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Consumers have been patiently waiting for the Federal Trade Commission (FTC) to begin its work. Among US regulatory agencies, the FTC has the greatest economy-wide authority and mandate to protect consumers against deception and other harmful business practices. It is an important role that sometimes gets lost when politics and populism suck the oxygen out of the room.
Sadly that has been the situation in recent years, as much of Washington’s political energy has been focused on net neutrality, meddling in the 2016 election, and who’s said what on Twitter. As a result, it has taken more than a year since the beginning of the Trump administration for politicians to agree on nominees for a permanent chairman and full complement of commissioners for the FTC.
For the new decision makers to be effective, they will need to ward off three popular fallacies that could distract the agency from its primary mission moving forward.
Fallacy 1: Mega companies are killing competition
Reality 1: Competition has driven technology change and globalization, resulting in larger firms
Journalists and politicians appear to take the fallacy as settled economics. In 2016, The Economist published two reports arguing that “the rise of the corporate colossus threatens both competition and the legitimacy of business.” In 2017, Business Week argued that US markets are dominated by monopolies. Politicians ranging from Sen. Elizabeth Warren (D-MA) to President Trump have repeated the mantra here, here, and here.
It is easy to understand how people have fallen for the fallacy: President Obama’s Council of Economic Advisers (CEA) released a 2016 study that headlined purported increases in market power. Advocacy groups have released numerous flawed studies in support of the fallacy.
What is wrong with the “studies”? The Obama CEA focused on revenue share of the 50 largest firms in 13 broad industry categories. Other than utilities (which are largely government-sanctioned monopolies), the most concentrated was finance and insurance, with the 50 largest having a 48.5 percent revenue share. But this is a sector where regulation has driven small companies out of business. Even if that weren’t true, that those 50 companies account for less than half of the revenue would seem to imply that revenues are broadly spread across the sector.
As economist Carl Shapiro points out, both the CEA and Economist studies so greatly oversimplified their analysis as to render them useless: Both focused on how much revenue a company received across all its markets in a sector, completely ignoring the long-accepted view in economics that market power should be measured in, well, actual markets. Aggregating across markets is like claiming that the US experienced a very hot New Years because the sum of the daily high temperatures in Minneapolis, Chicago, Milwaukee, Buffalo, New York City, Cleveland, Detroit, Philadelphia, and Boston on January 1, 2018, was over 100 degrees!
What is the reality? Most of the growth in firm size has occurred in industries where regulation and the use of information technologies have risen. Regulation often squeezes out small firms that cannot afford compliance costs. Information technology makes it less costly for firms to grow by integrating operations across geographic areas.
Fallacy 2: Businesses are making more profits than ever
Reality 2: Profits are normal, and risk has risen
Numerous journalists and pundits embrace this fallacy. One of The Economist’s 2016 studies stated: “Profits are too high. America needs a giant dose of competition.” Esquire recently published an article about how tech companies are hoarding riches.
It’s easy to see how people fall for the fallacy. For example, The Economist argues that US companies’ global returns on capital increased from around 8 percent in 1963 to around 16 percent in 2013.
But this is an incomplete picture. Figure 1 shows corporate profits in the US relative to gross domestic product (GDP) from the end of the Great Depression through 2016. The ratio of profits to GDP tells us how profits relate to the rest of the economy. They have indeed risen in recent years, but there is much more to the story.
Figure 1. Corporate Profit as a Percentage of GDP, 1940 Through 2016
Today’s profit levels are normal compared to those from 1940 through the early 1960s. The lowest profit levels were during the Reagan administration and George H. W. Bush administration (7.7 percent and 7.2 percent respectively), when profits were also unusually stable: Relative to the Reagan years, profit variances were almost 200 percent higher during the Obama administration, 900 percent higher during the George W. Bush administration, and more than 200 percent higher during the Clinton administration.
When risks are higher, it takes higher profits to attract capital. Also, while the so-called tech giants, such as Google and Facebook, have noticeably high profits and attract critics, focusing on these profits misses the real capital market. Nearly 80 percent of tech firms either lose money or just break even. So to attract capital, the tech sector needs highfliers, as I explained in an earlier essay.
Fallacy 3: Antitrust should be used to address perceived social ills
Reality 3: Using antitrust in this way flies in the face of the rule of law and is wasteful
Various activists, such as the author of the Esquire article, suggest using antitrust to change relative incomes in the US, punish big companies for being big, etc.
Shapiro points out that some of the purported ills are inadequately researched, so any government policies directed at them would likely be unproductive. Also antitrust is poorly equipped to deal with any problems besides competition issues. And when it is misused, customers suffer.
In addition, the misuse of antitrust is contrary to the legitimate laws that created and empowered US antitrust authorities. This country was established as a country of laws specifically to prevent powerful politicians and bureaucrats from following pet initiatives that are not adopted through our legitimate lawmaking systems.
The bottom line is that the new FTC decision makers should take this opportunity to focus the agency on its true mission. American consumers deserve it.
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