The Biden Administration Embraces a Backward Approach to Economics

By Mark Jamison

Wednesday, August 30, 2023

 

Is the Biden administration breaking its promise to promote competition?

 

In a surprising turn of events, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have released proposed merger guidelines that spurred sharp criticism from experts across the political spectrum. Both legal scholars and economists alike are panning these guidelines, citing errors in case-law citations and a backward approach to economic analysis. For an administration pledging to prioritize competition and embrace the latest scientific and economic understandings, this is an unfortunate misstep that demands reconsideration.

 

Merger guidelines play a vital role in providing clarity and predictability for businesses. By outlining how merger laws will be enforced, these guidelines have effectively lowered business costs and benefited consumers. The DOJ and FTC continually work to improve the guidelines to reflect improving economic understanding and the complexities of an evolving economy. Courts have similarly rejected simplistic rules and emphasized rigorous, case-specific analyses that prioritize consumer welfare.

 

However, the merger guidelines proposed by FTC chair Lina Khan and the DOJ’s Jonathan Kanter fail to uphold these principles. They have defended their proposal, highlighting that “the proposed guidelines include — for the first time — legal citations to Supreme Court cases.” Bragging about the inclusion of legal citations to Supreme Court cases is a mistake — the primary purpose of merger guidelines is to embody the best of economic understanding, not act as a legal brief.

 

Furthermore, the agencies’ reliance on outdated cases has been criticized by eminent antitrust scholars, as subsequent court decisions have corrected many of its errors. The agencies cite cases incorrectly or reference ideas that subsequent court decisions have rejected. Geoff Manne’s analysis shows that the median age of the cases cited is 50 years. The merger guidelines have been updated four times since then, and recent court cases have overridden the older decisions.

 

The proposed guidelines’ most cited case is Brown Shoe v. United States from 1962. Unfortunately, Brown Shoe “is sharply at odds with what courts do today in merger cases,” according to notable antitrust scholar Herbert Hovenkamp, and the Supreme Court has subsequently corrected many of its errors. Furthermore, the proposed guideline number six incorrectly cites Brown Shoe as its authority for how much of a market is closed to competitors because of a vertical merger — a merger between two businesses involved in related steps in the supply chain. Simply put, Brown Shoe doesn’t say what the proposed guidelines claim it does.

 

The economic foundation of the proposed guidelines is equally problematic. Khan and Kanter claim that modern analytical tools and market realities have been considered, but the guidelines regress to using simple metrics like market shares as almost conclusive evidence, disregarding the more comprehensive approach adopted in the 2010 merger guidelines. The presumption that a merger may substantially lessen competition based on market structure alone disregards relevant evidence and economic insights.

 

This market-share approach is flawed for several reasons. Notably, the Supreme Court has been rejecting it since the 1970s, as highlighted by the Second Circuit Court of Appeals this year in Fjord v. AMR Corp. Moreover, in the context of an increasingly globalized world with significant technological advancements and increased regulations, assuming that keeping firms small is sustainable is a fallacy. Scale economies and the need for firms to be effective in dealing with regulators drive many to grow larger, often through mergers. Adapting organically is often too costly or effectively impossible, making mergers the only way for some firms to stay relevant.

 

The Biden administration’s plan will hold American companies back from being world leaders by denying them opportunities to economically acquire new competencies and achieve scale. The world’s best technical talent will find the U.S. a less rewarding place to work, and investment money will move to countries whose regulations are less political. Consumers will pay the price.

 

The DOJ and FTC should withdraw or substantially alter these imprudent guidelines. But the ultimate responsibility rests with the White House. President Biden’s administration has broken its promise to embrace solid economic understanding. It is time for the White House to emphasize letting businesses adapt to changing economic realities as the best way to serve consumers. The president’s commitment to economic growth and promoting actual competition demands nothing less.