We’ve seen plenty of economic issues discussed in this presidential election: the proper level of financial regulation, the high cost of prescription drugs, the clustering of wealth at the very top. But all of these things, and many more, boil down to one problem: Practically every major American industry has become extremely concentrated, and this creeping monopolization has increased inequality, created economic hazards where they previously didn’t exist, and heightened public anxiety.
A remarkable hearing in Washington yesterday actually addressed this. And senators from both parties agreed with unusual bluntness and unanimity: Far more needs to be done to fight monopolies and keep them from hurting our economy and our people.
Here’s why this hearing was important: We’ve had antitrust laws on the books for over a century to fight industry consolidation. But weak enforcement and an ideological disposition to trust the market to self-correct has diminished antitrust to almost nothing. The fact that both parties want the government to stop monopolies could finally force the agencies to get aggressive and protect the economy.
At a Senate Judiciary subcommittee hearing on antitrust oversight, the first such hearing in three years, everyone—Democrats, Republicans, and the two witnesses, Federal Trade Commission (FTC) chair Edith Ramirez and assistant attorney general of the antitrust division William Baer—agreed that there had been a “tsunami” of mergers and acquisitions (M&A) recently. Baer attributed it to money coming off the sidelines after the Great Recession. But the numbers are historic in nature: 2015 was the biggest year of M&A ever, with more than $3.8 trillion in deal value. That means lots of fees for Wall Street banks that shepherd the deals; it’s become a major profit center for them. And 2016 promises to be just as good, if not better.
This makes sense if you think about everything you buy and every service you pay for, and how they come from concentrated suppliers. We have four airlines serving 80 percent of all passengers. We have four cable and Internet companies providing most of the nation’s cell-phone and television service. We have four big commercial banks, five big insurance companies (only three if two proposed mergers go through this year), and a handful of producers selling every major consumer product. Even when you think you have a choice, like in the array of online travel-booking sites, two companies (Expedia and Priceline) own all the subsidiaries.
Two laws from the turn of the twentieth century, the Sherman and Clayton Acts, empower the government to police markets for cartel behavior and pricing abuse, to deny mergers when they create anti-competitive concentration, and to break up monopolies that harm consumers and stunt the economy. Two agencies, the FTC and the Justice Department’s antitrust division, carry this enforcement capability. And on Wednesday, senators doubted that the agencies are getting the job done.
Senator Mike Lee, the Utah Republican who chairs the subcommittee, worried that the agencies lack the resources to deal with the merger wave. Ranking member Amy Klobuchar, the Minnesota Democrat, questioned the “conduct remedies” agencies use in lieu of blocking mergers—for instance, forcing the merged company to sell off retail outlets or business lines to maintain competition. “We often talk about firms being too big to fail,” Klobuchar said. “The question for antitrust enforcement is whether some mergers are too big to fix.”
Iowa Republican Chuck Grassley brought up consolidation in the market for seeds, and how that creates issues in the food-supply chain—if one set of seeds is tainted and a monopoly controls seed distribution, the consequences of safety hazards magnifies. Al Franken, the Minnesota Democrat, expressed concern about “platform monopolies”—Internet giants like Facebook, Google, Apple, and Amazon, who “use their positions … to stifle competition and inhibit the free flow of ideas.”
Orrin Hatch, the Utah Republican, probed even deeper, bringing up a 2015 Wall Street Journal investigation showing that the FTC’s Bureau of Competition had enough evidence to conclude that Google was illegally preferencing its own companies in search results, but the FTC’s senior leadership overrode the bureau and closed the Google case. Ramirez asserted that “our conclusion was consistent with the recommendation made by Bureau of Competition staff,” and paid lip service to remaining vigilant on Google in the future. But Hatch certainly got her attention.
Perhaps nobody lit into the antitrust agencies more than Connecticut Democrat Richard Blumenthal. “The merger policy of our nation simply has failed,” Blumenthal said. “As a national initiative we need to rethink the approach we have taken.” He highlighted the rapid consolidation of the airline industry, and how companies collude with one another to keep ticket prices high, despite a drop in the cost of fuel.
This comes about, Blumenthal alleged, not only because four carriers serve 80 percent of the market, but because seven shareholders control 60 percent of United Airlines, and also large chunks of its competitors. Passive investing through index funds means that everyone invested owns the same basket of stocks, and some wonder whether this common ownership drives up costs, as nobody has an incentive to cut prices. “It’s an issue we are looking at in more than one industry,” the Justice Department’s Baer said.
Permissiveness across the government often breeds market concentration, which makes the antitrust agencies extremely powerful. And since both parties now seem to agree that greater enforcement is needed, they can pressure for more aggressive interventions to preserve competition.
In fact, they already are. For example, Franken brought up the credit-rating agencies, who facilitated the financial crash by giving inflated credit ratings to faulty mortgage-backed securities. The problem was that the rating agencies are paid by the banks who issue securities, and to achieve more business, they gave better ratings. Years after the meltdown, and despite official reports that they continue to inflate ratings to chase business, the top three rating agencies issued 95 percent of all ratings last year.
Franken passed legislation in Dodd-Frank to change the rating agency compensation model to create competition on accurate ratings, but the Securities and Exchange Commission scotched it. Baer replied that it’s the SEC’s job to oversee rating agencies. Franken shot back: “The SEC has responsibility but they aren’t using it.”
There have been some successful merger challenges in recent years, from Time Warner Cable/Comcast to Sysco/U.S. Foods to AT&T/T-Mobile. But those have been in cases where the consolidation was so blatant that it would be impossible to prevent harm to market competition. More often the agencies impose conditions, as in the Safeway/Albertson’s grocery-store merger where they forced the new company to sell 168 stores to a competitor. That competitor promptly went out of business within nine months, and the new Albertson’s behemoth bought back some of the stores. The conditions, as lawmakers in both parties suggested, often don’t work.
There’s copious evidence that monopolies use their power to detrimental ends. Expedia, after acquiring competitor Orbitz, announced a program to put hotels higher up in searches if they pay a fee. Amazon has squeezed prices for book publishers and restricted those who don’t comply. Drugmakers like Turing Pharmaceuticals use patent-created monopolies to jack up the price of drugs 5,000 percent overnight, and prevent would-be generic competitors from acquiring samples needed to get FDA approval to enter the market.
When questioned about other cases, the antitrust enforcers appeared to pad their stats. Ramirez, the FTC chair, mentioned on numerous occasions a $1.2 billion settlement with Teva Pharmaceuticals, over a “pay-for-delay” deal it reached with generic manufacturers, preventing competition to its sleep-disorder drug Provigil. But Klobuchar pointed out that the total harm to consumers in increased prices has been estimated between $3.5 and $5.6 billion. “The defendant got to keep 70 to 80 percent of the profits,” Klobuchar said. Ramirez only replied that the FTC tries to estimate the appropriate penalty.
We need competition because it benefits consumers on price and quality—there’s no incentive for a monopoly to deliver good service if consumers have no options. We need it because consolidation creates a few winners economically amid many losers, and they use that power to influence politics and take even more gains. We need it because any problem with one big bank or one big food distributor magnifies when the company is one of a precious few.
Amazingly, Wednesday’s hearing showed that antitrust policy is not a partisan issue. It’s even become a point on the campaign trail: Hillary Clinton and Bernie Sanders have stressed greater antitrust enforcement and breaking up monopolies, and while not specifically talking antitrust, Donald Trump wants to inject competition into the drug industry. But the pressure from Congress is even more encouraging, because it could be all it takes to spur the agencies to do their job. And aggressively enforcing the antitrust laws would be one of the best ways to reinvigorate our economy.