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http://ssrn.com/abstract=2090237
 
 

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Section 2 Enforcement and the Great Recession: Why Less (Enforcement) Might Mean More (GDP)


Alan J. Meese


William & Mary Law School

August 15, 2011

Fordham Law Review, Vol. 80, No. 4, 2012
William & Mary Law School Research Paper No. 09-221

Abstract:     
Section 2 of the Sherman Act bans monopolization of any part of interstate commerce. This essay draws on macroeconomic theory and the New Deal experience with partial repeal of the antitrust laws and cartelization of labor to examine the relationship between macroeconomic stability and the standards courts employ when evaluating Section 2 claims. In particular, the essay evaluates the contention by President Obama's Antitrust Division that purportedly lax enforcement of Section 2 by the Bush Administration helped bring about the recent Great Recession. The essay also evaluates the related claim that more aggressive enforcement focused on maximizing the welfare of purchasers in the monopolist's market at the expense of society’s overall economic welfare would help forestall and ameliorate economic downturns.

Shortly after President Obama took office, the Antitrust Division of the Department of Justice repudiated a 2008 report that had articulated the Bush Administration’s Section 2 enforcement policy. In so doing, Christine Varney, Assistant Attorney General in charge of the Antitrust Division, claimed that President Bush’s Section 2 policy was insufficiently interventionist and partly responsible for the Great Recession. In particular, Ms. Varney singled out the Bush Administration’s conclusion that conduct by a monopolist only violates Section 2 if it results in harm to consumers in the relevant market that is “disproportionate” to the magnitude of productive or other efficiencies. According to Ms. Varney, the Bush Administration’s “disproportionality” standard echoed the pro-cartel stance of early New Deal legislation, unfairly privileged producers over consumers and stultified economic recovery. A more interventionist and pro-consumer standard would, she said, combat the downturn and encourage recovery.

Both macroeconomic theory and empirical evidence confirm the Obama Administration's claim that the New Deal's cartelization of wages and prices exacerbated the Great Depression and concomitantly slowed recovery. During the early 1930s, the Roosevelt Administration imposed so-called “codes of fair competition,” which encouraged or mandated wage and price fixing, on over 500 American industries pursuant to the National Industrial Recovery Act (“NIRA”). After the Supreme Court unanimously voided the NIRA, Congress re-imposed the NIRA's wage cartel policy by passing the National Labor Relations Act (“NLRA”). Both the NIRA codes and NLRA wage-fixing interfered with the normal process of macroeconomic adjustment, whereby a downward shift in the aggregate demand schedule results in lower prices, a larger real money supply, and thus a rebound in demand which, given a vertical supply curve, restores output to its pre-recession levels. Price floors, of course, prevented prices from falling and thus dampened the response of aggregate demand, while wage floors increased real wages and the cost of production, thereby altering the shape of the aggregate supply curve and reducing aggregate output.

However, any analogy between New Deal wage and price cartels and the Bush Administration’s “disproportionality” standard is strained at best. Under long-standing Section 2 case law, a monopolist’s conduct that excludes rivals from the market is nonetheless lawful whenever such conduct constitutes “competition on the merits” or is otherwise necessary to effectuate such competition by producing significant efficiencies, regardless whether any resulting harm exceeds or greatly exceeds the conduct’s benefits. Thus, the Bush Administration’s “disproportionality” standard was in fact more interventionist than authorized by current law, in that it purported to condemn some conduct that is necessary to produce significant efficiencies and thus unobjectionable, simply because such conduct visits “disproportionate” harm on consumers in the relevant market. Of course, the standard suggested by the Obama Administration, focused on the welfare of consumers simpliciter, would be more interventionist still, banning, as it would, any conduct that raised consumer prices, regardless of the conduct’s overall efficiency impact.

Thus, conduct that survives scrutiny under the disproportionality test but fails a more intrusive consumer welfare test bears only passing resemblance to New Deal-style wage and price fixing. Unlike New Deal labor and producer cartels, which immunized conduct that unambiguously misallocated resources and destroyed wealth, the Bush Administration’s disproportionality standard shielded conduct that likely produces more wealth than it destroys and thus enhances national output in the long run. To be sure, a novel and more intrusive standard focused solely on the welfare of consumers would ban additional price-increasing conduct. However, such conduct would survive scrutiny under the disproportionality test because it produces significant efficiencies. Because the “consumer harm” resulting from such conduct is almost entirely distributional in nature, these efficiencies will generally outweigh, sometimes by a wide margin, the negative consequences of the misallocation of resources caused by any monopolistic output reduction. Moreover, such efficiencies free up productive resources that flow to other industries, thus enhancing output and lowering prices outside the monopolized market and increasing the nation’s potential output. Banning conduct that raises prices but would have survived the Bush Administration’s disproportionality test will thus have an ambiguous effect on the overall price level and reduce the nation’s GDP in the long run. Antitrust should leave macroeconomic stabilization to fiscal and monetary policy and focus on what it does best, namely, identifying and condemning conduct that on balance results in a misallocation of resources and thus reduction in total economic surplus. More intrusive regulation will likely mean less potential output and thus less GDP.

Number of Pages in PDF File: 47

Keywords: Monopolization, Monopoly, Section 2 of the Sherman Act, Consumer Welfare, Total Welfare, Obama Administration, National Industrial Recovery Act, National Labor Relations Act, New Deal, Great Depression, Great Recession, Aggregate Demand, Aggregate Supply, Potential Output

JEL Classification: D31, D42, D61, E12, E13, E22, E24, E32, E64, E65, K21, L12, L41, O40

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Date posted: June 25, 2012 ; Last revised: July 3, 2012

Suggested Citation

Meese, Alan J., Section 2 Enforcement and the Great Recession: Why Less (Enforcement) Might Mean More (GDP) (August 15, 2011). Fordham Law Review, Vol. 80, No. 4, 2012; William & Mary Law School Research Paper No. 09-221. Available at SSRN: http://ssrn.com/abstract=2090237

Contact Information

Alan J. Meese (Contact Author)
William & Mary Law School ( email )
South Henry Street
P.O. Box 8795
Williamsburg, VA 23187-8795
United States
757-221-1609 (Phone)
757-221-3261 (Fax)
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