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Antitrust After the Coronavirus
The pandemic has clarified a lot about America and the West. Now comes the political reaction.
Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
Today I’m going to write about the emerging super concentrated economy, and what we’re going to have to do after the pandemic to restore our liberties.
First, some housekeeping. I was on a podcast with Rob Johnson of the Institute for New Economic Thinking (INET). Also, I co-wrote a report on how to address the market power of Google and Facebook through a framework called “regulated competition.” You can read that report here.
A Government of Corporate Monopolies
Societies reveal their core values at moments of crisis, first by clarifying and then through a political reaction to what that crisis revealed. The clarification usually takes a few years, because we have to let the illusions drop before we can assess our real situation clearly and build new political options.
In 1929, the stock market crash and banking freeze revealed an America uncomfortable with having democratic institutions take care of its people. Over the next few years, hundreds of thousands went hungry as relief agencies ran out of supplies even as farmers over-produced food. (Note the parallels today, as food banks run short while meatpackers engage in mass culling of chickens). From 1930-1932, Herbert Hoover worked 18 hour days and exhorted big business to engage in hiring, but he was absolutely unwilling to reorient power away from Wall Street.
At first leaders, including Democratic leaders who took a Congressional majority in1931, sought to out-Hoover Hoover. John Nance Garner, the House Democratic Speaker, avoided conflict with big business, and sought as his response to the depression a sales tax increase. But eventually the public bought into a radical new philosophy, and elected Franklin Delano Roosevelt in 1932. In his inaugural address, FDR did what Hoover would not. He attacked the social order, saying “practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.” FDR, with the New Deal, took power from monopolists and financiers, and replaced them with public institutions, redistributing power, shrinking private finance, and structuring competitive markets where there had been monopolies.
After 9/11, there was a similar clarification in the face of a crisis, as the American and Western “End of History” conception of a financier-led order as invulnerable and forever dominant was challenged. The political reaction, however, went the opposite way to the New Deal, narrowing democracy instead of expanding it. We lashed out, angrily and violently with poorly conceived wars in the Middle East, justified in a haze of self-righteousness. Domestically the reaction was just as bad, with George W. Bush pushing an aggressive capital gains tax cut in 2003. The most telling illustration of how we responded was uncovered by the Wall Street Journal, perhaps the most cynical story I think I’ve ever seen about corporate leadership.
On Sept. 21, 2001, rescuers dug through the smoldering remains of the World Trade Center. Across town, families buried two firefighters found a week earlier. At Fort Drum, on the edge of New York's Adirondacks, soldiers readied for deployment halfway across the world.
Boards of directors of scores of American companies were also busy that day. They handed out millions of bargain-priced stock options to their top executives….
A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock-market decline, to give executives especially valuable options. A review of Standard & Poor's ExecuComp data for 1,800 leading companies indicates that from Sept. 17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock-option grants. The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999 and 2003.
These companies included Home Depot, Black & Decker, UnitedHealth, and Merrill Lynch. The reaction by the top brands in corporate America, in other words, was to loot. Just a few years later came the Enron scandal, a more obvious signpost of flagrant corporate misbehavior. A corporate crime spree and the war in Iraq were the reaction to 9/11, a doubling down on the insecure foundations of 1990s globalism.
In the next crisis, of 2008-2010, first there was a clarification that our financial order was fragile. The political reaction was yet more mass looting through a foreclosure wave and open bailout, aided and abetted by a Democratic President who used the language of left-wing social justice and tolerance. The reaction against Bush and Obama led to the election of a bumbling crude nationalist, Donald Trump, who sounds like he’s always trying to sell you a time share or vitamin supplements.
Which brings us to the Coronavirus.
Right now, we’re in the clarifying stage. After decades of assuming that stuff just shows up on shelves, we are now seeing how production really works, and why we are having such a tough time producing and distributing the things we need, or having such trouble with basic institutional competence, things like testing and tracing or distributing protective equipment.
The reason America can’t handle the Coronavirus is the same reason we can’t do anything else right. We don’t let the people who do the work have any say over how or whether the work is done. That’s why America has mishandled various wars, the response to Katrina, the financial crisis, big tech monopolies, Boeing, the Iowa caucuses, and the crisis with Hurricane Maria in Puerto Rico. American institutions are organized entirely around the short-term horizon of financiers, and these financiers seek to create monopolies and to grab cash by thinning out supply lines and generating hidden risk.
The pandemic has revealed and amplified a crisis of concentration. In the years leading up to the crisis, there was a merger boom in hospitals, who then cut hospital bed capacity. Concentrated supply chains ruined our capacity to make our own medicine and safety equipment, and the decline of community banks eroded the ability of small business lending programs to get money out to the economy through a dwindling number of community banks. Bad merger policy is even why we were short on ventilators.
The coronavirus crisis has also clarified that we have a weak state, incapable of mobilizing national resources in a pandemic. It’s not just a lack of testing and tracing. We lack a functional universal health care system, and hospitals are even cutting doctor and nurse pay because of the financier domination of our social resources.
You usually go into a crisis with the policymakers who got you into trouble, and that’s the case here. Policymakers still believe that the right kind of state is a weak state. Take Makan Delrahim, Trump’s Assistant Attorney General for Antitrust. His division is tasked with investigating anti-competitive behavior, of which there is likely a substantial amount. Yet he is, and I’m not kidding, trying to help Chinese mattress importers evade trade restrictions. That’s not just bad policymaking, it’s a comically irrelevant attempt to further weaken trade protection. The clownish Delrahim is simply unprepared to think clearly about how to react to a crisis that requires real public institutions. (UPDATE: The DOJ Antitrust division withdrew their brief making this point. Thank you Mr. Delrahim! It’s not always easy to admit error, and I respect the choice to do so.)
It isn’t just Delrahim, he’s just the silliest of our leadership class. Congress passed a multi-trillion dollar bailout bill, which Senator Democratic leader Chuck Schumer called the most important legislation since Lyndon Johnson’s Great Society. And it’s true that Congress did appropriate huge sums of money, far more than anything during the financial crisis, with virtually no pushback. Some see a dramatic and positive contrast from the early Obama years, when Democrats could barely get an under-powered stimulus bill through a skeptical Congress. Finally Congress works together! But the reason this bill had little opposition despite its size is because it reinforced existing power hierarchies. It isn’t about building a stronger government, it is just enlarging a weak state.
Congress, for instance, appropriated money to go to hospitals; Trump asked UnitedHealth to manage the payments. Trump has largely delegated governing authority to various private equity groups, or monopolies. It’s not just Trump. California Governor Gavin Newsom is partnering with Google on rural distance learning, and state attorneys general are partnering with Amazon to stop price gouging. So much partnering!
In the first four packages of Coronavirus legislation, the small business funding program organized by Senators Marco Rubio and Ben Cardin has been the only major facility designed to even slow the roll-up of monopoly power. The many trillions of credit and spending have very modest restrictions on use. There are meager prohibitions on executive compensation, stock buybacks, conflicts of interest, and dividends, all easily evaded. The Federal Reserve included some of these restrictions in its various lending facilities. But so far, there has been nothing on mergers.
And it’s not just policymakers on the right, or ones in public office. Obama-era DOJ Antitrust Division leader Bill Baer wrote a piece accepting that we are heading towards an economy of giants:
But realistically, not all businesses are going to be able to get up and running again. That means many markets are going to become more concentrated. We will see it in all sectors, from agriculture and retail to manufacturing and travel. Fewer competitors means less competition, more market power for some sellers and some buyers, and more risk of tacit price coordination. In the end consumers will pay more.
Baer offers no ideas, just a shrug, pointing to an obvious problem and saying ‘someone else should do something about that.’ Learned helplessness seems to be a pervasive attitude. House Democratic progressives, who wrote an endless laundry list for a more egalitarian set of bailout policies that will go straight into a shredder, didn’t ask for merger restrictions or elevated antitrust scrutiny.
Even more bizarrely, this week, an Amazon lobbyist named Nate Sutton was caught committing what looks a lot like perjury in front of Congress. Last July, Sutton had told two members of Congress investigating big tech information on how Amazon uses data to create its own private label products; the Wall Street Journal just revealed Sutton had lied. This is a huge deal. Lying to Congress during an investigation, which is a crime, makes oversight impossible. Yet the Chair of the Judiciary Committee, Jerry Nadler, as part of his statement on the matter, actually praised Amazon for its work during the pandemic. Nadler is an anti-monopolist, and did some gnashing of teeth over the corporation’s "apparent lack of candor,” but it still displayed a remarkable lack of self-respect by a powerful Democratic Congressman.
In other words, the coronavirus has clarified that our government is weak, but the political reaction is to just accept the weakness of state institutions, and throw taxpayer money and political legitimacy at private institutions who govern in their stead.
Corporate America has gotten the message. Apple and Google, who together run most of the world’s mobile phone operating systems, are putting out a global contact tracing system for the Coronavirus. They are making core political decisions about how to use it and when it will end.
Who else has stepped into the coordinating role that state actors used to play? Matt Levine of Bloomberg had an interesting observation about giant asset managers, noting that "BlackRock, Fidelity Investments, Aviva Investors, Janus Henderson and Amundi, Europe’s largest asset manager” are telling drug companies to stop competing. Asset managers, who wield the pension money of the world, control large chunks of virtually every corporation, so in effect, this is private allocators of public capital taking a direct governing role.
Blackrock is talking to pharma companies about “ways of developing and deploying medicines and equipment, including working with industry competitors and regulators.” Other concentrated investor groups are putting pressure on pharmaceutical companies “to share any relevant findings on a vaccine and other treatments as well as to drop any enforcement of relevant patents.”
There’s nothing wrong with mobilizing social resources in a crisis. But what is fascinating is that it is not the United States or EU governments doing so, but the United States of Asset Managers. They are the ones engaging in patent reform and structuring collaboration among industry competitors.
Along with public policymakers becoming sideline players is a new massive lobbying approach. The techlash is over, says the big tech booster brigade. The endless and cynical boosterism by big corporations was momentarily revealed by an Amazon memo unearthed by Vice, in which the corporation’s general counsel discussed “different and bold” ways to donate masks to maximize PR value, even as top executives were organizing a campaign to plant negative media stories about Amazon workers seeking protective equipment. “It’s a fantastic gift if we donate strategically,” he wrote.
And this public relations campaign is working. There’s a renewed culture of deference to big tech coursing throughout upper class culture. For example:
The Coming Reaction
Yet, after clarification comes reaction. It took a few years for people to come to grips with the Depression, same with 9/11 and the financial crisis. I don’t think this crisis will take as long, because it comes so quickly after the last social shock.
And finally, there are signs of life. Last week, Antitrust Subcommittee Chairman David Cicilline called for a merger moratorium during the pandemic. “As millions of businesses struggle to stay afloat, private equity firms and dominant corporations are positioned to swoop in for a buying spree,” he said. Senators Elizabeth Warren and Josh Hawley have also called for elevated antitrust scrutiny, and Congresswoman Pramila Jayapal has been needling Amazon about its various business practices, after reacting angrily to Amazon’s deception. (Jayapal asked the question to which Sutton lied).
More broadly, we are all getting used to a pandemic-stricken world, one where there is a need for a strong state. A variety of Republicans, for instance, are thinking about how to re-shore pharmaceutical manufacturing, which is a significant break from the neoliberal model. The Federal Reserve will be disclosing transaction level data. And while Trump has been deferring to private power to govern and refusing to use or strengthen public institutions like the Post Office, his temporary polling boost from the pandemic has disappeared. Joe Biden, who really doesn’t have a philosophy except doing what he thinks the electorate wants, is now saying he wants a new bill that is “a hell of a lot bigger” than the last one, with more anti-corruption measures.
So I’m seeing the early inklings of a turn away from the philosophy that got us into this mess. I hope we soon move beyond the empty moral grandstanding where Doritos commercials thank essential workers, which is just a variant of ‘support the troops’ as a guilt-ridden way of either not serving in combat or supporting knowingly immoral wars for which one pays no cost. We have to restructure our social hierarchy, so that people who do the work have control over the work, instead of the middlemen and monopolists.
To that end, putting forward a merger moratorium is a good first step. But we’re going to need much more. We will need a temporary Pandemic Antitrust Act to break apart companies that have gained power because of the pandemic. We do not want a world where, as Jim Cramer fears, there are just three retailers, Amazon, Walmart, and Costco. Such a bill could be modeled on Senator Phil Hart’s early 1970s legislation titled the “Industrial Reorganization Act,” which would have established a commission to break apart corporations with a certain market share threshold. It could be a no-fault monopolization statute, which means it wouldn’t be a law enforcement regime requiring proof of wrongdoing. It isn’t Bezos’s doing that he gained massive amounts of power during the pandemic, and it shouldn’t be seen as a penalty to restructure Amazon. It’s just break-up via policy, simply because we want people to be able to run businesses independent of a few giants. The goal is to save and expand opportunity in commerce for all of us.
We will also need a new way of deal with companies that have gone under, a sort of combination of bankruptcy statute along with a small business subsidy and lending package. The goal of this bill would be to allow businesses to go through a quick bankruptcy reorganization, and to facilitate a lending facility to help them reopen quickly. We do not want bankrupt independent stores to return inventory en masse, crushing upstream distributors and producers and wiping out fragile eco-systems. We also do not want small lenders to be harmed, since they are critical to productive enterprise.
(There will also be a need for a rethink of our global economic order, but that’s a bit beyond my scope.)
At any rate, it’s time to think big, and to start from the premise that big business, at least temporarily, is going to be structuring the response to the pandemic. A new generation of leaders and thinkers is not going to tolerate that kind of governance for long, but we will still have a lot to clean up after this mess is over. So what are the policy levers to shape the world after we decide that we actually prefer our public democratic institutions to govern?
That’s the question that we should be thinking about.
Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to a book to hunker down, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
P.S. Here’s a letter I got on bond defaults. The ugliness will be unprecedented.
I no longer manage fixed income mutual funds and separate accounts for a living, but my pals in the business are expecting a wave of municipal bond defaults unlike anything we've seen. The Chicago papers may soon run an update of the famous 1975 NY Daily News headline, "Trump to City and State – Drop Dead," as pension obligations swamp bondholders there and possibly in NJ and CT as well.
There were relatively few bond defaults during the Great Depression (Detroit, Miami and Arkansas were the big names), but that was a time when the municipal market was tiny, and revenue bonds scarce.
Every corner of the $4 trillion market has big problems today. Hospitals have lost nearly all their profitable lines of business. Many colleges and universities may never reopen, and those that do will have to get by with withered endowments. No income collected at airports, transit systems and highways. Revenue bonds engineered from slices of general government receipts, from sales taxes, to gas taxes to personal income taxes, will miss their coverage targets. And states dependent on capital gains taxes (California assesses a whopping 13.3% on gains realized by its wealthiest citizens) will see enormous holes open in their budgets in a magnitude much worse than they witnessed in the 2008 financial crisis.
Budget season is just around the corner – most public bodies are on July 1 to June 30 fiscal years – so we won't have to wait long for the ugly projections.
Muni bonds remain popular for individual investors. The Fed's latest quarterly tally has nearly half held by households and another quarter in managed funds. When headlines are bad and individuals sell, yields have to rise enough to attract hedge funds. The math is brutal.