Hillary Clinton is putting antitrust enforcement front and center as a tool to fight income inequality, fingering industry consolidation as a major driver of said inequality. As I noted recently, antitrust enforcement was perhaps also the most important, if little-noticed, plank in the healthcare reform package Clinton put forward last month.
This is a big deal. Clinton is tying together high prices in key industries -- pharma and healthcare chief among them -- outsized compensation for the top 1%, including via stock buybacks, and the weakening of labor:
Economists, including President Obama’s Council of Economic Advisers, have put their finger on what’s going on: large corporations are concentrating control over markets. Two-thirds of public corporations operated in more concentrated markets in 2013 than in 1996, according to recent reporting by the Wall Street Journal. Rather than offering better products for lower prices, they are using their power to raise prices, limit choices for consumers, lower wages for workers, and hold back competition from startups and small businesses.Vigorous antitrust enforcement, Harvard legal scholar Einer Elhauge argues in a newly updated article, had an enormous impact at previous pivot point in U.S. economic history:
It’s no wonder Americans feel the deck is stacked for those at the top. It’s good for our economy when companies prosper by innovating, creating new products, and investing in their workers. But in too many instances, that’s not what’s happening. Just as declining union membership means workers have less bargaining power to improve wages and benefits, increasing concentration in a given market means customers can no longer vote with their feet and take their business elsewhere. And all too often, the additional corporate revenue is going to stock buy-backs and executive bonuses instead of benefiting consumers, employees, and the economy as a whole.As president, I will take on this fight.
First, I will take steps to stop corporate concentration in any industry where it’s unfairly limiting competition. For example, right now, it’s perfectly legal for a pharmaceutical company to pay a competitor to keep a generic drug off the market. These so-called “pay for delay” agreements keep prescription drug costs artificially high and diminish patient choice. I will empower the Department of Justice to vigorously investigate proposed health insurance mergers and take action to rein in prescription drug and out-of-pocket costs.
[Limited antitrust enforcement under Roosevelt] abruptly changed in March 1938, when President Roosevelt appointed Yale Law Professor Thurman Arnold to head the Antitrust Division. Arnold explicitly rejected the notion that antitrust enforcement should be relaxed during an economic downturn. He vastly increased antitrust enforcement, expanding the antitrust division to 583 lawyers by 1942. In his five years in office, he brought 44% of all the antitrust cases that had been brought in the first 53 years of the antitrust laws.
Arnold also made antitrust enforcement far more systematic and focused. Prior enforcement (even before the New Deal) had been not only isolated but also mercurial in a way that often seemed to challenge big businesses just for being big. The combination meant little deterrence of anticompetitive conduct not only because enforcement was unlikely, but also because it was unclear just what firms were supposed to do to avoid enforcement. Arnold made clear that (unlike his predecessors) he had no problem with businesses being big as long as their conduct was efficient and lowered consumer prices. This gave firms a far clearer and more desirable signal about how to modify their behavior. Further, Arnold deliberately used antitrust enforcement as a form of economic policy, targeting industries that he thought were inefficient in a way that hampering economic growth and using multiple simultaneous lawsuits in each selected industry to thoroughly restore free competition at each stage of the industrial process. His strategy was to "hit hard, hit everyone and hit them all at once.” He multiplied the effect of his expansion of prosecutorial resources by using prosecutions to obtain extensive consent decrees designed to go beyond the alleged antitrust violations to make markets as competitive as possible, as quickly as possible, in as many industries as possible.
Arnold further pursued an aggressive campaign to change the law on cartels, which resulted in the landmark May 1940 decision in United States v. Socony–Vacuum Oil Co., argued before the Supreme Court by Thurman Arnold himself, which adopted a sweeping definition of price-fixing and made it per se illegal. Socony made antitrust compliance far less dependent on agency enforcement levels, both because the deterrent effect was so clear and because the change in antitrust law spawned a sharp rise in private antitrust litigation, with private antitrust cases commenced rising from 8 in 1937 to 110 in 1941 and judgments for private antitrust plaintiffs rising 16-fold by 1947-1951.
Arnold’s antitrust enforcement successfully lowered prices in the targeted industries. Arnold himself stated that his goal was to have macroeconomic effects: lowering prices that were elevated by anticompetitive conduct so that consumers could buy more, which would cause firms to increase production and thus employment, which in turn would increase consumer purchasing power, further increasing production and employment. After dropping 32% from 1937 to 1938, industrial production rose by an average of 22% per year after Arnold’s 1938 appointment. In order to produce more, firms needed to hire more workers. Unemployment, which had risen from 14% to 19% from 1937 to 1938, steadily declined in the years after Arnold’s March 1938 appointment, reaching 10% by 1941, as the following chart illustrates.99 Of course, Thurman Arnold’s appointment could not affect the economy until he successfully brought cases and obtained consent decrees, which took some months, which is consistent with the fact that the rise in output and employment began in the year after his March 1938 appointment rather than immediately with his appointment.
Elhauge argues in some detail that ramped up wartime production does not explain the steep drop in unemployment and consumer prices from 1938-1941 that drove the economic surge that ended the Great Depression (military spending was lower from 1938-1940 than in 1937) .This historical argument about the effects of antitrust enforcement -- which has its counterpart in the weakening of enforcement in the Reagan era -- is ancillary to Elhauge's main thesis, which is that shareholder consolidation among major institutional investors is currently crimping growth by providing incentives for major companies within the same industry to collude rather than compete. That is, "horizontal shareholding," which occurs when a handful of major investors own large stakes in the major competitors in a given industry, induces those companies to keep prices (and executive compensation) high. Clinton might want to look at that phenomenon too.
One attractive aspect of antitrust enforcement in the current political environment is that it's not dependent on legislation. If Elhauge is right, it's also a highly effective tool for promoting economic growth and shared prosperity.