The consolidation also gave them more bargaining power over hospitals for determining reimbursements. In response, hospitals began merging into giant hospital systems, capable of getting higher reimbursements from insurers. The result was a ratcheting up of health care costs, along with fewer choices. In 1992, the average-sized American city had four hospitals; by 2014, it was served by just two.
The consolidation on both sides gave hospitals and insurers together even greater clout. By the time Congress considered the Affordable Care Act, the two groups had enough leverage in Washington to ensure that the legislation would boost the profits of both the big insurers and the giant hospital systems. They made their support of the proposed legislation contingent on a requirement that everyone buy insurance and not get a “public option” to choose Medicare-like public insurance over private insurance. Their winnings have amounted to hundreds of billions of dollars. Directly or indirectly, the rest of us pay.
Why isn’t antitrust law as effective at curbing the new monopolists as it was the older forms of monopoly? Partly because antitrust enforcement has lost sight of one of its original goals: preventing large aggregations of economic power from gaining too much political influence.
Markets need rules for determining the degree to which economic power can be concentrated without damaging the system. But there’s no obvious “correct” answer. It depends on weighing efficiencies that come from large-scale enterprises against the power of such enterprises to raise prices; balancing innovations enabled by common platforms and standards against their capacity to squelch innovation by others; and determining an appropriate allocation of economic power among various groups.
It also depends on something even more basic: the effects of concentrated economic power on elected officials and on the prosecutors, attorneys general, and judges they appoint or confirm and on how these people, in turn, affect the above-mentioned decisions about the rules of the market.
We do not talk about this any longer but the political influence of concentrated economic power was a central concern in the late nineteenth century when Congress enacted the nation’s first antitrust law. As I have noted, the field of economics was then called “political economy,” and inordinate power could undermine both. This was the era of the robber barons—including Andrew Carnegie, John D. Rockefeller, and Cornelius Vanderbilt—whose steel mills, oil rigs and refineries, and railroads laid the foundations of America’s industrial might. They also squeezed out rivals who threatened their dominant positions, and they ran roughshod over democracy. They ran their own slates for office and brazenly bribed public officials, even sending lackeys with sacks of money to be placed on the desks of pliant legislators. “What do I care about the law?” Vanderbilt infamously growled. “Hain’t I got the power?” Forty-eight of the seventy-three men who held cabinet posts between 1868 and 1896 either lobbied for railroads, served railroad clients, sat on railroad boards, or had relatives who were connected to the railroads.
The public grew deeply concerned about the economic and political power of their combinations, then called “trusts.” “The enterprises of the country are aggregating vast corporate combinations of unexampled capital, boldly marching, not for economic conquests only, but for political power,” Edward G. Ryan, the chief justice of Wisconsin’s Supreme Court, warned the graduating class of the state university in 1873. “The question will arise, and arise in your day, though perhaps not fully in mine, ‘Which shall rule—wealth or man; which shall lead—money or intellect; who shall fill public stations—educated and patriotic free men, or the feudal serfs of corporate capital?’ ”
The twin dangers of unchecked economic and political power were clearly connected in the public’s mind. Wall Street supplied the glue. Populist reformer Mary Lease, speaking in 1890 on behalf of the Farmers’ Alliance, charged, “Wall Street owns the country. It is no longer a government of the people, by the people and for the people, but a government of Wall Street, by Wall Street and for Wall Street.” Antitrust was envisioned as a means of breaking the diabolical links between the economic and political power of the new combinations. “Liberty produces wealth, and wealth destroys liberty,” wrote Henry Demarest Lloyd in his acclaimed Wealth Against Commonwealth (1894). “The flames of the new economic evolution run around us, and we turn to find that competition has killed competition, that corporations are grown greater than the State and that the naked issue of our time is with property becoming master, instead of servant.”
Republican senator John Sherman of Ohio did not distinguish between economic and political power when, in 1890, he urged his congressional colleagues to act against the centralized industrial powers that threatened America. Each form of power was viewed as indistinguishable from the other. “If we will not endure a king as a political power,” Sherman thundered, “we should not endure a king over the production, transportation, and sale of any of the necessaries of life.”
With Americans demanding action, Sherman’s Antitrust Act passed the Senate 52 to 1, moved quickly through the House without dissent, and was signed into law by President Benjamin Harrison on July 2, 1890. Perversely, however, in its early years the act was used as a weapon against organized labor; conservative prosecutors and jurists interpreted the Sherman Act to bar unions, as I will show. But by the Progressive Era, commencing in 1901, presidents were willing to use the Sherman Act as Congress had intended, to break the connection between economic and political power. President Teddy Roosevelt—castigating the “malefactors of great wealth,” who were “equally careless of the working men, whom they oppress, and of the State, whose existence they imperil”—used the act against E. H. Harriman’s giant Northern Securities Company, which had been cobbled together to dominate transportation in the Northwest. As Roosevelt later recounted, the lawsuit “served notice on everybody that it was going to be the Government, and not the Harrimans, who governed these United States.” Antitrust lawsuits were also brought against DuPont and the American Tobacco Company. President William Howard Taft broke up Rockefeller’s sprawling Standard Oil empire in 1911. President Woodrow Wilson explained the dangerous connection between excessive economic and political power in similar terms, in his 1913 book, The New Freedom: “I do not expect to see monopoly restrain itself. If there are men in this country big enough to own the government of the United States, they are going to own it.”
In subsequent years, however, antitrust lost its central concern with political power. Republican presidents of the 1920s were not especially worried about economic combinations large enough to own the government of the United States, because they depended on the beneficence of America’s largest corporations. After the Great Crash of 1929, even Franklin D. Roosevelt encouraged businesses to cooperate rather than compete (until 1938, when he put Thurman Arnold in charge of the antitrust division of the Justice Department and Arnold let loose with a buzz saw of antitrust suits). After World War II, antitrust focused almost exclusively on consumer welfare—that is, preventing large companies or combinations from gaining the market power to raise prices excessively. The giant AT&T Bell System monopoly was broken up in 1984, not because of its formidable political and legal clout but because it was thought to undermine competition and keep prices too high.
We are now in a new gilded age of wealth and power similar to the first Gilded Age, when the nation’s antitrust laws were enacted. The political effects of concentrated economic power are no less important now than they were then, and the failure of modern antitrust to address them is surely related to the exercise of that power itself. In this new gilded age, we should remind ourselves of a central guiding purpose of America’s original antitrust law and use it no less boldly.
6
The New Contracts
Contracts are a third building block of capitalism. They are agreements between buyers and sellers to do or provide something in exchange for something else. If property and market power lie at the heart of capitalism, contracts are its lifeblood
—the means by which trades are made and enforced. But as with property and market power, contracts do not just happen. Although reputations for trustworthiness are important, promises are not kept automatically, and contracts are not self-enforcing. Any system of exchange requires rules about what can be bought and sold, what circumstances constitute fraud or coercion, and what happens when parties cannot fulfill what they have promised. In a democracy, these rules emerge from legislatures, agencies, and courts.
Here again, the debate over the “free market” versus government disguises how these rules are made and who has the most influence over making them. The age-old debate thereby prevents us from seeing and debating two central issues: whom the current rules actually serve, and what the rules ought to be in order to serve the rest of us. The underlying rule-making process is especially difficult to see today because so many of the things that are bought and sold are intangible, such as a television series streamed over the Internet or shares in a bond fund. New technologies have also created services that entail vexing moral questions, such as the renting out of a womb for surrogate pregnancy. And the technologies also connect buyers and sellers on different sides of the planet who will never meet one another. These changes have, in turn, created a host of new questions about what should be traded. The complexity and abundance of information also, paradoxically, makes it harder to define fraud or coercion or to determine who is at fault when a contract is breached and fairly allocate the losses. This has opened the way for political influence over all aspects of the new contracts.
Social norms play some role. For example, advances in medicine, online communication, and transportation have made it easier to buy and sell human organs, blood, surrogate pregnancies, and sex. That doesn’t mean such sales are legal, however. Sales of organs are banned in the United States. (The ban dates back to 1984, when Virginia physician Dr. H. Barry Jacobs announced a plan to purchase kidneys, mainly from poor people eager to sell one of their own, and market them to whoever could afford to buy them. The American public was so horrified that Congress stopped Dr. Jacobs in his tracks. Several other nations have similar bans.) On the other hand, you can sell your blood in the United States, as well as in Mexico, Thailand, Ukraine, and India. But you can’t in Canada and Britain. You can rent out your womb for money in most American states (in 2014, the going rate for gestational surrogacy was $20,000 to $30,000), but not in most of Europe (Britain allows surrogates to be paid expenses, but no more).
In 1999, Sweden decided that selling sex was no longer illegal and stopped treating prostitutes as criminals. But the country made it illegal to pay for sex. Swedish police found that the number of women trafficked into Sweden thereafter dropped sharply, as compared with the many thousands trafficked into neighboring Denmark, where paying for sex remained legal.
Where trades in body parts, blood, wombs, or sex are banned, it is often due to concerns that poor people will otherwise be exploited by the wealthier in ways that are degrading and dangerous. Rich people rarely sell their kidneys or blood, and affluent women usually don’t rent out their wombs or become prostitutes. Studies find that most prostitutes come from poor families and are pushed into the trade in their early teens by adult men. Vulnerability also figures in. Even when it comes to legal drugs, America worries about sales to buyers who might not be able to make informed decisions about them. In 2012, the pharmaceutical giant GlaxoSmithKline settled with the Justice Department by paying a $3 billion fine and agreeing to stop promoting to children under eighteen an antidepressant approved only for adults; pushing two other antidepressants for unapproved purposes, including remedying sexual dysfunction; and, to further boost sales of prescription drugs, showering doctors with gifts, consulting contracts, speaking fees, even tickets to sporting events.
Buried within the rules about what can be traded and what cannot are also assumptions reflecting the status and power of different groups in society. Powder cocaine, for example, is the drug of choice for many in the elite, while crack cocaine is used by the poor. They are two forms of the same prohibited drug, but before 2010, those who sold or purchased crack cocaine faced sentences one hundred times longer than those caught using the powdered form. This was part of the reason African Americans served as much time in prison for nonviolent drug offenses as whites did for violent offenses. In 2010, Congress enacted the Fair Sentencing Act, reducing the sentencing disparity between crack and powder cocaine to eighteen to one.
Harm to society as a whole is another consideration. Although you cannot easily buy or sell guns in Canada or most of Europe, America’s National Rifle Association has gone to great lengths to ensure Americans the “right” to buy even rapid-fire machine guns. (It has stopped short of surface-to-air missiles or atomic bombs, however.)
Similarly, you are not allowed to buy and sell votes in the United States, although anyone even vaguely familiar with how political campaigns are financed might harbor some doubts about the nation’s commitment to this principle. Before the twentieth century, contracts to lobby government officials were not enforceable on the grounds that lobbying was contrary to public policy. In the 1874 case Trist v. Child, for example, Trist, a former diplomat, had hired Child to lobby Congress to authorize payment of money Trist claimed the government owed him and then refused to pay Child when Congress finally came through. Child sued. The Supreme Court declined to enforce the contract between Trist and Child, reasoning that such contracts could lead to corruption. “If any of the great corporations of the country were to hire adventurers who make market of themselves in this way, to procure the passage of a general law with a view to the promotion of their private interests,” the court argued, “the moral sense of every right-minded man would instinctively denounce the employer and the employed as steeped in corruption, and the employment as infamous.” That logic obviously failed to impress the Supreme Court eighty-six years later when it decided that corporations are people under the First Amendment, entitled to hire as many lobbyist adventurers as they can possibly afford.
It is true that if a society bans certain agreements between willing parties, they might still occur in black markets. Prohibition of alcohol was a notorious failure in the 1920s, just as bans on the purchase and sale of marijuana are today. Black markets are inherently risky and dangerous since illegal contracts can only be enforced through violence or the threat of violence (which is an argument for regulating sales of things that attract eager buyers but pose minimal harm to the public, rather than trying to prevent them altogether).
Meanwhile, technology is continuously creating opportunities for new products and services, raising additional questions about what can be sold. Indentured servitude is banned, but what about students seeking to sell shares of their future earnings in exchange for money up front to pay for their college tuitions? Price gouging is also prohibited, but what about Uber drivers who, during bad storms, charge up to eight times the normal fare? High-frequency stock trading now accounts for more than half the trading volume on public exchanges, but is it fair for such traders to profit from receiving data on stock trades a fraction of a second before everyone else receives it, by devising ultrafast communications systems unavailable to most investors?
Increasingly, political power is determining what can be traded and how. For example, a practice presumably banned in the Securities Exchange Act of 1934 is the buying and selling of stocks based on insider information available to people who receive data likely to affect share price before other investors get the same data. (The act didn’t specifically ban the practice but has been interpreted by the courts as if it did.) That’s because trading on confidential information gives the insiders an advantage and rigs the stock market to the benefit of anyone they tip off, a fraud perpetrated on other investors. Over the years, commissioners at the SEC, federal prosecutors, and judges have defined illegal insider traders to include any investor who knows the information he or she relies on was obtained from someone who violated a duty to keep the in
formation confidential in return for a personal benefit.
But in a world where information spreads almost instantaneously, and in which large amounts of money can be made getting such information a fraction of a second before everyone else, insider trading is difficult to police, let alone define. In 2014, after hedge fund Level Global Investors made $54 million by shorting Dell Computer stock based on insider information from a Dell employee, Global Investors’ co-founder Anthony Chiasson claimed he didn’t know where the tip came from or whether the leaker benefitted from the leak, and that few traders on Wall Street ever know where the inside tips they use come from because confidential information is, according to Chiasson’s lawyer, the “coin of the realm in securities markets.” Chiasson was convicted nonetheless. But in December 2014, the court of appeals overturned Chiasson’s conviction, ruling that Chiasson was so far removed from the leak that he could not possibly have known the source of the information or whether the tipper received a “substantial benefit” in return. The court thereby made official what had been the unofficial law on the Street: It’s all about who you know. If, for example, the CEO of a company gives his golfing buddy a confidential tip about what the company is about to do, and the buddy tells a hedge-fund manager who then makes a fortune off that confidential information, the winnings are perfectly legal.
Because confidential information is the “coin of the realm” on Wall Street, it’s likely that a significant portion of what is earned on the Street is based on information unavailable to average investors. Insiders fix the market for their own benefit. What’s the chance that Congress will change the law to rein in insider trading? Almost zero as long as the Street continues to provide a significant share of the campaign contributions that members of Congress and the president rely on to get elected. In Europe, by contrast, trading on confidential information is illegal. If a trader knows or has reason to know that specific information is not yet public, he may not use it.
Saving Capitalism Page 6