Antitrust and the political economy: Part 1

The last five years of ‘polycrisis’ have accelerated a rethink in received wisdoms across multiple areas of policy, with several paradigm shifts in 2023 as policymakers struggled to deal with overlapping emergencies.

Re-appraising the role that government can play in directing and making large transformational investments, founded around a ‘new industrial policy’; rethinking the causes and cures for inflation; recognising that trade policy which enabled hyper-globalisation and facilitated offshoring also favoured large incumbents; embracing antimonopoly as an explicit goal.

As a key instrument to control how assets get reallocated and used in the economy, antitrust cannot be aloof and independent of the profound shifts affecting the economy and upending other policy choices. Current US enforcers have embraced this holistic view, elsewhere is more of a struggle.

This first column in a two-part series argues that the defensive posture of much of the antitrust community at large is a-historic and out of touch.

The confluence and intensification of multiple crises (climate, energy, pandemic, wars) in the post-2008 era, accelerating since 2019, has driven major reappraisals in multiple policy areas and changed conventional wisdoms – leading to what Rana Foroohar recently described as the ‘Great Reordering’ orchestrated in the US by the Biden administration, an ‘epochal shift in how the economy is governed’ (Faroohar 2023).

‘Resilience’ and ‘strategic autonomy’ have become fundamental economic goals given realisation that long supply chains are unreliable and brittle, making us dependent on unfriendly regimes for everything from energy to commodities to sophisticated components; deindustrialisation has occurred with little relief from social amortisation measures; the labour share of GDP has fallen and large swathes of the population have become impoverished and disenfranchised.

Inequality between vast corporations with enormous lobbying powers and citizens has deeply affected the democratic discourse in the US and elsewhere.

Europe has multiple issues of its own – including divisions and fragmentation – but is also reflecting on similar phenomena; see the Resilient EU 2030 report produced by the Spanish Presidency of the EU in September 2023, which provides a realistic appraisal of the mountain Europe has to climb and why it needs an urgent plan (Spain’s National Office of Foresight and Strategy 2023).

A major rethink is leading to the resurgence of industrial policy as a key lever to direct and implement change. While the very notion of industrial policy was unmentionable in the US until five years ago, and in Europe was traditionally associated with bad, inefficient national champions lobbying their governments for subsidies, the position has moved on.

State-led programmes like the US Inflation Reduction Act, the American Rescue Plan, and the Investing in America agenda (and European equivalents) were initially seen with apprehension as the first salvo of a protectionist turn and a bad ‘race to subsidies’.

There is, however, recent serious work on industrial policy by economists and economic historians1 debunking the myth that state intervention needs necessarily be about ‘picking winners and supporting losers’.

State participation and investment can drive essential progress in areas where private initiative is insufficient – greening the economy, expanding energy sources, creating and updating infrastructure, designing intellectual property, laying out independent digital systems.

This is much more ambitious than the traditional narrow framing of ‘legitimate’ industrial policy (one that meets ‘state aid controls’ in European parlance) as a mere correction of ‘market failures’ that needs to pursue ‘efficiency’ at all costs. ‘Efficiency’ – a word which features hundreds of times in a recent paper by DG Comp economists on industrial policy and state aid control (Piechucka et al 2023) – is a bad single fixation in policymaking.

Antitrust is the policy tool we have to police the reorganisation and recombination of assets in the economy, especially by firms with market power, and the way they are deployed vis-à-vis competitors and consumers

While we do not want to be wasteful, the notion that we can only pursue public investment if we prove it to be ‘efficient’ is a major drag on designing more ambitious initiatives. Yes, intervention needs to be purposed in well-defined ways, not as ‘moonshots’ (unhelpful framing); indeed, a recent paper by Mazzucato and Rodrik (2023) seeks to move beyond ‘moonshots’ and set out a taxonomy based on actual case studies, with emphasis on ‘conditionalities’.

This rehabilitation of industrial policy is A Big Deal: we will not get out of our predicament relying on markets alone – especially in Europe, which is suffering from structural issues that drive major gaps in productivity and investment (see multiple reports commissioned recently by the EU to hommes savants Mario Draghi and Enrico Letta)2.

Another distinct area where recent events have triggered a major rethink has been the inflation spike of 2022-23. In the US, multiple experts predicted at the time that this would require the Fed to sharply raise interest rates to create lasting mass unemployment, which would eventually beat inflation by curbing demand, albeit at the cost of a painful recession.

A few ‘heterodox’ economists (Claudia Sahm, Stephanie Kelton, Isabella Weber and others) argued instead that inflation was a transitory phenomenon caused by supply-side disruptions (pandemic, war) which meant supply chains were kinked and brittle, but would subside without a necessary recession once supply constraints were worked through.

While the Fed did indeed raise interest rates, the anomaly is that unemployment did not increase and the economy grew, achieving what appears to be a ‘soft landing’ and (at least so far) averting a recession.

Paul Krugman and Olivier Blanchard3 have been calling the quiet part out loud: that the ‘orthodoxy’ got the analysis mostly wrong, and while there is still uncertainty as to the precise mechanism that led prices back down, the traditional framing of the causes and cures to inflation is clearly being challenged.

European inflation had its own dynamic (eg. war and related gas price shocks, on top of the pandemic supply chain brittleness), and induced responses that were also controversial and unorthodox (the ‘gas price break’ in Germany from 2022, energy price controls also in France).

Yet another space where established thinking is challenged by changes in the political economy is trade. The conventional wisdom of adherence to WTO rules designed to eliminate barriers to trade has come under major question.

While ‘hyper-globalisation’ freed up inputs that were inherently mobile (capital and goods), labour remained essentially moored into place while social amortisation initiatives were inadequate. Industrial capacity was offshored, significant pockets of the labour force were impoverished and disenfranchised.

Further, free trade agreements that lowered barriers to trade had been often designed to favour the interests of major corporations – rules on pharma dictated by Big Pharma, rules on data flows and data localisation by Big Tech – and governments sided with these interests.

The approach is now questioned for instance as US Trade has challenged the standard argument that domestic giants should be favoured to withstand China and argued that dealing with foreign rogue monopolies does not justify abiding by monopolies at home – chokepoints need to be broken up, and domestic monopolies should not be tolerated on grounds they are somehow needed to counter bad foreign ones.

US support to WTO data flow and data localisation rules has been recently paused (‘to create space for Congress and policymakers to decide on these issues’) (Office of the USTR 2023, Kilic 2023). This position is also closer to that of the Global South, which is putting forward its own claims to a more equitable, post-colonial trade regime also in tech.

With all this happening around us, can antitrust be an island of stillness? Because ‘we know’ (classic antitrust economist answer) ‘we just know how firms and markets work’? How do we know? And all of this has stood still for the last 20 years? When a major driver of market dysfunctions and resulting inequality has been the rolling concentration of industry after industry (from chemicals to pharma to tech) also as a result of weak enforcement?

After years of permafrost and inaction, the dam finally broke and in the US we have seen a revolution in antitrust posture over the last two years. This has been incredible to watch for Europeans used to thinking ‘we are the lead enforcers’.

It has also met with much resistance, with the neo-Brandeisian movement tainted as fixated on ‘bigness’ and bent on fighting large corporations because of nostalgia for an era of inefficient small traders, as well as anti-business and anti-Wall Street sentiment (see multiple editorials in the Wall Street Journal, network commentary, etc).

But this is a caricature which ignores how we got here. The current enforcement posture is not isolated ideology by ‘political’ heads of agency. Antitrust is the policy tool we have to police the reorganisation and recombination of assets in the economy, especially by firms with market power, and the way they are deployed vis-à-vis competitors and consumers.

The paradigm shift that Lina Kahn and Jonathan Kanter (and their colleagues) have sought to bring about in the US can be seen as a ‘return to the original animating values’ of US antitrust, but should also be read in the context of massive changes in the underlying political economy which have also spawned other policy rethinks: the end of ‘trickle-down economics’, after half a century of devoted practice.

It would be unusual and bizarre if underlying economy-wide shifts of this magnitude left antitrust enforcement unchanged – in the face of evidence of increased concentration in multiple sectors resulting from serial deals ‘rolling up markets’ over the past two decades, inequality increasing, unfairness in commercial practices, exploitative and exclusionary conduct, issues in labour markets, as well as violations of privacy on a massive scale.

How can we fail to adjust enforcement to this changed landscape? For a further discussion and proposals, see the second column in this series.

Endnotes

1. Just to quote a few, Lane (2020, 2021), Juhasz et al (2023); see also Criscuolo et al (2022).

2. See https://www.ft.com/content/e4681f0f-52ec-4f78-bbc8-fd7381ebfeb3

and https://institutdelors.eu/wp-content/uploads/2020/11/20230915_Report-Letta-ENG.pdf.

3. See Krugman (2023) and various tweets by Olivier Blanchard.

References

Criscuolo, C, N Gonnei, K Kitazawai and G Lalannei (2022), “Are industrial policy instruments effective? A review of the evidence in OECD countries”, OECD Science, Technology and Industry Policy Papers, No. 128.

Foroohar, R (2023), “The Great Reordering”, Washington Monthly, 29 October.

Juhasz, R, N Lane and D Rodrik (2023), “The New Economics of Industrial Policy”, NBER Working Paper 31538.

Kilic, B (2023), “Washington Takes a Step Toward Greater Openness in Digital Trade”, Centre for International Governance Innovation, 16 November.

Krugman, P (2023) “Beware Economists Who Won’t Admit They Were Wrong”, The New York Times, 18 December.

Lane, N (2020), “The New Empirics of Industrial Policy”, Journal of Industry, Competition and Trade 20: 209-34.

Lane, N (2021), “Forum Response: A Flight Plan that Fails”, Boston Review, September.

Mazzucato, M and D Rodrik (2023), “Industrial Policy with Conditionalities”, Institute for Innovation and Public Purpose Working Paper 07/2023.

Office of the United States Trade Representative (USTR) (2023), “Ambassador Katherine Tai’s Remarks at the National Press Club on Supply Chain Resilience”, June.

Piechucka, J, L Sauri-Romero and B Smulders (2023), “Industrial Policies, Competition, and Efficiency: the Need for State Aid Control”, Journal of Competition Law and Economics.

Spain’s National Office of Foresight and Strategy (2023), Resilient EU 2030.

This article was originally published on VoxEU.org.