Regulation Recessions

In his column “Robber Baron Recessions” Paul Krugman argued this Monday that American companies have been investing less because of greater market concentration in their industries. Exhibit A for Krugman is Verizon: he contends that it has not sufficiently invested in Fios, a fiber optic system that would accelerate internet speeds.  He thus wants more government intervention to police monopoly power and decrease economic concentration.

Both Krugman’s claim and his remedy are dubious.  Let’s begin with alternate explanations for low corporate investment. The most obvious is government regulation.  The Obama administration has been one of the most aggressive regulators in history. And given the resurgence of the left generally as represented by the relative success of Bernie Sanders, the political climate threatens even more onerous regulation in the future. Regulation and political uncertainty kill investment, because companies cannot assure themselves a projected rate of return.

Krugman could have hardly chosen a better example than Verizon to undermine his own case.  The Obama administration’s policy of net neutrality curbs pricing freedom and may well presage further government restrictions on those who provide the pipes for the internet.  The government could indeed do more for investment by reducing regulations and the uncertainty they bring.

Second, it is not at all clear that market concentration leads to lower investment. Joseph Schumpeter thought that monopoly power likely leads to more investment in innovation, because those with high market share could capture a greater return on their investment. To be sure, this effect has to be weighed against the advantages of multiple actors coming up with new ideas, but the trade-off between size and multiplicity almost certainly varies industry by industry.

Third, government regulators have compiled a terrible record of intervening to police concentration, particularly in our era of technological acceleration. They sued IBM for monopolization right before Microsoft ate IBM’s lunch and Microsoft right before Google came to dominate.

Finally, European companies have not been investing much in their enterprises either.   Yet there antitrust regulators embrace a more intrusive competition policy closer to the kind of which Krugman approves.

Thus, Krugman’s case is shaky on multiple grounds. Regulation rather than concentration is the likely cause of low investment and there is no empirical evidence that a more vigorous antitrust law will improve the situation. Indeed, in creating more regulatory uncertainty, it is likely to make things worse.