Norway’s Opera said Thursday that downloads of its browser more than doubled after Microsoft Corp. was forced to give European users a choice of Web software to settle European Union antitrust charges.  Microsoft started sending updates to Windows computers in Europe in early March that launches a pop-up screen telling them to pick one or more of 12 free Web browsers to download and install, including Microsoft’s Internet Explorer.  Opera Software ASA said European downloads of its newest desktop browser increased 130 percent between March 12-14, after the updates were sent out. It saw the highest increase in Poland, where downloads went up 328 percent.

Here are some details on what the browser choice screen looks like in practice, or here.

Coke and PepsiCo sell concentrate to bottlers, which then bottle and distribute the soft drinks in their territories. Many of these smaller bottlers are small businesses that have been run by family members for decades and have perpetual contracts to distribute the sodas.   One concern for some smaller bottlers is that the big cola makers might now push for more price promotions in the regions they control, a move that could also drive down prices and profit margins at smaller bottlers. There are also questions about how both companies will handle distribution of any new drinks they launch.

For Coke and PepsiCo, managing the often delicate relations with their remaining independent bottlers will be key to driving sales and efficiency in their distribution systems.  PepsiCo said it is committed to nurturing “constructive” and “mutually profitable” relationships with its independent bottlers. PepsiCo says it has no plans to acquire the remaining portion of its bottling system, but instead it intends to focus on teaming up with its bottlers.  Coke declined to comment.

Most industry watchers say that independent bottlers will continue to have a strong presence and that both companies will likely strive to keep relations cordial with these distributors. Small bottlers will also benefit as the overall beverage system gets more efficient. Nonetheless, the big bottler deals are set to bring major changes to the industry, which is fighting a slump in sales of traditional sodas….

The recent deals will allow Coke and PepsiCo to cut costs sharply and allow them to be more flexible on pricing and in offering retailers better deals, moves that could indirectly push smaller bottlers to do the same.  “The pressure would be that they might lower prices to major customers on some products, where the independent bottlers may not have thought it necessary in the past,” Mr. Glover said.

This trend back toward vertical integration is pretty interesting.  The article suggests that integration will result in greater pricing flexibility and lower overall prices, suggesting that perhaps integration is solving a double marginalization problem.  But has bottler market power increased in the last decade or so?  Why now?

A second possible explanation is that the costs of ameliorating promotional incentive conflicts by contract has increased over the relevant time frame. Like most vertical contracts, the key here is to understand how the incentives of the prospective transacting parties do not coincide and therefore must be controlled contractually rather than left to unrestrained competition and self-interest.  A common incentive incompatibility, identified by Klein & Murphy (1988) and later analyzed by Klein (1995), occurs when: (1) manufacturers sell a product at a significant markup over marginal cost, (2) the retailer provides some input like marketing activity or promotion that has a significant impact on demand for the product, and (3) consumers have heterogeneous demand for these promotional services, i.e. different value placed on placement of the product on eye-level shelf space, product demonstrations, etc.    The basic economic forces under these conditions suggest that the downstream “promotional service provider” such as a franchisee or retailer does not have adequate incentives to promote the product or supply the efficient level of marketing activity. This is because the franchisee does not take into account the franchisor’s (large) profit margin on additional sales induced by provision of promotional services. This is most likely to be the case when products are differentiated, e.g. soda!

Under these conditions, transacting parties will find contractual solutions to these problems (including vertical integration) to induce the supply of the efficient level of promotional services. My analysis with Ben Klein on slotting contracts and solo authored work on category management contracts are examples of the types of contracts one sees put to use in the retail industry to control the transacting parties incentives in favor of non-performance and faciliate self-enforcement of the contract.  But the real question here is whether the incentive conflict has changed in the soda market in recent years such that vertical integration has become a more efficient solution for assuring supply of the desired distribution services than contracting.   I’m not sure what the change could be.  Contractual relationships with bottlers can be governed by franchise termination laws, which render if incredibly difficult and nearly impossible to terminate a bottler for non-performance.  The article notes that many of the bottler contracts are “perpetual.”

Relatedly, Muris, Scheffman & Spiller (1992) provide a similar analysis of the previous shift to vertical integration in the soft drink distribution market following a dramatic increase in the importance of marketing activity in the industry, e.g. supplying retailers with product display, “pushing” product by encouraging retailers to give premium shelf space with “slotting contracts,” and executing local promotions. It is true that one could call this change in optimal contractual form as a response to increasing transactions costs, but that is probably a bit misleading and certainly too vague to really get at the underlying economics.  Most folks assume that this means a response to an increased incentive to engage in hold up over specialized assets. But this incentive to vertically integrate has nothing to do with specialized assets in the conventional Klein, Crawford, and Alchian (1978) or Williamsonian sense.

Including Todd’s excellent post, and Bill Easterly’s response, much has already been said on this count. Todd really hammers at the key point, and the value of Hayek in the curriculum, when he writes:

Hayek is the most courageous and important critic of social planning, and if we are going to expose high school students to the poison of Marx, we must give them the antidote of Hayek. Hayek realized the fallacy of central planning and its inevitable failure decades before anyone else. His book “The Road to Serfdom” should be required reading for any literate American. His ideas about the decentralization of knowledge, the important role heterogeneous preferences would play in destabiling attempts at social planning, and the link between progressivism and totalitarianism are some of the most important contributions to human knowledge of the past 100 years.

Absolutely.  But I want to talk a bit more about the data.  Measuring citation counts between economists is probably not a good way to measure the sort of influence that we are talking about in terms of appropriateness for a high school economics curriculum.  I suspect White’s  (1980) “A Heteroskedasticity-Consistent Covariance-Matrix Estimator and a Direct Test for Heteroskedasticity” cites better than anything else since 1970, but I’m not sure I’d recommend it to a high school senior.   Influence is a tough concept to measure.  And Wolfers, to his credit, calls for alternative measures if they exist.  Well, Todd points to one potential measure, noting that Hayek ranks ninth among economists cited in law journals.   But if one restricts attention to Hayek’s influence with other Nobel Laureates, in which he ranks second only behind Ken Arrow.   That sounds pretty influential to me and with a measure that probably matters more for the relevant type of influence than a general JSTOR citation count.

No doubt that data are better than opinion and all of that.  Using data to find answers is a good thing — but we do want to be mindful that the data we are using are measuring the right thing.  Looking for keys under lampposts comes to mind.  I just don’t think that general citation counts are a very good measure of the sort of influence we are talking about when we are deciding the whether “Hayek belongs” in high schools, much less that the data can be used to support claims that insisting that Hayek be taught cannot be supported by the merits and must be the product of ideology (of course, I think everybody understands that in the particular case of the School Board here, there is plenty of ideology involved, but that is separate from the data claim being made).

UPDATE: I should make clear that I find the School Board’s decisions generally troubling, and am skeptical about the role of school boards in picking curriculum in economics as well as other topics.

In economics, the revisions add Milton Friedman and Friedrich von Hayek, two champions of free-market economic theory, among the usual list of economists to be studied, like Adam Smith, Karl Marx and John Maynard Keynes.

To the Times, this is evidence of the Board’s desire to put a “conservative stamp on . . . economics textbooks.” As usual, the Times gets it wrong.

Hayek is the most courageous and important critic of social planning, and if we are going to expose high school students to the poison of Marx, we must give them the antidote of Hayek. Hayek realized the fallacy of central planning and its inevitable failure decades before anyone else. His book “The Road to Serfdom” should be required reading for any literate American. His ideas about the decentralization of knowledge, the important role heterogeneous preferences would play in destabiling attempts at social planning, and the link between progressivism and totalitarianism are some of the most important contributions to human knowledge of the past 100 years.

Economist, and my friend, Justin Wolfers disagrees. On the ever-interesting Freakonomics blog, Wolfers examines citations to Hayek in economics journals, and concludes the data “suggests that Hayek just doesn’t belong with Smith, Marx, Keynes, or Friedman.”

Others are coming to Hayek’s defense. See comments by William Easterly here.

I offered my own defense of sorts in a 2005 paper for the inaugural issue of the New York University Journal of Law & Liberty. I look at citations to Hayek and other famous “economists” in law journals and by judges. Hayek is the ninth most cited economist, behind only Mill, Smith, Coase, Becker, Stigler, Arrow, Marx, and Friedman. Hayek has been quite influential on law, and like Mill, Smith, and Friedman is accessible to high school students wrestling with big-picture ideas about economics and society.

I do agree with Wolfers’s skepticism about school boards generally and some of the specific decisions of the Texas Board. I also agree that Hayek would be skeptical about attempts to impose knowledge from above. But, since these decisions must be made, it is nice to see some balance being brought to economics education.

Of course, much of this shouldn’t matter. Education starts at home, and I can say that no matter what the high school curriuculum at the University of Chicago Laboratory Schools (where my kids will attend), they will learn about Hayek in the Henderson House.

At the outset, the President claimed that a central goal of reform was to reduce the cost of health care itself. While Mr. Obama was always concerned with expanding health insurance coverage to the uninsured, he maintained that health care cost reduction is also key (and, in fact, necessary for expanding coverage without breaking the bank). For example, in a June 2009 radio address setting forth his goals for health care reform, the President insisted, “We must attack the root causes of skyrocketing health care costs,” and he reiterated his “belief that any health care reform must be built around fundamental reforms that lower costs, improve quality and coverage, and also protect consumer choice.” Similarly, his Council of Economic Advisers listed a reduction in actual health care costs as one of the two goals (along with insurance coverage expansion) of health care reform:

CEA’s findings on the state of the current system lead to a natural focus on two key components of successful health care reform: (1) a genuine containment of the growth rate of health care costs, and (2) the expansion of insurance coverage.

So I have a question for supporters of Obamacare (either the House bill, the Senate bill, or the President’s own proposal): What provisions of the proposed legislation will reduce the costs of health care itself? This is an honest question. I’m really trying figure out, if a reduction in health care costs is a primary goal of this legislation (and mustn’t it be?), what is the strongest possible case for the pending proposals?

Viewing the proposals in the most favorable light, I can see how they could conceivably lower the price of health insurance. By forcing everyone to carry insurance, even the healthy people who would otherwise forego it, the legislation could bring more healthy people into insurers’ risk pools, thereby reducing the average pay-out per insured and, accordingly, the premiums each insured must pay. This assumes, of course, that the legislation will succeed in driving healthier people into the risk pool — a highly questionable assumption for reasons I explained here — but I can at least see how the legislation might drive down average insurance prices if it really forces more healthy people to carry insurance. Of course, the folks who wouldn’t buy insurance but are forced by law to do so will experience a price increase, but the average price of purchased insurance policies would likely fall if adverse selection were reduced by an individual mandate. That, however, affects only insurance prices. It has nothing to do with lowering actual health care costs. And that’s where our real problem lies.

Other key cost/price-reducing provisions in the pending proposals seem similarly focused on reducing the cost or price of insurance, not the cost of health care services themselves. The Health Insurance Rate Authority created by the Obama proposal would employ rate regulation to keep insurance prices in check, but the regulators would presumably permit rate increases justified by rising health care costs (otherwise there’d be shortages), and the Authority would do nothing to constrain those costs. The proposed insurance exchanges would, according to Harvard economist David Cutler, “help curb underwriting and inefficient marketing practices that raise costs in the small-group and individual insurance markets.” But, again, this creates efficiencies only in the provision of insurance — it does nothing to reduce the costs of health care services, the costs that really drive the price of insurance in the first place. Proposed changes to Medicare (i.e., reimbursement reductions, changes in payment calculations to reflect value created rather than services performed, efforts to combat fraud and abuse) could reduce the government’s outlays on Medicare, but they do nothing to reduce the actual costs of the health care services being provided.

So what provisions of the proposals could really reduce actual health care costs? I see three: malpractice reform (which would reduce costly “defensive medicine”), improvements in information technology and comparative effectiveness research (which would allow doctors to share medical records more cheaply, to avoid costly mistakes resulting from a lack of knowledge about a patient’s history, and to select treatment options that have been shown to work effectively), and investments in preventive care (which would reduce total costs under the principle that “an ounce of prevention is worth a pound of cure”).

Should we expect much from these three sources of cost-reduction? Almost certainly not. First, the proposed malpractice reforms are anemic at best. As the Los Angeles Times reports, meaningful malpractice reform is essentially missing from the House and Senate bills (and the House bill might even weaken state tort reform efforts, as it would award certain grants only to states whose new tort reforms “do[] not limit attorneys’ fees or impose caps on damages”). The Obama proposal purports to reduce medical malpractice claims and the high-cost defensive treatments they encourage through a competitive grant program for States to develop alternative dispute resolution mechanisms for malpractice claims, and it provides up to $25 million — an average of $500,000 per state! — for these grants. Does anyone really expect this puny program to reduce the incidence of high-cost, defensive medical treatments aimed solely at avoiding massive malpractice claims?

Investments in comparative effectiveness research and preventive care could reduce total health care costs, but how significant would this cost reduction really be? Comparative effectiveness research will lower costs only if health care providers actually use the research findings in making treatment decisions, and this seems somewhat unlikely given that (1) doctors tend to think their patients are unique and should not be confined to “off the rack” treatments, and (2) insured patients have little or no incentive to pressure their physicians to follow the most cost-effective treatment regimens. I’m not saying cost-effectiveness research won’t reduce costs at all, and I do think this sort of “information gathering/dissemination” is an appropriate effort for the government (given the positive externalities of research, etc.). I just doubt the cost-savings will be that great. The same goes for the investments in preventive care, which, as detailed here (click through to see summaries of the provisions) amount mainly to grants for demonstrations, etc.

So am I missing something? Are there other provisions in these proposals that will actually reduce health care costs? If so, I’d really like to know.

If not, then how much sense does it make to move forward with this 2400+ page legislation? To focus on reducing the cost of health insurance without focusing on reducing the cost of health care services themselves — by far the largest component of health insurance costs — is to try to squeeze water from a rock. There just ain’t much there! The health insurance industry doesn’t display supracompetitive profits that can be reduced via creative regulation. As John Calfee explained in last Friday’s Wall Street Journal:

Fortune 500 data show that of the 43 industries that actually made a profit in 2009, health insurance ranked 35th, with profits of only 2.2% of revenues.

More fundamentally, premium increases are driven not by profits but by costs, as WellPoint has made abundantly clear in California. When HHS issued “Insurance Companies Prosper, Families Suffer,” its Feb. 18 report on firms that implemented “excessive” premium increases, plenty of nonprofit firms (such as Blue Cross/Blue Shield of Michigan, Regency Blue Cross/Blue Shield of Oregon, and Blue Cross/Blue Shield of Rhode Island) made the list.

But rather than argue over accounting data—which never show that profits amount to a significant portion of health-care costs anyway—let’s listen to what the marketplace is telling us. If health insurance is so lucrative, why aren’t giant companies jumping in?

MetLife has chosen to invest billions of dollars of free cash not in the health-insurance business but in a risky acquisition of the international life insurance business of beleaguered conglomerate AIG. And what about firms like Microsoft, General Electric, Google and Wal-Mart? They know how to enter new markets and make a profit. Why aren’t they selling health plans?

Those who know best are persuaded that far from being easy, making money selling health insurance is tough. It is no wonder Warren Buffett told CNBC on March 1 that health insurance is one part of the vast insurance market in which he has avoided investing.

Rather than trying to reduce the costs of health insurance only, Congress would do much better to enact reforms calculated to reduce the cost of health care itself. As I explained in this post, the starting point would be the elimination of the tax advantage afforded to employer-provided health insurance, an advantage that has transformed health “insurance” into pre-paid health care and has, in the process, decimated effective price competition for medical services. Unfortunately, President Obama — in a shamefully disingenuous attack during the presidential campaign — effectively took that sensible option off the table.

So, Obamacare supporters, what am I missing? Tell me how this thing is going to reduce actual health care costs? Surely you can do better than Paul Krugman, who recently assured New York Times readers that there’s plenty of cost-saving efforts in there, even if “nobody knows how well any one of these efforts will work.” It’s a little like drilling for oil, he says: “any individual test hole … will probably come up dry,” but “the odds are, in fact, that some of the test holes will pan out, and produce big payoffs.”

For Pete’s sake, Obamacare supporters, please tell me that’s not the best you’ve got!

But that question has already been answered. The Government Accountability Office conducted a study of the agriculture sector.  In addition, they consulted the academic literature and scholars and other experts in the field. The GAO concluded there is no evidence that concentration has had any adverse price effects on commodities or consumer producers.

One would expect that someone among the panel of enforcers at the state or federal level, particularly the DOJ or USDA, would be aware of and familiar with the GAO report. I submitted a question to that effect, asking if–or how–the GAO report would inform the activities of the state and federal enforcers. That question was not selected by the moderator to be addressed.

Antitrust is an extremely blunt tool that cuts coarsely through an industry. Wielding such a tool blithely before the face of industry is likely to have chilling effects on investment and innovation. Why would (or should) businesses invest in facilities, producers, or innovations when there is such great uncertainty over how the politicization of antitrust enforcement is going to be brought down upon them?

There is some snow still on the ground here in Iowa. It will melt more slowly given the chill cast upon agriculture by the comments of the enforcers…if the comments have more behind them than just saying what a farmer-oriented audience wants to hear. Perhaps Marvel Comics had it right?

Unfortunately, Diana Moss is the lone antitrust expert on the seed industry concentration panel (also known as the “is Monsanto an antitrust problem?” panel), and it falls to her to put meat on these bones.  But she fails in the effort, and really just repeats the same mantra as the farmer, with exactly the same amount of evidence (zero, in case I wasn’t clear on this point).  (Moss’s AAI paper on biotech seeds is available here; our ICLE paper partially addressing Moss’s is here).

Asked, “how to think about structure and is this a highly-concentrated industry?” Moss answers that we should view biotech seeds as a “platform”–with upstream markets and downstream markets.  This move is important for her argument–separating input competition from output competition–because there’s lots of competition among seed distributors, and the overall effect of seed trait development has been pretty much unambiguously positive.  I’m not sure why she calls this a “platform,” other than it lets her analogize to Microsoft.  But it doesn’t help analytically.  For the rest of us, she is talking about competition and concentration in an input market–where the relevant input is patented seed traits.  Of course it matters in assessing the effect of concentration in the input market if price and value are improving in the output market, even though a key input may be available from only a small number of firms.

But whatever we call them–”seed platforms” or “seeds” or “seed traits,”–the argument founders on the absence of evidence, and the claim that “there is concentration in the industry” does not (claims to the contrary) mean that there is actually inefficiency in the industry.

Moss starts by asking “what are the alternatives?”  She wants to know where Monsanto’s competition is (and of course she forgets that few competitors does not equal no competitors), on the assumption that more competition is better.  Well, yes–but she is looking at the wrong dynamic.  She asks what alternatives there are to Monsanto’s traits–where are Monsanto’s competitors?  But that’s a pure SCP question (structure, conduct, performance–the discredited assumption from the 1960s that competitive outcomes correlated necessarily with industry structure–with the degree of concentration in an industry).  The relevant question is not “how can we get more competition?,” it’s “would competitive outcomes improve if we intervened to engineer a market with more competitors?”  Moss’s question assumes the only way to improve outcomes is to have more competitors, but she has no evidence to support the claim; it is merely assumed.

Moreover, again reflecting her “platform” claim, she assumes that every farmer and thus every seed manufacturer will need to plant seeds with biotech traits–in other words, if you’re a consumer in the output market, you are necessarily an indirect purchaser in the input market.  But that isn’t true.

Keeping with the theme, she analogizes to Microsoft.  She analogizes to Intel.  She thinks this makes the point.  But while a computer can’t function without an O/S or without a processor, soybeans can indeed be grown without biotech traits (I think I also heard Jim Tobin, on the panel from Monsanto, make this point).  It may be that almost all farmers prefer seeds with Roundup Ready genes, even at a higher price.  But there will always be competition for these seeds from non-GMO seeds.  The mix of price and quality may be different, but at some price, for all farmers, the non-GMO seeds would offer a better alternative; non-GMO seeds will always exert competitive pressure on GMO seeds.  And of course “buy nothing” is always an available alternative unless demand is infinitely inelastic (and here it is not).

So Moss claims there is “less choice.”  But less than what?  She implicitly compares the market to some ideal, theoretical world, but she has no measure of the cost of getting to that world, and no support (again) for the claim that the “competitive ideal” is preferable.

Moss says we would get “more innovation from competition, instead of having one firm dominate.” This is an unfortunate and misleading confusing of ex ante and ex post.  As Mike noted in a tweet earlier today, “the market for traits is not monopolized. Just turns out the traits farmers like best were created by one firm.“  As it happens, the only constraint that I know of on innovation is the willingness and ability to incur the risk and bear the cost of R&D.  This is not a “barrier to entry,” unless any positive cost is a barrier to entry, in which case there are no contestible markets in the world.  One firm “dominates” here only because its innovation has proved extremely successful.  Ex post, there is only one firm that invented the most valuable herbicide resistance trait.  Ex ante, any number of firms could have done so.  The returns to that investment (and its patenting) are not evidence of diminished innovation, but rather precisely the opposite: The return on that investment is evidence that the innovation has been enormously beneficial.

On patents, by the way, Moss maintains a clever line that, even though it’s true that post-patent-expiration (in 2014 for Monsanto’s Roundup Ready I, FYI) there will be lots of competition, the only way to have real competition on the day the patent expires is for “the pipeline” to be started long before patent expiration.  She wants a sort of Hatch-Waxman Act for seed traits (although she thinks H-W is too cumbersome and she wants something better).  Again, the claim sounds nice, but she has no analysis of the effect on innovation incentives.  It is indeed probably true that some H-W kind of legislation would bring “generic” seed traits to market more quickly.  And I have no reason to think that the precise term of patent protection in place today for this precise innovation is optimal, so of course it’s possible that shortening the term could improve efficiency.  But the burden should be on the proponent.  It’s hard to have confidence in claims that, essentially, patent terms should be shortened when the proponents offer no evidence to show that overall outcomes would be improved, taking account of reduced incentives for innovation.

As I noted earlier, there are always rents to be split, and, not coincidentally, it’s hard not to see this whole enterprise as one big rent-seeking effort.  I do hope that the DOJ and USDA get something of value out of this process, rather than just offering (inadvertently, I assume) encouragement for rent-seeking through politics.  But until we see evidence that intervening in this market would increase overall efficiency rather than just the wealth of certain farmers relative to that of certain shareholders, it’s hard to take the claims seriously.

More reasoned:

• Find a balance between food and fuel in the policy debate (though no clear directions how)
• Increase trade in global markets (always easy to talk about forcing other countries to buy more of our stuff without addressing the domestic industry issues)
• Invest in new research and technology (and in land-grant universities…now, how can I argue with that?)

More reactionary:

• Take that research and technology and give it away (thereby eliminating any private incentive for investment)
• Limit subsidies going to large farms so only small farms benefit
• Big companies should be busted up (no matter the efficiency implications for consumers or ag producers)
• Prohibit contracting between packers and livestock producers because it creates “captive supply” and thins out the cash market (thereby eliminating packers’ ability to provide consistent quality meat products to consumers and many producers’ abilities to access financial capital)

In short: Farmers want to make more money and want to change the rules to get more of the money in the system. Surprises, anyone?

The question of the morning (from my perspective):
How much of the consequences associated with some of these ideas are intended or simply foreseeable?

Second, I believe that we should view extensions of government activity under a presumption of error, especially where there is no evidence of a market failure or where the case for government regulation is suspect, say because of the potential for an incumbency bias or the possibility of abuse by the forces of totalitarianism. The control we have over our government, which, after all, has a monopoly on legal physical violence, is tenuous and something that requires constant vigilance. Giving incumbent politicians the ability to write rules that will make it more likely they will be reelected is something that should be done only, if at all, in the face of overwhelming evidence of the inability of citizens to make sensible political decisions in the absence of these rules.

Third, I believe that people generally want to restrict “corporations” in the abstract from influencing politics, a belief that is born out by recent polling data showing about 70% of people disagree with the result in Citizens United. In other words, if we voted on Citizens United, I think we would have voted the other way. As I describe below, I do not think this should matter. Based on the first two priors, I think the Court got the case right, and that its countermajoritarian instincts here are a sign of strength in the decision, not weakness.

Here are some thoughts about the case and its aftermath.

First, I think it is amusing how the case is perceived on both sides of the political aisle. Political commentators on the Left have said the case has “more dire implications than Dred Scott” and that “within 10 years every politician in this country will be a prostitute.” Or take this zinger from Justice Stevens’s opinion: “The Court’s ruling threatens to undermine the integrity of elected institutions across the Nation” and “do damage to this institution” as well.

The law that was struck down was passed in 2002: The Bipartisan Campaign Reform Act. It was upheld against a facial challenge in a 2003 case called McConnell, which was based on a precedent from 1990, called Austin. So pick your time period, pre 2002, pre 1990, whichever. Were all politicians prostitutes of corporate interests, whatever that is, in 1989?

Or, looking at the issue another way, does the fact that the conduct permitted by Citizens United was legal in 26 states prior to Citizens United, suggest that politicians are hopelessly corrupt in over half our states? What about the fact that prior to the case, companies, unions, and advocacy groups and other agglomerations of individual interests that chose the corporate form could do exactly what Citizens United allows them to do if the speech was funneled through “separate segregated funds,” commonly known as Political Action Committees? The belief in disaster must be based on a claim that when corporations or unions can fund political speech directly, from so-called treasury funds, instead of indirectly, the flood gates will open and companies will spend much, much more on politics. This is a claim about how corporations act that is highly suspect, a point I will return to in a moment.

Moreover, what about all the money the so-called special interests spend on lobbying members of our legislatures? The campaign finance laws say nothing about this, and which is more likely to influence public policy creation, a drug company running an ad in New Jersey 30 days before the election telling citizens that Senator Henderson is a Marxist who wants to nationalize drug development or that same company spending millions on lobbyists to jawbone existing legislators about the virtues of our current system?

A final point about the hysteria: Do critics of more political speech have such little faith in the people to make decisions that the inevitable consequence of more information about politics will be to bias it in a socially negative direction? Was it really the case that 2 U.S.C section 441(b), the law at issue in the case, is all that was preserving our democracy? I for one have more faith in the strength of our Union and the wisdom of the people than to think that the byzantine structure of federal election law is all that distinguishes American politics from that of the Ukraine or Nigeria. Even if you believe, as many do, that the average corporation is analogous to the National Socialist party, this does not mean we must necessarily regulate their speech. Remember, we let the Nazis speak.

On the Right the fans are just as simple minded. An op-ed in the Wall Street Journal after the decision argued (lamely) that Citizens United is a key victory for business in the battle to reduce the influence of trial lawyers. The unstated suggestion is that companies will give more money and this is a good thing. This is highly suspect, and I suspect that businesses are not in favor of the decision. Every penny spent to influence law is a penny not spent to pay managers, hire workers, innovate, or make shareholders wealthy.

Campaign finance laws can be thought of as a solution to a simple collective action problem: every firm would prefer not to pay politicians not to treat them badly, but none individually have an incentive to refrain from doing so absent collective agreement of the same. An obvious solution to the collective action problem is an agreement among firms to refrain from spending on politics. But this agreement would be illegal under our antitrust laws. Campaign finance laws may be a rough substitute. (Note the irony that laws restricting speech are necessary because of other laws prohibiting firms from acting rationally in their self interest.)

The zero-sum game aspect of corporate giving can be seen by looking at the donations by businesses in the 2008-2009 election cycle. Business corporations gave $1.96 billion to political campaigns, 50.6% to Republicans, 49.4% to Democrats. They play both sides, making claims of Citizens United meaning more corporate influence or better for Republicans somewhat fanciful.

While we are on the subject of partisanship, it is interesting to compare business giving with that by the other major corporate contributors – labor unions, specifically public-employee unions. Unions donated $674 million in 2008-2009 (about 1/3rd of what businesses gave), but they gave overwhelmingly to Democrats (92% to 8%). The net contributions from “corporations” were $1.6 billion for Democrats and $1.0 billion for Republicans. The conservative majority of the Court hardly gave Republicans a gift, assuming these ratios continue when the rules are liberalized across the board, and we have no reason to believe they won’t be. (For reference, one candidate, our president, raised nearly $1 billion in donations from individuals in that year.)

So it is not at all clear that this case will make things worse or that it favors one political party or the other. It is not even clear that it favors things corporate or business over things uncorporate. After all, there are corporations on the side of almost all issues, especially when we remember that the ACLU, NRA, Sierra Club, AARP, Citizens United, and others are corporations too. Are those anti-corporate readers out there afraid of all of them or just some of them? If you like the ACLU and the Sierra Club, but not the NRA and the AARP, and as a consequence want to ban the speech of the former and not the latter, this is the road to totalitarianism. The Supreme Court is adamant that restrictions on speech cannot be based on content. Tolerating the speech of those we disagree with is one of our most sacred core values.

This case is about just this kind of toleration and the threat of unchecked political power. To see this, consider this passage from the Court in Citizens United:

The law before us is an outright ban, backed by criminal sanctions. Section 441b makes it a felony for all corporations—including nonprofit advocacy corporations—either to expressly advocate the election or defeat of candidates or to broadcast electioneering communications within 30 days of a primary election and 60 days of a general election. Thus, the following acts would all be felonies under §441b: The Sierra Club runs an ad, within the crucial phase of 60 days before the general election, that exhorts the public to disapprove of a Congressman who favors logging in national forests; the National Rifle Association publishes a book urging the public to vote for the challenger because the incumbent U. S. Senator supports a handgun ban; and the American Civil Liberties Union creates a Web site telling the public to vote for a Presidential candidate in light of that candidate’s defense of free speech.  These prohibitions are classic examples of censorship.

Let me reframe the Court’s holding: the government may not ban political documentaries in the 60 days before an election. This is the end of democracy? The government tried to ban speech about government! Imagine a Palin Admistration banning the Michael Moore movie “Dumb as the Average Moose,” before the 2016 presidential election? How would those on the Left react to that decision?

The Solicitor General admitted during oral argument that the logical extreme of the law would allow the government to ban book publishers, who happen to have chosen to organize their economic affairs as corporations, from publishing political books before elections. Yes, you read that right. Book banning. This goes to the heart of the First Amendment. Imagine James Madison and Thomas Jefferson traveled to our era and asked about the Bill of Rights. If Citizens United came out the other way, we would have to tell them that virtual child pornography and pole dancing are protected by the First Amendment, but books or documentaries about politicians are not. I’m not suggesting that we limit our constitutional interpretation to a what-would-the-Founders-think analysis or even to the plain text (which, by the way, says Congress shall pass no law restricting the freedom of speech), but if the First Amendment means anything, it means protecting speech about politics.

Of course, one could argue that books or documentaries about politicians are OK, so long as the speaker was you or me or all of us acting together, so long as we didn’t organize as a corporation. But why should the value of political speech be determined by whether the entity doing the speaking or enabling the speaking is a corporation or person, partnership, or sole proprietorship? Or whether the corporation speaking was a “media corporation,” a class of corporations that were exempted from the regulation. So our First Amendment, as previously interpreted, said that the New York Times or Fox News could say whatever they want about politics whenever they wanted, but that the ACLU and Apple could not. I see no basis for this in the text of the Amendment or in common sense. What is the difference between a non-media company and a media company? What if Apple started a newspaper? Could it then speak?  How about a blog? Is that media? Why should Rupert Murdoch get to spend and say what he wants on politics, but not News Corp.? And what is the reason for encouraging businesses that want to speak to choose to organize as partnerships or individuals instead or corporations? Imagine a corporation with one owner – should the corporation not be allowed to speak the same as its sole owner?

One possibility is a concern that when News Corp. spends money on politics, it is spending shareholders’ money, or, depending on your point of view, employees’ money or other stakeholders’ money. This is as true as it is irrelevant. For one, investing is voluntary, and there is no demand for any individual firm’s stock. If you own shares in Exxon Mobil, and it decides to spend $1 million to fund ads supporting Sarah Palin for president, you can convert your shares to cash and buy shares of Apple Computer, which is running ads supporting President Obama’s reelection. The only time this voting with your feet argument doesn’t work is if the conduct causing you to sell also is the cause of a loss of firm value, thus making your shares worth less than they would have been. Given the trivial amounts firms spend or could possibly spend on politics, this is in the world of law-school hypotheticals. (ExxonMobil had political expenditures of about $500,000 in 2008, on profits of nearly $50 billion, or less than 0.001%. We will, of course, have to wait and see how much they spend next year, but, for the reasons I describe below, I’d be shocked if it was orders of magnitude more. Even if they spent 1000 times more, the expenditures would be only 1 percent of profits, something unlikely to move the stock price needle significantly.)

Business corporations exist to make money, and donations to candidates will be aimed in that direction. Insofar as they are, shareholders should be happy, and if they aren’t, they can exert influence by selling their shares. If instead, the claim is just corporate influence, as opposed to this agency costs story, then we are back to puzzles about individual contributions, donations by PACs, lobbyists, and so on. Corporations spend handsomely to lobby politicians, and shareholders don’t complain. Why? Because presumably the lobbying is about increasing firm value – that is, making money for shareholders. Why do we think other forms of political spending would be different?

Moreover, firms are very jealous and protective of their reputations. Do you think Nike is going to risk its brand by spending billions to elect politicians that may offend 49% of the population? And if they do, don’t we have faith in other constraints on such attempts at manipulation? Consumer boycotts, news reports, publicity by non-profits, and so on are likely to cause firms to be quite cautious in their attempts to buy politicians outright.

Finally there is the claim that business are creatures of the state and therefore the state should be able to tell them what to do. This certainly used to be the case, when state legislatures gave businesses permission to do only certain things in return for, well, political contributions and favors. But thankfully we’ve moved past this so-called concession theory. The concession theory is plainly inconsistent with the contractarian model of the firm, which treats corporate law as nothing more than a set of standard form contract terms provided by the state to facilitate private ordering. Limited liability can be created by contract as easily as it can by state diktat, and no matter what, if we have this view of government power, it has no end. Everything exists in some way because of government action or inaction, but that is not the basis of our government. We believe our rights exist not because of the government, but rather the other way around – the government exists to protect our preexisting rights.

Let me close with three final observations.

First, I think the case is interesting in how it reveals the schism on the Court (and in all of politics) between those with faith in experts and those with faith in markets. The campaign finance laws, and the dissenters’ views of elections law, are premised on a belief that we can design rules, no matter how layered and complex, that can be implemented by well-meaning bureaucrats with the result that we can take the money/corporate influence/corruption out of politics and finally create Democracy. These people are uncomfortable with uncertainty and unknown outcomes, and believe we should plan our way to some sort of utopia. The Citizens United majority, on the other hand, seems to have a distrust in experts and regulating natural things out of existence, preferring instead to rely on markets to work toward the optimal state of affairs. Of course, there is a tradeoff between a belief in centralized versus diffuse knowledge, and the question is how much of each. In short, I think the Citizens United majority looked at the elaborate regulatory regime, the relative ineptness of the Federal Election Commission bureaucrats charged with implementing it, and decided to err on the side of the marketplace of ideas.

Second, we should not forget the history of our regulation of corporate speech, which, by the way, survives Citizens United. The first law banning corporate contributions in federal political elections was based in part about the content of corporate speech. The Tillman Act, passed in 1907 is named for Senator Benjamin Ryan “Pitchfork Ben” Tillman from South Carolina, one of the most reprehensible public servants in our history. Tillman argued that, “The negro must remain subordinated or be exterminated,” and openly called for the murder of blacks in order to, “keep the white race at the top of the heap.” Tillman wanted to restrict corporate speech to reduce the influence of Northern corporations, which were opposed to segregation. We should not condemn restrictions of corporate speech for this reason, but we should remember that the motives behind allegedly idealistic legislation are not always what they seem. Sometimes corporations have good things to say; sometimes they have bad things to say. Telling them they cannot speak prevents us from hearing both during a crucial period before our elections.

Finally, some critics deride the case as “activist” and inconsistent with claims about the proper judicial role made by some of the justices in the majority. Of course the claim of activism is as silly as the claim of courts as simply calling balls and strikes, as the Chief Justice has argued. Some of the Court’s job is calling balls and strikes, but most is about policy. And, some of the best court decisions are countermajoritarian. Consider Meyer v. Nebraska (1923), which dealt with a state law banning foreign language instruction for young children, passed during the anti-German hysteria of World War I. The Nebraska Supreme Court had upheld the ban, writing, “The legislature had seen the baneful effects of permitting foreigners, who had taken residence in this country, to rear and educate their children in the language of their native land.” Oliver Wendell Holmes followed his views about judicial restraint and dissented. But the Court got it right. Activism was essential to preserve our liberty.

In Citizens United, the Court decided that we cannot trust the government to tell us what we should be hearing about our political system. In the view of this corporate law professor, this is a victory for our democracy.

Now we hear Iowa AG Miller pushing for the development of “the non-antitrust laws to deal with concentration.”  By which he means the Packers and Stockyards Act.  Maybe the DOJ has their Section 5 after all!

As if on cue, AG Miller trots out the pendulum story of antitrust enforcement–”how to bring the antitrust law back to the middle.”  This is not really an accurate description, unfortunately.  Even worse, it’s not an economically-sensible concept, and measuring the efficiency of antitrust enforcement by counting enforcement actions (or looking at rhetoric) is usually just flimsy cover for an essentially-political determination.  Combine that with Miller’s suggestion that the P&S Act’s “unfair practices” language should be enlisted in the service of dealing with concentration, and the risk of false positives is much magnified.  Which, of course, is a perfect lead-in for Christine Varney.Varney:

“Biotech:  Patents have been used to maintain or extend monopolies.  We will look very closely at any attempt to maintain or extend a monopoly through the patent laws.”

“What can antitrust really do?  When we see mergers, we look closely at the resulting concentration from a merger [she mentions the depradations of Dean Foods.  I really need to blog on that case . . . ]”

“We will continue to scrutinize every merger that comes before us.  Those mergers that don’t increase efficiency, we will stop.  They will not go through in this administration.”

“Big is not bad, but with big comes an awful lot of responsibility.”

“When you have large market share, you must engage in behavior that keeps markets open.  You cannot engage in conduct to maintain or extend your monopoly.” [No--there is no such thing as false positives].

“We have criminal authority, and it is illegal for competitors to sit down together to fix prices.  We will, wherever we find price fixing, prosecute that criminally.”

“Make sure everyone’s making a decent wage and consumers have food on the their tables that is safe and healthy at a decent price.”

Holder sums up by saying “our overriding concern at the DOJ is fairness.”  He’s probably telling the truth–and that’s the problem.  Varney finishes her remarks talking about decent wages and healthy food.  “Decent” and “healthy” are not antitrust-relevant concepts, and the antitrust laws don’t really contemplate their protection.

This is why this event is so problematic–and so politicized.  You can’t talk about farmers in the US without talking about these things, but you shouldn’t be talking about these things when talking about antitrust.  And when the AAG for antitrust suggests that concentration may threaten these attributes in a way that antitrust should address, alarm bells go off.  And although the courts should be a bulwark against this–and someone here even mentioned that the jurisprudence might present a problem for the effort–there are errors, and there are ways around the courts (Section 5 of the FTC Act, and now, apparently, the Packers and Stockyards Act).

Vilsack is introducing the event, and seems to be lamenting the extraordinary increase in productivity in the farm sector–by which I mean, he laments the loss of farm jobs even though output has increased by leaps and bounds.  That’s an unfortunate framing of the issue, but it suggests that economic efficiency won’t be at the core of the discussion.

Some choice quotes from Vilsack:

“Great efficiencies have led to consolidation.  They’ve also led to lower prices for consumers.  . . . Is marketplace providing a fair deal to ranchers and farmers.”

“We know seed companies control the lion’s share of certain commodities–does that help or hurt farmers?”

“The purpose of the workshops is to determine if the system is fair [not efficient, fair --ed.].”

And now Eric Holder:

“erosion of free competition is one of the greatest threats to our economy.”

“We’ve learned the hard way that reckless deregulation can foster conduct that is harmful [this is a paraphrase . . . ]”

“Enforcement of the antitrust laws does not fully address the concerns of farmers and other stakeholders.  [Which explains why this isn't an antitrust event . . . ]“

And now comments from the panel, moderated by Vilsack . . . I’ll focus on the most relevant (if any) . . .

Holder:

“commitment to enforcing the antitrust laws in the ag sector.”

Grassley:

refers to “concentration and lack of competition in agriculture”

“not enough competition and too much concentration [I'll assume that's not an economic conclusion]“

“bigger isn’t per se bad but it can lead to predatory practices and behavior.”

“I don’t want anything to be done that stifles innovation.”

Well, as the political speeches proceed, there’s not much to report.  I’ll post this and await Varney’s comments . . . .

US Secretary of Agriculture Tom Vilsack opened this session with a laundry list of statistics concerning rural America and the agriculture sector. The statistics focused on national concentration ratios and national averages, which are tremendously deceiving for understanding the agriculture sector.

For instance: the top four beef packing firms comprise 80% of the industry; the top four pork packers comprise 65% of that industry.  The percent of cattle and hogs sold in cash markets have dropped precipitously.  The majority (vast, in the case of hogs) are sold under some type of contractual arrangement. These are significant increases relative to 20 years ago.

However, these national statistics belie the fact that concentration at the local market level may not have changed as much as the national statistics suggest, as much of the consolidation at the national level has occurred as regional-based agribusinesses have merged or acquired businesses in other regions and lines of business.  While downstream firms would see fewer suppliers at the national scale, the number of firms buying from farmers in any given local market may not have changed so drastically.

Likewise, the statistics Secretary Vilsack offered about the portion of farm household income earned off the farm (suggesting an dependent vulnerability) is extremely misrepresentative.  As I noted in an earlier blog, the dependence of farming operations on off-farm income is tremendously skewed toward the small farms that produce a very small fraction of the value of agricultural production.

In this type of arena, it is too easy to fall into one of two traps: using national averages to describe a very heterogeneous industry, and using individual stories and anecdotes (on schedule later today) to draw broad inferences. Both fail to properly inform the issue.

Second, criticize the decision to spend money on global warming now. This could either be because other problems are more pressing, because raising energy prices may cause an economic downturn that causes significant human suffering, or because money spent today may turn out to be wasted either because our predictions about warming are incorrect or because future technologies will be able to solve any future problem much more cheaply. (This last criticism is a question of inter-generational bargaining — imagine someone from 100 years from now coming back to us today and we asked her whether we should spend the money now or instead us it to create wealth that future generations could use to solve the problem. The answer to the question is not at all obvious.)

While there is lots to be said, both pro and con, to these criticisms, I want to ask a different question:

What would we do if we knew observed increases in global temperatures were the result of natural causes, say solar or volcanic activity?

If we knew for certain that humans were not to blame, we would be focused on reducing the expected costs of any systematic change in global climate, instead of trying to stop it.  So what would we do? Would we try to develop technologies to stop the changes or would we focus more on trying to ameliorate the costs? If the former, what would those be and how much would they cost? Would we be more or less likely to engage in global cooperation and wealth sharing if we were not pointing fingers at each other about who was to blame?

These questions and others in the same vein are worth asking for two reasons. It may be that the costs of these strategies would be lower than the costs of trying to stop the problem in the first place. I’m not an expert or qualified to even make a guess, but it seems like a question worth asking. In addition, and more importantly, the questions about remediation and prevention raised above are the same questions we would ask if we accept there is insufficient political will to stop climate change. This seems like a fair description of today’s reality. Things may change — China and India may be convinced to focus more on the weather in 100 years than pulling hundreds of millions of their citizens out of poverty, and the US consumer may agree to be a lot poorer to leave a cooler planet to our great grandchildren — but I doubt it. And, until they do, we need to at least think about what we would do if we aren’t to blame.

Later this week Mike Sykuta and I will be winging our way to Iowa on behalf of the ICLE to attend the first of the year-long series of DOJ/USDA Workshops on Agriculture and Antitrust Enforcement Issues.  You can find the agenda for the first workshop, to be held Friday, March 12 in Ankeny, Iowa, here.  Intrepid reporters, we, our plan is to “live blog” the event for those of you unable to attend.  This first workshop, in addition to introducing the series, will focus on farming, which means seeds, which means the dispute between DuPont and Monsanto over licensing terms and everyone’s perennial favorite: industry concentration.

The agenda clearly reflects the highly-politicized nature of the issues under discussion, and, for example, a few news reports have suggested that the agenda has changed in response to pressure from Iowa Senator Tom Harkin.  Regardless, we expect a lively and interesting discussion.

For ease of reference all of our blogs from the workshop will be categorized under “ag/antitrust workshop,” and each post will have “DOJ/USDA Workshop” in the title.

TOTM is no stranger to the issues, and Mike and I have blogged a few times about the antitrust/licensing issues involved.  See:

Competition in Agriculture Redux (Manne, Kieff and Wright)

Competition in Agriculture (Sykuta)

Monsanto’s Licensing Case Victory (Manne)

Yet More Evidence Against the DOJ’s Antitrust Plantings (Sykuta)

The Seeds of an Antitrust Disaster (Manne)

DOJ Disconnect: Do We Really Need a Roadshow? (Sykuta)

Together with Scott Kieff and Joshua Wright, we also submitted a comment to the DOJ on the topic, “Comment on Intellectual Property, Concentration and the Limits of Antitrust in the Biotech Seed Industry,” available here (SSRN) or here (if you prefer to get it directly from the DOJ website).

The news has also been covering the seed industry antitrust issues, the DOJ/USDA workshops and agricultural antitrust issues more generally, and you can find a host of relevant news articles here.

We’re looking forward to the workshops and to your comments on the day’s events.