In the last two weeks, there has been a wave of new mergers that many see as a sign of renewed confidence in the markets. As the recession is receding, we see the economy returning. Antitrust history, though, tells us that mergers among competitors can lead to increased concentration in the market and, ultimately, to higher prices for consumers. This can result directly, as we’ve seen in the past, in huge consolidations that have resulted in only a few, large, firms within a market.
Consequently, we have been confronted with a crisis on such a scale that past President George W. Bush had to ask: “How have we come to a point where we can’t let an institution fail without affecting the whole economy?”
Having taught and written on antitrust for over 30 years, as well as practicing in the field, I believe the answer is that we got to this dilemma of “too big to fail” because we were not enforcing the antitrust laws and other regulatory oversights.
The failure of the government to be the watchdog against increased concentration, leading to higher prices and monopolistic conduct, is the result of a failure adequately to regulate mergers and other concentrations of the market when they would increase prices and hurt consumer purchasing power. I’m not alone in making this observation. In his recent book, “A Failure of Capitalism,” Judge Richard Posner, an outspoken defender of markets and laissez-faire economics, concludes that the current financial crisis was “abetted by government inaction,” during severe market failure when the government failed “to take timely and coherent measures to avoid or lessen the recession.”
The perils of too much deregulation
It is now painfully clear that federal deregulation went too far. We failed to heed the lesson that the lack of regulatory and antitrust enforcement permits greater concentration of power in the hands of a few.
Consumers, as a result, pay higher prices for goods and services. At its worst, we come face-to-face with our present economic landscape where taxpayers (the real stakeholders) have to bail out corporations and banks because they have been deemed “too big to fail.”
This is not to suggest that under the present circumstances we should expect or fear high prices in the short term, or that all mergers are bad. The recent merger ($68 billion stock and cash deal) between the pharmaceutical giants Pfizer and Wyeth was correctly approved both by the Federal Trade Commission and the European Commission because it was found to be competitive. This is an excellent example of appropriate regulatory oversight. Nor should we worry that prices soon will increase substantially since demand for goods and services is still low and because debt remains high.
In short, the “new normal” in the global economy should not permit any firm or bank to get “too big to fail.” A more measured, balanced regulatory role, along with vigilant government officials, can prevent more bailouts in the future. Next steps should include:
1) increased antitrust enforcement of current laws on mergers and monopoly conduct;
2) greater regulatory oversight of the banking and finance industry and credit markets;
3) reconsideration of the repeal of the Glass-Steagall Act (separating commercial and investment banking) ; and
4) the promotion and harmonization of international laws and norms on competition policy.
Traditional capitalism recognized instability in markets and always permitted corrections in the market to be made through market failures and exits and appropriate intervention by government oversight. We should return to those policies and practices.
E. Thomas Sullivan is senior vice president for academic affairs and provost, and Julius E. Davis Chair in Law, at the University of Minnesota. He is the co-author, with Professors Herbert Hovencamp and Howard Shelanksi, of “Antitrust Law, Policy, and Procedure” (6th ed., 2009) and co-author, with Professor Jeffrey Harrison, of “Understanding Antitrust and Its Economic Implications” (5th ed., 2009).