Pro Publica is an nonprofit that does long-form investigative journalism. Like most such journalism, its work typically tells a story–which is to say that it has a slant. But the stories are also scrupulously sourced and well-written in a strong-but-fact-based tone. The organization has recently published two stories that offer a skeptical look at antitrust enforcement.
Justin Elliott has written \”The American Way,\” which is subtitled \”President Obama promised to fight corporate concentration. Eight years later, the airline industry is dominated by just four companies. And you’re paying for it\” (October 11, 2016). Here\’s the start:
Three years ago, the Obama administration unleashed its might on behalf of beleaguered American air travelers, filing suit to block a mega-merger between American Airlines and US Airways. The Justice Department laid out a case that went well beyond one merger. \”Increasing consolidation among large airlines has hurt passengers,” the lawsuit said. “The major airlines have copied each other in raising fares, imposing new fees on travelers, reducing or eliminating service on a number of city pairs, and downgrading amenities.”
The Obama administration itself had helped create that reality by approving two previous mergers in the industry, which had seen nine major players shrink to five in a decade. In the lawsuit, the government was effectively admitting it had been wrong. It was now making a stand. Then a mere three months later, the government stunned observers by backing down. It announced a settlement that allowed American and US Airways to form the world’s largest airline in exchange for modest concessions that fell far short of addressing the concerns outlined in the lawsuit.
The Justice Department’s abrupt reversal came after the airlines tapped former Obama administration officials and other well-connected Democrats to launch an intense lobbying campaign, the full extent of which has never been reported. They used their pull in the administration, including at the White House, and with a high-level friend at the Justice Department, going over the heads of staff prosecutors. And just days after the suit was announced, the airlines turned to Chicago Mayor Rahm Emanuel, Obama’s first White House chief of staff, to help push back against the Justice Department.
Some lawyers and officials who worked on the American-US Airways case now say they were “appalled” by the decision to settle, as one put it.
Jesse Eisinger and Justin Elliott wrote the second article, called \”These Professors Make More Than a Thousand Bucks an Hour Peddling Mega-Mergers\” (November 16, 2016). The subtitle reads: \”The economists are leveraging their academic prestige with secret reports justifying corporate concentration. Their predictions are often wrong and consumers pay the price.\” Here\’s a taste:
\”Economists who specialize in antitrust — affiliated with Chicago, Harvard, Princeton, the University of California, Berkeley, and other prestigious universities — reshaped their field through scholarly work showing that mergers create efficiencies of scale that benefit consumers. But they reap their most lucrative paydays by lending their academic authority to mergers their corporate clients propose. Corporate lawyers hire them from Compass Lexecon and half a dozen other firms to sway the government by documenting that a merger won’t be “anti-competitive”: in other words, that it won’t raise retail prices, stifle innovation, or restrict product offerings. Their optimistic forecasts, though, often turn out to be wrong, and the mergers they champion may be hurting the economy.
\”Some of the professors earn more than top partners at major law firms. Dennis Carlton, a self-effacing economist at the University of Chicago’s Booth School of Business and one of Compass Lexecon’s experts on the AT&T-Time Warner merger, charges at least $1,350 an hour. In his career, he has made about $100 million, including equity stakes and non-compete payments, ProPublica estimates. Carlton has written reports or testified in favor of dozens of mergers, including those between AT&T-SBC Communications and Comcast-Time Warner, and three airline deals: United-Continental, Southwest-Airtran, and American-US Airways.\”
The second lesson is that government regulatory decisions are not formulated in a laboratory or a seminar room. They are made through a process of politics and law, which includes lobbying and behind-the-scenes pressure early in the process, which can then be followed by lawsuits and high-priced consultants if needed. Economists refer to a theory of \”regulatory capture,\” meaning that those who are being regulated have powerful incentives to learn to manipulate the regulatory apparatus. There are of course attempts to insulate the regulators from such pressures, and then to insulate the insulation. But those who supposed to be the targets of regulation can often find way to avoid or minimize the way the rules are applied to them, and also often find ways to use the regulatory apparatus to their own advantage–for example, to impose costs or block entry on other competitors. (For a classic statement of this argument, see George Stigler\’s 1971 article, \”The Theory of Regulation,\” in the Bell Journal of Economics and Management Science, available here or through JSTOR.)
An honest defense of the role of markets in economic activity needs to be warts-and-all, both pointing out strengths and acknowledging weaknesses and failings. An honest defense of the role of government regulation needs to be warts-and-all, too, which means not just discussing what angelically perfect regulators might accomplish, but how real-world regulators actually perform.