PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The FTC’s Bizarre Attempt to Rationalize Regulatory Overreach

By at 18 November, 2022, 5:48 pm

by Raymond J. Keating –

The Democratic majority on the Federal Trade Commission (FTC) has released a policy statement meant to make sense of how the agency will alter the interpretation of Section 5 of the Federal Trade Commission Act dealing with “unfair methods of competition.” In reality, it’s more accurate to note that this statement attempts to dress up or disguise gross regulatory overreach that ignores basic economics, not to mention undermining the rule of law.

This, of course, fits with the views of Lina M. Khan, who chairs the Federal Trade Commission.

It should be no surprise that regulatory activists, led by Khan, are taking vague phrases like “unfair competition” and “unfair methods of competition,” and trying to make them fit their own agenda. That should have been expected by Congress when they passed the Federal Trade Commission Act. Indeed, antitrust laws like the Sherman Antitrust Act (1891) and the Federal Trade Commission Act (1914) seem to specialize in vague language that leads to regulatory uncertainty, inconsistency and activism.

Vague “mush”

This policy statement includes assorted declarations by federal lawmakers at the time of the law’s passage to support the current FTC’s position. Of course, though, these are limited and selective. There is no way to know if the majority of House and Senate members voting for the FTC Act agreed with these few statements.

For good measure, this policy statement attempts to define “unfair methods of competition” with equally vague declarations from the time. For example:

“During debates over the meaning of unfair methods of competition, members of Congress had no difficulty identifying concrete examples. One congressman noted that when it comes to unfair methods of competition, ‘[t]here is that in the common sense of fairness and right dealing which indicates plainly the distinction between close bargaining and oppression.’ Both the House and Senate also expressed a common understanding that unfair methods of competition encompassed conduct that tended to undermine ‘competitive conditions’ in the marketplace.”

There’s nothing concrete about these declarations; instead, it’s simply more vague mush. This would be amusingly ridiculous if not for the serious ramifications of such policymaking. In fact, this entire FTC policy statement can be read as an ironic case against the regulatory activism it purports to support.

The following paragraph in this policy statement makes clear just how far the FTC wishes to go in regulating far and wide throughout the economy:

“Congress evinced a clear aim that ‘unfair methods of competition’ need not require a showing of current anticompetitive harm or anticompetitive intent in every case. First, the legislative history is replete with statements to the effect that Congress wanted the FTC to stop monopolies in their ‘incipiency.’ Requiring the FTC to show current anticompetitive effects, which are typically seen only after the monopoly has passed the ‘embryonic’ stage, would undercut Congress’s hope to prohibit unfair business practices prior to, or near, monopoly power. In addition, many of the practices listed by Congress as patently unfair do not automatically carry with them measurable effects. Second, in considering and rejecting a definition of ‘unfair methods of competition’ that would have required a showing of intent, legislators noted that such a requirement would inappropriately restrict the new provision to the metes and bounds of the antitrust laws and place an undue burden on the Commission in proving its cases.”

After all, evidence and intent can be so cumbersome and inconvenient if one’s desire is to regulate and control industries far and wide. And a bit later, this statement goes still further into the fog:

“Because the Section 5 analysis is purposely focused on incipient threats to competitive conditions, this inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue. Instead, the second part of the principle examines whether the respondent’s conduct has a tendency to generate negative consequences; for instance, raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition. These consequences may arise when the conduct is examined in the aggregate along with the conduct of others engaging in the same or similar conduct, or when the conduct is examined as part of the cumulative effect of a variety of different practices by the respondent. Moreover, Section 5 does not require a separate showing of market power or market definition when the evidence indicates that such conduct tends to negatively affect competitive conditions. Given the distinctive goals of Section 5, the inquiry will not focus on the ‘rule of reason’ inquiries more common in cases under the Sherman Act, but will instead focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.”

This statement that supposedly clarifies policymaking resorts to even vaguer terms, such as “has a tendency” and “tends to.” The power to decide is handed over to regulators to do with as they see fit.

Again, this is nothing less than an attempt to empower FTC regulators with the ability to interfere and dictate operations and structures in businesses across industries. After all, you never know what might lead to a monopoly. This is grave and dangerous, and no business or industry should feel safe.

A Path to Regulate Without Boundaries

If this is not enough, how about regulatory activism in the name of “harms” that are not defined? It is declared in this policy statement:

“The unfair methods of competition framework explicitly contemplates a variety of non-quantifiable harms, and justifications and purported benefits may be unquantifiable as well. The nature of the harm is highly relevant to the inquiry; the more facially unfair and injurious the harm, the less likely it is to be overcome by a countervailing justification of any kind.”

The FTC statement also provides a lengthy, “non-exclusive” list of conduct that fits with the idea of “unfair methods of competition.” These are more tangible examples of just how far the commission’s majority is willing to go to regulate without any boundaries, such as the law or checks and balances, including:

• “Conduct deemed to be an incipient violation of the antitrust laws. Incipient violations include conduct by respondents who have not gained full-fledged monopoly or market 70 power, or by conduct that has the tendency to ripen into violations of the antitrust laws.” These would include “mergers, acquisitions, or joint ventures that have the tendency to ripen into violations of the antitrust laws,” and “a series of mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws.”

• “Conduct that violates the spirit of the antitrust laws. This includes conduct that tends to cause potential harm similar to an antitrust violation, but that may or may not be covered by the literal language of the antitrust laws or that may or may not fall into a ‘gap’ in those laws.” On this list, examples included “mergers or acquisitions of a potential or nascent competitor that may tend to lessen current or future competition.”

After reading this policy statement, one is left wondering what lies behind this naked power grab by regulators. The answers can be found in fascinating and illuminating remarks given by Christine S. Wilson, who is the only Republican FTC Commissioner, in April of this year. Wilson’s address is titled “Marxism and Critical Legal Studies Walt into the FTC: Deconstructing the Worldview of the Neo-Brandeisians.”

By the way, what are neo-Brandeisians? In an SBE Council analysis, I summed them up this way: “The idea is to create an opportunity for advancing a hyper-regulatory agenda via antitrust. The academics putting forth this agenda claim the ‘neo-Brandeis’ or ‘neo-Brandeisian’ label in reference to former Supreme Court Justice Louis Brandeis, who opposed big business essentially for being big. Like Brandeis, these activists reject serious considerations of economics, markets and business.”

A Neo-Brandeisian Schooling by Wilson

I urge people to read both the FTC policy statement and Wilson’s address in full. It’s all very sobering. But here are a few points from Wilson worth highlighting:

• “Neo-Brandeisian beliefs parallel Marxist and CLS positions in rejecting individualism. The consumer welfare standard benefits individuals through low prices, greater choice, higher quality, and more innovation, but like Marxists, the Neo-Brandeisians would have us subjugate the rights of the individual to the rights of favored groups. Chair Khan has already told us that all decisions are political, so we know which groups are selected for preferential treatment will depend on which way the political winds are blowing.”

• “Neo-Brandeisian approach are striking. Although private property may remain a reality, they seek to replace the invisible hand with heavy-handed regulation. They characterize as successes the unwieldy regulatory frameworks that once governed railroads and airlines. Indeed, Chair Khan has touted railroad regulations as a model for regulating large tech companies. And they have advocated for extensive use of rules to govern competition generally – no more case-by-case ex post enforcement, but instead an ex ante ordering of the market. The list of rules they intend to create is breathtaking. Ultimately, the Neo-Brandeisians would prefer that the government, rather than the private sector, orchestrate the functioning of the economy. All of these concepts help us understand why the Neo-Brandeisians loathe the consumer welfare standard. While increased productivity and lower prices benefit consumers, those same things signify worker exploitation under the labor theory of value. Efficiencies, productivity, declining costs, and lower prices all point to the cheapening of commodities that Marx discussed… Neo-Brandeisians believe that consumers must sacrifice lower prices for the greater good, in whatever way the politicized process happens to define the greater good at the moment.”

What does this all mean in the end? Wilson offered the following summation:

“Marx envisioned ‘the abolition of bourgeois property’ and state-controlled mechanisms of production. We know that command and control economies lead to the drastic misallocation of resources, creating misery and deprivation for ordinary citizens. For the same reasons that central planning failed in the Soviet Union, Cuba, China, North Korea, Venezuela, and elsewhere, the regulatory regimes that governed transportation industries in the United States generated lower levels of innovation and supply, and higher prices, than those same industries experienced following deregulation.  The Neo-Brandeisians would have us ignore this history and expand significantly the government’s role in the U.S. economy. But we know from history what heavy-handed regulation does to innovation.”

Real harm being inflicted on innovation, entrepreneurship and investment

Wilson is correct, as innovation dies at the hands of hyper-regulation and controls by government, as entrepreneurship and investment are disincentivized, and innovation evaporates accordingly. For good measure, we know regulation of “mergers or acquisitions of a potential or nascent competitor,” that is, putting a halt or a limit on such acquisitions, will harm entrepreneurial firms, as they would, again, face far greater difficulties in attracting investors.

Make no mistake, acquisition is a major avenue for entrepreneurs and investors to achieve returns on investment. In turn, of course, this would actually limit emerging and future competitors, and serve as a kind of ironic and perverse government protection for large established firms. (See Innovation and Startup Ecosystem at Risk: Revamping the U.S. M&A Regulatory Framework)

As an economist, it’s actually rather shocking to read a policy statement such as this one put out by the FTC because if told that this would happen not that long ago, the reaction would be disbelief. After all, who could imagine regulators appointed by a president and approved by the Senate being so far gone?

Yet, here we are with the Biden-Khan FTC.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.

 

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