but the members of the favored groups.

For instance, Sowell has argued that affirmative action actually harms not only flesh-and-blood white and Asian-Americans who are passed over, but also harms those African-Americans who are “mismatched” in their educational endeavors and end up failing or dropping out of schools when they could have been much better served by attending schools where they would have been very successful. Another example Sowell often points to is minimum wage legislation, which is often justified in the name of helping the downtrodden, but has the effect of harming low-skilled workers by increasing unemployment, most especially young African-American males. 

Any attempts at achieving racial justice, in terms of correcting historical injustices, must take into account how changes in processes could actually end up hurting flesh-and-blood human beings, especially when those harmed are black Americans. 

A Positive Agenda for Policy Reform

In Sowell’s constrained vision, a large part of the equation for African-American improvement is going to be cultural change. However, white Americans should not think that this means they have no responsibility in working towards racial justice. A positive agenda must take into consideration real harms experienced by African-Americans due to government action (and inaction). Thus, traditional justice demands institutional reforms, and in some cases, recompense.

The policy part of this equation outlined below is motivated by traditional justice concerns that hold people accountable under the rule of law for violations of constitutional rights and promotes institutional reforms to more properly align incentives. 

What follows below are policy proposals aimed at achieving a greater degree of racial justice for black Americans, but fundamentally informed by the constrained vision and traditional justice concerns outlined by Sowell. Most of these proposals are not on issues Sowell has written a lot on. In fact, some proposals may actually not be something he would support, but are—in my opinion—consistent with the constrained vision and traditional justice.

Reparations for Historical Rights Violations

Sowell once wrote this in regards to reparations for black Americans:

Nevertheless, it remains painfully clear that those people who were torn from their homes in Africa in centuries past and forcibly brought across the Atlantic in chains suffered not only horribly, but unjustly. Were they and their captors still alive, the reparations and retribution owed would be staggering. Time and death, however, cheat us of such opportunities for justice, however galling that may be. We can, of course, create new injustices among our flesh-and-blood contemporaries for the sake of symbolic expiation, so that the son or daughter of a black doctor or executive can get into an elite college ahead of the son or daughter of a white factory worker or farmer, but only believers in the vision of cosmic justice are likely to take moral solace from that. We can only make our choices among alternatives actually available, and rectifying the past is not one of those options.

In other words, if the victims and perpetrators of injustice are no longer alive, it is not just to hold entire members of respective races accountable for crimes which they did not commit. However, this would presumably leave open the possibility of applying traditional justice concepts in those cases where death has not cheated us.

For instance, there are still black Americans alive who suffered from Jim Crow, as well as children and family members of those lynched. While it is too little, too late, it seems consistent with traditional justice to still seek out and prosecute criminally perpetrators who committed heinous acts but a few generations ago against still living victims. This is not unprecedented. Old Nazis are still prosecuted for crimes against Jews. A similar thing could be done in the United States.

Similarly, civil rights lawsuits for the damages caused by Jim Crow could be another way to recompense those who were harmed. Alternatively, it could be done by legislation. The Civil Liberties Act of 1988 was passed under President Reagan and gave living Japanese Americans who were interned during World War II some limited reparations. A similar system could be set up for living victims of Jim Crow. 

Statutes of limitations may need to be changed to facilitate these criminal prosecutions and civil rights lawsuits, but it is quite clearly consistent with the idea of holding flesh-and-blood persons accountable for their unlawful actions.

Holding flesh-and-blood perpetrators accountable for rights violations should not be confused with the cosmic justice idea—that Sowell consistently decries—that says intertemporal abstractions can be held accountable for crimes. In other words, this is not holding “whites” accountable for all historical injustices to “blacks.” This is specifically giving redress to victims and deterring future bad conduct.  

End Qualified Immunity

Another way to promote racial justice consistent with the constrained vision is to end one of the Warren Court’s egregious examples of judicial activism: qualified immunity. Qualified immunity is nowhere mentioned in the statute for civil rights, 42 USC § 1983. As Sowell argues in his writings, judges in the constrained vision are supposed to declare what the law is, not what they believe it should be, unlike those in the unconstrained vision who—according to Sowell— believe they have the right to amend the laws through judicial edict. The introduction of qualified immunity into the law by the activist Warren Court should be overturned.

Currently, qualified immunity effectively subsidizes police brutality, to the detriment of all Americans, but disproportionately affecting black Americans. The law & economics case against qualified immunity is pretty straightforward: 

In a civil rights lawsuit, the goal is to make the victim (or their families) of a rights violation whole by monetary damages. From a legal perspective, this is necessary to give the victim justice. From an economic perspective this is necessary to deter future bad conduct and properly align ex ante incentives going forward. Under a well-functioning system, juries would, after hearing all the evidence, make a decision about whether constitutional rights were violated and the extent of damages. A functioning system of settlements would result as a common law develops determining what counts as reasonable or unreasonable uses of force. This doesn’t mean plaintiffs always win, either. Officers may be determined to be acting reasonably under the circumstances once all the evidence is presented to a jury.

However, one of the greatest obstacles to holding police officers accountable in misconduct cases is the doctrine of qualified immunity… courts have widely expanded its scope to the point that qualified immunity is now protecting officers even when their conduct violates the law, as long as the officers weren’t on clear notice from specific judicial precedent that what they did was illegal when they did it… This standard has predictably led to a situation where officer misconduct which judges and juries would likely find egregious never makes it to court. The Cato Institute’s website Unlawful Shield details many cases where federal courts found an officer’s conduct was illegal yet nonetheless protected by qualified immunity.

Immunity of this nature has profound consequences on the incentive structure facing police officers. Police officers, as well as the departments that employ them, are insufficiently accountable when gross misconduct does not get past a motion to dismiss for qualified immunity… The result is to encourage police officers to take insufficient care when making the choice about the level of force to use. 

Those with a constrained vision focus on processes and incentives. In this case, it is police officers who have insufficient incentives to take reasonable care when they receive qualified immunity for their conduct.

End the Drug War

While not something he has written a lot on, Sowell has argued for the decriminalization of drugs, comparing the War on Drugs to the earlier attempts at Prohibition of alcohol. This is consistent with the constrained vision, which cares about the institutional incentives created by law. 

Interestingly, work by Michelle Alexander in the second chapter of The New Jim Crow is largely consistent with Sowell’s point of view. There she argued the institutional incentives of police departments were systematically changed when the drug war was ramped up. 

Alexander asks a question which is right in line with the constrained vision:

[I]t is fair to wonder why the police would choose to arrest such an astonishing percentage of the American public for minor drug crimes. The fact that police are legally allowed to engage in a wholesale roundup of nonviolent drug offenders does not answer the question why they would choose to do so, particularly when most police departments have far more serious crimes to prevent and solve. Why would police prioritize drug-law enforcement? Drug use and abuse is nothing new; in fact, it was on the decline, not on the rise, when the War on Drugs began.

Alexander locates the impetus for ramping up the drug war in federal subsidies:

In 1988, at the behest of the Reagan administration, Congress revised the program that provides federal aid to law enforcement, renaming it the Edward Byrne Memorial State and Local Law Enforcement Assistance Program after a New York City police officer who was shot to death while guarding the home of a drug-case witness. The Byrne program was designed to encourage every federal grant recipient to help fight the War on Drugs. Millions of dollars in federal aid have been offered to state and local law enforcement agencies willing to wage the war. By the late 1990s, the overwhelming majority of state and local police forces in the country had availed themselves of the newly available resources and added a significant military component to buttress their drug-war operations. 

On top of that, police departments were benefited by civil asset forfeiture:

As if the free military equipment, training, and cash grants were not enough, the Reagan administration provided law enforcement with yet another financial incentive to devote extraordinary resources to drug law enforcement, rather than more serious crimes: state and local law enforcement agencies were granted the authority to keep, for their own use, the vast majority of cash and assets they seize when waging the drug war. This dramatic change in policy gave state and local police an enormous stake in the War on Drugs—not in its success, but in its perpetual existence. Suddenly, police departments were capable of increasing the size of their budgets, quite substantially, simply by taking the cash, cars, and homes of people suspected of drug use or sales. Because those who were targeted were typically poor or of moderate means, they often lacked the resources to hire an attorney or pay the considerable court costs. As a result, most people who had their cash or property seized did not challenge the government’s action, especially because the government could retaliate by filing criminal charges—baseless or not.

As Alexander notes, black Americans (and other minorities) were largely targeted in this ramped up War on Drugs, noting the drug war’s effects have been to disproportionately imprison black Americans even though drug usage and sales are relatively similar across races. Police officers have incredible discretion in determining who to investigate and bring charges against. When it comes to the drug war, this discretion is magnified because the activity is largely consensual, meaning officers can’t rely on victims to come to them to start an investigation. Alexander finds the reason the criminal justice system has targeted black Americans is because of implicit bias in police officers, prosecutors, and judges, which mirrors the bias shown in media coverage and in larger white American society. 

Anyone inspired by Sowell would need to determine whether this is because of racism or some other variable. It is important to note here that Sowell never denies that racism exists or is a real problem in American society. But he does challenge us to determine whether this alone is the cause of disparities. Here, Alexander makes a strong case that it is implicit racism that causes the disparities in enforcement of the War on Drugs. A race-neutral explanation could be as follows, even though it still suggests ending the War on Drugs: the enforcement costs against those unable to afford to challenge the system are lower. And black Americans are disproportionately represented among the poor in this country. As will be discussed below in the section on reforming indigent criminal defense, most prosecutions are initiated against defendants who can’t afford a lawyer. The result could be racially disparate even without a racist motivation. 

Regardless of whether racism is the variable that explains the disparate impact of the War on Drugs, it should be ended. This may be an area where traditional and cosmic justice concerns can be united in an effort to reform the criminal justice system.

Reform Indigent Criminal Defense

A related aspect of how the criminal justice system has created a real barrier for far too many black Americans is the often poor quality of indigent criminal defense. Indigent defense is a large part of criminal defense in this country since a very high number of criminal prosecutions are initiated against those who are often too poor to afford a lawyer (roughly 80%). Since black Americans are disproportionately represented among the indigent and those in the criminal justice system, it should be no surprise that black Americans are disproportionately represented by public defenders in this country.

According to the constrained vision, it is important to look at the institutional incentives of public defenders. Considering the extremely high societal costs of false convictions, it is important to get these incentives right.

David Friedman and Stephen Schulhofer’s seminal article exploring the law & economics of indigent criminal defense highlighted the conflict of interest inherent in government choosing who represents criminal defendants when the government is in charge of prosecuting. They analyzed each of the models used in the United States for indigent defense from an economic point of view and found each wanting. On top of that, there is also a calculation problem inherent in government-run public defender’s offices whereby defendants may be systematically deprived of viable defense strategies because of a lack of price signals. 

An interesting alternative proposed by Friedman and Schulhofer is a voucher system. This is similar to the voucher system Sowell has often touted for education. The idea would be that indigent criminal defendants get to pick the lawyer of their choosing that is part of the voucher program. The government would subsidize the provision of indigent defense, in this model, but would not actually pick the lawyer or run the public defender organization. Incentives would be more closely aligned between the defendant and counsel. 

Conclusion

While much more could be said consistent with the constrained vision that could help flesh-and-blood black Americans, including abolishing occupational licensing, ending wage controls, promoting school choice, and ending counterproductive welfare policies, this is enough for now. Racial justice demands holding rights violators accountable and making victims whole. Racial justice also means reforming institutions to make sure incentives are right to deter conduct which harms black Americans. However, the growing desire to do something to promote racial justice in this country should not fall into the trap of cosmic justice thinking, which often ends up hurting flesh-and-blood people of all races in the present in the name of intertemporal abstractions. 

Happy 90th birthday to one of the greatest law & economics scholars ever, Dr. Thomas Sowell. 

Yet another sad story was caught on camera this week showing a group of police officers killing an unarmed African-American man named George Floyd. While the officers were fired from the police department, there is still much uncertainty about what will happen next to hold those officers accountable as a legal matter. 

A well-functioning legal system should protect the constitutional rights of American citizens to be free of unreasonable force from police officers, while also allowing police officers the ability to do their jobs safely and well. In theory, civil rights lawsuits are supposed to strike that balance.

In a civil rights lawsuit, the goal is to make the victim (or their families) of a rights violation whole by monetary damages. From a legal perspective, this is necessary to give the victim justice. From an economic perspective this is necessary to deter future bad conduct and properly align ex ante incentives going forward. Under a well-functioning system, juries would, after hearing all the evidence, make a decision about whether constitutional rights were violated and the extent of damages. A functioning system of settlements would result as a common law develops determining what counts as reasonable or unreasonable uses of force. This doesn’t mean plaintiffs always win, either. Officers may be determined to be acting reasonably under the circumstances once all the evidence is presented to a jury.

However, one of the greatest obstacles to holding police officers accountable in misconduct cases is the doctrine of qualified immunity. Qualified immunity started as a mechanism to protect officers from suit when they acted in “good faith.” Over time, though, the doctrine has evolved away from a subjective test based upon the actor’s good faith to an objective test based upon notice in judicial precedent. As a result, courts have widely expanded its scope to the point that qualified immunity is now protecting officers even when their conduct violates the law, as long as the officers weren’t on clear notice from specific judicial precedent that what they did was illegal when they did it. In the words of the Supreme Court, qualified immunity protects “all but the plainly incompetent or those who knowingly violate the law.” 

This standard has predictably led to a situation where officer misconduct which judges and juries would likely find egregious never makes it to court. The Cato Institute’s website Unlawful Shield details many cases where federal courts found an officer’s conduct was illegal yet nonetheless protected by qualified immunity.

Immunity of this nature has profound consequences on the incentive structure facing police officers. Police officers, as well as the departments that employ them, are insufficiently accountable when gross misconduct does not get past a motion to dismiss for qualified immunity. On top of that, the regular practice of governments is to indemnify officers even when there is a settlement or a judgment. The result is to encourage police officers to take insufficient care when making the choice about the level of force to use. 

Economics 101 makes a clear prediction: When unreasonable uses of force are not held accountable, you get more unreasonable uses of force. Unfortunately, the news continues to illustrate the accuracy of this prediction.

The goal of US antitrust law is to ensure that competition continues to produce positive results for consumers and the economy in general. We published a letter co-signed by twenty three of the U.S.’s leading economists, legal scholars and practitioners, including one winner of the Nobel Prize in economics (full list of signatories here), to exactly that effect urging the House Judiciary Committee on the State of Antitrust Law to reject calls for radical upheaval of antitrust law that would, among other things, undermine the independence and neutrality of US antitrust law. 

A critical part of maintaining independence and neutrality in the administration of antitrust is ensuring that it is insulated from politics. Unfortunately, this view is under attack from all sides. The President sees widespread misconduct among US tech firms that he believes are controlled by the “radical left” and is, apparently, happy to use whatever tools are at hand to chasten them. 

Meanwhile, Senator Klobuchar has claimed, without any real evidence, that the mooted Uber/Grubhub merger is simply about monopolisation of the market, and not, for example, related to the huge changes that businesses like this are facing because of the Covid shutdown.

Both of these statements challenge the principle that the rule of law depends on being politically neutral, including in antitrust. 

Our letter, contrary to the claims made by President Trump, Sen. Klobuchar and some of the claims made to the Committee, asserts that the evidence and economic theory is clear: existing antitrust law is doing a good job of promoting competition and consumer welfare in digital markets and the economy more broadly, and concludes that the Committee should focus on reforms that improve antitrust at the margin, not changes that throw out decades of practice and precedent.

The letter argues that:

  1. The American economy—including the digital sector—is competitive, innovative, and serves consumers well, contrary to how it is sometimes portrayed in the public debate. 
  2. Structural changes in the economy have resulted from increased competition, and increases in national concentration have generally happened because competition at the local level has intensified and local concentration has fallen.
  3. Lax antitrust enforcement has not allowed systematic increases in market power, and the evidence simply does not support out the idea that antitrust enforcement has weakened in recent decades.
  4. Existing antitrust law is adequate for protecting competition in the modern economy, and built up through years of careful case-by-case scrutiny. Calls to throw out decades of precedent to achieve an antitrust “Year Zero” would throw away a huge body of learning and deliberation.
  5. History teaches that discarding the modern approach to antitrust would harm consumers, and return to a situation where per se rules prohibited the use of economic analysis and fact-based defences of business practices.
  6. Common sense reforms should be pursued to improve antitrust enforcement, and the reforms proposed in the letter could help to improve competition and consumer outcomes in the United States without overturning the whole system.

The reforms suggested include measures to increase transparency of the DoJ and FTC, greater scope for antitrust challenges against state-sponsored monopolies, stronger penalties for criminal cartel conduct, and more agency resources being made available to protect workers from anti-competitive wage-fixing agreements between businesses. These are suggestions for the House Committee to consider and are not supported by all the letter’s signatories.

Some of the arguments in the letter are set out in greater detail in the ICLE’s own submission to the Committee, which goes into detail about the nature of competition in modern digital markets and in traditional markets that have been changed because of the adoption of digital technologies. 

The full letter is here.

In the wake of the launch of Facebook’s content oversight board, Republican Senator Josh Hawley and FCC Commissioner Brendan Carr, among others, have taken to Twitter to levy criticisms at the firm and, in the process, demonstrate just how far the Right has strayed from its first principles around free speech and private property. For his part, Commissioner Carr’s thread makes the case that the members of the board are highly partisan and mostly left-wing and can’t be trusted with the responsibility of oversight. While Senator Hawley took the approach that the Board’s very existence is just further evidence of the need to break Facebook up. 

Both Hawley and Carr have been lauded in rightwing circles, but in reality their positions contradict conservative notions of the free speech and private property protections given by the First Amendment.  

This blog post serves as a sequel to a post I wrote last year here at TOTM explaining how There’s nothing “conservative” about Trump’s views on free speech and the regulation of social media. As I wrote there:

I have noted in several places before that there is a conflict of visions when it comes to whether the First Amendment protects a negative or positive conception of free speech. For those unfamiliar with the distinction: it comes from philosopher Isaiah Berlin, who identified negative liberty as freedom from external interference, and positive liberty as freedom to do something, including having the power and resources necessary to do that thing. Discussions of the First Amendment’s protection of free speech often elide over this distinction.

With respect to speech, the negative conception of liberty recognizes that individual property owners can control what is said on their property, for example. To force property owners to allow speakers/speech on their property that they don’t desire would actually be a violation of their liberty — what the Supreme Court calls “compelled speech.” The First Amendment, consistent with this view, generally protects speech from government interference (with very few, narrow exceptions), while allowing private regulation of speech (again, with very few, narrow exceptions).

Commissioner Carr’s complaint and Senator Hawley’s antitrust approach of breaking up Facebook has much more in common with the views traditionally held by left-wing Democrats on the need for the government to regulate private actors in order to promote speech interests. Originalists and law & economics scholars, on the other hand, have consistently taken the opposite point of view that the First Amendment protects against government infringement of speech interests, including protecting the right to editorial discretion. While there is clearly a conflict of visions in First Amendment jurisprudence, the conservative (and, in my view, correct) point of view should not be jettisoned by Republicans to achieve short-term political gains.

The First Amendment restricts government action, not private action

The First Amendment, by its very text, only applies to government action: “Congress shall make no law . . . abridging the freedom of speech.” This applies to the “State[s]” through the Fourteenth Amendment. There is extreme difficulty in finding any textual hook to say the First Amendment protects against private action, like that of Facebook. 

Originalists have consistently agreed. Most recently, in Manhattan Community Access Corp. v. Halleck, Justice Kavanaugh—on behalf of the conservative bloc and the Court—wrote:

Ratified in 1791, the First Amendment provides in relevant part that “Congress shall make no law . . . abridging the freedom of speech.” Ratified in 1868, the Fourteenth Amendment makes the First Amendment’s Free Speech Clause applicable against the States: “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law . . . .” §1. The text and original meaning of those Amendments, as well as this Court’s longstanding precedents, establish that the Free Speech Clause prohibits only governmental abridgment of speech. The Free Speech Clause does not prohibit private abridgment of speech… In accord with the text and structure of the Constitution, this Court’s state-action doctrine distinguishes the government from individuals and private entities. By enforcing that constitutional boundary between the governmental and the private, the state-action doctrine protects a robust sphere of individual liberty. (Emphasis added).

This was true at the adoption of the First Amendment and remains true today in a high-tech world. Federal district courts have consistently dismissed First Amendment lawsuits against Facebook on the grounds there is no state action. 

For instance, in Nyawba v. Facebook, the plaintiff initiated a civil rights lawsuit against Facebook for restricting his use of the platform. The U.S. District Court for the Southern District of Texas dismissed the case, noting 

Because the First Amendment governs only governmental restrictions on speech, Nyabwa has not stated a cause of action against FaceBook… Like his free speech claims, Nyabwa’s claims for violation of his right of association and violation of his due process rights are claims that may be vindicated against governmental actors pursuant to § 1983, but not a private entity such as FaceBook.

Similarly, in Young v. Facebook, the U.S. District Court for the Northern District of California rejected a claim that Facebook violated the First Amendment by deactivating the plaintiff’s Facebook page. The court declined to subject Facebook to the First Amendment analysis, stating that “because Young has not alleged any action under color of state law, she fails to state a claim under § 1983.”

The First Amendment restricts antitrust actions against Facebook, not Facebook’s editorial discretion over its platform

Far from restricting Facebook, the First Amendment actually restricts government actions aimed at platforms like Facebook when they engage in editorial discretion by moderating content. If an antitrust plaintiff was to act on the impulse to “break up” Facebook because of alleged political bias in its editorial discretion, the lawsuit would be running headlong into the First Amendment’s protections.

There is no basis for concluding online platforms do not have editorial discretion under the law. In fact, the position of Facebook here is very similar to the newspaper in Miami Herald Publishing Co. v. Tornillo, in which the Supreme Court considered a state law giving candidates for public office a right to reply in newspapers to editorials written about them. The Florida Supreme Court upheld the statute, finding it furthered the “broad societal interest in the free flow of information to the public.” The U.S. Supreme Court, despite noting the level of concentration in the newspaper industry, nonetheless reversed. The Court explicitly found the newspaper had a First Amendment right to editorial discretion:

The choice of material to go into a newspaper, and the decisions made as to limitations on the size and content of the paper, and treatment of public issues and public officials — whether fair or unfair — constitute the exercise of editorial control and judgment. It has yet to be demonstrated how governmental regulation of this crucial process can be exercised consistent with First Amendment guarantees of a free press as they have evolved to this time. 

Online platforms have the same First Amendment protections for editorial discretion. For instance, in both Search King v. Google and Langdon v. Google, two different federal district courts ruled Google’s search results are subject to First Amendment protections, both citing Tornillo

In Zhang v. Baidu.com, another district court went so far as to grant a Chinese search engine the right to editorial discretion in limiting access to democracy movements in China. The court found that the search engine “inevitably make[s] editorial judgments about what information (or kinds of information) to include in the results and how and where to display that information.” Much like the search engine in Zhang, Facebook is clearly making editorial judgments about what information shows up in newsfeed and where to display it. 

None of this changes because the generally applicable law is antitrust rather than some other form of regulation. For instance, in Tornillo, the Supreme Court took pains to distinguish the case from an earlier antitrust case against newspapers, Associated Press v. United States, which found that there was no broad exemption from antitrust under the First Amendment.

The Court foresaw the problems relating to government-enforced access as early as its decision in Associated Press v. United States, supra. There it carefully contrasted the private “compulsion to print” called for by the Association’s bylaws with the provisions of the District Court decree against appellants which “does not compel AP or its members to permit publication of anything which their `reason’ tells them should not be published.”

In other words, the Tornillo and Associated Press establish the government may not compel speech through regulation, including an antitrust remedy. 

Once it is conceded that there is a speech interest here, the government must justify the use of antitrust law to compel Facebook to display the speech of users in the newsfeeds of others under the strict scrutiny test of the First Amendment. In other words, the use of antitrust law must be narrowly tailored to a compelling government interest. Even taking for granted that there may be a compelling government interest in facilitating a free and open platform (which is by no means certain), it is clear that this would not be narrowly tailored action. 

First, “breaking up” Facebook is clearly overbroad as compared to the goal of promoting free speech on the platform. There is no need to break it up just because it has an Oversight Board that engages in editorial responsibilities. There are many less restrictive means, including market competition, which has greatly expanded consumer choice for communications and connections. Second, antitrust does not even really have a remedy for free speech issues complained of here, as it would require courts to engage in long-term oversight and engage in compelled speech foreclosed by Associated Press

Note that this makes good sense from a law & economics perspective. Platforms like Facebook should be free to regulate the speech on their platforms as they see fit and consumers are free to decide which platforms they wish to use based upon that information. While there are certainly network effects to social media, the plethora of options currently available with low switching costs suggests that there is no basis for antitrust action against Facebook because consumers are unable to speak. In other words, the least restrictive means test of the First Amendment is best fulfilled by market competition in this case.

If there were a basis for antitrust intervention against Facebook, either through merger review or as a standalone monopoly claim, the underlying issue would be harm to competition. While this would have implications for speech concerns (which may be incorporated into an analysis through quality-adjusted price), it is inconceivable how an antitrust remedy could be formed on speech issues consistent with the First Amendment. 

Conclusion

Despite now well-worn complaints by so-called conservatives in and out of the government about the baneful influence of Facebook and other Big Tech companies, the First Amendment forecloses government actions to violate the editorial discretion of these companies. Even if Commissioner Carr is right, this latest call for antitrust enforcement against Facebook by Senator Hawley should be rejected for principled conservative reasons.

[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 Eric Fruits, (Chief Economist, International Center for Law & Economics).]

In an earlier TOTM post, we argued as the economy emerges from the COVID-19 crisis, perhaps the best policy would allow properly motivated firms and households to themselves balance the benefits, costs, and risks of transitioning to “business as usual.” 

Sometimes, however, well meaning government policies disrupt the balance and realign motivations.

Our post contrasted firms who determined they could remain open by undertaking mitigation efforts with those who determined they could not safely remain open. One of these latter firms was Portland-based ChefStable, which operates more than 20 restaurants and bars. Kurt Huffman, the owner of ChefStable, shut down all the company’s properties one day before the Oregon governor issued her “Stay home, stay safe” order.

An unintended consequence

In a recent Wall Street Journal op-ed, Mr. Huffman reports his business was able to shift to carryout and delivery, which ended up being more successful than anticipated. So successful, in fact, that he needed to bring back some of the laid-off employees. That’s when he ran into one of the stimulus package’s unintended—but not unanticipated—consequences of providing federal-level payments on top of existing state-level guarantees:

We started making the calls last week, just as our furloughed employees began receiving weekly Federal Pandemic Unemployment Compensation checks of $600 under the Cares Act. When we asked our employees to come back, almost all said, “No thanks.” If they return to work, they’ll have to take a pay cut.

***

But as of this week, that same employee receives $1,016 a week, or $376 more than he made as a full time employee. Why on earth would he want to come back to work?

Mr. Huffman’s not alone. NPR reports on a Kentucky coffee shop owner who faces the same difficulty keeping her employees at work:

“The very people we hired have now asked us to be laid off,” Marietta wrote in a blog post. “Not because they did not like their jobs or because they did not want to work, but because it would cost them literally hundreds of dollars per week to be employed.”

With the federal government now offering $600 a week on top of the state’s unemployment benefits, she recognized her former employees could make more money staying home than they did on the job.

Or, a fully intended consequence

The NPR piece indicates the Trump administration opted for the relatively straightforward (if not simplistic) unemployment payments as a way to get the money to unemployed workers as quickly as possible.

On the other hand, maybe the unemployment premium was not an unintended consequence. Perhaps, there was some intention.

If the purpose of the stay-at-home orders is to “flatten the curve” and slow the spread of the coronavirus, then it can be argued the purpose of the stimulus spending is to mitigate some of the economic costs. 

If this is the case, it can also be argued that the unemployment premium paid by the federal government was designed to encourage people to stay at home and delay returning to work. In fact, it may be more effective than a bunch of loophole laden employment regulations that would require an army of enforcers.

Mr. Huffman seems confident his employees will be ready to return to work in August, when the premium runs out. John Cochrane, however, is not so confident, writing on his blog, “Hint to Mr. Huffman: I would not bet too much that this deadline is not extended.”

With the administration’s state-by-state phased re-opening of the economy, the unemployment premium payments could be tweaked so only residents in states in Phase 1 or 2 would be eligible to receive the premium payments.

Of course, this tweak would unleash its own unintended consequences. In particular, it would encourage some states to slow walk the re-opening of their economies as a way to extract more federal money for their residents. My wild guess: The slow walking states will be the same states who have been most affected by the state and local tax deductibility provisions in the Tax Cuts and Jobs Act.

As with all government policies, the unemployment provisions in the COVID-19 stimulus raise the age old question: If a policy generates unintended consequences that are not unanticipated, can those consequences really be unintended?

[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 Miranda Perry Fleischer, (Professor Law and Co-Director of Tax Programs at the University of San Diego School of Law); and Matt Zwolinski (Professor of Philosophy, University of San Diego; founder and director, USD Center for Ethics, Economics, and Public Policy; founder and contributor, Bleeding Heart Libertarians Blog)

This week, Americans began receiving cold, hard cash from the government. Meant to cushion the economic fallout of Covid-19, the CARES Act provides households with relief payments of up to $1200 per adult and $500 per child. As we have written elsewhere, direct cash transfers are the simplest, least paternalistic, and most efficient way to protect Americans’ economic health – pandemic or not. The idea of simply giving people money has deep historical and wide ideological roots, culminating in Andrew Yang’s popularization of a universal basic income (“UBI”) during his now-suspended presidential campaign. The CARES Act relief provisions embody some of the potential benefits of a UBI, but nevertheless fail in key ways to deliver its true promise.

Provide Cash, No-Strings-Attached

Most promisingly, the relief payments are no-strings-attached. Recipients can use them as they – not the government – think best, be it for rent, food, or a laptop for a child to learn remotely. This freedom is a welcome departure from most current aid programs, which are often in-kind or restricted transfers. Kansas prohibits welfare recipients from using benefits at movie theaters and swimming pools. SNAP recipients cannot purchase “hot food” such as a ready-to-eat roasted chicken; California has a 17-page pamphlet identifying which foods users of Women, Infants and Children (“WIC”) benefits can buy (for example, white eggs but not brown). 

These restrictions arise from a distrust of beneficiaries. Yet numerous studies show that recipients of cash transfers do not waste benefits on alcohol, drugs or gambling. Instead, beneficiaries in developing countries purchase livestock, metal roofs, or healthier food. In wealthier countries, cash transfers are associated with improvements in infant health, better nutrition, higher test scores, more schooling, and lower rates of arrest for young adults – all of which suggest beneficiaries do not waste cash.

Avoid Asset Tests

A second positive of the relief payments is that they eschew asset tests, unlike many welfare programs. For example, a family can lose hundreds of dollars of SNAP benefits if their countable assets exceed $2,250. Such limits act as an implicit wealth tax and discourage lower-income individuals from saving. Indeed, some recipients report engaging in transactions like buying furniture on lay-away (which does not count) to avoid the asset limits. Lower-income individuals, for whom a car repair bill or traffic ticket can lead to financial ruin, should be encouraged to – not penalized for – saving for a rainy day.

Don’t Worry So Much about the Labor Market  

A third pro is that the direct relief payments are not tied to a showing of desert. They do not require one to work, be looking for work, or show that one is either unable to work or engaged in a substitute such as child care or school. Again, this contrasts with most current welfare programs. SNAP requires able-bodied childless adults to work or participate in training or education 80 hours a month. Supplemental Security Income requires non-elderly recipients to prove that they are blind or disabled. Nor do the relief payments require recipients to pass a drug test, or prove they have no criminal record.

As with spending restrictions, these requirements display distrust of beneficiaries. The fear is that “money for nothing” will encourage low-income individuals to leave their jobs en masse. But this fear, too, is largely overblown. Although past experiments with unconditional transfers show that total work hours drop, the bulk of this drop is from teenagers staying in school longer, new mothers delaying entrance into the workforce, and primary earners reducing their hours from say, 60 to 50 hours a week. We could also imagine UBI recipients spending time volunteering, engaging in the arts, or taking care of friends and relatives. None of these are necessarily bad things.

Don’t Limit Aid to the “Deserving”

On these three counts, the CARES Act embraces the promise of a UBI. But the CARES Act departs from key aspects of a well-designed, true UBI. Most importantly, the size of the relief payments – one-time transfers of $1200 per adult – pale in comparison to the Act’s enhanced unemployment benefits of $600/week. This mismatch underscores how deeply ingrained our country’s obsession with helping only the “deserving” poor is and how narrowly “desert” is defined. The Act’s most generous aid is limited to individuals with pre-existing connections to the formal labor market who leave under very specific conditions. Someone who cannot work because they are caring for a family member sick with COVID-19 qualifies, but not an adult child who left a job months ago to care for an aging parent with Alzheimer’s. A parent who cannot work because her child’s school was cancelled due to the pandemic qualifies, but not a parent who hasn’t worked the past couple years due to the lack of affordable child care. And because unemployment benefits not only turn on being previously employed but also rise the higher one’s past wages were, this mismatch magnifies that our safety net helps the slightly poor much more than the very poorest among us. 

Don’t Impose Bureaucratic Hurdles

The botched roll-out of the enhanced unemployment benefits illustrates another downside to targeting aid only to the “deserving”: It is far more complicated than giving aid to all who need it. Guidance for self-employed workers (newly eligible for such benefits) is still forthcoming. Individuals with more than one employer before the crisis struggle to input multiple jobs in the system, even though their benefits increase as their past wages do. Even college graduates have trouble completing the clunky forms; a friend who teaches yoga had to choose between “aqua fitness instructor” and “physical education” when listing her job. 

These frustrations are just another example of the government’s ineptitude at determining who is and is not work capable – even in good times. Often, the very people that can navigate the system to convince the government they are unable to work are actually the most work-capable. Those least capable of work, unable to navigate the system, receive nothing. And as millions of Americans spend countless hours on the phone and navigating crashing websites, they are learning what has been painfully obvious to many lower-income individuals for years – the government often puts insurmountable barriers in the way of even the “deserving poor.” These barriers – numerous office visits, lengthy forms, drug tests – are sometimes so time consuming that beneficiaries must choose between obtaining benefits to which they are legally entitled and applying for jobs or working extra hours. Lesson one from the CARES Act is that universal payments, paid to all, avoid these pitfalls. 

Don’t Means Test Up Front

The CARES Act contains three other flaws that a well-designed UBI would also fix. First, the structure of the cash transfers highlights the drawbacks of upfront means testing. In an attempt to limit aid to Americans in financial distress, the $1200 relief payments begin to phase-out at five cents on the dollar when income exceeds a certain threshold: $75,000 for childless, single individuals and $150,000 for married couples. The catch is that for most Americans, their 2019 or 2018 incomes will determine whether their relief payments phase-out – and therefore how much aid they receive now, in 2020. In a world where 22 million Americans have filed for unemployment in the past month, looking to one or two-year old data to determine need is meaningless. Many Americans whose pre-pandemic incomes exceeded the threshold are now struggling to make mortgage payments and put food on the table, but will receive little or no direct cash aid under the CARES Act until April of 2021.

This absurdity magnifies a problem inherent in ex ante means tests. Often, one’s past financial status does not tell us much about an individual’s current needs. This is particularly true when incomes fluctuate from period to period, as is the case with many lower-income workers. Imagine a fast food worker and SNAP beneficiary whose schedule changes month to month, if not week to week. If she is lucky enough to work a lot in November, she may see her December SNAP benefits reduced. But what if her boss gives her fewer shifts in December? Both her paycheck and her SNAP benefits will be lower in December, leaving her struggling.

The solution is to send cash to all Americans, and recapture the transfer through the income tax system. Mathematically, an ex post tax is exactly the same as an ex ante phase out. Consider the CARES Act. A childless single individual with an income of $85,000 is $10,000 over the threshold, reducing her benefit by $500 and netting her $700. Giving her a check for $1200 and taxing her an additional 5% on income above $75,000 also nets her $700. As a practical matter, however, an ex post tax is more accurate because hindsight is 20-20. Lesson two from the CARES Act is that universal payments offset by taxes are superior to ex ante means-testing.

Provide Regular Payments

Third, the CARES Act provides one lump sum payment, with struggling Americans wondering whether Congress will act again. This is a missed opportunity: Studies show that families receiving SNAP benefits face challenges planning for even a month at a time. Lesson three is that guaranteed monthly or bi-weekly payments – as a true UBI would provide — would help households plan and provide some peace of mind amidst this uncertainty.

Provide Equal Payments to Children and Adults

Finally, the CARES Act provides a smaller benefit to children than adults. This is nonsensical. A single parent with two children faces greater hardship than a married couple with one child, as she has the same number of mouths to feed with fewer earners. Further, social science evidence suggests that augmenting family income has positive long-run consequences for children. Lesson four from the CARES Act – the empirical case for a UBI is strongest for families with children.

It’s Better to Be Overly, not Underly, Generous

The Act’s direct cash payments are a step in the right direction. But they demonstrate that not all cash assistance plans are created equal. Uniform and periodic payments to all – regardless of age and one’s relationship to the workforce – is the best way to protect Americans’ economic health, pandemic or not. This is not the time to be stingy or moralistic in our assistance. Better to err on the side of being overly generous now, especially when we can correct that error later through the tax system. Errors that result in withholding aid from those who need it, alas, might not be so easy to correct.

[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 Dirk Auer, (Senior Fellow of Law & Economics, ICLE); Eric Fruits (Chief Economist, ICLE; Adjunct Professor of Economics, Portland State University); and Kristian Stout (Associate Director, ICLE

The COVID-19 pandemic is changing the way consumers shop and the way businesses sell. These shifts in behavior, designed to “flatten the curve” of infection through social distancing, are happening across many (if not all) markets. But in many cases, it’s impossible to know now whether these new habits are actually achieving the desired effect. 

Take a seemingly silly example from Oregon. The state is one of only two in the U.S. that prohibits self-serve gas. In response to COVID-19, the state fire marshall announced it would temporarily suspend its enforcement of the prohibition. Public opinion fell into two broad groups. Those who want the option to pump their own gas argue that self-serve reduces the interaction between station attendants and consumers, thereby potentially reducing the spread of coronavirus. On the other hand, those who support the prohibition on self-serve have blasted the fire marshall’s announcement, arguing that all those dirty fingers pressing keypads and all those grubby hands on fuel pumps will likely increase the spread of the virus. 

Both groups may be right, but no one yet knows the net effect. We can only speculate. This picture becomes even more complex when considering other, alternative policies. For instance, would it be more effective for the state of Oregon to curtail gas station visits by forcing the closure of stations? Probably not. Would it be more effective to reduce visits through some form of rationing? Maybe. Maybe not. 

Policymakers will certainly struggle to efficiently decide how firms and consumers should minimize the spread of COVID-19. That struggle is an extension of Hayek’s knowledge problem: policymakers don’t have adequate knowledge of alternatives, preferences, and the associated risks. 

A Hayekian approach — relying on bottom-up rather than top-down solutions to the problem — may be the most appropriate solution. Allowing firms to experiment and iteratively find solutions that work for their consumers and employees (potentially adjusting prices and wages in the process) may be the best that policymakers can do.

The case of online retail platforms

One area where these complex tradeoffs are particularly acute is that of online retail. In response to the pandemic, many firms have significantly boosted their online retail capacity. 

These initiatives have been met with a mix of enthusiasm and disapproval. On the one hand online retail enables consumers to purchase “essential” goods with a significantly reduced risk of COVID-19 contamination. It also allows “non-essential” goods to be sold, despite the closure of their brick and mortar stores. At first blush, this seems like a win-win situation for both consumers and retailers of all sizes, with large retailers ramping up their online operations and independent retailers switching to online platforms such as Amazon.

But there is a potential downside. Even contactless deliveries do present some danger, notably for warehouse workers who run the risk of being infected and subsequently passing the virus on to others. This risk is amplified by the fact that many major retailers, including Walmart, Kroger, CVS, and Albertsons, are hiring more warehouse and delivery workers to meet an increase in online orders. 

This has led some to question whether sales of “non-essential” goods (though the term is almost impossible to define) should be halted. The reasoning is that continuing to supply such goods needlessly puts lives at risk and reduces overall efforts to slow the virus.

Once again, these are incredibly complex questions. It is hard to gauge the overall risk of infection that is produced by the online retail industry’s warehousing and distribution infrastructure. In particular, it is not clear how effective social distancing policies, widely imposed within these workplaces, will be at achieving distancing and, in turn, reducing infections. 

More fundamentally, whatever this risk turns out to be, it is almost impossible to weigh it against an appropriate counterfactual. 

Online retail is not the only area where this complex tradeoff arises. An analogous reasoning could, for instance, also be applied to food delivery platforms. Ordering a meal on UberEats does carry some risk, but so does repeated trips to the grocery store. And there are legitimate concerns about the safety of food handlers working in close proximity to each other.  These considerations make it hard for policymakers to strike the appropriate balance. 

The good news: at least some COVID-related risks are being internalized

But there is also some good news. Firms, consumers and employees all have some incentive to mitigate these risks. 

Consumers want to purchase goods without getting contaminated; employees want to work in safe environments; and firms need to attract both consumers and employees, while minimizing potential liability. These (partially) aligned incentives will almost certainly cause these economic agents to take at least some steps that mitigate the spread of COVID-19. This might notably explain why many firms imposed social distancing measures well before governments started to take notice (here, here, and here). 

For example, one first-order effect of COVID-19 is that it has become more expensive for firms to hire warehouse workers. Not only have firms moved up along the supply curve (by hiring more workers), but the curve itself has likely shifted upwards reflecting the increased opportunity cost of warehouse work. Predictably, this has resulted in higher wages for workers. For example, Amazon and Walmart recently increased the wages they were paying warehouse workers, as have brick and mortar retailers, such as Kroger, who have implemented similar policies.

Along similar lines, firms and employees will predictably bargain — through various channels — over the appropriate level of protection for those workers who must continue to work in-person.

For example, some companies have found ways to reduce risk while continuing operations:

  • CNBC reports Tyson Foods is using walk-through infrared body temperature scanners to check employees’ temperatures as they enter three of the company’s meat processing plants. Other companies planning to use scanners include Goldman Sachs, UPS, Ford, and Carnival Cruise Lines.
  • Kroger’s Fred Meyer chain of supermarkets is limiting the number of customers in each of its stores to half the occupancy allowed under international building codes. Kroger will use infrared sensors and predictive analytics to monitor the new capacity limits. The company already uses the technology to estimate how many checkout lanes are needed at any given time.
  • Trader Joe’s limits occupancy in its store. Customers waiting to enter are asked to stand six feet apart using marked off Trader Joe’s logos on the sidewalk. Shopping carts are separated into groups of “sanitized” and “to be cleaned.” Each cart is thoroughly sprayed with disinfectant and wiped down with a clean cloth.

In other cases, bargaining over the right level of risk-mitigation has been pursued through more coercive channels, such as litigation and lobbying:

  • A recently filed lawsuit alleges that managers at an Illinois Walmart store failed to alert workers after several employees began showing symptoms of COVID-19. The suit claims Walmart “had a duty to exercise reasonable care in keeping the store in a safe and healthy environment and, in particular, to protect employees, customers and other individuals within the store from contracting COVID-19 when it knew or should have known that individuals at the store were at a very high risk of infection and exposure.” 
  • According to CNBC, a group of legislators, unions and Amazon employees in New York wrote a letter to CEO Jeff Bezos calling on him to enact greater protections for warehouse employees who continue to work during the coronavirus outbreak. The Financial Times reports worker protests at Amazon warehouse in the US, France, and Italy. Worker protests have been reported at a Barnes & Noble warehouse. Several McDonald’s locations have been hit with strikes.
  • In many cases, worker concerns about health and safety have been conflated with long-simmering issues of unionization, minimum wage, flexible scheduling, and paid time-off. For example, several McDonald’s strikes were reported to have been organized by “Fight for $15.”

Sometimes, there is simply no mutually-advantageous solution. And businesses are thus left with no other option than temporarily suspending their activities: 

  • For instance, McDonalds and Burger King have spontaneously closed their restaurants — including drive-thru and deliveries — in many European countries (here and here).
  • In Portland, Oregon, ChefStable a restaurant group behind some of the city’s best-known restaurants, closed all 20 of its bars and restaurants for at least four weeks. In what he called a “crisis of conscience,” owner Kurt Huffman concluded it would be impossible to maintain safe social distancing for customers and staff.

This is certainly not to say that all is perfect. Employers, employees and consumers may have very strong disagreements about what constitutes the appropriate level of risk mitigation.

Moreover, the questions of balancing worker health and safety with that of consumers become all the more complex when we recognize that consumers and businesses are operating in a dynamic environment, making sometimes fundamental changes to reduce risk at many levels of the supply chain.

Likewise, not all businesses will be able to implement measures that mitigate the risk of COVID-19. For instance, “Big Business” might be in a better position to reduce risks to its workforce than smaller businesses. 

Larger firms tend to have the resources and economies of scale to make capital investments in temperature scanners or sensors. They have larger workforces where employees can, say, shift from stocking shelves to sanitizing shopping carts. Several large employers, including Amazon, Kroger, and CVS have offered higher wages to employees who are more likely to be exposed to the coronavirus. Smaller firms are less likely to have the resources to offer such wage premiums.

For example, Amazon recently announced that it would implement mandatory temperature checks, that it would provide employees with protective equipment, and that it would increase the frequency and intensity of cleaning for all its sites. And, as already mentioned above, Tyson Foods announced that they would install temperature scanners at a number of sites. It is not clear whether smaller businesses are in a position to implement similar measures. 

That’s not to say that small businesses can’t adjust. It’s just more difficult. For example, a small paint-your-own ceramics shop, Mimosa Studios, had to stop offering painting parties because of government mandated social distancing. One way it’s mitigating the loss of business is with a paint-at-home package. Customers place an order online, and the studio delivers the ceramic piece, paints, and loaner brushes. When the customer is finished painting, Mimosa picks up the piece, fires it, and delivers the finished product. The approach doesn’t solve the problem, but it helps mitigate the losses.

Conclusion

In all likelihood, we can’t actually avoid all bad outcomes. There is, of course, some risk associated with even well-resourced large businesses continuing to operate, even though some of them play a crucial role in coronavirus-related lockdowns. 

Currently, market actors are working within the broad outlines of lockdowns deemed necessary by policymakers. Given the intensely complicated risk calculation necessary to determine if any given individual truly needs an “essential” (or even a “nonessential”) good or service, the best thing that lawmakers can do for now is let properly motivated private actors continue to seek optimal outcomes together within the imposed constraints. 

So far, most individuals and the firms serving them are at least partially internalizing Covid-related risks. The right approach for lawmakers would be to watch this process and determine where it breaks down. Measures targeted to fix those breaches will almost inevitably outperform interventionist planning to determine exactly what is essential, what is nonessential, and who should be allowed to serve consumers in their time of need.