Not the Strongest Case: DOJ’s Google Antitrust Complaint

On Tuesday, the Department of Justice (DOJ) filed an antitrust complaint against Google. It marks the beginning of the first major monopolization case since the 1998-2002 Microsoft case. The filing’s timing and content are heavily politicized, and the quality of the complaint reflects this.

My colleague Jessica Melugin has a piece about the case in the Financial Times. Besides arguments about regulatory capture and the difficulty of sorting competitive from anticompetitive behavior, she points out an embarrassing shortcoming in the DOJ’s case:

It takes three steps to switch the default search on an iPhone from Google to another search engine. If, as is alleged, Google is acting as a gatekeeper to the internet, three clicks is not a very robust gate. 

Over at National Review’s Capital Matters site, I share some of my initial findings on the complaint. Their case does not look very rigorous:

Language matters. According to the complaint, Google doesn’t monopolize search, but rather “general search.” This phrasing allows the government to elide major portions of Google’s relevant market.

This is the relevant market fallacy. To strengthen their case, regulators often accuse a company of monopolizing a market far narrower than its actual relevant market.

In this case, the complaint even gives its own examples, on pages 9-10. 

Read Jessica’s Financial Times piece here. My National Review piece is here.

See also the recent CEI studies “The Case against Antitrust Law” and “Terrible Tech 2.0,” and CEI’s dedicated antitrust web site, antitrust.cei.org.

The Justice Department’s Google Antitrust Complaint

For those interested, the full text of the Justice Department’s 64-page complaint is here.

DOJ Suit Against Google Seeks to Expand Antitrust Standard Beyond Consumer Harm

This is a press statement originally posted at cei.org.

WASHINGTON, DC – The Department of Justice filed a lawsuit today alleging Google has broken antitrust laws with its search function and digital advertising practices.

Associate Director of CEI’s Center for Technology and Innovation Jessica Melugin said:

 “In the U.S., the antitrust standard is consumer harm. Consumers enjoy Google’s search without charge and the service continues to improve in quality and expand in offerings, like autocomplete and translations. It will be a heavy lift for the DOJ to show real consumer harm. That this bar is unlikely to be met is precisely why so many antitrust enthusiasts are calling for a fundamental rewriting and expansion of U.S. antitrust laws. Those proposed changes sacrifice the primacy of consumer welfare and insert competitors and broader socio-economic goals in its place. This suit is a mistake; antitrust should not be used to protect inefficient producers at the expense of consumer’s interests.”

 Senior Fellow Ryan Young said:

 “Any antitrust lawsuit against Google is unlikely to accomplish its goals. The Republicans driving the lawsuit want to avenge perceived political bias. An antitrust lawsuit is a strange way to go about regulating political speech.

 “Democrats might take over the Republicans’ lawsuit or file their own case, depending on how the election goes. They are concerned about monopoly power. For example, Google has a major share of online advertising revenues. But online ad prices have fallen by roughly half over the last decade, even as print advertising prices have gone up. Any first-year law student knows that monopolists don’t cut prices.They raise prices, because they have the market power to do so. Google clearly lacks this market power.

 “Nor is using competing search engines difficult. It takes seconds to type ‘DuckDuckGo.com’ or ‘Bing.com’ into your browser—even in Google’s Chrome browser. While Google is the default search option in most smartphones, Microsoft’s experience with Internet Explorer shows that default status matters very little when something better is a dozen keystrokes away. Its newer Chromium-based Edge browser, the new Windows default, has similarly failed to catch on. Consumers rule the search market, not Google.”

 Vice President for Policy Wayne Crews said:

 “The claimed purpose of antitrust is enhancing consumer welfare, but this suit seems more about competitor’s interests. One of the dangerous and unstated goals of antitrust exploitation is to grant lesser competitors forced access to the target’s voluntarily acquired customers without doing the hard work and innovation the target did to win them in the first place. News reports indicate that the DOJ asked rivals and other third parties for their views on which businesses Google should have to sell and which existing competitors should be off-limits as potential buyers in the forced fire sale.  

 “Government asking competitors how it should apply force illustrates the naked character of the rent-seeking involved here specifically and generally. We at least pretend that antitrust is about protecting competition and not competitors, but it seems the most prominent bipartisanship in Washington is to expand government power rather than reduce it.”

For more information about CEI’s work on antitrust, please visit cei.org/antitrust.

This Week in Ridiculous Regulations

It was a four-day week due to Columbus Day or Indigenous People’s Day—the controversy over which was just one of the things people were outraged about during the week. Bad judgment by Twitter content moderators caused a bipartisan flash mob to demand that the government regulate political speech. Supreme Court nominee Amy Coney Barrett had her confirmation hearings in the Senate Judiciary Committee. Meanwhile, regulatory agencies issued new regulations ranging from real estate appraisals to Brazilian steel.

On to the data:

  • Last week, 71 new final regulations were published in the Federal Register, after 91 the previous week.
  • That’s the equivalent of a new regulation every two hours and 41 minutes.
  • Federal agencies have issued 2,632 final regulations in 2020. At that pace, there will be 3,273 new final regulations. Last year’s total was 2,964 regulations.
  • There were 43 proposed regulations in the Federal Register last week, for a total of 1,744 on the year. At that pace, there will be 2,161 new proposed regulations in 2020. Last year’s total was 2,169 proposed regulations.
  • Last week, agencies published 406 notices, for a total of 17,849 in 2020. At that pace, there will be 22,200 new notices this year. Last year’s total was 21,804.
  • Last week, 1,823 new pages were added to the Federal Register, after 1,834 pages the previous week.
  • The 2020 Federal Register totals 66,199 pages. It is on pace for 82,337 pages. The 2019 total was 70,938 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. Four such rules have been published this year. Four such rules were published in 2019.
  • The running cost tally for 2020’s economically significant regulations ranges from net savings of between $1.19 billion and $4.19 billion. 2019’s total ranges from net savings of $350 million to $650 million, mostly from estimated savings on federal spending. The exact number depends on discount rates and other assumptions.
  • Agencies have published 59 final rules meeting the broader definition of “significant” so far this year. 2019’s total was 66 significant final rules.
  • So far in 2020, 526 new rules affect small businesses; 21 of them are classified as significant. 2019’s totals were 501 rules affecting small businesses, with 22 of them significant.

Highlights from last week’s new regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

J.B. Say on Wealthy Politicians

Jean-Baptiste Say’s Treatise on Political Economy holds up very well for a book whose most recent edition came out in 1821 (the first was published in 1803). For example, see this quotation on p. 427:

“Besides, there is some danger, that a man, who gives his services for nothing, will make his authority a matter of gain, however rich he may be. The wealth of a public functionary is no security against his venality: for ample fortune is commonly accompanied with desires as ample, and probably even more ample, especially if he have to keep up an appearance, both as a man of wealth and a magistrate.”

Thomas Paine on the GOP’s Infidelities

From chapter 1 of Thomas Paine’s 1794 book The Age of Reason:

“But it is necessary to the happiness of man, that he be mentally faithful to himself. Infidelity does not consist in believing, or in disbelieving; it consists in professing to believe what he does not believe.”

Paine’s insight shows why many Republicans have been deeply unhappy for the last four years. In order to maintain their standing in their group, Republicans have had to profess things they do not believe on crowd sizes at inaugurations, government spending and deficits, sharpies on maps, bump stocks for guns, the importance of character in leaders, freedom of the press, trade policy, antitrust policy, and more.

While being a political independent has its drawbacks, it also has an important benefit: I have never had to be mentally unfaithful to myself, and I never will. This has been good for my emotional health as well as my professional integrity.

Many Republicans are in poor shape on both of those fronts right now. What will they do when the Trump era ends? Has a genuine philosophical realignment taken hold in their party? Or are most Republicans just having a fling they will regret in the morning? My guess is that for many Republicans, the answer will be a little bit of both.

Tit-for-Tat Tariffs Don’t Work: Boeing and Airbus Show Why

A 16 year-long aerospace subsidies dispute between the United States and the European Union began another round this week. The U.S. claims that the EU’s Airbus subsidies are unfair. The EU argues that America’s Boeing subsidies are unfair. Both sides are right. But neither wants to admit that the other side has a point, too. The result has been tit-for-tat tariff increases and no subsidy reforms.

Today, the World Trade Organization (WTO) ruled that the EU may impose tariffs on up to $3.99 billion of American goods, because Boeing’s favorable tax treatment violates WTO rules.

This follows a 2019 decision allowing the U.S. to impose tariffs on up to $7.5 billion of EU goods due to the EU’s Airbus subsidies.

Boeing called today’s decision “irrelevant.” Last year, Washington state repealed the tax provision at the center of this decision. However, the larger sticking point in the dispute remains. Yes, this one tax break is gone, but Boeing still receives massive subsidies. That means the EU will not stop pressing the matter. Nor has the EU reformed Airbus’ special treatment. That means the U.S. won’t stop, either.

In addition to being ineffective, the tariffs are causing collateral damage to other industries that have nothing to do with the dispute, from French wines to American motorcycles. This deadweight loss matters at a time when the world economy is already hurting due to COVID-19.

The lesson both sides need to learn is, don’t copy other people’s mistakes. Instead, set a better example. Subsidized companies grow soft and lose their competitive edge. There is a reason why so much aerospace innovation these days, from space travel to supersonic flight, is happening outside of Boeing and Airbus’ subsidized comfort.

The right thing to do is for governments to stop subsidizing private businesses—even if the other side doesn’t. Set the right example. Boeing would likely do just fine without subsidies. They would certainly have far more incentive to improve their products and address their safety concerns than they do now.

And if Boeing can’t survive without subsidies, there is no shortage of entrepreneurs capable of unleashing engineering and manufacturing talent.

Either way, consumers and taxpayers win. Europe and Airbus can then either follow America’s positive example or be content with subsidized mediocrity. Realistically, they will very likely choose the subsidies. But we cannot let Europe’s mistakes be our own. The U.S. has been doing that for at least 16 years now, and we know it doesn’t work.

A modest starting point on the U.S. side would be closing the Export-Import Bank, which often devotes half of its business to securing below-market financing rates for Boeing’s customers, many of whom are state-owned. Boeing set record profits while Ex-Im was mothballed from 2014-2019, so we already know the company will do just fine without that multi-billion-dollar program.

For more on that idea, see my most recent Ex-Im paper.

This Week in Ridiculous Regulations

It was another volatile pre-election week. A still-symptomatic President Trump returned to the White House from Walter Reed hospital during prime time. More key staffers tested positive for COVID-19. In the vice-presidential debate, a fly that landed in Vice President Pence’s hair stole the show. Meanwhile, regulatory agencies issued new regulations ranging from auxiliary poultry provisions to water cannons.

On to the data:

  • Last week, 91 new final regulations were published in the Federal Register, after 73 the previous week.
  • That’s the equivalent of a new regulation every one hour and 51 minutes.
  • Federal agencies have issued 2,561 final regulations in 2020. At that pace, there will be 3,250 new final regulations. Last year’s total was 2,964 regulations.
  • There were 40 proposed regulations in the Federal Register last week, for a total of 1,703 on the year. At that pace, there will be 2,161 new proposed regulations in 2020. Last year’s total was 2,146 proposed regulations.
  • Last week, agencies published 465 notices, for a total of 17,443 in 2020. At that pace, there will be 22,136 new notices this year. Last year’s total was 21,804.
  • Last week, 1,834 new pages were added to the Federal Register, after 1,855 pages the previous week.
  • The 2020 Federal Register totals 64,374 pages. It is on pace for 81,693 pages. The 2019 total was 70,938 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. Four such rules have been published this year. Four such rules were published in 2019.
  • The running cost tally for 2020’s economically significant regulations ranges from net savings of between $1.19 billion and $4.19 billion. 2019’s total ranges from net savings of $350 million to $650 million, mostly from estimated savings on federal spending. The exact number depends on discount rates and other assumptions.
  • Agencies have published 58 final rules meeting the broader definition of “significant” so far this year. 2019’s total was 66 significant final rules.
  • So far in 2020, 510 new rules affect small businesses; 21 of them are classified as significant. 2019’s totals were 501 rules affecting small businesses, with 22 of them significant.

Highlights from last week’s new regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

The House Judiciary’s Antitrust Reports and Predatory Pricing

It is human nature to fear what we do not understand. And if there is anything politicians do not understand, it is markets. This is clearly shown in the 449-page report issued this week by the House Judiciary Committee’s antitrust subcommittee, headed by Democratic Rep. David Cicilline, and its 19-page companion report from Republican Rep. Ken Buck.

The current state of affairs in Washington reflects what the Nobel economist Ronald Coase wrote in his 1972 paper “Industrial Organization: Proposal for Research,” before the revolution in law and economics scholarship became mainstream:

If an economist finds something—a business practice of one sort or another—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation frequent.

In that spirit, the Democratic report advocates for breaking up the biggest tech companies, expanding antitrust laws with new legislation, banning most tech mergers, and flipping the burden of proof to presumption of guilt in many instances. The Republican report doesn’t go quite that far, but as is often the case in the Trump era, the difference between Republican and Democratic policies is pretty small.

This post will focus on predatory pricing. My colleagues and I will discuss other facets of antitrust policy elsewhere.

Predatory pricing involves selling products deliberately at a loss in order to force competitors out of the market. When the predator has the market to itself, it can then raise the price to unfair levels. Apple, Google, Facebook, and Amazon have all been accused of predatory pricing at some point.

Predatory pricing is already illegal. But the Supreme Court admitted in the 1986 Matsushita case that it has never been able to find an instance of it. After that, courts essentially gave up on their quest. The law in that area is now unenforced, on purpose.

The Democratic report seeks to bring it back by amending the Sherman Act to specifically ban predatory pricing. The Republican report shares the Democrats’ goal, but only recommends “a thoughtful plan,” which it does not specify, and “further committee hearings.”

There is a reason the Supreme Court has never found proof of predatory pricing. That reason is math. A predator has to lose money. The larger that predator’s market share, the more money it has to lose before driving competitors out. And as soon as the predator raises its prices, it also raises an opening for competitors to come back into the market.

It’s easy for many former competitors to reenter the market when the predator’s price goes back up. They already know what they’re doing, and have the infrastructure. And if the predator raises its prices super-high in order to make back its losses, the door opens to even more new competitors who take note of the predator’s unusually high profit margins.

In order for the predator to take back its monopoly, it will once again have to lose money, then raise prices to recoup the losses, which lets competitors back in. And on it goes in a potentially endless loop.

The counterargument goes that a company can sustain predatory prices forever if it subsidizes its losses with profits from elsewhere in the company. But this makes the company less competitive in those other markets. And taking resources away from a profitable product to subsidize a loss-making product is not exactly a profit-maximizing strategy.

So, despite progressives and populist conservative wishes, the Supreme Court’s Matsushita decision’s despair at the lack of predatory pricing is unlikely to change. That is, unless the definition of “predatory pricing” itself is changed via new legislation or what the Nobel economist Oliver Williamson called “creative lawyering” in the courts. That is what to look out for.

For more on antitrust policy, see Wayne Crews’s and my paper, and CEI’s dedicated antitrust site at antitrust.cei.org.

Jean-Baptiste Say on Manufacturing Nostalgia and Industrial Policy

There is a reason the classics never go out of style. For example, on page 62 of Charles Robert Prinsep’s translation of Jean-Baptiste Say’s 1803 A Treatise on Political Economy, Say writes:

Production is the creation, not of matter, but of utility.

That one sentence captures one of today’s major debates: the decline of manufacturing. Which matters more: output for its own sake, or the value people get from that output? Most economists agree with Say that utility matters more. It doesn’t matter how much steel a factory can crank out if people don’t get value from it. On the opposite side are economic populists such as Oren Cass on the right and Sen. Sherrod Brown on the left.

Many politicians are convinced that manufacturing is in decline, and are advocating far-reaching industrial policies from Washington to save it. Unlike Say, they seem to believe that there is something intrinsically better about creating physical goods, rather than services, ideas, or technologies. To them, matter is what matters most. This is not a reductio ad absurdum. Cass, in his book The Once and Future Worker, advocates subsidizing industries and even entire towns engaged in manufacturing, even if their products create so little value that few people want to buy them. Rather than doing more with less, Cass argues for the opposite.

This view is mistaken in two ways. First, according to the data, U.S. manufacturing is in good health. Second, the size of this or that sector doesn’t matter anyway. What does matter is that people are able to create as much value for each other as they can. Sometimes that involves manufacturing, and sometimes it doesn’t. Policy makers in Washington will never be in a place to correctly decide that ever-changing mix.

Pre-COVID manufacturing output in the U.S. was at near-record levels, though dented a bit by President Trump’s trade policies. It is still too early to tell what COVID’s impact will be, but it almost certainly will not be good. Fortunately, economic fundamentals remain strong. While recovery will likely take a few years, manufacturing will likely resume its long-term steady climb.

Even when populists do acknowledge the data, they worry that manufacturing output growth is slower than in other sectors of the economy. This is why manufacturing’s share of GDP is smaller than it used to be. This is just a more nuanced version of the same mistake. The percentage of GDP taken up by this or that industry does not matter. What matters is that consumers are free to spend on what gives them value.

The ongoing shift from manufacturing to services is hardly at the same level as the earlier shift from farming to manufacturing. But the impulse to oppose the change is the same. Even Adam Smith, who was no Luddite, distinguished between “productive” labor, which was agricultural, and “unproductive” labor, which was most non-agricultural. Today, Cass and other industrial policy advocates draw a similar distinction between productive manufacturing and less productive non-manufacturing jobs.

The data have a problem with this argument, too. Even back in the 1940s and 1950s, the service sector had roughly triple manufacturing’s GDP share. The populists’ fixation on ratios, rather than how much wealth people are creating, is a similar mistake to the one in the inequality debate Iain Murray and I pointed to in our paper “People, not Ratios.”

Say’s Treatise was published in 1803, about a generation after Adam Smith and right at the point in history when industrialization was becoming noticeable in Say’s native France. This was the beginning of the Great Enrichment that has raised incomes in the richer countries by 30-fold or so, and is still operating today.

This brings up the second flaw in today’s economic populism. Not only do populists often get the data wrong, they make a fundamental error about what people value.

Say’s insight is that if people value something, it doesn’t matter if it was made this way or that way, or on a farm or a factory, or even whether it is a physical product that a person can hold, or sit on, or drive. This is true regardless of an industry’s NAICS code, which is an artificial distinction anyway.

The whole point of labor is to create value for people, not to create it only in ways that Peter Navarro or Elizabeth Warren approve of. As Say says, what matters isn’t matter; it’s utility.