Economist Joseph Stiglitz says the US needs to update antitrust laws

The economist Joseph
Stiglitz is arguing that it’s time for the United States to
reconsider its antitrust laws.
Win
McNamee/Getty Images)

• There is a debate over whether the United States has a
  
  monopoly problem. A monopoly is
• The economist Joseph
  Stiglitz says that increased market concentration across
  several sectors has reduced competition and slowed economic
  growth.
• The US government has countered by saying data is being
  misrepresented and that giant companies today are not harming
  consumers.
• At a recent FTC hearing, Stiglitz called for an update of
  antitrust laws.
• This article is part of Business Insider’s ongoing series
  on Better
  Capitalism.

There are plenty of companies that may feel too big
to you, whether it’s trillion-dollar monoliths Apple and Amazon,
or even the cable company you’re forced to deal with every day.

But the question of whether they’ve got so much power that
they’re harming the economy is the subject of a debate in the
spotlight once again.

For Nobel Prize-winning economist Joseph Stiglitz of Columbia
University, there is indeed a monopoly and monopsony problem in
the United States, and it’s high time to address it with new
antitrust laws.

At a recent
Federal Trade Commission hearing on the subject, Stiglitz
said, “The point is, if our standard competitive analysis tools
don’t show that there is a problem, it suggests something may be
wrong with the tools themselves.”

Trust busting

The bedrock of America’s antitrust law was primarily built in the
late 19th and early 20th century, during the democratic and
reform-minded Progressive Era that followed the
Gilded Age’s reign of robber barons and progression of
inequality.

Even Adam Smith, the father of capitalism himself, warned in
“The
Wealth of Nations” against the consolidation of market power
in the hands of a few. This is represented on the selling side by
monopoly and on the buying side by monopsony, a term coined in
the 20th century that refers to firms using their size to
push down suppliers’ prices (Walmart is arguably an
example). 

Years of economic research has found that when market power is
highly concentrated, barriers to entry prevent new competitors
from building businesses, consumers have fewer options, and
employees receive lower wages. This in turn slows overall
economic growth.

Even before data on market power was routinely gathered, the
federal government established the definition for an illegal
monopoly and an illegal merger with the Sherman Act of 1890 and
the Clayton Act of 1914. It also created the FTC in 1914 to
enforce these rules.

Antitrust policy gradually evolved, and in 1982, the Herfindahl-Hirschman
Index was adopted to mathematically measure the concentration
of a market, clarifying whether it was competitive or not. The
HHI, which is defined as the sum of the squares of each firm’s
market share in a given market, concisely measures how
monopolistic that market is.

According to FTC and
Department of Justice guidelines, mergers and acquisitions
that would dramatically increase the HHI in a particular market
could come under further scrutiny about whether they would cause
unfair market concentration. The Obama administration loosened
those guidelines in 2010 in the wake of the financial crisis,
allowing more freedom for mergers.

Is there a problem?

Last year, Rice University’s Gustavo Grullon, York University’s
Yelena Larkin, and Cornell Tech’s Roni Michaely published a paper
that used
Census data to back up their finding that, “More than 75% of
US industries have experienced
an increase in concentration levels over the last two
decades,” and that this has decreased competition.

One measure provided by the Census Bureau investigated by Grullon
and his team — the market share of the four largest firms in a
particular industry — suggests varying levels of concentration
across industries:

Andy Kiersz/Business Insider

The
FTC and Department of Justice responded this May by
saying this paper and others like it were simply incorrect. It
wrote:

“At no level is the Census data capable of demonstrating
increasing concentration of ‘relevant markets’ in the antitrust
sense, i.e., ranges of economic activity in which competitive
processes determine price and quality, and in which the impact of
agreements, mergers, and unilateral conduct are evaluated in
competition law.”

That is, the federal government is arguing that antitrust law has
never been applicable to a massive, broad industry like
“pharmaceuticals,” but rather applies to markets for specific,
competing products. The government also argued that even if there
has been increased market concentration, it’s not necessarily a
bad thing. “First, when success and failure are random events,
markets become concentrated over time,” the government argued.
“Second, when success and failure are driven by relative degrees
of innovation and efficiency, markets also become more
concentrated.”

The Roosevelt Institute, an economic think tank that works with
Stiglitz,
felt compelled to respond. Marshall Steinbaum and Adil Abdela
wrote that differentiating between industries and antitrust
markets is valid, but that it is inaccurate to dismiss industry
concentration as irrelevant. They also were able to compile a
long list of specific antitrust markets that have been further
concentrated over the last 20 years, even though there is indeed
less data for such markets than for entire industries.

“If the federal antitrust enforcement agencies do not make
significant changes to the enforcement of antitrust policy, first
by acknowledging that many markets are highly concentrated, fewer
and fewer firms will continue to expand their dominance,” the
authors wrote, adding that the first step has to be the
government taking the data seriously.

Time for a change

Stiglitz asked the government to take this data seriously at the
FTC hearing in September.

He argued that this increase in market concentration has risen
simultaneously with growing inequality in the US since the 1970s,
when the policies of free market economists perhaps best
exemplified by the Chicago School of Economics began to take
hold.

He argued that the FTC needs to rethink what types of mergers it
allows, break up companies that are eliminating competition and
innovation and abusing their control over employees, and increase
transparency of contracts with customers.

It will be a necessary step to kickstarting relatively slow GDP
growth over the last 20 years.

“Innovation isn’t showing up in GDP, but it is in market power,”
Stiglitz said about the companies he deemed to have gotten too
big, smiling.