Antitrust Basics: Corruption and Rent-Seeking

This is the sixth entry in the “Antitrust Basics” series. See below for previous posts.

Rent-seeking is economics jargon for chasing after unfair special favors from government. Businesses and individuals have a large menu of rent-seeking options to choose from, and antitrust regulations are one of the items. Licensing regulations and other restrictions can make it harder for startups to enter a market, favoring incumbent businesses. Bailouts, such as General Motors and several large financial firms have received in recent years, are another form of rent-seeking. Cash subsidies, such as many green energy producers receive, are rent-seeking examples. Special financing, as through agencies like the Export-Import Bank or the Overseas Private Investment Bank, enable rent-seeking by Boeing and many farm and construction equipment manufacturers such as John Deere and General Electric.

All told, it is a minor miracle that corporate welfare is only about a $100 billion problem. Standard economic theory predicts that it should be much larger. Competitive Enterprise Institute founder Fred Smith and I wrote a paper arguing that virtue is an important limiting factor, though incomplete. Antitrust regulation provides another temptation to seek unfair rents, and would not improve the business world’s moral climate.

Neo-Brandeisians and other progressives rightfully oppose rent-seeking, but err when they propose increased antitrust policies as a solution.Tim Wu, a prominent neo-Brandeisian analyst, correctly points out how numerous companies game government policies to reduce competition, but then goes on to advocate for more government power as the solution. Even now, in a relatively restrained antitrust environment, roughly 95 percent of antitrust lawsuits are brought privately by competitors, not by the Justice Department or Federal Trade Commission. Repealing antitrust regulation would not eliminate rent-seeking—there are many other avenues rent-seekers can take—but it would reduce it.

Neo-Brandeisians advocating antitrust regulation as a way to promote virtue have a common misunderstanding of how governments work in practice. Government employees do not operate with only the public interest in mind. They are human beings, with the same incentives, flaws, and self-interested tendencies as other human beings.

Agency employees want to increase their budgets and power, and often enjoy the publicity that accompanies big cases. Regulators are also vulnerable to what is known as a Baptist-and-bootlegger dynamic. In Clemson University economist Bruce Yandle’s classic example, a moralizing Baptist and a profit-seeking bootlegger will both favor a law requiring liquor stores to close on Sundays, though for different reasons. A morally-motivated Baptist does not want people drinking on Sundays and a bootlegger would gain a lucrative monopoly every Sunday. They may find themselves strange bedfellows, and bootleggers may even hide themselves in Baptist clothing.

Applying this dynamic to antitrust regulation, a true-believing “Baptist” in Congress or at the Justice Department or the FTC would be inclined to listen seriously to the entreaties of corporate “bootleggers” who can come up with virtuous-sounding reasons for why regulators should give their businesses special favorable treatment.

Oracle, one of Microsoft’s rivals, ran its own independent Microsoft investigation during that company’s antitrust case, for what it alleged were Baptist-style reasons. “All we did is try to take information that was hidden and bring it to light,” said Oracle CEO Larry Ellison. “I don’t think that was arrogance. I think it was a public service.” Former Sen. Orrin Hatch (R-UT), who counted Oracle among his constituents, was one of the loudest anti-Microsoft voices in Congress. Around that time, he also received $17,500 donations from executives at Netscape, AOL, and Sun Microsystems.

Perhaps heeding Hatch’s admonition that, “If you want to get involved in business, you should get involved in politics,” Microsoft expanded its presence in Washington from a small outpost at a Bethesda, Maryland, sales office to a large downtown Washington office with a full-time staff, plus multiple outside lobbyists. Microsoft quickly went from a virtual non-entity in Washington to the 10th largest corporate soft money campaign donor by the 1997-1998 election cycle. Sen. Hatch’s campaign was among the beneficiaries.

The lines between Baptist and bootlegger can be blurry, and some actors play both parts. But such ethical dynamics are an integral part of antitrust regulation in practice.

The best way to reduce rent-seeking and regulatory capture is to have a system of government with few rents that can be sought, and fewer regulations that can be captured. Neo-Brandeisians, just like the rest of us, have to deal with the government we have, rather than an idealized abstraction. A more aggressive antitrust policy would increase rent-seeking, and should not be put forward as a solution to the problem.

For more, see Wayne Crews’ and my paper, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at antitrust.cei.org.

Previous blog posts in the Antitrust Basics series:

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