Adventurous Regulation and Pragmatic Innovation Policy Don’t Mix
Yesterday’s New York Times described a novel strategy by Biden Administration competition enforcers: losing in court. In short, David McCabe’s article for the Times reports that agencies intend to bring risky cases to “stretch” the law in the hopes that losses will justify expanding their regulatory mandates. Unfortunately, this kind of activism isn’t a good recipe for innovation-friendly policy, as it creates business uncertainty and raises costs for consumers.
How did we get here? For the past few decades, it has been generally accepted that antitrust enforcement is one of multiple tools in the toolbox for fostering a competitive, market-based economy. The yardstick for whether antitrust is succeeding has been consumers’ welfare. We measure that welfare based on fairly objective metrics like prices, output, quality, and innovation. This longstanding consensus has recently been challenged by activists urging a more ideological approach to antitrust enforcement, however, who want consumers’ welfare to share the spotlight with other goals like industrial policy.
As McCabe’s article points out, the FTC’s current attempt to block Meta’s acquisition of virtual reality fitness app maker Within appears to exemplify such activism. FTC Chair Khan reportedly overruled staff’s recommendation against challenging the deal, and the agency’s case went forward. “Given how novel the FTC’s argument is, it’s unclear if the agency will succeed in blocking Meta’s deal. But the agency may already see the case as a win”, McCabe writes, since “any courtroom losses would signal to Congress that lawmakers needed to update antitrust laws to better suit the modern economy.”
There are significant consequences for innovation if a company’s litigation exposure depends not on what existing law is, but rather what regulators desire it to become. First, using an agency’s litigation docket for government relations purposes has an opportunity cost. For every activist case an agency loses in the name of generating talking points for Congressional outreach, a more obvious but less theatrical enforcement action might have been brought. And when these talking points come at the expense of M&A activity, the long-term impact will be to deter investment in startups.
Second, regulatory activism creates uncertainty, and gives advantages to larger companies that can “lawyer up” in the face of regulatory uncertainty. Smaller companies cannot field enormous compliance teams, and must anticipate future regulators’ whims and avoid ventures that could implicate them. As the compliance burdens and risks around particular domains increase, SMEs exit, leaving larger firms that can more efficiently meet new compliance burdens. This becomes a moat. In the financial services context, for example, the number of full-service banks dropped nearly 30% in the decade after Dodd-Frank. Experts attribute this consolidation to the need to spread out the significant compliance costs over a larger amount of revenue.
The FTC’s new policy statement on Section 5 of the FTC Act further underscores its intention to experiment with unproven new theories of harm. The guidance indicates that the agency can challenge conduct in its incipiency, even when there is no demonstrated harm to competition or anticompetitive intent, and suggest that it may impose liability on companies even where there are procompetitive justifications for business models that benefit consumers.
This would not be the first time that an overly adventurous FTC has sought broader control over the economy through novel theories and activist interpretation of its powers. Unfortunately, previous FTC efforts to over-extend the agency’s antitrust and consumer protection authority led not only to uncertainty for businesses and the economy, but even Congressional inquiries into the agency’s utility, which questioned its self-conferred “National Nanny” role. Rather than protecting consumers, the FTC’s current effort risks deterring healthy M&A activity, and creating greater compliance burdens for business, the cost of which would ultimately be borne by consumers.
Through its antitrust and consumer protection missions, the FTC’s role is to protect America’s consumers and not to create or apply industrial policy. It is critical for U.S. consumers, innovation, and the economy that FTC antitrust enforcement experiments do not unduly raise the costs of doing business in America.
