Monday, February 09, 2009

Antitrust Enforcement Can Help Solve Economic Crisis: FTC Commissioner

This posting was written by John W. Arden.

Addressing the apparent conflict between attempting to stimulate the economy and enforcing the antitrust and consumer protection laws, FTC Commissioner J. Thomas Rosch told a bar group that “[a]ntitrust enforcement is part of the solution to the economic crisis, rather than the problem.”

In remarks made January 29 at the New York Bar Association Annual Dinner, Commissioner Rosch criticized the Chicago School of economic theory, which has “predominantly influenced antitrust for the past four-plus decades”; outlined how antitrust can be applied to the current financial crisis; and discussed how consumer protection may be affected by the financial crisis.

Chicago School “Dead”?

Rosch declared “the orthodox and unvarnished Chicago School of economic theory is on life support, if it is not dead.” The underlying principle that markets essentially take care of themselves without the need for regulation has been called into question by the recent crisis, perhaps replaced by the Keynesian view that “there can be situations where it is necessary for governments to stimulate growth and improve stability in the private sector.”

“Alan Greenspan and former Secretary of the Treasury Henry Paulson both fully subscribed to the Chicago School theory before the crisis. But in his testimony before Congress last October, Alan Greenspan recanted his faith in the market and the rationality of business people; he testified that more government regulation of the financial section was both necessary and proper. Although Secretary Paulson was not so specific about market imperfections and irrational behavior, he has intervened repeatedly to try to deal with perceived imperfections in that market . . . In short, two of my fellow Republicans whose opinions I respect a great deal have declared emphatically by their words and deeds that in the real world—as opposed to the worlds of political and economic theory—markets are not perfect; that imperfect markets do not always correct themselves; and that business people do not always behave rationally.”

Merger Review

Rosch took issue with predictions made by antitrust attorney David Boies last November (see Trade Regulation Talk, November 12, 2008) that the antitrust agencies would not block any mergers and acquisitions while the country is embroiled in the financial crisis, since the government would have to worry more about saving jobs than about anticompetitive mergers and other practices.

“Contrary to Mr. Boies, I think antitrust laxity during an economic recession can result in a deepening of economic contraction. Competition spurs innovation, productivity, growth and cost effectiveness. Increased prices are almost always (if not always) accompanied by reduced output. Thus, reduced antitrust enforcement could result in increased prices and reduced output, and in turn more unemployment. Put differently, if anticompetitive mergers and other business practices are permitted during an economic crisis, it is likely to cause reduced innovation and output, and consumers will lose the benefits of lower prices. Thus, I would suggest that competition laws need to be implemented at least as strictly during a time of economic crisis as they are otherwise.”

Boies may be right in predicting that political and societal forces may pressure the government to either block or allow a merger that will prevent job losses or plant closures, Rosch said. He cited the United Kingdom’s alteration of its regulatory framework for financial sector mergers to enable public interest concerns to “trump” competition review.

“I hope that the Administration here resists the temptation to emulate the UK in this respect,” he said. “I think it will: if the antitrust agencies take into consideration the financial condition of the merged entity, that is likely to help solve the current financial crisis.”

Unilateral Conduct, Cartel Activity

The FTC and Antitrust Division should be willing to challenge any unilateral conduct when there is direct evidence of predation or a purpose and effect to “eliminate or cripple rivals whose competition could operate to constrain a firm with monopoly power from exercising that power.” Rosch observed.

Extra vigilance may be needed to protect consumers and others from cartel activity, which may increase during a recession or depression.

Consumer Protection

Consumers struggling with financial difficulties are even more vulnerable to scams involving mortgage foreclosure rescue, debt settlement offers, credit repair counseling, debt collection, and subprime lending.

In addition to pursuing enforcement and regulatory efforts to protect consumers from these practices, the FTC continues to educate consumers about the potential harms from unfair and deceptive acts in these areas, according to the Commissioner.

“These are uncertain times, and many of the predictions I’ve made are uncertain,” Rosch concluded. “But one thing is certain, it is that the FTC has much to learn from the financial crisis. And, if we don’t learn from it, we are foolish.”

The Commissioner’s written remarks—“Implications of the Financial Meltdown for the FTC”—appear here on the FTC website.

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