Corporate Accountability: Addressing Concentrated Economic Power

(Draft)

For more information:

Charlie Cray
Center for Corporate Policy
[email protected]
(202) 387-8030

Three quarters of Americans believe that big corporations have “gained too much power over too many aspects of American life.”(1) It's time for congress to address the problems associated with corporate size and concentration, starting with the failure of antitrust enforcement.

Although economic size and corporate conglomerate structures in specific industrial sectors (e.g. media) have received significant attention before specific regulatory agencies (e.g. FCC), the question of overall concentration and structure of the economy has received only marginal scrutiny by Congress in the past decade.

Early 20th century antitrust laws are still being used to deal with the challenges of the concentrated global economy of the 21st century. The prevailing response to this among antitrust enforcers over the last quarter century has been to shunt aside the antitrust framework altogether, and dismiss out of hand the political wisdom that created the U.S. antitrust regime. Even the "aggressive" antitrust enforcement of the Clinton administration took on only a single significant case (Microsoft) and otherwise stood watch over the greatest concentration of corporate power in history -- asking for only a few tiny local market divestitures as the price of major merger approval.

The accelerated concentration of corporate power is reflected in the relatively small number of major media conglomerates, defense contractors, etc. Another symptom is the precipitous rise in the value of corporate mergers and acquisitions over the past 25 years – amounting to a total $1.4 trillion during the 1980s, exploding to $11 trillion during the 1990s, and continuing at an even greater frenetic pace of $7.6 trillion during 2000-2003 (including $3.4 trillion in 2000 alone) — adding up to a combined total of $20 trillion.(2)

Congress has not conducted a comprehensive examination of concentrated economic power in decades, especially as it affects smaller businesses, consumers and the health of our political democracy. The most recent congressional initiative in the area of antitrust (still ongoing) is the Antitrust Modernization Commission, which was established in 2002 and is expected to issue its recommendations around May 2007.(3) Since the AMC as a whole is dominated by corporate interest (no representatives from labor, consumer, or progressive economic groups were appointed to the AMC, though a few have submitted comments)(4,5), it has taken up few of the issues we would want to see raised; other discussions the committee has held appear to be framed to further undermine the existing system of regulations, including the abandonment of criminal antitrust penalties and the preemption of state enforcement powers.

While it will be important to be on guard against efforts to propel the AMC's recommendations into legislation, given the shift in the new Congress, it is time to push for a progressive review of corporate concentration and antitrust policy, i.e. take stock of the degree of corporate concentration and how it affects our economy (including small and medium-sized businesses), as well as our political democracy -- in order to assess how antitrust principles can be updated, revised and deployed to address the present challenges.

The idea would be to make this the subject of a series of hearings, or perhaps even more promisingly, a congressionally created, high-profile commission.

Such a commission or series of hearings might consider a series of topics we wish to see addressed, including:

* Weak enforcement by the Justice Department’s Antitrust Division.(6)

* The extent and impacts of concentration in a variety of key sectors: media, defense, energy, healthcare/pharmaceuticals, agriculture, automobiles among others. Each of the major industrial sectors presents its own special concerns and remedies. Media concentration, for example, presents familiar problems of limited voices in public debate and questions of constitutional theory (First Amendment).(7) In energy, there is strong evidence consolidation among Big Oil refineries has facilitated price gouging(8); an important additional question is the extent to which industry concentration is deterring or blocking development of alternative energy technologies. Agricultural concentration is pushing family farmers off the land.(9) Wal-Mart and other giant retailers have squeezed out smaller, independent retailers and seriously restricted their suppliers.

* The impact of deregulation on corporate concentration. Financial and other areas of deregulation have led to massive industry consolidation, with painful impacts on consumers and little to show in the way of productivity or efficient allocation of capital. This is particularly true of telecommunications, energy(10) and banking – sectors where major financial fraud has been rampant in recent years. Many of the largest mergers have unraveled because management subsequently determined that certain “efficiencies of scale” were not realized. Similar and likely worse harms are just now unfolding with deregulation of electric utilities. A lot of these deals are motivated by investment brokers and attorneys interested in enormous fees, who in turn continue pressing the ideological arguments behind deregulation.(11)

* How expanded intellectual property protections are fostering monopoly and undermining competition. This is a huge problem with Microsoft and software development, where progress has been visibly deterred by the monopoly and costs are outrageously high. But it extends to many other fields as well, including pharmaceuticals/healthcare inventions, where patent thickets are interfering with research and development -- even in the eyes of Big Pharma. The inappropriate extension of copyright is crowding out the public domain and exerting many pernicious effects.

* Private enforcement regimes. The Chamber of Commerce is complaining that private enforcement of antitrust should be restricted; but in fact the problem is the opposite: with aggressive deregulation and weakened governmental authorities, there is a strong argument for more private enforcement. Instead, we have experienced over a decades-long push for “tort reform” laws that hamper the rights of victimized consumers and investors. These tort “reforms” were a major factor leading to Enron and the other scandals.(12)

* The use of joint ventures, cross-sector ownership and other means to circumvent traditional restraints on concentration.(13)

* Wal-Mart and its economy-wide effects.(14)

* International consolidation. There is an issue of international cartels, the single area where the US has done a decent enforcement job. But there is, beyond this, the broader issue of global consolidation and global oligopoly.(15)

* The link between CEO pay and monopolism. As a congressional committee pointed out in 1941, "Of foremost interest is the intimate relation of the distribution of income to monopoly and the effectiveness of competition in general. The distribution of income in recent times reflects the existing monopolistic elements in the economy and, through the transmission of wealth derived from earlier monopolistic situations, the elements of industrial monopoly that have prevailed in the past. Historically, public indignation concerning the large fortunes and hence large incomes which had as their source either a strategic control of an industry, a particular product, or a natural resource, provided much of the impetus for the enactment and enforcement of laws designed to curb monopolistic practices. From what is known of the rise of great fortunes and incomes, very many, possibly the majority, resulted from the exploitation of circumstances in which strong elements of monopoly were present."(16)

The TNEC Example

A congressional investigation that would address this broad a set of issues is not without precedent. In the late 1930s, the Congress established the Temporary National Economic Committee as a joint Congressional-Executive branch committee, composed of members of both houses of Congress and representatives of several Executive departments and commissions.(17) The committee’s purpose was to study monopoly and concentration of economic power, and make recommendations for legislation.(18) The TNEC held hearings and commissioned monographs on a number of key industrial sectors, including petroleum, steel, the construction industry, investment banking, life insurance, industrial insurance, the milk industry, and the poultry industry. It also addressed specific topics, including patent policies, taxation, consumer problems, monopolistic practices, cartels, economic power and political pressures, technology and industry concentration and the war’s effect on prices.

Before the TNEC was allowed to expire in 1941 it submitted a final report to Congress, which concluded that “the regulatory powers of agencies like the Federal Trade Commission and the Securities and Exchange Commission are not sufficient to prevent the evils which arise from loose State charters,” and suggested the nation needed “a national charter system for all national corporations. … We cannot hope to stop the process of concentration if we are willing to allow the states to create the agencies through and by which the concentration has been brought about.”(19)

As the final report of the TNEC explained:

“The principal instrument of the concentration of economic power and wealth has been the corporate charter with unlimited powers – charters which afforded a detour around every principle of fiduciary responsibility; charters which permitted promoters and managers to use the property of others for their own enrichment to the detriment of the real owners; charter which made possible the violation of law without personal liability; charters which omitted every safeguard of individual and public welfare which common sense and experience alike have taught as are necessary….Among those to suffer the worst effects of the failure to require national standards [i.e. federal charters] for national corporations are, it is almost possible to say, the businessmen of the Nation who have been taught to fear a national charter law. Because the local corporation and the small corporation have no protection against the unfair and improper activity of the large corporation, little business has seen a constantly increasing portion of the Nation’s business pass into the hands of big business. Throughout the 50-year period during which the Government establishment at Washington has steadily grown little businessmen have always been told by the opponents of a charter system that they, the little ones, would be the victims of Government interference and control, if a national charter system were adopted. The system was not adopted and the little businessman finds himself compelled to deals with both the bureaucrat and the monopolist.”(20)

The TNEC’s first recommendation was to establish “national standards for national corporations” (i.e. federal charters). It urged Congress enact legislation to that effect. But World War II distracted from efforts to mount such a proposal.

Conclusion:

The economy and its structure have changed considerably since the TNEC concluded its work. A similar undertaking today would likely involve a different set of questions and key sectors for close investigation. It would be presumptuous to assume that today’s committee would endorse federal chartering as a means of addressing concentrated corporate power and its impact on the public interest, but certainly it should be an option worth examination. One thing is clear, however, which is that the current system of antitrust enforcement has many weaknesses, and antitrust laws fail to take into consideration many of the concerns of labor, consumers, communities and others. The committee (with the help of outside experts) should be encouraged to engage in a bold examination of these issues, and directed to spell out a variety of options for legislation.

For over 25 years, conservative economic, legal and regulatory ideology has stifled any meaningful discussion about how government can control giant corporations. Indeed, the prevailing opinion has been that corporations are private entities, over which the government has no legitimate authority. This predominant strain of thought is deeply embedded in the law, and even more deeply rooted in the culture. But it must be recognized that the privileges bestowed on businesses that seek the advantages of operating through the corporate form (e.g. limited liability) are extended by We the People through our government. Thus, it is our right -- indeed our duty – to demand that Congress take a fresh look at these questions.

In short, corporate consolidation is one of the defining features of our political economy (as it happens, 2006 is on target to set a new record for biggest merger & acquisition activity), but almost wholly unremarked upon in the media or the political process. The impacts tie directly to -- and to a considerable extent account for -- people's everyday complaints and concerns (oil price gouging, high price of drugs, Wal-Mart economy), but this has to be articulated. And if it's not, it is less than likely that we can muster the necessary support for fundamental solutions.

REFERENCES:

(1) See Business Week, “Too Much Corporate Power?” September 11, 2000.
(2) James Brock, “Merger Mania and Its Discontents: The Price of Corporate Consolidation,” Multinational Monitor, July/August 2005.
(3) The AMC was created under the "21st Century Department of Justice Appropriations Authorization Act," (Pub. L. No. 107-273, 116 Stat. 1758 (2002), also known as the Antitrust Modernization Commission Act of 2002, whose principle sponsor was Rep. Sensenbrenner (R-WI), former chair of the antitrust subcommittee of the House Committee on the Judiciary. To view the commission’s charter and the topics addressed at specific meetings, see their web site.
(4) CCP has a list of commission members and their corporate connections.
(5) See the American Antitrust Institute.
(6) Jason McLure, “Has the Antitrust Division Lost its Nerve?” Legal Times, January 11, 2007.
(7) Brennan Center for Justice (NYU Law): “Reclaiming the First Amendment: Constitutional Theories of Media Reform,” (legal symposium), 1/19/07.
(8) Tyson Slocum, Public Citizen, “Consolidation in the Energy Industry: Raising Prices at the Pump?”(PDF) (testimony before Senate Judiciary Committee, 2/1/06).
(9) Organization for Competitive Markets testimony before the Senate Judiciary committee, subcommittee on antitrust, competition and consumer rights, July 23, 2003.
(10) Public Citizen, Analysis of energy company mergers following the repeal of PUHCA.
(11) Walter Adams and James Brock, The Bigness Complex: Industry, Labor, and Government in the American Economy (2nd ed.).
(12) Prof. John C. Coffee, Jr., “Understanding Enron: It’s About the Gatekeepers, Stupid”.
(13) Robert Weissman, "Divide and Conquer: Restraining Vertical Integration and Cross Industry Ownership," Multinational Monitor, Oct.Nov. 2002.
(14) Barry Lynn, “Wal-Mart: Breaking the Chain,” Harpers, July 2006.
(15) The United Nations Commission on Trade and Development annual World Investment Reports occasionally delve into this area. See e.g. WIR 1997 – “Transnational Corporations, Market Structure and Competition Policy,” and WIR 1995, “Transnational Corporations and Competitiveness.” Available at www.unctad.org
(16) Temporary National Economic Committee, Monograph No. 4, Concentration and Composition of Individual Incomes, 1918-1937.
(17) Joint resolution of Congress, June 16, 1938 (52 Stat. 705)
(18) Antitrust doctrine holds “monopoly” and “monopolization” to be separate concepts in the law. See CRS Report 20241, “Monopoly and Monopolization – Fundamental But Separate Concepts in U.S. Antitrust Law,” May 23, 2005
(19) Final Report and Recommendations of the Temporary National Economic Committee, presented by Senator O’Mahoney to the Congress, March 31, 1941.
(20) Ibid.