If federal regulators allow the proposed merger between chemical giants Dow and DuPont, it will underscore the fact that economic efficiency is not a high priority for either of the two major political parties right now. Just as with similar anti-competitive mergers in airlines, health care technology, insurance, beer brewing and many other sectors, the Dow-DuPont merger would hurt consumers in the form of higher prices.
This would not be readily apparent to many households, as much of the output of both companies is in the form of “intermediate goods,” manufactured products that are sold as an input to other companies that produce “final goods” in the form they ultimately are used. Higher input prices from less competition in the chemical industry would become incorporated in higher prices of other products.
It doesn’t stop here, however. Regardless of what specific products they buy, all households are hurt when monopolies are not controlled, because monopolized markets inherently use economic resources such as land, labor and capital less efficiently than competitive markets. For the same use of resources, society gets fewer goods and services to meet people’s needs and wants. From the point of view of most economists, inefficiency, rather than unfairness, is the primary harm from monopolized markets.
That was not necessarily evident 140 years ago when the abusive actions of monopolies became a public issue.
It was the unfairness of the naked use of monopoly railroad power to raise prices on passengers and shippers that caused anger. Waste of resources was not visible nor even an issue.
Theory eventually caught up with reality, and economists found that when a monopolist cuts production to hike prices — as almost always happens — the resulting price-quantity combination, while maximizing profits, inherently causes economic waste. Prudent regulation can — though not always — restore output and price to levels that involve less abuse of consumers and simultaneously reduce economic waste.
During Teddy Roosevelt’s administration 110 year ago, just as now, the Republican Party was split between those who were pro-business and those who were pro-markets. The two are not the same. Teddy was pro-markets and made his reputation as a “trust buster.” His predecessor William McKinley and his protege and successor, William Howard Taft, both were, in contrast, pro-business without giving much thought to well-functioning markets.
The same choice faces both parties today. Few pro-market, pro-economic efficiency Republicans of TR’s orientation remain. Most in the GOP are opposed to “excessive regulation” of business, but don’t have coherent plans for what should be done when both economic theory and decades of economic history provide examples of how unregulated markets harm society as a whole.
Democrats of the Bernie Sanders persuasion often are anti-business and scornful of the whole idea of markets as a tool for efficiently allocating resources. Others, in the Hillary Clinton mainstream, talk a good line on protecting families from the excess power of big business but don’t do much in terms of specifics, like calling for a return to stricter enforcement of anti-trust.
In fairness to Sanders, he is the only candidate who probably would be active in opposing mergers of already-large firms. But his underlying scorn for markets themselves would obviate the creative use of market mechanisms to deal with problems like pollution or worker safety.
My conservative colleagues within economics will protest that our nation’s experience with regulation of monopolies had many pernicious side effects, including also reducing economic efficiency. They certainly are right.
The first federal anti-monopoly policy was the regulation of railroad rates with the Interstate Commerce Act in 1887. By the time 90 years had passed, it was clear that regulation of transportation pricing under this act had created railroad, trucking and airline companies that were often inefficient or non-innovative and sometimes unprofitable. One of the best things the Carter administration did in the 1970s was to end most such rate regulation. No administration of either party since then has come anywhere as close in improving efficiency.
Similarly, anti-merger zealotry reached ridiculous levels five decades after the 1914 Clayton Act patched holes in the original Sherman Antitrust Act of 1890. During the Eisenhower administration, the Justice Department once put the kibosh on a merger that would have given the resulting firm a mere 4 percent of the market.
That there were excesses in merger regulation 50 years ago does not, however, mean the economy is not harmed when Anheuser-Busch InBev dominates brewing on three continents, when GE can buy key competing electric machinery divisions away from France’s Alstom, when Heinz and Kraft become one or when Cigna and Anthem together insure one-sixth of the American public, with market share significantly higher in some key markets. And it doesn’t mean regulators should ignore the Dow-DuPont red flags.
There have been successive waves of mergers over the past 40 years. Those have not combined to boost our nation’s economy. Surprisingly, much research shows they have not done a great deal to improve returns to stockholders. Most of the gain has flowed to investment banks engineering the mergers and acquisitions and to key top management at the time of the deal. There always is much fervent rhetoric about how the new company will be able to do this or that so much better. Research shows it seldom turns out that way.
Any modern U.S. administration has the statutory authority to challenge mergers or acquisitions that will reduce competition. And corporations have legal grounds to oppose such challenges. Federal courts, influenced by “law and economics” arguments from 1980 on and reflecting conservative appointments in two Bush administrations, are less sympathetic to Justice Department arguments than they were in the 1930s-’60s. So the legal playing field is not rigged to one side or the other. But nothing occurs if the Justice Department does not choose to put the ball into play. A big chemical merger is a good occasion to do so.
Economist and writer Edward Lotterman can be reached at email@example.com