Antitrust as a form of campaign finance regulation

March 19

Zephyr Teachout of Fordham Law School has a new article on SSRN called Corporate Rules and Political Rules: Antitrust as Campaign Finance Reform. Here’s the abstract (paragraph breaks added; h/t Danny Sokol’s Antitrust & Competition Policy Blog):

This Article addresses itself to two of the most significant political moments in the last decade: the Supreme Court decision in Citizens United v. FEC, and the 2008 bailout of the “Too Big To Fail” companies. It proposes that in light of these two watershed moments, policy makers should explore new antitrust laws with absolute size caps.

First and foremost, it proposes that the existing division between the study of market structure and the study of political structure disables both fields. It argues that corporate rules are political rules, and should be treated as such, and understood in terms of their impact on democratic design. In particular, antitrust, which was considered a political tool for the first sixty years of its existence, should be again understood politically.

Second, it argues that large-scale companies have disproportionate influence in the political marketplace because of their size. It engages the public choice “rent-seeking” literature, using models to show why spending money on politics becomes cheaper and more likely with scale. The models suggest significant economies of scale in the production of political power, and therefore greater incentives for larger companies to spend money seeking wealth through changes in laws and regulations instead of innovation and development. The existing evidence conforms to these models. In light of the model and evidence, it proposes new laws that would limit the absolute size of all limited liability companies. The laws would be enforced through the antitrust framework, but also rely on the self-enforcement of liability rules (companies over a certain size would lose limited liability).

The Article anticipates several objections to the proposal: most prominently the objection that limiting size would be harmful for our economy. It reviews the evidence, demonstrating that in the production of goods and services over a certain size, there is very little evidence that large size adds social value.

In the final section, the article explores some unproven assumptions about the relationship between size and the pursuit of political power that might help explain why scholars concerned with rent-seeking have not previously embraced a robust size-based antitrust.

I’m not one who’s super-sympathetic to the antitrust enterprise generally, but if one is going to worry about large corporations, I do think that large corporations wielding political power is more problematic than large corporations wielding economic power. Indeed, this is a core concern of public choice theory–the ability of small, concentrated groups to get the way against the opposition of larger groups where the costs (though larger than the total benefits) are widely dispersed.

I’m not convinced that a rule limiting the absolute size of companies is the best way of addressing these concerns, especially in light of the basic economic liberty arguments for having a company as large as you like. On the other hand, the availability of limited liability is already a big government-provided distortion here, and while limited liability has many good effects, there’s an interesting literature regarding whether it’s really necessary. I don’t propose to go into all that now; I just wanted to flag this interesting article as a contribution to the antitrust debate.

This is relevant to my work because, in my article on Privatization and the Law and Economics of Political Advocacy, I discuss what role privatization could play on industry-expanding lobbying. This is specifically in the context of the claim that prison privatization will make criminal law more punitive because private prison firms will lobby for greater incarceration; but the analysis is more general. I write (emphasis added):

[T]here is little reason to believe that increasing privatization would increase the amount of self-interested pro-incarceration advocacy. In fact, it is even possible that increasing privatization would reduce such advocacy. The intuition for this perhaps surprising result comes from the economic theory of public goods and collective action.

The political benefits that flow from prison providers’ pro-incarceration advocacy are what economists call a “public good,” because any prison provider’s advocacy, to the extent it is effective, helps every other prison provider. (We call it a public good even if it is bad for the public: the relevant “public” here is the universe of prison providers.) When individual actors capture less of the benefit of their expenditures on a public good, they spend less on that good; and the “smaller” actors, who benefit less from the public good, free ride off the expenditures of the “largest” actor.

In today’s world, the largest actor–that is, the actor that profits the most from the system–tends to be the public-sector union, since the public sector still provides the lion’s share of prison services, and public-sector corrections officers benefit from wages significantly higher than their private-sector counterparts’. The smaller actor is the private prison industry, which not only has a smaller proportion of the industry but also does not make particularly high profits.

By breaking up the government’s monopoly of prison provision and awarding part of the industry to private firms, therefore, privatization can reduce the industry’s advocacy by introducing a collective action problem. The public-sector unions will spend less because under privatization they experience less of the benefit of their advocacy, while the private firms will tend to free ride off the public sector’s advocacy. This collective action problem is fortunate for the critics of pro-incarceration advocacy–a happy, usually unintended side effect of privatization. One might even say that prison providers under privatization are led by an invisible hand to promote an end which was no part of their intention.

. . .

The same sort of analysis that I have conducted here on the prison industry can also be used to evaluate the claim that, say, buying weapons from defense contractors (rather than having the military make them in-house) will exacerbate pro-war lobbying. Since governmental providers of defense services– i.e., the military leadership–have, on some accounts, been notorious pro-war lobbyists throughout history, such a claim is not credible unless one can tell a plausible story about why any defense contractor lobbying will not crowd out some lobbying by the military itself; and doing this requires taking a position on what motivates the people at the Pentagon. The same goes for private attorneys general, private redevelopment corporations, private landfill operators, and the like. The result will not always be the same, and the political influence argument may turn out to be correct in some of these cases and incorrect in others. But this should be the structure of the argument.

The surprising moral of this story should not be that surprising. Indeed, the central insight here was also an important argument in favor of the antitrust laws. Discussing the conditions that preceded the enactment of those laws, William Howard Taft wrote that “business methods and plans . . . directed to . . . suppressing competition . . . had resulted in the building of great and powerful corporations which had, many of them, intervened in politics and through use of corrupt machines and bosses threatened us with a plutocracy.” The argument is plausible, and it is likewise plausible that privatization, by fragmenting an industry into at least two chunks (and more if private firms do not cooperate on advocacy), may similarly reduce that industry’s political power.

In a roundabout way, then, privatization is a form of antitrust, and antitrust is a form of campaign finance regulation. It may not be worthwhile to privatize industries–or break up large corporations–merely to reduce their political advocacy, but at the very least this may count as an unintended–and possibly happy–side effect of privatization that, if real, should be taken into account in future analysis.

“In a roundabout way, then, privatization is a form of antitrust, and antitrust is a form of campaign finance regulation.” I’m pleased to see the “antitrust as a form of campaign finance reform” theme discussed more widely.

Sasha Volokh lives in Atlanta with his wife and three kids, and is an associate professor at Emory Law School. He has written numerous articles and commentaries on law and economics, privatization, antitrust, prisons, constitutional law, regulation, torts, and legal history.
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