Imperfect markets don't mean that regulation is the answer; competition often does a better job than bureaucracy at improving outcomes.
On July 9, 2021, President Biden issued EO 14036, an Executive Order on Promoting Competition in the American Economy. In many ways, this EO is rather humdrum. In others, it is a worrisome harbinger of further federal encroachment on the economy.
In 13 pages of the Federal Register, the EO establishes the Administration’s policy on competitiveness. The EO expresses the importance of a “fair, competitive, and open marketplace” for workers, small businesses, and entrepreneurs. The Administration worries about recent consolidations in several industries. In labor markets, workers have less bargaining power and are increasingly subject to non-compete agreements and occupational licensing. In agricultural markets, small farmers are suffering from monopolies on both the supply and the market side. IT consolidation has excluded market entrants, allowing big firms to extract monopoly profits, gather personal information of consumers for their own advantage, and cause harm to local newspapers, which have folded for want of subscribers. The Administration worries about hospital consolidation and patent barriers, as well as other industries (telecommunications, financial services, and shipping).
The Administration’s competition policy follows: (1) more aggressive antitrust enforcement; (2) reaffirmation of federal antitrust authority; (3) general promotion of competition and innovation; and (4) support for legislation to lower prescription drug prices, allowing the Medicare program to negotiate prices directly with drug manufacturers, and creating public health insurance.
The EO calls for a “whole-of-government” approach to industrial concentration and unfair competition. Agencies are called to enforce regulations more actively, revise various standards in favor of stricter statutory interpretation, favor competition in procurement and spending, and rescind regulations that stifle competition. The EO encourages agency cooperation (section 3) and creates a White House Competition Council for coordination (section 4).
In 23 subtitles (section 5), the EO lays out details. Some are general agency guidance. Others are more specific; examples vary from curtailing early termination fees in telecommunications contracts and air travel, to facilitating portability of financial data.
Overall, the EO contains 72 initiatives, ranging from encouragement to outright mandates for 14 different federal departments and agencies.
Basic Difficulties: The Growth of the Regulatory State
In many ways, EO 14036 is fairly mundane. It involves no new laws, and it is merely a statement of the Administration’s priorities in enforcing existing ones (although a less sanguine analysis might lament the move from objective standards to political will in antitrust enforcement). The EO is subject to a string of future hurdles: the agency rule-making process, the willingness of independent agencies to respond to presidential “encouragement,” actual implementation, and, in some cases, future statutory authority.
One could argue that EO 14036 is not authorized by the constitution, but it is constitutional. That is, one would be hard-pressed to find direct federal authority for antitrust enforcement in the U.S. Constitution; but President Biden is giving guidance for the enforcement of 130 years of antitrust laws that were duly passed by Congress and reaffirmed in a variety of SCOTUS rulings.
Still, we should be worried about the growth of the administrative state. President Trump issued an average of 55 executive orders per year; President Obama and his four predecessors issued an average of 35 to 48 per year. President Biden has already issued 53, for an average of 104 per year. Since 1994, executive orders have contained an average of 1,200 words; EO 14036 contains 7,000. The increased federal activity, along with the attempt to circumvent the legislative process, is troubling.
The EO 14036 background briefing cites evidence that American competitiveness has fallen. But there is also dissenting evidence. And even with increased concentration in American industry, it’s not clear that government has the knowledge or incentives to reach better outcomes than the market process—in fact, seminal work by economist George Stigler casts doubt on the danger of monopolies, their ability to persist without government support, and the very notion of market failure. Stigler was more worried, rightly, about political failure.
There are many problems with EO 14036. Here are five major issues.
1. We can all agree with the desirability of competitive markets, if not the methods to achieve them. But there is something contradictory about an attempt to increase competition through further regulation. If anything, the US government has historically been the largest (and most entrenched) monopoly in the US economy. Federal government spending stood at about 20% of GDP before the Trump-Biden spending splurge (an extravaganza passed under the guise of COVID-19, but largely good old-fashioned pork). It now stands at 30% of GDP, with several more trillion dollars on the horizon. If we add state and local government spending (20%), and the estimated burden of compliance with federal regulations (10%), American governments control about 60% of the economy. That would be a good place to start cutting for competitiveness. And, while we’re at it, how about addressing the quasi-monopoly of failed K-12 education?
2. Even if EO 14036 calls for increasing competitiveness, it will ultimately amount to increased regulation. Ironically, regulation has regressive effects for consumers. But regulatory compliance is also regressive for industry, as bigger companies enjoy lower regulatory costs per unit (they can afford compliance armies, in what economists call economies of scale). For example, in a working paper, my co-author and I examine the Dodd-Frank Act of 2010, and its effects on banking concentration. Although the Act’s (stated) intention was to end “too big to fail,” we find that it led to an increase in US banking concentration, as smaller banks faced higher per-unit regulatory costs, went under, and were absorbed into larger banks. A decade after Dodd-Frank, less than 1% of banks control two-thirds of assets, and 50% of checking accounts are held in five banks. It is puzzling to see an EO on competitiveness worry about industry concentration without addressing its root causes (increasing regulation and size of government).
3. Even assuming that antitrust policy is valid, what is the opportunity cost? Increased enforcement is not free. In an already bloated $7 trillion federal budget, what resources will be used for aggressive enforcement? Can we anticipate further increases in federal spending? Or will the resources be taken from other federal activities?
4. EO 14036 sneaks in a few things. To be sure, these don’t have supporting legislation (yet), but the EO includes net neutrality, support for public health insurance, and some thorny guidance about the revision of intellectual property (for pharmaceutical patents) and the content of labor contracts (for non-compete clauses). This comes dangerously close to violating the contracts clause of Article 1, Section 10 of the U.S. Constitution (even if the judicial precedent exists; see Home Building & Loan Association v. Blaisdell, 1934).
5. There are a few other examples of contradictions and ironies. It is hard to take seriously a proposal to increase competitiveness in labor markets from an administration that is pushing for the greatest barrier to entry, a $15/hour minimum wage, and is beholden to labor unions that tend to favor job licensing. It’s also interesting to note the absence of criminal justice reform as a priority (an estimated 27% of formerly incarcerated people are unemployed, as they face barriers to employment). While this may involve only 600,000 new people per year, it would have benefits for labor markets and for crime reduction.
It’s also not clear whether supporting small farmers is a good thing, as we consider trade-offs between economies of scale and a personal touch, between cost and quality. But if the Administration is serious about saving small farms, it could look at compliance costs with food safety regulations, which are six times higher for small farms, or farm subsidies, which go disproportionately to large farms. The EO encourages the Federal Maritime Commission “vigorously [to] enforce the prohibition of unjust and unreasonable practices in the context of detention and demurrage”—but there is no talk of ending the Jones Act.
As with anything spewing forth from the regulatory factory on the Potomac, there is much more to be said about EO 14036. Allowing hearing aids to be sold over the counter is nice, if ultimately trivial. The intention, if hollow, to decrease occupational licensing, is wonderful. And I confess I am particularly pleased by the intention to protect “the vibrancy of the American markets for beer, wine, and spirits, and to improve market access for smaller, independent, and new operations.” This is long overdue, but good luck overcoming the three-tier system and the tangled web of state regulations created under the 21st Amendment.
The goals may be laudable, but the details are contradictory. It’s hard to take seriously an administration that has, in six short months, vastly increased the regulatory and fiscal burden of the federal government—with unabashed plans for more—and then claims to be addressing competitiveness.