Germán Gutiérrez and Thomas Philippon are economists and professors at New York University’s Leonard N. Stern School of Business.
Like many foreigners visiting the United States in the late 1990s and early 2000s, we were pleasantly surprised to discover that nearly everything — from laptops to Internet to airplane tickets — was cheaper. Where we grew up, in Mexico and France, it cost at least 30 percent more to fly or connect to the Internet.
This was no accident. For decades, the United States had been a leader in deregulation and breaking up monopolies. The Airline Deregulation Act of 1978 phased out government control over airline prices and routes, which encouraged new airlines to enter the market. Since then, prices have nearly halved and the number of passenger miles flown have steadily increased. Similarly, the 1984 breakup of AT&T boosted competition and significantly drove down prices for long-distance phone calls. By the 1990s, a dial-up Internet connection was practically free. At the time, the United States was a great place to be a middle-class consumer.
But starting around 2000, U.S. markets began to lose their competitive edge. Now, Internet access and monthly cellphone plans are much cheaper in Europe than in America, as are flights. Even in Mexico, mobile data plans are better priced than in the United States.
Deliberate policy choices explain these changes. European countries created the single market, which took effect in 1993, and deregulated their domestic markets. Today, most European Union countries score better than the United States in enacting policies that make industries more competitive. Not surprisingly, antitrust enforcement remains active in Europe, with two recent cases against Google resulting in over $7.7 billion in fines. European markets are also less concentrated than U.S. markets.
Mexico, too, embarked on a much-needed telecom reform in 2013 to spur competition, and the price of mobile broadband subsequently plummeted. High data plans, for example, cost $100 in 2013 but were $25 in 2016. In the United States, comparable plans are on average over $50.
Meanwhile in the United States, deregulation and antitrust efforts have nearly ground to a halt. The United States has not completed a major reform to the goods and services market since 1996, and as a result, its industries have grown increasingly concentrated. Complex regulations and state licensing have proliferated at a breathtaking pace, hurting small businesses. Since 2000, the Department of Justice has brought only a single monopolization case, compared to more than 60 in the 1970s. And as economist John Kwoka shows, in the 2000s, merger enforcement actions by the Federal Trade Commission (FTC) dropped to essentially zero in industries with five or more competitors.
Moreover, when suing conglomerates for violating antitrust laws, the government agencies have a tough time winning cases, as evidenced by the recent AT&T-Time Warner merger and a Supreme Court decision that allowed American Express to bar businesses from steering customers toward credit cards with lower merchant fees, even though businesses argued that this “gag order” would drive up consumer prices.
As we argued in a recent paper, this trend reflects the growing influence of corporate interests in the United States. We found that lobbying and campaign finance expenditures lead to more leniency in antitrust enforcement and to more regulations that favor existing corporations. Other studies offer similar conclusions. One study found that firms with political connections sometimes receive beneficial outcomes in government reviews of mergers and acquisitions. And as scholar Christine Mahoney revealed, corporations are far more likely to achieve their lobbying goals in the United States than in the E.U., while citizen groups are less likely to succeed.
European institutions, on the other hand, are set up as independent agencies and are often insulated from corporate interests. The recent cases against Google are a good case in point. In the United States, although the Federal Trade Commission considered a similar case in 2012, it decided against pursuing it. Perhaps the commission found no violation. Or perhaps it worried about losing in the courts. Or perhaps Google’s political clout ended up pressuring officials to drop the case.
If the United States is to better serve its middle class, then it must refresh its faith in free markets, bearing in mind three key principles. First, Washington must remember that antitrust and deregulation used to be a bipartisan affair: It was Democratic President Jimmy Carter who oversaw airline deregulation and Republican President Ronald Reagan, the break-up of AT&T.
Second, policymakers need to innovate. Regulation needs to evolve and adapt to new technologies. Nobel Prize winner Jean Tirole argues that the old antitrust rulebook is no longer useful for regulating Internet platforms. America’s harsh response to the European privacy law, known as the General Data Protection Regulation, for example, demonstrates its disregard for innovative regulation. Data is a critical resource and U.S. regulators need to think deeply and creatively about who owns it. Once the leader in public policy innovation, the United States has become a champion of the status quo.
Third, the courts need to hold regulators to high but not impossible standards. A court-based system for processing anti-trust cases has many benefits, but the continuous ratcheting up of the standard of proof is overburdening regulators. For example, in 2003, the Department of Justice sued Oracle for acquiring PeopleSoft, a niche data software, reasoning that the merger reduced competition. But the court rejected the DOJ’s evidence, which relied on customer testimony, saying it was insufficient to prove that the merger would narrow the market. As the scholars Jonathan Baker and Carl Shapiro argued, the court had relied on faulty presumptions about the DOJ’s evidence, which not only put the burden of proof on the government but also set too high a standard for the government to meet. The solution, as the two scholars propose, is to ensure that both government agencies and courts consider evidence and presumptions that enable the government to shift the burden of proof onto the merging companies instead.
Free markets are supposed to discipline private companies, but today, many private companies have grown so dominant that they can get away with bad service, high prices and deficient privacy safeguards. The courts should hold regulators to high standards, but as in the overly laborious burden of proof required in the Oracle case, perfect can be the enemy of good.
Only two decades ago, the United States was effectively the land of free markets and a leader in deregulation and antitrust policy. If America wants to lead once more in this realm, it must remember its own history and relearn the lessons it successfully taught the rest of the world.