The ghost of Louis Brandeis is back — and he’s angry. Brandeis, nominated to the Supreme Court in 1916 by Woodrow Wilson, was the leading opponent of corporate bigness in his era. As economic historian Thomas K. McCraw writes, “Brandeis decided that big business could become big only through illegitimate means. By his frequent references to the ‘curse of bigness,’ he meant that bigness itself was the mark of Cain, a sign of prior sinning.”
Today, many on the left want to revive Brandeis, arguing that corporations not only are bigger than ever but also have become sinners against the progressive goals of greater fairness and democracy. Yet as we write in our forthcoming book, Big Is Beautiful: Debunking the Mythology of Small Business, not only are the progressives’ claims about increasing economic concentration mostly in error, but large corporations are vastly more “progressive” than small businesses are. Bigger companies provide higher-wage jobs, better workplace benefits, lower prices, stronger environmental protection, and greater workplace diversity, safety, and stability, while engaging in less tax evasion. Regardless, neo-Brandeisians want to go back to an economy in which most Americans are employed in small, locally owned firms or worker co-ops, and they want to use aggressive antitrust enforcement to get there.
Despite cloaking itself in progressive goals, Brandeisianism began as a movement to protect the owners of small firms, such as banks and retailers, from rising competition from bigger, more efficient corporations. The protection would come from measures such as anti-chain-store laws and prohibitions on interstate banking. After World War II, when it became clear that large firms weren’t going anywhere, antitrust advocates shifted their focus to keeping firms from getting big in the first place; they developed an antitrust doctrine known as the “Harvard school,” which espoused a belief that industry structure (above all, companies’ market share) mechanistically determined firms’ conduct and performance. In other words, the greater a firm’s market share, the more it hurts competition. The Supreme Court reflected this thinking in the 1966 case United States v. Von’s Grocery Co., in which it rejected a merger that would have produced a firm controlling just 7.5 percent of the relevant market, citing a “threatening trend toward concentration.”
However, the neo-Brandeisian approach fell out of fashion in the 1970s, largely as a result of its clear overreach and the emergence of the rival “Chicago school,” which focused on efficiency concerns more than size per se. This basic approach has rightly dominated U.S. antitrust law since. It reflects the understanding that in some industries high levels of concentration can be pro-consumer and pro-growth, and that companies should not be punished for gaining market share as long as they did so legally.
But the last few years have seen a remarkable convergence of the Left, and increasingly across the political spectrum, on the belief that U.S. companies have become too big and too powerful, and it’s time for Washington to step in. This new Brandeisianism has found a home in the Democratic party, in part because it reinforces the political message that the party stands in solidarity with the working class and small-business owners by demonstrating its desire to break up big companies. The “Better Deal” agenda, a document released this summer to lay out a new Democratic economic platform, for example, promised that Democrats would “crack down on monopolies and the concentration of economic power that has led to higher prices for consumers, workers, and small business.”
The revival of Brandeisianism stems from progressive think tanks and scholars’ push, since the Great Recession, to return to a pre-1970s approach to antitrust enforcement, according to which it’s suspect for a firm to have even modest market share.
The Roosevelt Institute wants to “tame the corporate sector” by reviving “an open markets agenda for the 21st century.” The Center for American Progress asserts that “our economy needs a progressive competition policy.”
Today’s Brandeisians would have us believe that industry concentration has reached crisis proportions and that breaking up big companies should be the animating goal not just of antitrust policy but of U.S. economic policy generally. For them, there is almost no economic problem that cannot be laid at the feet of large corporations and solved by the cure-all of antitrust enforcement.
The Brandeisian revival is fundamentally motivated by progressives’ longstanding desire for a redistribution of income to counter what they claim is a rapid and corrosive growth of income inequality. The policies they seek to achieve that goal also include a higher minimum wage, universal health care, and higher taxes on the rich. But those policies require legislative approval, which is not likely in a Republican-controlled Congress. Progressives have realized that, of the steps a Democratic president can take on his or her own, a tough antitrust policy would have the greatest symbolic impact.
The new Brandeisians believe that even limited economic concentration hurts consumers because it reduces competition for both workers and customers, enabling higher profits by way of artificially low wages and high prices. The scholarly literature generally finds that bigger firms do enjoy higher profits. But the key question is whether these higher profits come from market share or from superior productivity and performance. A comprehensive review of the economic literature on this question conducted by academics David Szymanski, Sundar Bharadwaj, and P. Rajan Varadarajan found that firms with greater market share enjoy higher profits because they are more efficient than smaller firms — and that this efficiency benefits workers, consumers, and shareholders.
But this does not deter the neo-Brandeisians, who paint a dark picture in which most of what American consumers buy is controlled by rapacious corporations making what economists call supranormal profits. Liberal icon Robert Reich writes that “antitrust laws have been relaxed for corporations with significant market power, such as big food companies, cable companies facing little or no broadband competition, big airlines, and the largest Wall Street banks. As a result, Americans pay more for broadband Internet, food, airline tickets, and banking services than the citizens of any other advanced nation.”
But they don’t. According to the OECD, U.S. broadband prices are higher than those of some countries but lower than those of at least eight other OECD nations, including the Netherlands and France — no mean feat, given that the U.S. is the second-least densely populated nation in the group, which makes deploying broadband wires expensive. The United States does not even make the list of the ten countries with the highest food costs. According to the 2017 Kiwi Aviation Cost Index, of 80 nations, the United States has the 30th-cheapest air travel. And the consulting firm Oxera finds that of eleven major developed nations, U.S. banking costs for consumers are the second-lowest.
Still, the new Brandeisians attack big corporations for rising inequality. The Center for American Progress writes: “A renewed focus on antitrust enforcement could make a significant contribution toward” reducing inequality. Reich writes that increased economic concentration has “resulted in higher corporate profits, higher returns for shareholders, and higher pay for top corporate executives and Wall Street bankers — and lower pay and higher prices for most other Americans.”
This is not true. According to the U.S. Bureau of Labor Statistics, not only did establishments with more than 500 workers pay their workers 77 percent more than establishments with fewer than 50 workers, but from 2004 to 2016, inflation-adjusted compensation for their workers grew by $3.88 per hour compared with just $1.45 for establishments with fewer than 50 workers.
Nonetheless, neo-Brandeisians argue that breaking up big firms would reduce profits, leading to higher wages or lower prices. So how much would the average American benefit if the corporate-profit rate (net income as a share of total receipts) were the same today as in the glory days of the 1950s and ’60s, when antitrust enforcement was much tougher and wage growth much higher?
In fact, returning to the profit rate of that era would make American workers worse off, at least in the short term, since corporate profits were higher then. But for the sake of argument, assume that neo-Brandeisians get a president whose Justice Department is able to fragment the largest corporations into medium-sized businesses and that this reduces corporate profits 25 percent. If all that money goes toward lowering prices for the bottom 90 percent of earners, the median income will increase a whopping — get ready for it — 3.1 percent, or $1,750 per household.
But second-order effects would quickly more than negate this one-time gain. This is because on average small and medium-sized firms are less productive than large ones (that’s why they pay their workers less). If the U.S. had the same firm-size structure as Canada, where on average businesses are smaller and less productive (which is one big reason Canada is less wealthy than the U.S.), U.S. per capita GDP would decrease by 3.4 percent. Lower profits would also mean reduced investment in research and development and machinery and equipment, which would in turn reduce future productivity and wage growth.
On average, large firms are more productive, sell at lower prices, and pay higher wages than small firms. As much as neo-Brandeisians want to argue the opposite, facts are stubborn. But in any case, their claims that smaller firms would be better for consumers is a ruse, because for many, the real goal is reducing the power of corporations. Roosevelt Institute scholar Sabeel Rahman admits as much when he writes, “If consumer prices are our only concern, it is hard to see how Amazon, Comcast, and companies such as Uber need regulation.”
Liberal activist and scholar Zephyr Teachout explains one key motivation: “For the last 40 years, we have seen unprecedented levels of concentration of power. . . . Democrats can’t change things if they don’t take on concentrated power and corruption.” Just as many Republicans seek to weaken political opponents by reducing the role of unions, the Brandeisian Democrats believe that it will be easier to achieve their political goals if corporate America is broken up. But it is a fantasy to believe that if the largest 500 American corporations were each split into two, the resulting 1,000 corporations’ lobbying prowess would be any less. They would have the same amount of funding, if not more, available to pay for lobbyists and PAC contributions. Moreover, most of the top ten spenders on lobbying from 2008 to 2016 were not individual corporations but trade associations, some of them, like the National Association of Realtors, representing predominantly small firms. So it’s not as if breaking up large firms could cut the power of business in Washington.
In short, there is no evidence that American firms are too big or too concentrated today and need to be whittled down to size by the neo-Brandeisian ax of antitrust enforcement. In the lion’s share of U.S. industries, to the extent firms are big, most bring real value to the economy, including its workers and consumers. The best thing the Left could do to help workers and consumers would be to accept large corporations as a group for the economically and technologically progressive force most are, while putting in place policies to increase living standards for most Americans, including policies to spur greater productivity growth, which is the major long-term source of increased per capita incomes. Restoring Brandeis is a sure path to regress, not progress.
– Mr. Atkinson is the president of the Information Technology and Innovation Foundation. Mr. Lind is the author of Land of Promise: An Economic History of the United States.