On the Tragedy of Paul Volcker


Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to do a quick recap of Paul Volcker’s life. Volcker, who died yesterday, was one of the most important men in finance in the last fifty years.

Volcker was an honest man, in many ways a great man, but one whose actions nonetheless helped shatter the American middle class. This wasn’t his intent, but it was what he accidentally wrought. Volcker’s life is a tragedy, not for him, but for the rest of us.

This picture is from the Edmond J. Safra Center for Ethics at Harvard.

The Volcker Rule

In 2009, when the world was falling apart, a lot of people were asking new President Barack Obama to turn to Paul Volcker, the tall and prestigious former central banker whose reputation was of near God-like stature. Obama did, asking Volcker for advice. But Larry Summers, key advisor to Obama, sabotaged the relationship. Volcker encouraged Obama to stop banks from gambling with internal hedge funds, but Summers wanted banks to keep gambling with internal hedge funds. Summers won the bureaucratic fight.

Volcker’s titanic reputation was by then decades old. But so too was Volcker pursuing honesty in finance, and getting pushed out because of it. In 1986, Ronald Reagan essentially fired Volcker from his position as the head of the Federal Reserve because Paul Volcker was trying to crack down on the junk-bond fueled mergers craze that was clearly corrupting America’s savings and loan banks. Felix Rohatyn, a Democratic fixer and Lazard investment banker, pleaded with the Republicans, “if we sacrifice Paul Volcker for the junk-bond mania, we will clearly show the world that we’ve lost any sense of financial responsibility.”

Here’s a story from 1986, at the height of the frenzy.

Volcker lost the battle at the Fed, and ultimately Alan Greenspan, who was on the payroll of one of the largest corrupt savings and loan banks, took over. Volcker, in pursuing financial rectitude, had no allies except the ‘respect’ of the financial world, which, as it turns out, isn’t worth much at all. And the reason, ironically, is because Volcker killed his greatest would-be allies.

I first ran into Volcker’s career while researching Penn Central, the train system that went bankrupt in 1970 in the greatest then-collapse in American history. It was like the Enron of its time. The Nixon administration tasked the conservative Volcker with overseeing the fiasco, and he was a fairly honest broker. He tried, not very hard, to get a bailout, but when Congressman Wright Patman said no, that was that.

In 1979 Jimmy Carter nominated Volcker to be the head of the Fed. Carter's advisor warned him that Volcker was the "candidate of Wall Street." In an era of red-hot inflation, Volcker's goal was to cut the growth of prices, with the ultimate end of keeping the dollar strong globally. He had popular backing, Americans saw inflation as the most pressing economic problem. Volcker went straight at the auto sector, the unionized pace setting industry which set the informal wage growth patterns of the entire country since the 1950s.

His goal was to crush wages, straight out. To give you a sense of how strongly he felt about this goal, consider that during this period, from the late 1970s to the mid-1980s, Volcker walked around with a card of union wages in his pocket to remind himself that his goal was to crush the middle class. Volcker even angered Reagan officials by keeping interest rates too high for too long. When they complained, he would pull “out his card on union wages” and note that inflation would not come down permanently until labor “got the message and surrendered.” Volcker said that the prosperity of the 1950s and 1960s was a "hall of mirrors" and that the "standard of living of the average American must decline."

Volcker was a deeply conservative, but not corrupt, official. I think the speech that best exemplifies how he thought was one he gave in 1981 before the Economic Club of New York, lauding the bankruptcy and turnaround of the city.

Five years ago, when I last addressed the Economic Club, the preoccupation of the day was the acute financial distress of this great City and State. That big black headline in the Daily News—"Ford to New York: Drop Dead"—was not quite accurate. But in its bold and brazen way, it did carry an essential message. Any lasting solution to our economic problems would have to begin, and end at home.

A month or so ago, I was struck by another headline, this time in a Wall Street Journal editorial: "The Supply Side Saves New York." Somehow, in five years, New York had become an example for the rest of the country to follow.”

Volcker, in other words, was an ardent fan of austerity. And in his speech, he explicitly noted that New York City had no printing press to get out of the fiscal jam it had been in. That was, as Volcker put it, “fortunate.” Instead, the city had to slash expenditures, particularly on the poor. Volcker hoped that the America would take this lesson to heart nationally, and since he ran the printing press, that’s what he made sure happened. He also believed strongly in slashing taxes, government spending, and in deregulation, as he said to businessmen in Kansas City that year.

Volcker raised interest rates radically, crushing small businesses, farms, banks, and credit unions. To many of his fans, and even his opponents, this was simply what had to be done to get inflation out of the system. But there was a brief experiment, if forgotten, experiment in trying a different path, In the spring of 1980, Jimmy Carter encouraged Volcker not to raise interest rates, but to place “credit controls” onto consumer borrowing. Credit controls are direct public rules on specific lending institutions that make it more or less expensive to lend or borrow, and were a major mechanism to keep inflation out of the system during World War Two and the Korean War. And the Fed had the authority to make it more expensive for banks and financial institutions to issue credit cards and lend money to consumers.

Volcker used these tools incredibly poor, clumsily even, with some suspecting he was intending to sabotage the use of regulatory tools he didn’t like. Inflation collapsed, as did interest rates and the economy slid rapidly. Within a few months, Volcker and the bankers got rid of credit controls. Inflation and interest rates jumped right back up, and Volcker was able to discredit credit controls. He then inflicted massive pain on the middle class instead of the banking system by using interest rates and monetary policy, instead of explicitly telling big banks to stop lending.

At the same time as Volcker was destroying unions, small banks, small farms, and small businesses, he was structuring the Too Big to Fail model of finance. In 1980, Nelson and Bunker Hunt, two oil billionaire heirs, tried to corner the silver market in league with Arab interests. Volcker organized a bailout. By 1980, Wall Street had gotten the message. Economist Albert Wojnilower explained, “It is now everywhere taken for granted that no monetary authority will allow any key financial actor to fail."

In the middle of the 1980s, Volcker’s strategy looked like a success. Inflation was gone, the economy was growing, technology seemed to be restructuring society, and the workforce had largely been de-unionized. But there was a something of a mirage, as a bubble in financial leverage through savings and loan banks and junk bonds emerged. Volcker tried to crack down on this bubble, to block the use of junk bonds for certain kinds of seedy transactions. He knew a scumbag when he saw one, and the junk bond peddlers and M&A artists were scum. But by then, his allies against financial corruption, notably the small banks, small business, and unions, were dead or dying. So it was Paul Volcker and all his vaunted respect, versus an army on Wall Street.

There was no contest. The predatory bankers won, as they did again in 2009.

Towards the end of his life, Volcker railed against the corruption he saw everywhere. But he never connected the dots between his own actions destroying public institutions and the inability to constrain the financial corruption he despised. Many people in finance have fond memories of an incorruptible Paul Volcker standing up against financial corruption and reigning in inflation. Which is true. But Volcker really wasn't on the side of democracy, and that's why he oversaw nothing but decline.

I ran into Paul Volcker a few years ago at a conference when I was a Democratic Congressional staffer. He harangued me and said 'why are you Democrats so weak?' I wish I had responded, 'because you killed the unions.'

And that is the tragedy of Paul Volcker.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy.

Matt Stoller

P.S. It’s short notice, but I’ll be giving a book talk today at 5pm on the impeachment of Andrew Mellon.

Public Citizen
1600 20th St., NW, Washington, DC 20009
Please RSVP to Aileen Walsh at awalsh@citizen.org.

Why Taxpayers Pay McKinsey $3M a Year for a Recent College Graduate Contractor


Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

A few days ago, Ian MacDougall came out with a New York Times/ProPublica piece on how consulting giant McKinsey structured Trump immigration policy. Lots of people cover immigration. I’m going to discuss why the government buys overpriced services from McKinsey. (Spoiler: It goes back to, of course, Bill Clinton.)

First, I’ll be doing a book talk in D.C. on the evening of Dec 10th and one in New York on the evening of Dec 18th for my book Goliath: The 100-Year War Between Monopoly Power and Democracy. There’s info below my signature with details. Business Insider named Goliath one of the best books of the year on how we can rethink capitalism. If you have thoughts on the book, as always, let me know.

In case you’re in the listening to podcast mode, I was recently on Lapham’s Quarterly podcast and Pitchfork Economics with Nick Hanauer to talk monopoly and Goliath.

And now…

As regular readers of BIG know, my basic theory of the world is that most of our political economy problems are caused by these guys being in charge of everything.

The Point of McKinsey: Charging $3 Million a Year for the Work of a 23-Year Old

McKinsey has a lot of high-flying rhetoric about strategy, sustainability, and social justice. The company ostensibly pursues intellectual and business excellence, while also using its people skills to help Syrian refugees. That’s nice.

But let’s start with what McKinsey is really about, which is getting organizational leaders to pay a large amount of money for fairly pedestrian advice. In MacDougall’s article on McKinsey’s work on immigration, most of the conversation has been about McKinsey’s push to engage in cruel behavior towards detainees. But let’s not lose sight of the incentive driving the relationship, which was McKinsey’s political ability to extract cash from the government. Here’s the nub of that part of the story.

The consulting firm’s sway at ICE grew to the point that McKinsey’s staff even ghostwrote a government contracting document that defined the consulting team’s own responsibilities and justified the firm’s retention, a contract extension worth $2.2 million. “Can they do that?” an ICE official wrote to a contracting officer in May 2017.

The response reflects how deeply ICE had come to rely on McKinsey’s assistance. “Well it obviously isn’t ideal to have a contractor tell us what we want to ask them to do,” the contracting officer replied. But unless someone from the government could articulate the agency’s objectives, the officer added, “what other option is there?” ICE extended the contract.

Such practices used to be called “honest graft.” And let’s be clear, McKinsey’s services are very expensive. Back in August, I noted that McKinsey’s competitor, the Boston Consulting Group, charges the government $33,063.75/week for the time of a recent college grad to work as a contractor. Not to be outdone, McKinsey’s pricing is much much higher, with one McKinsey “business analyst” - someone with an undergraduate degree and no experience - lent to the government priced out at $56,707/week, or $2,948,764/year.

How does McKinsey do it? There are two answers. The first is simple. They cheat. McKinsey is far more expensive than its competition, and is able to get that pricing because of its unethical tactics. In fact, the situation is so dire that earlier this year the General Services Administration’s Inspector General recommended in a report that the GSA cancel McKinsey’s entire government-wide contract. Here’s what the IG showed McKinsey was eventually awarded.

The Inspector General illustrated straightforward corruption at the GSA, which is the agency that sets schedules for how much things cost for the entire U.S. government (and many states and localities, who also use GSA schedules).

What happened is fairly simple. McKinsey asked for 10-14% price hike for its already expensive IT professional services (which is a catch-all for anything). The government contracting officer said no, calling the proposal to update the firm’s contract schedule with much higher costs “ridiculous.” So McKinsey went to the officer’s boss, the Division Director. In 2016, a McKinsey representative sent the following email to the GSA Division Director.

We would really appreciate it if you could assist us with our Schedule 70 application. In particular, given that you understand our model, it would be enormously helpful if you could help the Schedule 70 Contracting Officer understand how it benefits the government.

The pestering worked. The GSA Division Director seems to have had the contract reassigned and granted the price increase McKinsey wanted. The director also seems to have been lying to the inspector general, as well as manipulating pricing data, breaking rules on sole source contracting, and pitching various other government agencies, like the National Oceanic and Atmospheric Administration, to buy McKinsey services. Eventually the director straight up said, “My only interest is helping out my contractor.”

From 2006 when McKinsey signed its original schedule price, to 2019, it received roughly $73.5 million/year, or $956.2 million in total revenue from the government. The inspector general estimated the scam from 2016 onward would cost $69 million in total overpayments. It’s a scandal. But still, something about it doesn’t quite make sense. Why would a government division director at the GSA seek to increase costs for the government? It’s not bribery, since the IG didn’t recommend firing or arresting the government official who pushed up costs (or at least that’s not in the IG report).

The Industrial Funding Fee

And this gets to the second reason why McKinsey can charge so much, which has to do less with McKinsey and more with an incentive to overpay more generally. It’s more likely something called the ‘Industrial Funding Fee,’ or IFF. The GSA’s Federal Acquisition Service gets a cut of whatever certain contractors spend using the GSA’s schedule, and this cut is the IFF. The IFF is priced at .75% of the total amount of a government contract. In the case of McKinsey, since 2006, “FAS has realized $7.2 million in Industrial Funding Fee revenue.”

In other words, the agency of the government in charge of bulk buying isn’t paid for saving money, but for spending too much of it. The IFF also incentivizes the GSA to get the government to outsource to contractors anything it can, simply to get more budget. The IFF has been creating problems like the McKinsey over-payment for a long time. In 2013, the GSA Inspector General traced a similar situation with different contractors. Managers at GSA overruled line contracting officers to raise prices taxpayer pay for contractors Carahsoft, Deloitte and Oracle. Government managers at GSA micro-managed and harassed their subordinates and damaged the careers of contracting officers trying to negotiate fair prices for the taxpayer.

How did the GSA get such a screwed up incentive as the Industrial Funding Fee? Well, in 1995, to get the government to become more entrepreneurial as part of its “Reinventing Government” initiative, Bill Clinton’s administration implemented the Industrial Funding Fee structure. It worked in generating money for the GSA. It worked so well that Congress’s investigative agency found in 2002 that the GSA stopped having to rely on Congressional appropriations. It had so much extra money that it started to spend lavishly on its “fleet program,” which is to say vehicle purchases. In other words, the GSA earned so much money by outsourcing the work of other government agencies to high-priced contractors that it just started buying fleets of extra cars.

By 2010, GSA had “sales” of $39 billion a year. While the GSA is supposed to remit extra revenue to the taxpayer, it often just stuffs the money into overfunded reserves. More fundamentally, the culture of the procurement agencies of government has been completely warped. The GSA’s entire reason for existing was to do better purchasing for the government, using both expertise and mass buying power to get value. But now officials try to generate revenue by getting the government to spend more money on overpriced contractors. Like McKinsey.

Does McKinsey do a good job? The answer is that it’s probably no better or worse than anyone else. I’m sure there are times when McKinsey is quite helpful, but it’s in all probability vastly overpriced for what it is, which is basically a group of smart people who know how to use powerpoint presentations and speak in soothing tones. You can just go through news clippings and find areas McKinsey did cookie cutter nonsense. For instance, McKinsey helped ruin an IT implementation for intelligence services. In the immigration story, MacDougall shows that the consulting firm encouraged ICE to give less food and medical care to detainees. That’s cruelty, not efficiency.

Still, it’s not all on McKinsey. The Industrial Funding Fee is one reason paying $3 million a year for a 23-year old McKinsey employee instead of hiring an experienced person directly to do IT management has some logic to a government procurement division head. The policy solution here is fairly simple - kill the IFF fee structure and finance government procurement agencies through Congressional appropriations directly. Also follow the IG’s recommendation and cancel McKinsey’s contracting schedule.

At any rate, at some point decades ago, we decided that most political and business institutions in America should be organized around cheating people. In this case, the warped and decrepit state of the GSA leads to McKinsey-ifying the entire government. Mr. Clinton, you took a fine government that basically worked, and ruined it. McKinsey sends its thanks.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, buy my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.


Matt Stoller

P.S. I’ll be giving book talks in D.C. and New York. Info is below.

December 10 (Tuesday)
Washington, D.C.
Book talk at Public Citizen at 5pm
1600 20th St., NW, Washington, DC 20009
Please RSVP to Aileen Walsh at awalsh@citizen.org.

December 18 (Wednesday)
Brooklyn, NY - Old Stone House from 6:30-8pm
A Conversation with Matt Stoller, author of “Goliath”, and Zephyr Teachout
336 3rd Street
Brooklyn, 11215

Did Economists Stop Congress From Ending Prison Rape?


Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

Today I have a treat for you, an issue of BIG written by an anonymous government lawyer buried deep in the bowels of American bureaucracy. One of the reasons Americans are losing faith in our political institutions is because laws passed by democratically elected officials increasingly don’t matter. One of my favorite regulators, Rohit Chopra at the Federal Trade Commission, said explicitly, as a sort of challenge to the commission, that “FTC orders are not suggestions.”

Of course, laws and regulators that affect the powerful are increasingly suggestions, and that’s why we’re in a political crisis. This anonymous lawyer is going to lay out one of the key institutional mechanisms by which economists and corporate interests wreck our ability to actually have laws take effect once they’ve been passed.

His explanation of how bureaucracy works will show that we should be paying attention this Wednesday to an obscure nomination of a corporate lawyer, Paul J. Ray, to be head of an agency of economists, the Office of Information and Regulatory Affairs, or OIRA. Because OIRA is where power really lives in Washington. It’ll be interesting to see if any Senators show up; Democratic Presidential nominee Kamala Harris is on the relevant Senate committee.

Why Congress Couldn’t Outlaw Prison Rape

Prison rape is one of the most horrifying and abhorrent practices in American culture. Prison rape is pervasive, a form of soft torture so extensive it is the butt of endless jokes in popular culture (as John Oliver noted in a long segment on how Hollywood jokes about the practice). In 2003, Congress unanimously passed the Prison Rape Elimination Act, a bill directing the Attorney General to issue regulations detecting and eliminating prison rape in Federal jails. In 2012, Erich Holder finally did so.

Congress gave discretion to the Attorney General, but because of an obscure regulatory agency, Holder didn’t have the final word. Instead, the Department of Justice was required to conduct an extensive cost-benefit analysis of its proposed rule and submit it to a small group of economists in the White House for their thumbs up on whether the Attorney General would be allowed to finalize the rule.

This group of economists is located in an obscure agency called the Office of Information and Regulatory Affairs, or OIRA, staffed at the time by a close friend of Obama, legal legend Cass Sunstein. Most agencies wishing to put out a must draft an extensive Regulatory Impact Analysis (RIA) detailing the costs and benefits of the rule, justify the need for the rule to OIRA, and make any changes OIRA economists demand. In this instance, technocrats issued a 168-page RIA questioning how much money the rape victims would be willing to pay to avoid rape, or how much they would be willing to accept in exchange for being raped. (The estimates were $310k to $480k for an adult victim, and $675k for a juvenile victim, for the ‘highest’ form of sexual assault.)

In the end, the regulations put forward were cruel and weak, exempting immigration facilities and putting "tight restrictions on inmates who report rape.” It also removed the requirement that prisons actually *do* anything except have a plan to reduce prison rape. Failure to execute on the plan meant they’ll need another plan.

Nine years after Congress passed the bill and more than two years after DOJ began working on the prison rape rule, the status quo prevailed. Or worse. McClatchy found that rate of sexual abuse in prisons has doubled over the past decade. Because of the secrecy involved in the process of cost/benefit analysis calculations, the public has no way to know what role OIRA played. All we know is that the law turned into a suggestion, buried in an exhausting swamp of fecklessness.

The Regulatory Impact Assessment is here, if you want to to go through the cost/benefit analysis of prison-based sexual assault. Or you can just read a key paragraph, which details the amount it is ‘worth’ per victim.

Gutting Rules on Vaping, Coal Ash, Rearview Cameras on Cars

While prison rape may be an extreme example, it’s not the only one. Over more than three years, OIRA and the National Highway Transportation Safety Administration (NHTSA) spent years negotiating over a statutorily-required regulation mandating rearview cameras that would help prevent backovers, including parents accidentally backing over their children. Despite evidence that hundreds per year die this way, according to one article, one OIRA staffer asked “How could anybody run over their own kid?” and worked to prevent NHTSA from issuing the rule.

Reportedly, OIRA pulled out every trick to stop NHTSA from finalizing this rule (which, remember, NHTSA was required by law to enact.)

Similarly, OIRA and the Environmental Protection Agency spent five years going back and forth over a proposed regulation governing the handling of coal ash, which is produced by coal-fired power plants and contains noxious chemicals. OIRA permitted EPA to finalize this rule only after downgrading the designation of coal ash from a “hazardous waste” to “solid waste,” and with less restrictive handling and disposal requirements.

Recently, the Los Angeles Times reported that the Obama Administration’s FDA tried to ban vaping flavors in 2015, only to have the rule substantially weakened by OIRA. According to one anti-tobacco advocate, “The failure to ban these egregious flavors more than three years ago literally opened the door to what was an entirely preventable explosion in youth addiction.” The Times reports that “Scientists expect more than 1.5 million years of human life to be lost,” all because, in the words of one Obama Administration official, “Is it reasonable to effectively shut down all of these vape shops and businesses when the benefits and harms were still inconclusive?”

How to End This Madness

OIRA has the authority to do all of this because of Executive Order 12,866, which was signed by President Clinton in 1993 “to reform and make more efficient the regulatory process.” Every president since Clinton has reaffirmed E.O. 12,866, often with their own “twist;” Obama emphasized that agencies should “consider...values that are difficult or impossible to quantify,” and Trump has put in place a regulatory budget. Regardless (especially since OIRA never took consideration of values impossible to quantify seriously), E.O. 12,866 has the end result of elevating economists above scientists and public health experts and giving economists a veto over all health, safety, and environmental regulations.

E.O. 12,866 requires any agency wishing to publish a “significant” rule to provide OIRA with an assessment or quantification of the proposed rule’s costs and benefits and explanation of why the proposed regulation is preferable to alternatives. With this information, E.O. 12,866 provides OIRA with up to 120 days to review the proposed rule and either send it back to the agency with comment or permit the rule to go into effect. If an agency disagrees with OIRA’s assessment (i.e., proposed changes), its only recourse is to appeal to the Vice President.

None of this is necessary, or particularly hard to fix. The President can just repeal E.O. 12,866 with a signature. Without E.O. 12,866, agencies would still be required to fully consider the data available to it, and the effects of their regulations. They could not regulate contrary to facts, logic, and rationality. They just wouldn’t be required to conduct the quantified cost-benefit analysis that the order mandates, unless Congress specifically told them to do that.

Of course, President Trump is doubling down on the executive order--he recently subjected non-binding guidance documents to quantitative cost-benefit analysis and OIRA review requirements--so his administration likely won’t repeal it any time soon. (Though given the deregulation his administration is undertaking, perhaps slowing down new rules is a positive.)

The order, and how OIRA has implemented it, are an unmitigated disaster. To actually govern again, we should get rid of it. That won’t fix everything, but it will stop centralized economists from breaking our democratic government.

So that’s the deal with OIRA. This anonymous lawyer wrote more on OIRA, but it’s kind of technical, so I put it below my signature so you can read it if you are interested.

This Wednesday, we’ll see if any Senators actually push the nominee - Paul J. Ray - on Wednesday about his agency’s behavior. Questioning of nominees in obscure hearings like this matters. Ray’s boss will be Congress, and if Congress is paying attention, he’ll know he’ll have a harder time messing with laws he doesn’t like.

At any rate, now’s the moment in our democratic process where we take notes on what we want changed in the bureaucracy. No one really wants to do anything right now, but soon the dam will break. Let’s put E.O. 12,866 on our checklist.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, buy my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.


Matt Stoller

Technical Specifics on OIRA

The order, and how OIRA has implemented it, are an unmitigated disaster. Scholars have noted four primary points of concern with E.O. 12,866 and OIRA’s implementation:

OIRA Lacks Transparency and Acts Arbitrarily - Although E.O. 12,866 requires OIRA to “make available to the public all documents exchanged between OIRA and the agency during” OIRA’s review of a rule, frequently this information is not made public. Draft copies of rules with redlines may be released, but not written communications. Perhaps more egregiously, although OIRA is required to provide agencies written explanations for its decisions to return a rule to the proposing agency for changes, the last time OIRA published such a letter was in 2011. Instead, it appears OIRA is forcing agencies to withdraw their regulations from OIRA review so that there is no paper trail, and also removes these proposed rules from OIRA’s statistics. In addition, OIRA has been known to put the kibosh on rules without explanation or approve rules without the required RIA out of political concern to the White House.

OIRA Slows Down Regulations - EO 12,866 provides OIRA 90 days to review an agency’s proposed regulation. While a delay of up to three months is extra time that a regulation is not effective, OIRA routinely takes more than its permitted time to review a regulation. Scholars have noted that OIRA “refuses to acknowledge submissions in order to stop the clock from starting on its review” and “bullies agencies into requesting that OIRA take additional time, and sometimes just sits on regulatory actions indefinitely.” Some proposed rules have sat with OIRA for several years. Every moment that a rule is delayed is less time for the rule to be effective, potentially harming the American public.

OIRA Takes Power Away from Policy Experts - Congress grants rule-making authority to specific regulatory agencies, not the White House, and certainly not OIRA. However, OIRA takes it upon itself to act as the policy expert, overriding the expertise of career scientists and public health officials. In one instance, OIRA urged the EPA to lessen limits on motorcycle air emissions “on the ground that the catalytic converter reducing emissions poses a safety threat,” and relented “only after motorcycle manufacturers convinced OIRA that its concerns were baseless.” In another, OIRA required EPA to make changes to a rule which the Second Circuit found to be in violation of the Clean Water Act. (It should also be noted that, although OIRA is generally said to consist of economists, many OIRA desk officers are not. These policy analysts are in no way qualified to critique the work of actual agency economists, scientists, and health officials.

OIRA Routinely Weakens Safeguards - OIRA is responsible for reviewing the cost-benefit data provided to it by agencies and suggesting ways to tweak regulations to improve benefits and decrease costs. However, OIRA routinely recommends agencies dilute the rules, rather than increase their strength. As one academic noted, “OIRA review functions as a one-way ratchet, almost always seeking to weaken standards whenever OIRA seeks changes, regardless of CBA's results.” Although I haven’t reviewed every instance of OIRA review (especially since many times OIRA’s comments are not made publicly available), I have not found an instance of OIRA strengthening a proposed regulation, nor have I run into anyone who has. Cost-benefit analysis conveniently seems to produce results heavily weighted against government action and consideration of those “values that are difficult or impossible to quantify” always seem to fall by the wayside.

Lisa Heinzerling, a professor at Georgetown University Law Center, articulated the issues with OIRA quite succinctly:

OIRA blows past the deadlines imposed by the order with casual abandon. Average review times are longer by far than they have ever been. OIRA and the agencies disobey almost all of the transparency requirements of the order. OIRA engages in “informal” review of agency actions so that it can pass on their wisdom before any public record of its involvement is created. Elevations of disputes beyond OIRA and the agency are not disclosed. Descriptions of changes insisted upon by OIRA are often lacking, and even when they are provided, they usually take the form of impenetrable redlined documents showing revisions that occurred after a rule went to OIRA. Rules die at OIRA without a written explanation. Rules are elevated beyond the agency and OIRA in an unstructured and even chaotic environment, in which any office or person in the White House might have a voice in determining whether a rule will issue. Meetings with outside parties on rules under review at OIRA are dominated by industry groups and the public has little information about what occurs during those meetings.

Without E.O. 12,866, most agencies would not be required to produce a quantified cost-benefit analysis. There are plenty of well-researched pieces detailing the issues with cost-benefit analysis. Congress almost never requires government agencies to conduct these analyses.

Instead, Congress may require an analysis of a rule’s effects on a specific industry (such as describing the impact of the rule on small entities), may cabin the analysis to a rule’s effects to one set of issues (such as effects on the environment), or may require that an analysis only consider what is technologically or economically feasible. In these cases, Congress did not enact a requirement to compare generalized costs and benefits or even quantify specific costs and benefits. Congress has never required an agency to conduct a quantified cost-benefit analysis of the kind E.O. 12,866 requires.

This is not to say that agencies are free to make rules without analyzing their potential consequences. The Administrative Procedure Act, a law passed in 1946 that sets requirements for agencies to follow when making decisions affecting the public, prohibits agencies from acting in an “arbitrary and capricious” manner, and allows judges to set aside such rules. Courts have interpreted this language to allow judges to overturn a regulation when the agency “entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise;” failed to “examine the relevant data and articulate a satisfactory explanation for [the] action including a rational connection between the facts found and the choice made;” or failed to consider “less restrictive, yet easily administered” alternatives. All nine Supreme Court justices even hold that agencies must consider the costs of potential rules before issuing them.

The Qualcomm Case: Why China Uses U.S. Technology Americans Are Locked Out Of


Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

You’ve probably noticed that BIG newsletters have dropped in frequency, that’s because I’m working on a few longer form stories and a new project I’ll announce soon.

Some house-keeping. Apparently I hurt the feelings of DOJ Antitrust chief Makan Delrahim when I pointed out to reporter Nihal Krishan that enforcement actions against Google matter more than speeches about Google. To underscore the point, Google just bought another company, CloudSimple.

Delrahim didn’t like this point. According to Krishan, he said I’m wrong, and that I’m “out there taking unnecessary criticism of the Justice Department's work." Look, I’m driven by outcomes, and we have a concentration crisis that is destroying our society. I’m happy to be wrong about Delrahim, and I’ll happily admit I am wrong if he ends up doing something useful. But I’m seeing a a lot of speechifying about enforcement, even as big tech busts out to acquire as much as possible in this lax enforcement environment. In fact, I’m seeing some actively bad things coming out of DOJ, as I’ll go into below.

Today I’m going to write about the most important monopolization case going on today, which is the Federal Trade Commission case against Qualcomm, the U.S. leader in chipsets for 5G wireless technology. The basic issues in this case involve China, the fusion of our national security apparatus with big business, and whether the U.S. will be a nation of monopolies or a nation of liberty.

But first, a picture of Ashton Kutcher and his business acumen. Yes, it’s 2019, and things are still really dumb.

Qualcomm as John D. Rockefeller or Bill Gates

So let’s start with the background of the case. Qualcomm is a very important corporation, but one you may not have heard of because it doesn’t do consumer oriented work. The company makes critical components for cell phones, the stuff you don’t see but that goes into the guts of telecom systems. Its technology connects phones to cell networks, and it makes its money by selling chips and by licensing its patents to device makers.

The story of how Qualcomm monopolizes is pretty simple. The corporation does what Bill Gates did to computer manufacturers and what John D. Rockefeller did to railroads, as I wrote a few weeks ago. Rockefeller’s oil was critical to railroads, and Gates’s operating system software was critical to computer makers. Both of them thus forced their dependents to give them a fee not just for every Rockefeller barrel of oil or Microsoft OS license, but a fee for every one of their competitors’ as well. They taxed their competition and made it impossible to compete.

Qualcomm does this as well. As its competitor Intel explained, Qualcomm “refuses to sell [phone makers] any chipsets unless those manufacturers also purchase separate patent licenses that require them to pay exorbitant royalties for every handset they sell, regardless of whether the handset contains a Qualcomm chipset.” In other words, it’s the Gates/Rockefeller playbook. Find an essential chokehold, and use it to control the industry.

Qualcomm uses a few other anti-competitive tactics. It refused to license its patents - essentially standard and necessary for the industry - to competitors. And it cut exclusive deal arrangements with customers to box anyone else out of the market. (You can read the rest of Intel’s amicus brief if you want to hear expensive lawyers accurately whine about being treated unfairly.)

Eventually, probably at the behest of Apple, the FTC sued Qualcomm. This suit is the first major monopolization case since Microsoft back in the 1990s. In the district court, Qualcomm lost, and the judge forced the corporation to change its licensing practices to make them what’s called FRAND, or fair, reasonable, and non-discriminatory. Later on, however, in a significant win for Qualcomm, an appeals court put a stay on the judgment.

While the FTC is suing Qualcomm as a monopolist, the Department of Justice Antitrust Division filed a brief on behalf of Qualcomm. The DOJ argument is basically saying, yeah, Qualcomm does all that stuff, but Judge Gorsuch said it’s all legal and efficient, and we don’t want to dissuade the liberty to abuse patents and market power. Two other officials, one at the Department of Defense and another at the Department of Energy, also weighed in. Ellen Lord, a former defense contractor and the Under Secretary of Defense for Acquisition and Sustainment for the DOD, argued that Qualcomm’s position as a monopolist enables it to support national security and help China. A Department of Energy official Max Everett basically said the same thing.

The DOD’s Ellen Lord has what is effectively the antitrust chief position for the Pentagon. Her tenure has been a quiet disaster. She enabled a merger in the rocket industry that allowed a nuclear missile monopoly, and she’s probably going to allow the UT-Raytheon merger. It’s not a surprise she’s stepping out to defend a monopolist, that’s what she does. I’m not impressed with these pro-monopoly arguments. Neither, incidentally, is former DHS cabinet member Michael Chertoff, who wrote an op-ed in the Wall Street Journal pointing out that monopolies are bad for national security.

In the technology race against China, the U.S. should prefer to let competition drive innovation rather than support exclusive national champions. Apart from the economic inefficiency, a single-source national champion creates an unacceptable risk to American security—artificially concentrating vulnerability in a single point. The government’s argument in support of Qualcomm isn’t prudent, and if courts accept it, the result would be a self-inflicted wound to U.S. national interests. We need competition and multiple providers, not a potentially vulnerable technological monoculture.

While Chertoff is working for corporate clients who are opposed to Qualcomm, he’s not wrong on the merits. We need look no further than Boeing, which is a “national champion” in aerospace. That’s not working out so well for us, is it?

There’s one other argument that I think matters on the monopolization and security front, especially as it relates to intellectual property like patents and copyrights. And this has to do with the innovation ecosystem, and how strict IP laws that promote concentration in the West actively contribute to Chinese technological dominance.

It starts with some history.

China Is Living in 1950s America

From the 1950s to the 1970s, the U.S. had a fairly open patent regime, spurred not so much by changes to patent law as antitrust suits. Lawsuits against RCA, IBM, Dupont, AT&T, and others forced large dominant firms to license their technology to domestic firms.

In my book - Goliath: The 100-Year War Between Monopoly Power and Democracy - which is by the way a tremendous Christmas gift for all your politically interested friends and families - I go over how this regime worked. The short story is that the scientists at those giants developed great stuff, but the suits in those corporations didn’t get it. It took innovative small businesses to deploy what monopolists wouldn’t.

This open regime, along with government spending, is the origin of Silicon Valley, because small firms ended up commercializing the technology. But from the 1980s onward, we closed off innovation by tightening IP laws and enabling monopoly. This older regime disappeared, and even its memory evaporated. Open IP regimes and markets are now alien to American lawyers. I found a law review article written by a former FTC lawyer in the early 2000s on a suit antitrust suits with Xerox involving patent divestment. It was, he wrote, like finding a “previously undiscovered ancient culture.” He also found the suit unsettling, he argued, because the FTC’s remedy “seems to have done a world of good.”

Today, American intellectual property is locked into dominant firms, who spend large amounts of money making sure no one else can use it. Apple for instance spends $1 billion a year on its legal division, and Disney is right now suing people online for using Baby Yoda memes. China, however, has a way around our IP laws; it just hacks our corporations or legally forces technology transfer, and then moves this knowledge throughout its technology sector. Thus American know-how floods into China, while Americans are locked out of the wisdom we developed and paid for.

More than just the transfer is the ecosystem of business development and investment. China is innovating on top of our knowledge, which the America government has legally blocked Americans from using. Our venture capitalists and entrepreneurs shy away from competing with giants or accidentally stepping on patents. In other words, China is de facto living in the incredibly productive legal environment America had for our own technology sector from the 1950s to the 1970s. Their ability to innovate on top of our technology, combined with our inability to deploy that same technology, is now a huge national security vulnerability.

There are two ways to address this problem. The first is to try and stop Chinese tech development. The Commerce Department is rolling out new rules to engage in far more granular examination of supply chains, which is probably good. But U.S. tech giants are already moving key facilities to Switzerland so they can evade American jurisdiction. The reality is that our strategy of blocking the diffusion of knowledge will require a large number of policy choices, from finance to trade, for which we are unprepared. We’ll have to take those steps, but it’ll take a lot of time and political battling to do so. It’s also not clear that we can stop the development of Chinese technology, nor is it necessarily desirable to do so. If the Chinese come up with a cure for cancer, that’s a good thing for humanity.

The second strategy is to encourage more innovation here. And that means addressing extreme financialization of our intellectual sector that has locked Americans out while allowing the Chinese to innovate on our own knowledge and know-how. That’s what the FTC did when it sued Qualcomm, but we’ll need a much more aggressive attack on concentration in American markets. The idea is that if our markets are flexible enough and we have enough government financing of basic research, we can unlock the remarkable wisdom in our corporations and deploy and development technology much faster than we do today, and faster than China does with its autocratic state capital framework.

This strikes me as a much more fruitful path. After all, putting our brilliant engineers at Google and demanding they spend their time finding out how to get us to click on more ads seems quite wasteful, especially as China is using all the cool technology in American firms that our engineers can’t deploy to develop ways to undermine democracy.

That’s the theory, anyway.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, buy my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.


Matt Stoller

P.S. I’m going over little shitty software monopolies (LSSM). For some reason people keep complaining about a yoga studio software called MindBody. If you’ve had experience with it, let me know.

Also, the key elements of LSSM’s seem to be locking in users and then abusing them with random fees and an increasingly bad user experience. I’ve been doing research, but I don’t have totally solid public policy ideas on how to attack this problem. I’m thinking that enforced compatibility with competitors, openly listed pricing with no secret rebates, and perhaps a dominance standard on monopolization would help. I don’t know how open source fits in here. If you have better ideas, let me know.

The End of the Paramount Consent Decrees, Quiet Clearance of Google-Looker


Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to write about the Google-Looker merger, as well as the proposed end of the legal structure underpinning Hollywood movie distribution. The movie industry is structured by an antitrust deal cut between the DOJ and studios in 1948 known as the Paramount Consent Decrees, a deal that essentially separated film production and distribution. Trump DOJ chief Makan Delrahim just announced he’s going to ask a court to get rid of this deal. This matters, and I’ll be explaining how.

First, some housekeeping.

  • I was interviewed by On the Media about Bill Gates and how he made his money. I was on the last fifteen minutes, but the whole show was very good.

  • I have a half drafted issue of BIG on what I call ‘little shitty software monopolies’ like bank management software, nonprofit management software, and so forth. If you have examples, send them my way. And I’m going to be getting back to the “Bob’s” and Office Space fairly soon.

  • Thanks for the comments on my book Goliath. Keep sending them so I know what you find useful.

  • I was on the Rising with Krystal Ball and Saagar Enjeti yesterday to talk about antitrust, Obama, and the middle class. You can watch that below.

And now…

Google/Looker, Or Enforcement Versus Bragging

Yesterday, Trump DOJ Antitrust Division chief Makan Delrahim gave a speech lauding aggressive enforcement against big tech. He’s been giving speeches like this for quite some time. Here’s a sample snippet.

Over the past several years, we have overcome the mindset that somehow digital markets could not or should not be policed by antitrust law. Many cautioned against antitrust enforcement by arguing that monopoly rents in high-tech markets are fleeting, because the markets move so quickly and because barriers to entry are almost always low.

In recent years, the conversation among antitrust practitioners has evolved, in line with the growing public perception that digital platforms that enjoy durable network effects may be acting anticompetitively.

Delrahim takes credit for “overcoming a mindset'“ of inaction, which I find odd. “Overcoming a mindset” is not the same thing as a track record of action. Delrahim speaks as if he’s accomplished great things. Has he?

The short answer is no. Under Delrahim, DOJ cleared the obviously illegal Sprint-T-Mobile merger, approved an equally illegal Disney-Fox merger, and has sought to shape the law in ways that are favorable to big tech through his friend of the court brief program.

More significantly, last week, the DOJ quietly cleared the Google $2.6 billion purchase of Looker, which is one of Google’s largest acquisitions ever. There are arguments for why clearing this merger isn’t a big deal, since the merger looks to have more to do with Google beefing up its cloud division than getting more power over advertising or search. But still, this is the acquisition of a big data company by Google, so who knows what or how Google will use the corporation it is buying? Also, why is the DOJ encouraging a Godzilla versus Mothra dynamic in the cloud sector? Shouldn’t we want lots of decentralizing as the sector is forming, rather than a few giants like Amazon vs Microsoft vs Google?

At any rate, the DOJ last month said it was taking a closer look at this acquisition, and then a few weeks later clears it. This whole episode is just classic Delrahim. Speechifying and bragging in public, helping big tech quietly when he thinks no one is paying attention. I’ve written about Delrahim’s emptiness before, but I still find this level of braggadocio about strong enforcement bizarre. Rhetoric without a track record to match is empty and induces cynicism.

The End of the Paramount Consent Decrees?

Delrahim took a more high profile and significant action in that same speech yesterday, when he said he would petition the court to end the 1948 Paramount Consent Decrees settlement. It will take a few years to eliminate these rules, but both eliminating them and signaling that the DOJ wants to eliminate them signals that the DOJ has accepted the massive consolidation in the streaming world, and wants that same kind of consolidation applied to the already concentrated movie exhibition industry.

So what are these decrees and why do they matter? The Paramount Consent Decrees were designed to separate movie production and distribution by barring a variety of practices in the industry and forcing the divestiture of theater chain ownership by studios. They are the result of decades of battles between and among studios, chains, and antitrust enforcers from the 1920s to the 1940s.

Prior to the decrees, five major Hollywood studios and a few more minor ones owned and controlled theater chains. While the major ones directly owned only 17.35% of the theaters in the country, they actually controlled 90% of the significant movie houses nation-wide. After the decrees, the studios sold off their theaters, and there was an open market where independent theaters could choose to exhibit movies without being under the control of the studio who made that movie.

The most important part of the decree was to bar ‘block booking,’ which was a practice that meant forcing theaters to accept a slate of movies from a studio in order to have access to the studio’s most popular films, or ‘must-have’ content. Today that would be requiring a theater to carry a bad Disney movie in return for getting access to the latest Avengers release. Other practices barred included clearances, which means granting geographic exclusives to certain theaters or chains, and circuit dealing, which is a technique theater chains have used to prevent rival theaters from fairly competing.

The premise behind the 1948 case was that vertical integration, or the control of an entire supply chain, is dangerous. This threat still exists today. Small theater businesses or small chains are the ones who are threatened by this decree. Small chains on average charge lower prices than big ones, they tend to serve small towns and small markets that wouldn’t ordinarily get big chains, they host community events like children’s showings, classic movie showings and film festivals, and they serve as a check against giant movie chains.

So what will happen if this decree is repeated? The big studios and theater chains will wipe everyone else out.

Here’s a comment by Bow Tie Theaters, one of the few remaining independent theater chains in existence. To give you a sense of history, Bow Tie started in the Nickelodeon era, went through Vaudeville and today runs modern multiplexes. Walt Disney debuted Mickey Mouse in Steamboat Willy at a Bow Tie theater. In 2009, it opened Richmond Virginia’s first new movie theater in forty years, a “themed adaptive reuse of a 19th Century former locomotive assembly plant.” This is a creative modern theater chain with deep roots in the industry.

Here’s what Bow Tie told the DOJ.

Any imposition of block booking would monopolize the limited number of screens a particular theatre displays. This could effectively force a Bow Tie theatre to become captive to a particular studio’s content. For instance, if Paramount were to require that a Bow Tie location display all of its additional films for the right to display a summer blockbuster, it is plausible that at times a specific location would be running Paramount pictures exclusively. Thus, in addition to the concerns surrounding customer choice and cost, the prohibition on block booking is necessary to uphold other aspects of the Decrees and to prevent theatre chains such as Bow Tie from becoming de facto exclusive exhibitors of a particular studio’s content.

Bow Tie would become an adjunct of a studio, a zombie independent chain. Smaller theaters would have it even worse. As one small theater in Wisconsin put it to the DOJ, “The Paramount Decree is important to us because without it, we would cease to exist.”

Killing small theaters is a problematic move for an antitrust enforcer. So why take down this decree? Delrahim has argued that in an era with streaming and high-technology, these decrees don’t matter anymore. Consumers are better off if studios and chains can concentrate power. Here’s what he said.

Since the decrees were entered, however, the movie industry has undergone significant change. Back in the 1930s and 40s, metropolitan areas generally had a single movie theatre with one screen that showed a single movie at a time. Today, not only do our metropolitan areas have many multiplex cinemas showing films from different distributors, but much of our movie-watching is not in theatres at all. Technological advancements, most recently subscription streaming services, have permitted more American consumers to watch movies anywhere they want at any time. 

Competitive pressures have emerged from unexpected sources. For example, some of you might remember the now-defunct Moviepass, which charged consumers one flat price to see an unlimited number of movies in theaters. This business model was flawed, and this led to effective prices so low that some described it as a “great socialist scheme accidentally implemented by very confused capitalists.” Moviepass ultimately exited the market, but nevertheless has affected how some movie theaters are looking at innovation; AMC launched its own monthly flat-free program last year.

What a weird comment from a Republican antitrust enforcer, and yet quite telling. Concentrating power helps usher in socialism, or central planning, but by “confused capitalists.”

Delrahim is echoing the consumer welfare oriented gibberish that corrupted Obama-era antitrust enforcement. He’s pretending there is a robust competition by expanding a proposed market to include all video content watched anywhere by consumers. But theaters operate in different markets than home viewing, even if the video product is similar. People will pay for movie tickets at theaters, and they will also buy video products at home using different pricing terms and with a different screen and cultural experience. As the Writers Guild put it:

The creators of Crazy Rich Asians chose a theatrical release with Warner Brothers over a significantly higher initial monetary offer to distribute the film via Netflix, recognizing that the cultural and social experience of having the first all-Asian film from a major Hollywood studio since 1993 in theaters would not be replicated by having one available on Netflix.

New technology often doesn’t change old markets, but we hear the argument constantly that antitrust enforcement is outdated. People often say ‘oh well antitrust laws were written for steel and railroads, not the internet.’ It’s a silly point for a number of reasons, one of which is that we actually have monopoly problems in steel and railroads. In the case of the movie industry, there’s still a serious problem with block booking, even before the takedown of the Paramount consent decrees. There’s also massive concentration in the industry.

Disney, for instance, after its slew of acquisitions over the last decade, has reduced output and increased its market share. As the WGA puts it, “the ability to increase market share while reducing output is a function of anticompetitive market power over theater owners.” It can demand 65-70% of ticket sales, monopolize “each theater's largest venue, and crowd out other features.” Many of the major studios are “cutting development budgets for new films, or studio research and development”, and focusing on franchise films like Marvel movies. For screenwriters, artists, and film crews, this reduced output means “fewer jobs, lower compensation and less creativity.”

The end of these decrees doesn’t really make sense even on Delrahim’s own terms. Delrahim brought the first case against vertical integration in decades, the AT&T-Time Warner challenge. This was an attack on concentration in the media industry. And now he’s arguing that vertical integration in the media industry is… good? The only plausible explanation is that Delrahim brought the AT&T challenge because he was trying to please Trump, and now he’s getting rid of this consent decree to please some other powerful player or just get himself some headlines.

At any rate, I’m sort of glad Delrahim has done something so stupid and obvious. The exhibition business is already very concentrated. Imperial Disney is doing what it’s doing, and streaming is basically designed under the current public policy framework to become a fight among monopolists over market power. It’s time to have a real conversation about vertical integration in the big media industry. Much as China’s clumsy censorship of the NBA’s Houston Rockets executive made the stakes of our China policy obvious to policymakers, the proposed end of the Paramount Consent Decrees could spark a more open debate among artists in Hollywood about whether they want to have a creative industry anymore, and how political they are willing to get if they decide they actually do.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, buy my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.


Matt Stoller

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