We Need More, Smaller Companies

As improbable as it seems from our vantage point today, antitrust was a major topic of debate during the presidential election of 1912. All four candidates – William Howard Taft, the incumbent Republican president; Theodore Roosevelt, the former president and Progressive Party candidate; Woodrow Wilson, governor of New Jersey and the Democratic candidate; and labor leader Eugene Debs, the Populist Party’s candidate – agreed that something had to be done to curb big business. But they differed about what to do.

It was the Gilded Era of plutocrats and giant trusts that devoured or combined with other firms. The United States Steel Corporation, for example, had swallowed no less than 228 separate companies. Wilson, who was advised by Boston lawyer Louis D. Brandeis, thought behemoth corporations sapped the verve and élan of the nation. Every time an independent firm was acquired by a conglomerate, someone who was previously chief executive officer and captain of a ship became a mere member of the crew in a corporate bureaucracy. Wilson wanted to invigorate antitrust and restrain mergers and acquisitions.

Teddy Roosevelt was also advised by a progressive intellectual – in his case, Herbert Croly, a founder of the New Republic magazine. Roosevelt agreed that giant corporations and the enormous wealth they generated for the men who controlled them endangered the nation. But Roosevelt believed that giant corporations were inevitable in the industrial age. The nation needed big companies to do big things. Rather than stopping businesses from becoming big, Roosevelt wanted to regulate them to ensure that their power was not misused. He argued that the national government needed to be strong enough to keep big businesses on a leash. He criticized Wilson for being afraid of power – corporate or governmental.

Wilson argued that controlling big business through government regulation was a pipedream. Rather than permitting the government to control them, big businesses would control the government. “Don’t you see that [giant corporations] must capture the government, in order not to be restrained too much by it?” Wilson asked.

Wilson won the election, and two years later Congress enacted the Clayton and Federal Trade Commission Acts.

Over the next half century, the struggle between big business and those seeking to keep it in check ebbed and flowed. In the 1970s and 1980s, however, big business gained the upper hand. Its most potent weapon was ideological: it persuaded the antitrust fraternity – lawyers and economists in the regulatory agencies, Congress, courts, and universities – that antitrust should be exclusively concerned with consumer welfare. If two firms want to merge, economists predict whether the new entity will have enough market power to reduce total industry output and increase prices (which are two sides of the same coin). If the answer is yes, the merger should be prohibited; if the answer is no, the merger should be allowed. The social and political consequences of mergers are deemed too subjective to be taken into account.

We now find ourselves in a new Gilded Age. There is much concern about plutocracy, but we also need to also pay attention to the social and political consequences of mergers and acquisitions. During the past decade, for example, Monsanto purchased more than 30 companies, Oracle acquired more than 60 companies, and Google purchased more than 120 companies. In less than a decade beginning in the mid-1990s, more than 80 aerospace-defense firms merged into four dominant firms. Until relatively recently, there were a rich diversity of major book publishers in the United States. Now five conglomerates publish roughly two-thirds of all books in the country, and just one firm, Amazon, sells nearly more than 40% of all books in the country and 67% of all e-books.

Why should we care?

First, corporate size correlates with political power, and corporate giants use their political muscle to obtain all manner of government favors and subsidies. Social scientists call this rent-seeking; liberals call it corporate welfare; conservatives call it crony capitalism. But no matter what we call it, we are talking about a corporate parasitism that sucks blood from the nation and its taxpayers. When in 2003, for example, Congress included prescription drugs in the Medicare program, the big pharmaceutical companies successfully lobbied to prohibit Medicare from negotiating prices. Instead, Medicare must pay manufacturers 106% of what drug makers claim to be their average wholesale price. This costs American taxpayers tens of billions of dollars per year. According to one study, the annual cost of corporate welfare is equal to the total salaries earned in a two-week period by every worker in the country. Most of those benefits flow to the five hundred largest companies.

Second, mergers and acquisitions suppress research and development. Steve Jobs is reported to have said that every merger represents a failure of innovation. Rather than investing aggressively in research themselves, large corporations find it more efficient to buy smaller companies that create new products or processes.

Third, mergers and acquisitions damage local communities. When one company acquires another, it typically closes that firm’s headquarters and consolidates executive functions in its own headquarters. But executives are often leaders in civic institutions, and the home of the acquired firm loses not merely jobs but community leadership and philanthropy. One study found that the presence of corporate headquarters is associated with elite nonprofit cultural institutions in a community. Another study found that companies that are headquartered in a community contribute more to local charities than do comparable businesses headquartered elsewhere.

Fourth, there are too many false positives in merger analyses – that is, the predicted net benefits for consumers often are not realized. The real driving force behind many mergers is increased compensation and prestige for top executives. Even when a merger proposal is supported by elaborate analyses, predicted future “synergies” and “efficiencies” may be camouflage for what really matters: the personal interests of top executives.

Fifth and perhaps most important, citizens are better off with more, smaller companies than with fewer, larger firms. Citizens are not merely consumers. They are also workers who benefit from a diversity of employers. The British advertising company WPP, for example, has merged with or acquired more than 300 previously independent agencies, including venerable American firms such as J. Walter Thompson and Young & Rubicam. It used to be that someone who was unhappy at one firm could look elsewhere. But with fewer firms, personal freedom is diminished. An unhappy executive at WPP remarked: “Every place I wanted to work was already owned by WPP. And I realized that to move, I’d need the approval of some grand poobah.”

The debate between Wilson and Teddy Roosevelt was settled by the banking crisis of 2008. There were two roots of the crisis: a long period of aggressive bank mergers, and a successful lobbying campaign by big banks to repeal the Glass-Steagall Act, which had protected the nation since the Great Depression. The repeal allowed financial institutions to both engage in commercial banking with taxpayer-insured accounts and to invest in high-risk instruments such as subprime mortgages and derivatives. The aftermath of the crisis, however, is most telling. Why, in light of what we learned, did we not break up the big banks? Even Alan Greenspan, who previously favored deregulating the banks, concluded after the crisis that the big banks should be disaggregated. “If they are too big to fail, they are too big,” Greenspan said. Wilson and Brandeis would tell us we haven’t broken up the big financial institutions because their political power made that impossible.

Since the founding of the Republic, Americans have understood the dangers of consolidated power. Constitutional law is a key tool for limiting consolidated governmental power. Antitrust law was originally intended as a key tool for limiting consolidated commercial power. That is how it should be interpreted.

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This piece was written for the Los Angeles Daily Journal. It is adapted from my forthcoming article “The New Road to Serfdom: The Curse of Bigness and the Failure of the Antitrust,” which will be published by The University of Michigan Journal of Law Reform. A preliminary version of that article is available here.

 

Accrediting Agency Puts UNC on Probation

The agency that accredits the University of North Carolina at Chapel Hill has placed UNC on a twelve-month probation as a result of the scandal involving 3,100 students, most of them athletes, taking sham courses over a period of thirteen years. "It is the most serious sanction we have," the president of the accrediting agency said. The only more severe sanction would be revoking the University's accrediation, an action that terminates federal aid and generally results in a college's demise. A story about the action is available here.

Will the NCAA use the accrediting agency's action as an excuse to temper its own sanctions? This was a massive fraud scheme carried on over many years and involving athletes in most of the University's athletic programs. UNC's initial reaction to disclosure of the scheme was to engage in a cover-up and to personally attack a key whistleblower.

What was the main objective of the scheme? Clearly, it was intended to benefit the University's athletic programs by keeping athletes academically eligible. Anything less than the "death penalty" for the programs that UNC cared most about protecting -- men's basketball and football -- will be inadequate. The NCAA should require the termination of those programs for at least two or three years.

Far more than justice for UNC is at stake. This scandal should sound the tocin for system-wide reform. Colleges and universities are special institutions. They purport to teach values such as honesty and integrity. To teach them, they must exemplify them. But universities have been sucked into system that requires them to sell their souls for the money and visibility generated by men's football and basketball. Alumni and fans know the system is rotten to the core, but they pretend otherwise for the sake of entertainment and rah-rah goodtimes. The UNC scandal should galvanize college presidents, faculties, and trustees into declaring that the hypocricy has gone far enough and demand system-wide reform. The NCAA should do its damndest to turn this scandal into a catalyst for making that happen.

A Challenge to the ACC

Brian Kelly, head football coach at Notre Dame, recently said:

[A]ll of my football players are at-risk – all of them – really. Honestly, I don’t know that any of our players would get into school by themselves right now with the academic standards the way they are. Maybe one or two of our players that are on scholarship.

Kelly went on to say that “we have to provide all the resources necessary for them to succeed and don’t force them into finding shortcuts,” keeping in mind the great demands football makes on players’ time and the “incredibly competitive” nature of Notre Dame classrooms.

Kudos to Brian Kelly, who sounds as if he really wants to do the right thing.

But it will only be possible for Kelly to do the right thing if his football players have the capacity to do Notre Dame-level college work.

According to its website, 98% of Notre Dame’s undergraduates ranked in the top 10% of their high school class and the middle half of them had SAT scores between 1380 and 1510. I am not suggesting that athletes must have those credentials. Surely students with lower credentials can succeed at Notre Dame. But by the same token, not everyone can succeed at Notre Dame. All so-called at-risk students are not the same.

The NCAA has minimum admission credentials that member schools must follow, but those standards are absurdly low. For Division I, the NCAA employs a sliding scale – the higher one’s high school GPA, the lower his or her SAT score may be, and vice versa. For example, a kid in the middle of both scales needs a GPA of 2.75 and an SAT score of 720 to be accepted by an NCAA college.

Experienced educators have told me that an SAT of 1100 is considered the base for being able to do rigorous college work. Of course, there are kids who do poorly on standardized tests but have the capacity to do rigorous college work nonetheless. To demonstrate that, however, such students should have performed well in at least a moderately rigorous high school program.

How do we know if Notre Dame – and other colleges – are really doing the right thing? The yardstick the NCAA and colleges want us to use is graduation rates. But graduation rates, by themselves, are inadequate. If athletes are steered into sham classes – as was the case at the University of North Carolina – or into gut courses, graduation rates don’t mean a thing. In fact, very high graduation rates may just as easily reflect academic fraud or lack of meaningful standards as academic success.

As Jay M. Smith and Mary Willingham suggest in their important book, Cheated: The UNC Scandal, The Education of Athletes, and the Future of Big-Time College Sports (Potomac Books 2015), the best mechanism for ensuring academic integrity is transparency.

Smith and Willingham urge colleges to publish a list of courses that athletes take together with the average grade of all students in those courses. This would not violate students’ privacy rights. The particular courses students take are public information of a sort anyway – instructors and other students know who is sitting in their classrooms – and no one’s individual grades would be made public. But by comparing the GPAs in these courses with the average GPAs of other courses offered by the same academic departments (which should also be made public), we’d have a pretty good idea if athletes are being channeled into sham or gut courses.*      

Colleges should also publish the average admissions credentials for their athletic programs. Suppose, for example, Notre Dame reported that it accepted thirty new football players last year, that 80% of them ranked in the top half of their high school class, and that their average SAT score was 1180. I, for one, would feel that even though those credentials are well below those of all Notre Dame’s undergraduates, those kids, as a group, probably have the capacity to do Notre Dame-level work. On the other hand, if only 20% of the football players ranked in the top half of their high school class and their average SAT score was below 980, I would reach the opposite conclusion.

Publishing this information would be powerful. As Justice Louis D. Brandeis famously put it: “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”  

Who should mandate this kind of transparency? As a Syracuse alum, I’d like to see the athletic conference to which my alma mater belongs – the Atlantic Coast Conference (ACC) – do it. And there are good reasons for the ACC to take the lead in this kind of reform. The ACC includes academically prestigious schools such as Duke, Virginia, Wake Forest, and Georgia Tech. Moreover, the ACC includes two Jesuit institutions – Notre Dame and Boston College – for which morality has a special importance.

Would this place the ACC at a disadvantage vis-à-vis the major college conferences? Perhaps. But some athletes and their families might take special pride at going to an ACC school. Some fans might take a special interest in the ACC; after all, presumably they like college sports because they want to see real college students on the field and on the court. And if the ACC took the lead, maybe the Big Ten and other conferences would feel pressure to follow suit. Or again, maybe not. But sometimes you just have to do the right thing anyway.   

The ACC mission statement proclaims that the ACC strives to afford individuals the “equitable opportunity to pursue academic excellence.” The scandals at UNC and other schools demonstrate that it is not living up to that aspiration.

So how about it ACC college presidents? How about it ACC Commissioner John D. Swofford? Are your stated desires to do the right thing genuine or merely propaganda?

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* To be entirely clear, let me add this postscript. I am not suggesting that universities publish the courses taken by individual athletes but rather by athletes as a group. It would be perfectly fine to restrict the list to courses taken by, say, more than two athletes. We would therefore have a list of courses with a notation about how many total students took the course, how many were members of athletic programs, and the progams (e.g., football, wrestling, etc.) with which they were associated. No individuals would be identified.

 

image of edmund burkeEDMUND BURKE

 

Edmund Burke -- the great eighteenth century British statesman -- was both a liberal and a conservative.  For a relatively concise but complete profile of Burke, and an explanation of why by today's standards Burke may be considered either a liberal or a traditional conservative -- but emphatically not a libertarian, neoconservative, or social conservative -- read Professor Bogus' article Rescuing Burke, 72 Missouri Law Review 387 (2007).

Here are some quotes from Edmund Burke:

"We must all obey the great law of change.  It is the most powerful law of nature, and the means perhaps of its conservation."

"Society become a partnership not only between those who are living, but between those who are dead, and those who are to be born."

"The individual is foolish; the multitude, for the moment is foolish, when they act without deliberation; but the species is wise, and, when time is given to it, as a species it always acts right."

"Whatever each man can separately do, without trespassing upon others, he has a right to do for himself; and he a right to all which society, with all its combinations and skill and force, can do in his favor.  In this partnership all men have equal rights; but not to equal things."

 

EDMUND is a blog by Professor Carl T. Bogus.

 

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