One great achievement of Bidenomics that you may not have seen celebrated is the private equity drought. Private equity is very possibly the most despised industry in America (the titles of two recent books about it were Plunder and These Are the Plunderers), and it’s in a slump. Credit goes to the chairs of two independent agencies, over whom President Joe Biden has no direct control. But Biden appointed one of them, Federal Trade Commission Chair Lina Khan, and he reappointed the other, Federal Reserve Chair Jerome Powell.
Thanks in part to Khan and a third key player, Assistant Attorney General Jonathan Kanter, who heads the Justice Department’s Antitrust Division, the dollar value of merger activity fell, on an annualized basis, by 41 percent during the first half of 2023. Khan and Kanter’s role was to increase the heretofore largely nonexistent threat of antitrust enforcement. Powell’s role, which was more decisive, was to increase the cost of borrowing by raising interest rates. Mergers are often funded through debt. “Private equity” is really just a euphemism for “leveraged buyout,” an industry moniker discarded after its most famous practitioner, the junk-bond king Michael Milken, went to jail. Leveraged buyouts finance more than one-third of all mergers. When leveraging (i.e., borrowing) gets more expensive, private equity firms perform fewer leveraged buyouts and—voilà!—you get fewer mergers. Which, contrary to what you might read in the financial pages, is a good thing.
Unfortunately, the merger dropoff and the private equity drought won’t last forever. Indeed, last week we learned that in the third quarter of 2023, mergers rose 35 percent on an annualized basis. This was reported in the financial pages as good news, when really it’s bad news because the result will be more industry concentration. As even the Fed starts to realize inflation really is coming under control—its favorite inflation indicator, the personal consumption expenditures, or PCE, index, fell in August from 4.3 to 3.9 percent on an annualized basis when you strip out volatile food and gas prices—it will likely lower interest rates sometime next year. That means it will be up chiefly to Khan and Kanter to keep mergers down and private equity parched.
The FTC filed a complaint last week against the private equity firm Welsh, Carson, Anderson & Stowe regarding its consolidation of anesthesia practices across Texas, which it says is raising prices. This is part of a stepped-up effort at both the FTC and the Justice Department to scrutinize private equity’s multiyear binge of buying up and consolidating all sorts of health care businesses, from nursing homes to hospices. But Khan’s most significant effort to discourage corporate gigantism isn’t about mergers or private equity at all. It’s an antitrust lawsuit brought last week by the FTC and 17 state attorneys general against her longtime bête noire, Amazon.
Khan got the job of FTC chair largely on the strength of an influential paper she wrote in 2017 for the Yale Law Journal when she was still a law student. In the article, Khan argued against an antitrust standard, favored by the courts after publication of Robert Bork’s 1978 book The Antitrust Paradox, that said antitrust law existed only to protect the interests of the consumer. In her paper, titled “Amazon’s Antitrust Paradox,” Khan argued that this standard “fails to capture the architecture of market power in the twenty-first century marketplace.” Instead of just looking at prices, she argued, antitrust regulators should also look at the effects of economic concentration on such factors as the pace of innovation, the ability of competitors to remain in or enter the market, and the ability of suppliers to earn a profit. In essence, Khan was arguing to return to the antitrust standard that preceded Bork—a standard invented to check the economic power of the railroad, banking, and oil trusts in the late nineteenth and early twentieth centuries. Although Khan’s paper didn’t say so, Amazon is basically the Standard Oil of our time.
The FTC’s lawsuit points out that Amazon takes close to half of every dollar on every third-party sale, with one seller saying, “We have nowhere else to go, and Amazon knows it.” Farmers said much the same thing about railroads in the nineteenth century. Until 2019, Amazon bound suppliers contractually from selling their products at lower prices on other platforms. Now Amazon just puts such products at the bottom of its search results. Amazon’s search function, the lawsuit argues, is a mess, choked with advertisements and prioritizing its own often-inferior products. I’ve actually noticed this. Searching for a product on Amazon these days is like shouting at a very deaf store clerk “Please get me X” only to have the clerk show you three entirely irrelevant items because he can’t hear a word you say.
One difficulty with the Amazon lawsuit, as Camilla Hodgson pointed out last week in the Financial Times, is that although sellers, with good reason, hate Amazon, consumers love it. “You just could not be going after a more popular corporation,” David Balto, a former FTC policy director, told Hodgson. It’s true! Even granting that its search function is all crapped up, I still love Amazon, and I use it a lot. This is hard on my conscience, because Amazon is right up there with Starbucks, Apple, and Walmart as one of the worst union-busters in the country.
Interestingly, neither Khan’s Yale Law Review article nor the FTC lawsuit mentions unions or wages. To the extent either includes any discussion of monopsony (i.e., a circumstance where there is only one buyer), it’s to consider the impact on sellers, not on warehouse or contract labor. Perhaps that’s because labor disputes at Amazon warehouses tend to be not about wages (average pay exceeds $20 per hour) but about working conditions; among other things, Amazon warehouses have a miserable record on worker safety. Or perhaps it’s because antitrust law, even in the distant past, has never been terribly effective at addressing labor monopsony or at helping labor unions in other ways. Indeed, monopoly and oligopoly can be very pro-worker under the right circumstances. Think U.S. Steel in the 1960s, or (to a diminished extent) the Big Three auto companies today, wherein unions secure workers their fair share of of the spoils from market concentration. Still, we regulate the economy we have, not the economy we used to have and wish to return. When only 6 percent of the private sector is unionized, increasing competition for labor through antitrust is not a bad strategy to empower workers.
Even without that potential benefit, the Amazon lawsuit justifies itself on its own merits, which emphasize that Amazon is amassing a dangerous quantity of economic power in relation to other businesses. And along with Khan’s lawsuit against Google, it sends the message to other large corporations and to private equity firms that the cost of excessive bigness will remain high even when interest rates come down. Let’s hope they heed it and that the merger recession extends into 2024.